Process costing / continuous operational costing is defined in as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or process. Costs are averaged over the units produced during the period."
It is used where it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. It is common (but not essential) to identify process costing which continuous production such as the following.
The manufacture of soap.
Food and drink.
The features of process costing which make it different from specific order costing methods such as job costing or batch costing are as follows.
1. The output of one process is the input to subsequent process unit a completed product is produced.
2. The continuous nature of production in may processes means that there will usually be closing work in progress which must be valued. In process costing it is not possible to build up cost records of the cost of each individual unit of output because production in progress is an indistinguishable homogeneous mass.
3. There is often a loss in process due to spoilage, wastage, evaporation and so on.
4. Output from production may be a single product, but there may also be a by product (or by products) and joint products.
Framework for dealing with process costing
Process costing is centered on four steps. The exact work done at each step will depend on the circumstances of the question, but the approach can always be used.
Step 1- Determine output and losses
Determine expected output.
Calculate normal loss and abnormal loss and gain.
Calculate equivalent units if there is closing or opening work in progress.
Step 2- Calculate cost per unit of output, losses and work in progress
Calculate cost per unit or cost per equivalent unit.
Step 3- Complete accounts
Complete the process account.
Write up the other accounts required by the question such as abnormal loss/gain accounts, scrap accounts and so on.