Question

Describe the Process Costing method: 1. their characteristics, features and challenges; and 2. their application in manufacturing industries.

Answer 1

Process Costing is the most widely used method of cost ascertainment.Process Costing refers to a method of accumulating cost of production by process.It is used in many industries like steel, sugar,chemicals etc.

" Process Costing is a method of costing used to ascertain the costs of products at each process, stage or operation of manufacture"

5 steps for Process Costing Method

1. Analyse the flow of actual units.

2. Convert the inventory to determine the equivalent units.

3. Identify the total costs.

4. Calcate the average cost per equivalent unit.

5. Allocate costs to finished products and work in process units.

Characteristics of Process Costing

1. Production of Googs is continuous except where the plant is shut down for repairs until final product.

2. The finished product is result of two or more processes.

3. Each process is distinct and predetermined.

4. Costs are accumulated by processes.

5. The products are standardised and homogeneous.

6. Costs of production is analysed at each step and finally after completion of production.

Features of Process Costing

1. It helps in computation of costs of products as well as the finished products.

2. It is easy to tender prices because of standardised processes.

3. It helps in a choser control over production and costs.

4. It helps in computation of costs at shorter intervals which is usually a week, a fortnight or a month.

5. It is possible to evaluate the performance of every process.

6. Cost of production is ascertained periodically which helps management in to receive various reports and review the progress and efficiency of production process.

Challenges for Process Costing

1. It is difficult to allocate costs among joint products and bye products.

2. It is difficult to.measure work in progress.

3. It is difficult to value losses,scraps and wastes under this method.

4. The costs used under this method are historical costs which are of no use for management reports and managerial control.

5. It is also difficult to value the closing stock when one product is transferred from one department to other department.

6. This method provides average cost per unit which is not very accurate and it is of no use for detailed analysis and operating Effeciency.

2) The process Costing procedure is applied when goods are manufactured under circumstances of continuous processing or under continuous mass production environment.In fact process costing systems are frequently termed as continuous or mass production systems.

The type of manufacturing process establishes the type of costing sysyt that must be applied.For example a chemical company will adopt a process cost procedure, an equipment manufacturing company will follow the same.It is important to understand that excluding some alterations the application of process costing methods are increasing day by day.

Process Costing methods are applied by company manufacturing steel, rubber, garments , lubricants, shoes, screws, bolts etc.

Another type of manufacturing concerns applying process costing system which manufactures things such as planes, typewriters and household appliances.

Finallycertain service industriessuch as gas, water and heat cost their products by applying process costing systems.