Process Costing
I. Discuss Process Costing, clearly bringing out its advantages and disadvantages.
DEFINITION
Costs are accumulated in costing systems. According to Glautier and Underdown (2001), the development of costing systems reflects the manner in which accounting methods have been adapted to the needs of different forms of activity and technology, and also to the appearance of advanced manufacturing techniques that have been a feature of recent years. Cost accounting systems allow full product costs to be accumulated in accordance with the type of technology employed, and one of the major costing systems found is Process Costing. According to Lal and Srivastava (2009) in Cost Accounting, this is an accounting method that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, lot or time frame, which might include an entire month’s production and not an individual unit. It is method that is applied to the manufacturing business that is held together by various continuous or repetitive processes. It works efficiently for the industries that are known to produce a single type of product such as the Coca Cola Company, cement factories, sugar industries and oil refineries. It helps to keep a tight reign over the monthly expenditures in a manufacturing business, because production is undertaken in anticipation of demand, and hence, finished goods are stocked until they are sold.
Process Costing is suitable for continuous manufacturing settings, such as factories and utility companies because it allows managers to get detailed information on the production statistics of individual departments or workgroup. It simplifies record keeping by relying on statistical calculations rather than actual inputs, and thus able to determine the average cost of each unit produced. It is a relatively easy to use compared to other cost allocation methods. A complication arising in Process Costing
DEFINITION
Costs are accumulated in costing systems. According to Glautier and Underdown (2001), the development of costing systems reflects the manner in which accounting methods have been adapted to the needs of different forms of activity and technology, and also to the appearance of advanced manufacturing techniques that have been a feature of recent years. Cost accounting systems allow full product costs to be accumulated in accordance with the type of technology employed, and one of the major costing systems found is Process Costing. According to Lal and Srivastava (2009) in Cost Accounting, this is an accounting method that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, lot or time frame, which might include an entire month’s production and not an individual unit. It is method that is applied to the manufacturing business that is held together by various continuous or repetitive processes. It works efficiently for the industries that are known to produce a single type of product such as the Coca Cola Company, cement factories, sugar industries and oil refineries. It helps to keep a tight reign over the monthly expenditures in a manufacturing business, because production is undertaken in anticipation of demand, and hence, finished goods are stocked until they are sold.
Process Costing is suitable for continuous manufacturing settings, such as factories and utility companies because it allows managers to get detailed information on the production statistics of individual departments or workgroup. It simplifies record keeping by relying on statistical calculations rather than actual inputs, and thus able to determine the average cost of each unit produced. It is a relatively easy to use compared to other cost allocation methods. A complication arising in Process Costing
References: 1. Drury, C. (2008). Management and Cost Accounting. (7th Ed.) UK: Cengage Learning 2. Hilton, W.R, Maher, W.M and Selto, H.F (2003). Cost Management: Strategies for Business Decisions. (2nd Ed.) New York: McGraw-Hill/Irwin 3. Lal, J. and Srivastava, S. (2009). Cost Accounting. (4th Ed.) New Delhi: Tata McGraw-Hill Publishing Company Limited.