A process costing system is a product costing system used by companies that produce large amounts of similar products or liquid products or that have long, continuous production runs of identical products. Because these companies have a continuous production flow, it would be impractical for them to use a job order costing system, which tracks costs to a specific batch of products or a specific job order. In contrast to a job order costing system, a process costing system accumulates the costs of direct materials, direct labor, and overhead for each process, department, or work cell and assigns those costs to the products as they are produced during a particular period.

The product costs provided by a process costing system play a key role in the management process. When managers plan, they use past and projected information about product costs to set selling prices and prepare budgets. Each day, managers use cost information to make decisions about controlling costs, managing the company’s volume of activity, ensuring quality, and negotiating prices. Actual costs are incurred as units are produced, so actual unit costs can be computed.

When managers evaluate performance results, they compare targeted costs with actual costs. When managers communicate with external stakeholders, they use actual units produced and costs incurred to value inventory on the balance sheet and cost of goods sold on the income statement. They also analyze internal reports that compare the organization’s measures of actual and targeted performance to determine whether cost goals for products or services are being achieved.