MANAGEMENT CONTROL SYSTEM

RAVI KUMAR - 20397107

 Process costing control

Introduction to process costing.

Process Costing refers to a method of accumulating cost of production by
process. It represents a method of cost procedure applicable to continuous or
mass production industries producing standard products. Costs are compiled for
each process or department by preparing a separate account for each .

What is process costing?

Process Costing is probably the most widely used costing system. Process Costing
is a method of costing under which all costs are accumulated for each stage of
production and the cost per unit of product is ascertained at each stage of
production by dividing the total cost of each process by the normal output of that
process.

It represents a type of costing procedure for mass production industries

producing standard products. Typically, in such industries all goods produced are
for stock, units produced are identical, goods move down the production line in a
continuous stream, and all factory procedures are standardized, costs are
compiled for each process or department by preparing a separate account for
each process. Thus, it is a method of costing used to ascertain the cost of product
at each stage of manufacturing.
How process costing works?

A process costing system accumulates costs when a large number of identical

units are being produced. ... A process costing system accumulates costs and
assigns them at the end of an accounting period. At a very simplified level, the
process is: Direct materials, direct labour and overhead.

What is process costing used for?

Process costing is a type of operation costing which is used to ascertain

the cost of a product at each process or stage of manufacture.  "The
costing method applicable where goods or services result from a
sequence of continuous or repetitive operations or processes. Costs are
averaged over the units produced during the period". Process costing is
suitable for industries producing homogeneous products and where
production is a continuous flow. A process can be referred to as the
sub-unit of an organization specifically defined for cost collection
purpose.

How process costing is used for control?

Managers need to maintain cost control over the

manufacturing process. Process costing provides managers with
feedback that can be used to compare similar product costs from one
month to the next, keeping costs in line with projected manufacturing
budgets.
Advantages of process costing control
A process costing system must be in place to compile the respective costs undertaken
by each group. The implementation of a process costing system comes with many
advantages.

COSTING SYSTEM CONTAINS COSTS PROCESS

Business and industries that use process costing can better contain
manufacturing expenses. Under this system, each department is assigned a cost
center, which is a number or code that identifies the purchases made by a single
department, reports Accounting Coach. As financial expenditures, such as the
acquisition of supplies and employee salaries, are made throughout the
production process, each group creates a report highlighting purchases that
have been made under its respective cost center.

These reports are compiled and reviewed by senior management. This data
allows them to identify inefficiencies within the supply chain. For example, a
cost center report may indicate that 50 percent of production costs come from
the procurement department. Management can then dictate steps that the
procurement team must take to minimize costs.

Inventory Control

The Internal Revenue Service  requires all businesses that maintain an inventory

to meticulously track and report its supply. The IRS uses this information to
accurately value the business so that tax estimates can be made. Tracking
inventory can be a cumbersome task for very large corporations. This process
can be simplified, however, through the implementation of a process costing
system.

Throughout the manufacturing process, each department documents any

materials purchased. In addition, each good is valued and added to the cost
center report. Management includes this information on the company’s income
tax returns.

Job Costing System Provides Uniformity

Many organizations allow each of their departments to operate autonomously.

For example, the procurement department will have policies and procedure that
are completely unique and independent of those of the supply chain group. This
can be an incredibly ineffective way for a business to operate.

Each department, in this scenario, may have its own jargon, making
interdepartmental communication difficult. Furthermore, maintaining separate
systems and policies means that additional money and time must be spent to
cross-train employees. Through the implementation of a process costing system,
a company will ensure that every department, regardless of function, operates
in a uniform manner. This will allow members of the manufacturing supply chain
to be in sync with one another.

Disadvantages of process costing control

The following are the main disadvantages of process costing:

1. Costs obtained at the end of the accounting period are only of historical value
and are not very useful for effective control.

2. Work in progress is required to be ascertained at the end of an accounting

period for calculating the cost of continuous process. Valuation of work in
progress is generally done on estimated basis which introduces further
inaccuracies in total cost.

3. Where different products arise in the same process and common costs are
prorated to various cost units. Such individual products’ costs may be taken as
only approximation and hence not reliable but may be taken as the best.

4. There is a wide scope of errors while calculating average costs. An error in one
average cost will be carried through all processes to the valuation of work in
process and finished goods.

5. The computation of average cost is more difficult in those cases where more
than one type of products are manufactured and a division of the cost elements is
necessary.

Reasons for using process costing control

Company units of product in a given period of time.
 Products are manufactured in large quantities, but products may be sold in
small quantities, sometimes one at a time automobiles, loaves of bread), a
dozen or two at a time (eggs, cookies), etc.
 Product costs must be transferred from Finished Goods to Cost of Goods
Sold as sales are made. This requires a correct and accurate accounting of
product costs per unit, to have a proper matching of product costs against
related sales revenue.
 Managers need to maintain cost control over the manufacturing process.
Process costing provides managers with feedback that can be used to compare
similar product costs from one month to the next, keeping costs in line with
projected manufacturing budgets.
 A fraction-of-a-cent cost change can represent a large dollar change in
overall profitability, when selling millions of units of product a month.
Managers must carefully watch per unit costs on a daily basis through the
production process, while at the same time dealing with materials and output
in huge quantities.
 Materials part way through a process (e.g. chemicals) might need to be
given a value, process costing allows for this. By determining what cost the
part processed material has incurred such as labor or overhead an "equivalent
unit" relative to the value of a finished process

Process costing vs job costing

Two of the primary methods of determining the cost of each product are process
costing and job costing. Process costing doesn’t rely on tracing the costs of each
individual item throughout the production process, so it’s particularly useful for
industries that mass produce identical items and cannot easily trace each item’s
costs. Job costing, in contrast, tracks all direct and indirect costs for each item or
project. This is more commonly used by companies that offer custom products or
services and price each one individually. For example, a construction company
that makes custom homes needs to know exactly how much it costs to build each
house so it can charge an appropriate amount and track whether each home-
building project is profitable.
Process costing is an important accounting method for manufacturers that make
large volumes of identical items, such as companies in the food processing, oil and
chemicals industries. For these companies, it can be difficult or impossible to
directly allocate costs to each item as it moves through the manufacturing
process. Process costing enables companies to estimate item costs by adding up
the expenses of each step in the manufacturing process, then dividing by the
number of items. To ensure accuracy, comspanies need to include only product-
related costs from each department involved in the process and correctly allocate
cost to work-in-progress at each stage. Financial management software,
particularly platforms integrated into a larger ERP tool, can help track costs by
department, as well as generate overview reports and store historical data to
monitor trends over time.