Question

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

Answer 1

• Process costs is a step by step process from raw materials Inventory to Work in process Inventory to finished Goods Inventory to Cost of Goods sold.
• Process costing is an important process that many corporations use to keep track of where their money is being spent in the production and distribution processes.
• Understanding the cost of the goods is the first step to start the production process.
• A process costing system is used by corporations that produce similar or identical units of product in batches having similar process.
• Companies that use process costing are Chevron Corporation (petroleum products), and Pittsburgh Paints (paint).
• Calculating the process costing for products produced helps manufacturing or production companies to determine how much product is being produced and how much it costs to produce it.
• Therefore, many large corporations use process costing system to help them track total costs and total stock being produced.
• It is necessary that a company chooses the appropriate type of costing system for their product type and industry.
• One type of costing system that is appropriate is process costing.
• Process costing is more beneficial in homogeneous products than other costing systems.
• Business owners allocate production cost with each process the goods are passed through in the production.
• Process costing is used when there is mass production of similar goods.
• One type of costing system that is used in certain industries is process costing which differs from other types of costing like job costing in some ways.
• In process costing system, unit costs are like averages, the process-costing system requires less bookkeeping than does a job-order costing system.
• Hence, some companies often prefer to use the process-costing system.