What is process costing used for?
|
A process costing system is a technique used within the manufacturing industry to determine the total production cost of a unit of merchandise. It is particularly used in environments where production passes through multiple cost centers. For example, production within a large corporation may require that product move through more than one department, such as procurement, manufacturing, quality assurance and distribution. Each of these departments has its own budget. Show As a result, a process costing system must be in place to compile the respective costs undertaken by each group. The implementation of a process costing system comes with many advantages. Process Costing System Contains CostsBusiness and industries that use process costing can better contain manufacturing expenses. Under this system, each department is assigned a cost center, which is a number or code that identifies the purchases made by a single department, reports Accounting Coach. As financial expenditures, such as the acquisition of supplies and employee salaries, are made throughout the production process, each group creates a report highlighting purchases that have been made under its respective cost center. These reports are compiled and reviewed by senior management. This data allows them to identify inefficiencies within the supply chain. For example, a cost center report may indicate that 50 percent of production costs come from the procurement department. Management can then dictate steps that the procurement team must take to minimize costs. Inventory ControlThe Internal Revenue Service requires all businesses that maintain an inventory to meticulously track and report its supply. The IRS uses this information to accurately value the business so that tax estimates can be made. Tracking inventory can be a cumbersome task for very large corporations. This process can be simplified, however, through the implementation of a process costing system. Throughout the manufacturing process, each department documents any materials purchased. In addition, each good is valued and added to the cost center report. Management includes this information on the company’s income tax returns. Job Costing System Provides UniformityMany organizations allow each of their departments to operate autonomously. For example, the procurement department will have policies and procedure that are completely unique and independent of those of the supply chain group. This can be an incredibly ineffective way for a business to operate. Each department, in this scenario, may have its own jargon, making interdepartmental communication difficult. Furthermore, maintaining separate systems and policies means that additional money and time must be spent to cross-train employees. Through the implementation of a process costing system, a company will ensure that every department, regardless of function, operates in a uniform manner. This will allow members of the manufacturing supply chain to be in sync with one another. Reading Time 3 mins DefinitionWhen we assign a cost to a product, we can use job costing if it is a unique product or a service and we can assign the costs directly. In some cases, though, it is going to be too time-consuming. When a manufacturing process involves the continuous production of identical units rather than distinguishable job lots, there can be no job orientation. When there is no obvious start or finish because the manufacturing process is endlessly repetitive, the management turns to a process costing system to accumulate and allocate manufacturing costs. As opposed to the other costing techniques, process costing is a method where the cost of products is determined on the basis of different levels of production. It is used where standardized, homogeneous goods are produced. TypesThe process costing method has its advantages and disadvantages. It is easy to use, flexible, and less expensive. At the same time, it provides less financial accuracy, cannot measure each department, among other shortcomings. When using this method, the accounting department can choose one of the process costing types based on what is most suitable for the situation.
 No More Bookkeeping Stress Keeping proper financial records is time-intensive and small mistakes can be costly. BooksTime makes sure your numbers are 100% accurate so you can focus on growing your business. ExampleLet’s take a look at a candy factory as an example. Obviously, the candy-making process is far more complicated than what we will describe here, but let’s assume that there are several stages that candy has to go through to become a final product. These are the cooking process, forming process, cooling process, and wrapping process. So, we will take raw materials (sugar, milk, butter, cocoa, flavorings, etc.) and bring them into the cooking department. Here we will add labor and manufacturing overheads. Once we are done with the candy mixture preparation, we will move on to the forming, then cooking, and finally the packaging. When the candy is going through these stages, it is really work in process (WIP). Ultimately it will go to finished goods and then the cost of goods sold in our accounting records. With process costing, we will have a WIP account for each process (department) where we will record all the costs that go into making the candy during that process. As we move from process to process, we will decrease the WIP account of the cooking process and increase the WIP account for the forming process, and so on. Having separate WIP accounts is an important, distinguishing feature of this costing method. Share This ArticleRate the article Rate the article (0 voted) 0 / 5 Author: Charles Lutwidge When should a process costing system be used?Process costing is used when there is mass production of similar products, where the costs associated with individual units of output cannot be differentiated from each other. In other words, the cost of each product produced is assumed to be the same as the cost of every other product.
What is the main purpose of the process cost summary?Definition: A process cost summary is a production report that shows a department's expenses, units produced, and costs allocated to the production units. In other words, this is a report that summaries all of the production activities of a department or process.
How is process costing used in cost accounting?Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production.
|
