The Chartered Institute of Management Accountants defines Process Costing as
"The method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period, being initially charged to the operation or process."
Process costing is the opposite of activity based costing. This accounting methodology traces and accumulates direct costs, and allocates indirect costs of a manufacturing process to products in a large batch such as an entire month’s production, and then divides this total cost with the number of units to derive average cost of each unit.
The process costing methodology suits homogeneous products and continuous flow production situations and finds widespread application in manufacturing industries such as chemicals, petroleum, gas, textiles, steel, rubber, cement, flour, pharmaceuticals, shoes, plastics, sugar, and coal.
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