Process costing is applied when goods are mass produced in large quantities and the costs linked to individual units cannot be easily distinguished from each other. It is used in industries where products go through a continuous flow or series of standardized processes, such as chemical manufacturing, food processing, textile manufacturing, oil refining, and assembly line manufacturing. This costing method helps allocate total production costs evenly across all units produced during a period, making it ideal for standardized, identical products made through repetitive processes. In summary, process costing is typically applied:
- When large quantities of identical or nearly identical products are produced
- When production involves a continuous or sequential flow of operations
- When individual unit costs are difficult to track separately
These conditions make process costing appropriate for industries like chemicals, food, textiles, petroleum, and automotive assembly, among others, where the emphasis is on average cost per unit rather than cost tracing to individual items or jobs.
