This system of costing applies to a continuous and ongoing process that never, or rarely, stops. In such circumstances the unit cost cannot be separately recorded as in job costing. The unit cost in process costing is found by dividing the total costs for a period of time by the output over that period.

Example
The total of all direct and indirect costs for running a coal mine for a week amounted to £6 million. Output during this time amounted to 200,000 tonnes.

In some process industries there may be partially completed products at any moment in time so that at the end of an accounting period these need to be converted into equivalent whole units in order to calculate the average unit cost of each complete unit.

Example
A company started a process on 1 March and incurred total costs of £100,000 during the month. Output for the month was 2,000 complete products plus 200 that were 40 per cent partially completed.

Further situations in some process industries, for example oil refining, are when products are produced either jointly or as a by-product of the main process. The costing treatment of by-products, so called because they do not have significant value relative to the main product, is that their net realizable value goes to offset the costs of the main product.

However, when products are produced simultaneously in a process, with each product having a significant value on its own, these are referred to as joint products. The costing problem this throws up is how to split the common costs incurred up to the separation point. This can be done in one of two ways:

1. By volume – the common costs are apportioned pro rata to a physical measure of the quantity of each produced; or
2. By market value – the common costs are apportioned on the basis of the market value of each joint product at the time of separation.

Taken From : Accounting for Non-Accountants