Costing Methods: Process Costing

Process costing refers to a system that measures how costs build up at each stage of a continuous production flow.
It works well for products that are identical, such as soda bottles or rolls of paper.
For example, at ClearFizz Beverages, thousands of bottles of iced tea move along a continuous production line. In separate departments, the tea is brewed, flavored, filled, and packaged. Each department collects and tracks its own costs.
These costs are summarized in production cost reports, which show how costs are allocated across each department.
Then, the total cost of materials, labor, and overhead is divided by the number of units completed to measure the average unit cost.
For instance, if it costs ten thousand dollars to produce ten thousand bottles, each bottle costs one dollar to make.
This process helps ClearFizz accurately value its inventory and set product prices reliably.