Financial Terms
Process costing

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Definition of Process costing

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Process costing

A method of costing for continuous manufacture in which costs for an accounting compared are compared with production for the same period to determine a cost per unit produced.

Process costing

A costing methodology that arrives at an individual product cost through the calculation of average costs for large quantities of identical products.

Related Terms:

FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs

modified FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per
equivalent unit but, in transferring units from a department,
the costs of the beginning inventory units and the
units started and completed are combined and averaged

process costing system

a method of accumulating and assigning costs to units of production in companies producing large quantities of homogeneous products;
it accumulates costs by cost component in each production department and assigns costs to units using equivalent units of production

strict FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per equivalent unit and, in transferring units from a department, keeps the
cost of the beginning units separate from the cost of the
units started and completed during the current period

weighted average method (of process costing)

the method of cost assignment that computes an average cost per
equivalent unit of production for all units completed during
the current period; it combines beginning inventory units
and costs with current production and costs, respectively,
to compute the average

cost of production report

a process costing document that
details all operating and cost information, shows the computation
of cost per equivalent unit, and indicates cost assignment
to goods produced during the period

Process Costing Image 2

equivalent units of production (EUP)

an approximation of the number of whole units of output that could have been
produced during a period from the actual effort expended
during that period; used in process costing systems to assign
costs to production

First in, first-out costing method (FIFO)

A process costing methodology that assigns the earliest
cost of production and materials to those units being sold, while the latest costs
of production and materials are assigned to those units still retained in inventory.

hybrid costing system

a costing system combining characteristics
of both job order and process costing systems

Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.

absorption costing

a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns

Absorption costing

A methodology under which all manufacturing costs are assigned
to products, while all non-manufacturing costs are expensed in the current period.

Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

activity based costing (ABC)

A relatively new method advocated for the
allocation of indirect costs. The key idea is to classify indirect costs,
many of which are fixed in amount for a period of time, into separate
activities and to develop a measure for each activity called a cost driver.
The products or other functions in the business that benefit from the
activity are allocated shares of the total indirect cost for the period based
on their usage as measured by the cost driver.

activity-based costing (ABC)

a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services

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Activity-based costing (ABC)

A cost allocation system that compiles costs and assigns
them to activities based on relevant activity drivers. The cost of these activities can
then be charged to products or customers to arrive at a much more relevant allocation
of costs than was previously the case.

attribute-based costing (ABC II)

an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product

backflush costing

a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
from standard

business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer

cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a

Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price

direct costing

see variable costing

Direct costing

A costing methodology that only assigns direct labor and material costs
to a product, and which does not include any allocated indirect costs (which are all
charged off to the current period).

full costing

see absorption costing

In-house processing float

Refers to the time it takes the receiver of a check to process the payment and
deposit it in a bank for collection.

Ito process

Statistical assumptions about the behavior of security prices. For
details, see the book by Hull listed in the “Bibliography”.

Job costing

A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customer’s specification or in a batch of identical product/services.

job order costing system

a system of product costing used
by an entity that provides limited quantities of products or
services unique to a customer’s needs; focus of recordkeeping
is on individual jobs

joint process

a manufacturing process that simultaneously
produces more than one product line
joint product one of the primary outputs of a joint process;
each joint product individually has substantial revenuegenerating

Kaizen costing

The process of continual cost reduction that occurs after a product
design has been completed and is now in production. Cost reduction techniques can
include working with suppliers to reduce the costs in their processes, implementing
less costly re-designs of the product, or reducing waste costs.

life cycle costing

the accumulation of costs for activities that
occur over the entire life cycle of a product from inception
to abandonment by the manufacturer and consumer

Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

multiprocess handling

the ability of a worker to monitor
and operate several (or all) machines in a manufacturing
cell or perform all steps of a specific task

Price discovery process

The process of determining the prices of the assets in the marketplace through the
interactions of buyers and sellers.


A series of linked activities that result in a specific objective. For example, the
payroll process requires the calculation of hours worked, multiplication by hourly
rates, and the subtraction of taxes before the final objective is reached, which is the
printing of the paycheck.

process benchmarking

benchmarking that focuses on practices and how the best-in-class companies achieved their results

process complexity

an assessment about the number of processes through which a product flows

Process flow production

A production configuration in which products are continually
manufactured with minimal pauses or queuing.

process map

a flowchart or diagram indicating every step
that goes into making a product or providing a service

process productivity

the total units produced during a period
using value-added processing time

process quality yield

the proportion of good units that resulted from the activities expended

processing time

the actual time consumed performing the
functions necessary to manufacture a product

product- (or process-) level cost

a cost that is caused by the development, production, or acquisition of specific products or services

Purchased In-Process Research and Development

Unfinished research and development that is acquired from another firm.

relevant costing

a process that compares, to the extent possible
and practical, the incremental revenues and incremental costs of alternative decisions

Reprocessed material

Material that has been reworked and returned to stock.

statistical process control (SPC)

the use of control techniques that are based on the theory that a process has natural variations in it over time, but uncommon variations
are typically the points at which the process produces "errors", which can be defective goods or poor service

Target costing

A method of costing that is concerned with managing whole-of-life costs of a product/service during the product design phase – the difference between target price (to achieve market share) and the target profit margin.

target costing

a method of determining what the cost of a
product should be based on the product’s estimated selling
price less the desired profit

Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns


Any items being converted into finished goods or released from
the warehouse in anticipation of beginning the conversion process.

Work-in-process inventory

Inventory that has been partially converted through the
production process, but for which additional work must be completed before it can
be recorded as finished goods inventory.


A method of costing that involves making continual, incremental improvements to the
production process during the manufacturing phase of the product/service lifecycle, typically
involving setting targets for cost reduction.


the Japanese word for continuous improvement
kaizen costing
a costing technique to reflect continuous efforts
to reduce product costs, improve product quality,
and/or improve the production process after manufacturing
activities have begun







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