process costing accounting essay

process costing accounting essay

Process Costing Accounting

1. Introduction

Process system is used primarily in manufacturing. Process costs are tracked by processes and by department. The main goal is to come up with a cost for the end product. This costing method covers material, labor, and overhead. There are two types of cost systems for manufacturing: job order costing and process costing. Deciding which of the two cost systems is an essential part of the set-up process. The process costing system is an approach designed to evaluate the production process. In a process costing system, the production facility is divided into various activities. This division may be done on various bases such as time. In such a system, there will often be tiers of product activity such as raw materials, working process, and finished product. A process costing system relies fundamentally on the effective accumulation of cost involved in each tier of data.

Process costing is a cost accounting system for production operations. This suite of activities includes the cost of and incidental to: the acquisition of raw materials, the delivery of raw materials to the production area, the fabrication of the raw materials and other inputs into subassemblies, and the delivery of these to the production areas, production oversight and administration operational oversight. The cost of direct labor, and the cost of the equipment. There are two main types of product costs for a manufacturer: direct labor and payroll. A manufacturer may use a process costing accounting method for these costs. Process costing is based upon the nature of the product itself being produced, as well as the stage of production the product is in. Process costing is useful for manufacturing products that are homogeneous in nature.

2. Cost Accumulation in Process Costing

Once we have selected the product(s) to be costed, we will consider how costs are accumulated in process costing. Process costing is used in industries that convert raw materials into similar or identical units of finished goods. Examples would include processing acid, refining flour at a grain mill, and manufacturing baby food. Those in the diversion industry (milk, vegetable, and fruit) have this kind of operation. When costs are met by process, the revenue is reduced. Since they are paid, these costs are collected in an accumulation account, Cost of Goods Sold. For example, look at the following purchases of acid and the amount of salary over a period of two weeks for a chemical plant manufacturing operation. When direct labor costs are met, they are charged to Work-in-Process, not to the Cost of Goods Sold. If you think about how rough wheat is refined into a fine product that is used by consumers, you have identified the type of cost flow in companies that employ process costing. Let’s review the following steps and the flow of costs for prepared wood milling.

Many companies use process costing. Companies including Winnebago Industries, Valmont Industries, Roundy’s, and the Hain Celestial Group use process costing. For example, Roundy’s, a Midwestern grocery store chain, prepares its own breakfast meats using a recipe that has been in the company since 1972. Roundy’s uses process costing to determine the cost per pound. This is important information to know as the company sets sale prices to ensure it remains competitive among consumers while also generating a profit. For them, process costing generates information for management.

3. Cost Allocation Methods in Process Costing

Allocation methods have some advantages and disadvantages. Because of this, the most appropriate allocation process is very important as an important management decision. Besides the difficulties of many more, allocation of fixed costs is done by applying the method if the people take the first stage of this process, set up a sequence and find out the competent variable or set up a plan that explains how fixed costs will increase if the product diversity increases (especially general). Method assignment fixed costs are the most commonly used and preferred method in general terms. Because cost-variance is also dependent on fixed and variable structure, it is a more accurate distribution method. However, J. Mention are to be noted that part of the donor is to be wasted in the business. Especially if there is a structural difference in subsequent periods, usually standard costs cannot be estimated but are determined but the tariffs determined according to the methods and structures of the allocation methods previously included in the method. Any complicated method also includes approximately the same fixed cost in terms of this. Be expressed because of the host. This is only a bet for most estimation results of the most results. Because of this, cost allocations that take into account the intermediate level and the problem-solving approach are required.

There are different criteria for the allocation of costs. Cost allocation is an integral part of management. Cost allocation is used in various cost fields. Allocation is the allocation of undeveloped indirect costs to predefined cost objects such as chairs and services. Because the cost scarcity is, it is very important that cost aligned with cost object can be allocated as correctly as possible. This form of determination at the same time used as the base for value setting, or when calculating the production cost of the product, and for capacity planning when the production will be expanded. In an industry where the flow of goods cannot be identified, cost allocation will be faced with various complexities. Allocation of production costs for each part of the production process for the system like this will be to determine the vacant costs for a specified period in the required cost object.

4. Advantages and Disadvantages of Process Costing

Process costing is one of the most widely used methods of cost accounting. The following are some of the advantages of this type of work. Process costing is easy to understand and operate. This system is not expensive, that is, the cost of collecting and processing it is lower. Process costing can be easily adapted to various production processes and provides various cost data. The marginal cost information of a product can, if desired, be estimated more accurately under the process costing cost. The process of cost estimation begins with the basics of cost accounting, i.e., the allocation of labor, materials, and other overhead costs. The evaluation of work in progress (WIP) at the end of the accounting period is relatively simple, as the aggregate value of production in a stop is obtained. Such evaluations can also help overcome the difficulties associated with the value of the relevant work-in-process accounts, provided that the percentage is completed. Since the costs of each processing department are recorded in their respective accounts, current processing department judges can provide useful information and can be used as a study to highlight possible weaknesses.

Some of the advantages of process costing include the fact that it is easy to understand, easy to operate, can be shaped to give more accurate instructions and guidance, can be planned well in advance, with lower cost of collecting and processing, and marginal cost information. The disadvantages of process costing are that it is difficult to distinguish between the three cost elements according to a product, the aggregate data masquerading as any opportunity for correction or modification, can make the system uncomfortable, and do not pay attention to costs from time to time.

5. Conclusion

Process costing is an important accounting method. It is an effective way to determine a company’s cost. It is mostly suitable for companies providing services and for those producing homogeneous products with identified and similar production values. Process costing is used by large companies that adopt long life cycle systems and is a generic way to account for production value and assess intermediate inventory value. However, the low resolution of the method, the provision of information not assuring a low level of efficiency and flexibility, the accuracy of the result, and taking into account the evolution of each company in the case of the company’s cultural penetration in the intellectual sector require companies’ managers to study their business area.

The companies that adopt process costing resort to an accounting method tailored to the particular industry their business is carried out in. The different production methods, the variety of products manufactured, and the cost to produce them call for different value and cost accounting methods. Process costing is a suitable choice for companies operating in sectors such as chemical, utilities, food, and oil, where there is not much of a difference between the products manufactured, the raw materials used, and the processes required for production. However, process costing is slow and the result is not always accurate, making it not recommended for companies operating in industries with a high product life cycle and cheaper products.