Process Costing Systems: How They Work and Their Benefits

Discussion Questions 

Process Costing Systems 

A Process costing system is a costing system that assigns production costs to units of output. It is used to determine the cost of a good. Companies use process costing systems when mass producing units that are nearly identical. In other words, the process costing method is widely used by companies that produce large quantities of homogenous products (Vitez, n.d). With this in mind, it is important to note that operation costing system work based on the notion that homogenous products should have the exact same price. Through the use of process costing systems, business owners can accurately calculate as well as apply the business costs for producing a certain product. Costs are assigned first to production departments (Wilkinson, 2013). Once the costs have been to production departments, the costs are assigned to units of output as they move through the departments. 

Process costing systems are in contrast with other costing methods like job costing (Eydman, 2017). In addition, process costing systems are optimal under certain conditions. The first condition is that the units produced must be homogenous. Homogeneous indicates that the units of outputs are nearly identical. If the units produced are homogenous, then it may be beneficial to use this system (Wilkinson, 2013). Secondly, process costing systems are often used when the output products are of low value. Simply put, if the output products are of low value, then it may be beneficial to use this system (Wilkinson, 2013). Lastly, process costing systems are used if it is difficult or infeasible to trace production costs directly to individual units of output. 

The unit cost of finished goods is determined using five steps. The first step involves analyzing inventory flow. Once the inventory flow of the units being produced has been determined, the in-process inventory is converted to equivalent units. All applicable costs are then computed. This is then followed by computing the cost per unit of finished and in-process inventory. Once the cost per unit has been determined, the costs to units of finished and in-process inventory are allocated. 

How Managers use Information obtained from Operation Costing 

Process costing systems provide a number of benefits to businesses and organizations. In this regard, managers can use the information provided by these systems in several ways. First, managers can use this information provided by process costing systems to determine the prices of the units they produce. In addition, they can use the information provided by these systems to make informed decisions. This includes decisions pertaining to what is best for the company. As such, managers can use the information provided by process costing systems to contribute to organizational performance. By using the information provided by these systems, managers can decide whether or not to increase their spending on products or production. This, in turn, contributes to organizational performance. 

As seen, process costing systems are very beneficial. Managers can use these systems in a number of ways. For example, they can use it to evaluate the expense of their organization. In addition, they can the information provided by process costing systems to see what money is going where. With this in mind, organizations producing homogenous units should adopt this system. 

References 

Eydman, M. (2017). Comparison of job order and process costing. [Online]. Retrieved August 11, 2020, from https://www.researchgate.net/publication/337012785_Comparison_of_Job_Order_and_Process_Costing 

Wilkinson, J. (2013). Process costing. [Online]. Retrieved August 11, 2020, from, https://strategiccfo.com/process-costing/ 

Vitez, O. (n.d). Steps in process costing. Retrieved August 11, 2020, from, https://smallbusiness.chron.com/steps-process-costing-4066.html