Process Costing

by Dan

Process costing is a system of allocation companies use to determine cost for (usually homogenous) items which they produce. Because homogenous items are very similar to indistinguishable from each other, process costing can determine an assigned cost to masses of similar units using a computation of of a single item and averaging that cost applied to the bulk.

Process costing has several advantages, one of the primary being its simplicity and ease of use.  Compared to other cost allocation methods, process costing is simpler – especially for homogenous or bulk items.  The simplicity lies in allocating business costs  according to the number of processes each good passes through in its production.  Individualizing each process and applying labor, materials and manufacturing overhead to the total cost creates a simplified average cost for each item.

Process costing is also quite flexible, allowing a company to add or delete a process as they deem necessary.  Along the production course if process costing reveals potential to refine a process that may be unprofitable or proven costly, the company can eliminate the redundant process and therefore increase cost savings.  The application of process costing can help a company control and organize their production process effectively, allowing them to operate at the most competitive rate.

This system of determining a unit or product cost can also be beneficial because of its uniformity in budgeting and cost allocation.  This makes it easy to track any deviation from standard costs and possible to locate any operations of discrepancy or inefficiency to a specific department or process without the costly process of checking each individual department or process.

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