Question

Select a company and discuss why they should be using process costing. 200 words

Answer 1

The company I have selceted is Frito Lay- the manufacturer of Lays chips. To understand why Frito Lay should be using process costing, we will have to first understand what process costing is and for kind of products it is used.

In process costing, the direct costs are accumulated and traced to products and the indirect costs are allocated to products. The assignment of costs ocurs in a batch which can also include the entire month's production. The ultimate goal is to assign cost to each unit. The assignemnt of cost to each product is done on an average basis.

The type of products which would use process costing are homogenous products which are produced in large quantities. Since the costing is done on an average basis, the costs of the product will more or less be the same. Thus, the processes deployed to manufacture the product and the cost of each product should be the same.

The bags of chips produced by Lays or identical . Differentiation might be in terms of flavor and size, however the processes undergone to make a bag of chips are the same. Thus, allocation of an average cost would be a correct representative of the actual cost of the product. Thus, Frito Lay should use process costing.