What is Process Costing System?
A process costing system accumulates direct materials, direct labour, and overheads by department or production process rather than by individual job. Total costs are divided by equivalent units produced in the period to get an average unit cost. It suits continuous and homogeneous production.
How It Works
- Identify each production department or process.
- Accumulate all costs incurred in each department for the period.
- Calculate equivalent units of production, accounting for partially completed work in progress.
- Divide total cost by equivalent units to get unit cost; transfer cost between departments as products move through the process.
Saudi Context
Saudi petrochemical, refining, cement, and food processing companies in Jubail, Yanbu, and Sudair industrial cities use process costing. Outputs are usually homogeneous and continuous, making job-level tracking impractical. Costing methods are reviewed during IFRS audits by SOCPA-licensed firms.
Example
A Yanbu cement plant accumulates SAR 12 million costs in its kiln department during a month with 30,000 equivalent tonnes of output. Unit cost is SAR 400 per tonne, transferred to the next process at that rate.