Question

Sock makers like Stance typically use several different processes, including knitting, design imprinting, washing and drying, inspection, and packaging/shipping. What are some benefits of using separate process cost summary reports for each process?

Jeff tries to order raw materials just-in-time for their use in production. How does holding raw materials inventories increase costs? If the items are not used in production, how can they impact profits? Explain.

Answer 1

Process costing is used when identical units were produced in batches employing a consistent process.
Costs are allocated process wise based on no of units processed and separate cost summary prepared for each process.
It gives the management better understanding of costs and help them in decision making.
It also evaluates efficiencies of process and identifies inefficient areas of production.
Under this system, Output of 1st process is considered as input of 2nd process. And hence, Inventory Tracking can be done accurately and easily.

If raw materials are remain unused or unsold then it will be kept in warehouse / stores. For this, The storing costs like, storing space, labour, insurance etc. will incurred and it will be added to the total inventory cost. As a result, Raw material inventories costs will incrase.
For holding raw materials, there are holding cost like cost of goods damaged or spolied which also increase the inventory cost.

If items are manufacturing item and not used in production, It will be recorded as closing inventory and will include holding cost related to these items. As a result closing inventory will reflect higher value.
A higher value of closing inventory results higher profit (Unrealiesd) in financial statements.