Definition: A process cost accounting system is a method of assigning direct materials, direct labor, and factory overhead expenses to specific processes, departments, or cost objects in an effort to value finished goods inventory. In other words, this is a systematic way to allocate all conversion and prime costs to a process. Keep in mind, this system is designed to allocate costs to processes—not jobs.
What Does Process Cost Accounting System Mean?
The difference between a process and a job is subtle. Basically, a process is a group of steps usually performed by a single department. For example, one process for an auto manufacturer might be to paint the auto body parts. One job might be to complete 10 custom cars. A job can involve several processes.
The process cost accounting system looks at the different steps in each process and allocates costs to them. For example, the painting process would have workers’ labor, paint and supply costs, as well as rent and utility costs associated with it. After all the expenses are identified, they are added up and divided by the number of units that we produced in the process to get the cost per equivalent unit.
The system allocates costs to each process throughout the production line. At the end of the production line, all of the process costs are added up to equal the finished goods cost.
In other words, this accounting system tracks the production costs for each process that is required to produce a finished good. Let’s assume there are 10 processes to make a car. This accounting system tracks how many expenses were used in each of the 10 processes. Then the costs from process 1 through 10 are added together to arrive at a total production cost. This total number is divided by the number of units produced to give the value of each finish product made in that period.