What is Process Costing?
Process costing is a cost accounting system used by businesses that produce large quantities of identical units through continuous or repetitive processes. Costs are accumulated by process or department and then averaged across all units produced.
How It Works
- Identify each process step in the production flow.
- Accumulate direct material, direct labour, and overhead in each process account.
- Compute equivalent units of production for partially completed units.
- Divide total costs by equivalent units to get the cost per unit.
- Transfer completed units’ cost to the next process and ultimately to finished goods.
Saudi Context
Saudi petrochemical, cement, dairy, and beverage producers — many supplied by SABIC, Saudi Cement, and Almarai-style operators — use process costing. The cost per tonne or per litre flows into product profitability dashboards and zakat declarations.
Example
A dairy line incurs SAR 1,000,000 of total processing cost and produces 200,000 equivalent units of yoghurt in the period. Cost per unit = SAR 5. Each completed batch is transferred to finished goods at that cost.