Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced. (Job costing or job order costing is a method used when the units manufactured vary significantly from one another.)
To illustrate process costing, let’s assume that a product requires several processing operations—each of which occurs in a separate department. The costs of Department One for the month of June amount to $150,000 of direct materials and $225,000 of conversion costs (direct labor and manufacturing overhead). If the number of units processed in June in Department One is the equivalent of 100,000 units, the per unit cost of the products processed in Department One in June will be $1.50 for direct materials and $2.25 for conversion costs. These costs will then be transferred to Department Two and its processing costs will be added to the cost of the units.

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The accounting process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps:

1.

Identify the transaction or other recognizable event.
2.

Prepare the transaction's source document such as a purchase order or invoice.
3.

Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited.
4.

Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order.
5.

Post general journal entries to the ledger accounts.

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The above steps are performed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are performed at the end of the accounting period.


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