Process costing is a cost accounting approach that follows the apportionment of costs on the output units. However, the cost is not traced on the individual units of products, but all the units of output produced. The operation of this method assumes that the company engages in the production of large quantities of homogenous products. As such, the costs are initially assigned to the departments involved in the production of the output. The process costing method also works best for products with low-value units, which are also difficult to trace their separate cost units (Wilkinson, 2013). Some of the operations that can effectively utilize the process costing approach include the manufacture of computer chips and bottling plants.
The operation of process costing follows fives steps to determine the unit costs of the products. The first step is to evaluate the cost flow model of the inventory account of the production. The analysis of the inventory majorly looks at the amount of inventory that is available at the beginning of the production process, the amount of inventory that is added during the production, the inventory that is utilized in the production, and the amount of inventory that is left at the end of the production. The second step is to apportion the number of product units based on the amount of inventory at the end of the work in progress (Wilkinson, 2013). The process costing approach assumes that the amount of inventory completed at the end of the work in progress is equivalent to the product units produced. Thirdly, the process costing method computes the amount of indirect and direct costs that need to be apportioned to the finalized units, as well as, those that are still in progress. The indirect and direct costs also include the costs linked to the inventory at the beginning of the production and the costs incurred in the applicable production period. For instance, in the case of Milton Manufacturing, the total indirect and direct costs would amount to $669,000. The fourth step involves the calculation of the total costs apportioned to the produced units of products. As such, the completed units in the ending inventory must also be taken into account to ensure that the process cost is allocated to every unit produced. The unit cost is determined by dividing the total assigned costs with completed units of products. Lastly, the costs are apportioned to the completed units of the product as well as the work in progress account for units still in inventory.
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Managers of an organization can employ the information provided by process costing to ensure that they undertake the proper planning of the business activities and goals. Firstly, managers can use the information offered by process costing to enhance the capacity of resource-constrained activities (Greenwood & Reeve, 1994). This is because the process costing approach depicts the amount of resources apportioned to the various departments that take part in the production process. Secondly, the managers also utilize information accrued from process costing to control the amounts of inventory channeled for the production process. This is achieved because every department records the inventories purchased for the manufacture of the products. Lastly, managers also employ the information adopted from process costing to make sure that the organization attains the uniformity of production. The departmental aspect of this costing method makes it easier for managers to ascertain that every department is functioning consistently.
References
Greenwood, T. G., & Reeve, J. M. (1994). Process cost management. Journal of Cost Management , 7 (4), 4-19.
Wilkinson, J. (2013). Process Costing. The Strategic CFO . Retrieved from https://strategiccfo.com/process-costing/
