State the main characteristics of process costing and outline the costing procedure thereof.

Process Costing:

1. Main Characteristics:

1.1 Continuous Production:

• Process costing is used in industries where production is continuous and the product passes through various processes or stages of production. Examples include chemical manufacturing, oil refining, and food processing.

1.2 Uniform Products:

• The products produced in process costing are usually uniform and homogeneous. This allows for the costs to be averaged over the total production.

1.3 Cost Accumulation by Process:

• Costs are accumulated for each process or department rather than for each individual job or unit of production. This helps in determining the cost of production for each process.

1.4 Multiple Cost Centers:

• Process costing involves multiple cost centers or departments, each responsible for a specific stage of production. Costs are allocated to these cost centers based on the resources consumed by each.

1.5 Equivalent Units:

• Process costing involves the concept of equivalent units, which accounts for the fact that not all units in production may be complete at the end of the accounting period. Equivalent units help in calculating the cost per unit of production.

2. Costing Procedure:

2.1 Identify Cost Centers:

• The first step in process costing is to identify the various cost centers or departments involved in the production process. Each cost center is responsible for a specific stage of production.

2.2 Accumulate Costs:

• Costs are accumulated for each cost center, including direct materials, direct labor, and overhead costs. These costs are recorded in the respective cost center's account.

2.3 Calculate Equivalent Units:

• Equivalent units are calculated for each cost center to account for the units that are partially completed at the end of the accounting period. This involves estimating the percentage of completion for each unit in process.

2.4 Allocate Costs:

• Once the equivalent units are calculated, costs are allocated to these units based on the percentage of completion. This helps in determining the cost per equivalent unit for each cost center.

2.5 Calculate Total Cost:

• The total cost for each cost center is calculated by multiplying the cost per equivalent unit by the total equivalent units for that cost center.

2.6 Reconcile Costs:

• Finally, the costs for each cost center are reconciled to ensure that the total costs assigned to production equal the total costs incurred by the organization.

3. Advantages of Process Costing:

3.1 Cost Control:

• Process costing helps in controlling costs by identifying inefficiencies in the production process and taking corrective action.

3.2 Cost Allocation:

• Process costing helps in allocating costs to each process or department, providing a more accurate picture of the cost of production.

3.3 Pricing Decisions:

• Process costing provides valuable information for pricing decisions, as it helps in determining the cost per unit of production.

3.4 Inventory Valuation:

• Process costing helps in valuing inventory, as it provides a systematic method for allocating costs to inventory items.

Conclusion:

• Process costing is a valuable costing technique used in industries where production is continuous and products are uniform. It helps in determining the cost of production for each process or department, providing valuable information for cost control, pricing decisions, and inventory valuation.