Question

What type of products would use Process Costing and why?

Please provide a comprehensive response to this question.

Answer 1

In process costing, the direct costs are accumulated and traced to products and the indirect costs are allocated to products. The assignment of costs ocurs in a batch which can also include the entire month's production. The ultimate goal is to assign cost to each unit. The assignemnt of cost to each product is done on an average basis.

The type of products which would use process costing are homogenous products which are produced in large quantities. Since the costing is done on an average basis, the costs of the product will more or less be the same. Thus, the processes deployed to manufacture the product and the cost of each product should be the same. For example, Cola bottles produced or bags of chips.