The operation of process costing refers to the period in the organization where there is a production of a lot of similar products. During that period, it is difficult to differentiate individual units about the costs associated with them. In other terms, the prices of each product produced will be assumed to be equivalent to the value of the other products. The company is likely to accumulate the costs over some time and then summarize them and make an allocation of all those units made in production during that fixed period on a consistent period. An example of this is in the food production and chemical processing industries.
The cost of finished goods refers to a calculation of the total value of inventory that was produced within a specified period and is available for sale. It is the total expenditure incurred in the process of changing the work process inventory into complete products. To determine the cost of finished goods, it involves a calculation of adding all the total manufacturing costs. Example of manufacturing costs are; direct labor, factory overhead and the cost incurred from direct materials
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Managers make an application of the information obtained from the process costing in several areas in the manufacturing management. The data collected can be used in valuing inventories. Using process costing makes it easier to determine the product cost in your industry. Again, managers can apply the information obtained from the process costing to help them in evaluating the production efficiency of its processing departments. From there, they will be able to make an assessment and make sure they eliminate or the wastes that are found. The information will also give them a chance to forecast on future costs and setting of prices to be used in the sales.
