Process costing helps make effective pricing decisions by providing accurate cost information that can help determine the product\u2019s selling price. If a manufacturing unit is manufacturing two or more products, which are quite dissimilar to each other, weighted average method is used. Under this method, weighted average is computed and used in valuation of the incomplete units.<\/p>\n
Since its introduction in the 1920s, process costing has been utilized in industries such as food processing, chemical manufacturing, and oil refining. When using process costing, the procedure that is used to manufacture a product is divided into well-defined processes. For each process, a separate account is opened to which all incurred costs are charged. The finished material of one process makes up the raw material of the next process. Hence, the cost of each process is transferred alongside the finished material to the next process until it ends in the finished stock account.<\/p>\n
Understanding these steps can help businesses accurately determine the cost of their products and make informed decisions regarding their production processes. Why have three different cost calculation methods for process costing, and why use one version instead of another? Alternatively, process costing that is based on standard costs is required for costing systems that use standard costs. In general, the simplest costing approach is the weighted average method, with FIFO costing being the most difficult. The process costing method involves dividing the production process into distinct stages or processes.<\/p>\n
Process costing is widely used in the steel industry, where raw materials like iron ore and coal are processed into steel products. It assists in determining the cost of each process, including blast furnace operations, smelting, casting, rolling, and finishing. If mass produced televisions have the same parts, manufacturers can assign consistent prices to the products based on how much the products cost to manufacture overall.<\/p>\n
Companies usually make use of this method in a process costing system when it is time-consuming or not convenient to collect the current information about the real costs. This can be done either using the weighted average method, standard costing method, or the first-in-first-out (FIFO) method. It is usually good accounting practice to carefully select the process costing method that best meets a business\u2019s needs. Hence, a process costing system is used to allocate costs to an individual unit after a process of mass production. Sensors can also track process efficiency and identify bottlenecks in production lines. Using IoT-connected systems, utility use in manufacturing processes can be separated and tallied by time or location.<\/p>\n
In these industries, the production process is continuous and standardized, making it difficult to determine the exact cost of producing each product unit. Process costing enables manufacturers to allocate costs across production to determine the cost per output unit. We calculate this by dividing the total cost by equivalent completed units in the production phase. The basis of equivalent units can be the weighted average, standard cost, or first-in-first-out inventory method. For instance, a typical example of when to use process costing is when determining the precise cost required to create one gallon of aviation fuel.<\/p>\n
Capabilities to monitor and report operational costs, labor, and other expenditures related to production processes, an accurate analysis of manufacturing costs can be generated for process costing. MRP (Materials Requirement Planning) software encompasses all manufacturing resources. It includes equipment tracking, workforce direct labor and allocation, overhead costs, financial accounting, and component costs.<\/p>\n