Question

1. Explain: The importance of applying process costing system in businesses [ 7 marks] [ minimum 600 words].

Answer 1

The importance of process costing Costing is an important process that many companies engage in to keep track of where their money is being spent in the production and distribution processes. Understanding these costs is the first step in being able to control them. It is very important that a company chooses the appropriate type of costing system for their product type and industry. One type of costing system that is used in certain industries is process costing that varies from other types of costing (such as job costing) in some ways. In process costing unit costs are more like averages, the process-costing system requires less bookkeeping than does a job-order costing system. Thus, some companies often prefer to use the process-costing system.

A lot of things will be depend on process costing result. Below is some example:

Selling price of a product. The Propper price setting will use this statement : Selling price = Direct cost + Overhead + Profit. Direct cost & overhead will be found in Process section of a product. if you fail to provide it, you will fail to meet the actual profit achievement.

Product cost efficiency (or cost saving). You will need to provide product cost first in order to know what to do or what kind of to do tasks in order to create cost saving. Fail to do this, then your product cost will be unmanageable. You will find difficult time to compete with your competitor.

Budget setting (or proposal). How do you suppose to create budget setting when you didnt know how much a product cost is? Your HQ will reject you budget proposal.

Production efficiency KPI. Cost is one of key element in evaluating production performance.

1. Process costing helps determination of cost in each process and of the final product at short intervals. If overhead rates are predetermined, unit costs can be computed very promptly even at weekly or monthly.

2. The average cost can be easily determined when the methods of production are standardized. Price quotations can be submitted more promptly with standardization of processes.

3. It involves less clerical work and cost than job costing. Cost finding is simpler and less expensive.

4. Allocation of expenses can be easily made and the costs in each process accurately determined.

5. Use of standard costing system is very effective in process costing.

6. The performance analysis and managerial control is facilitated to a greater extent because of the availability of cost data in the form of prompt and accurate cost reports.