There are 3 necessary production cost elements which come under process costing. They are as follows.
- Expenditure related to production
At the beginning of the process, the main requirement for commodity production is based on the material. After any material is issued, it is then offered for processing. After passing through these stages, it is passed over to another process.
There are certain cases where supplementary materials are required to be added when the production process transfers it from the first process and continues until the end. Usually, ordered materials are issued only after the production house stipulates it. The incurred tariff in the entire operation is considered as a material cost.
There are certain Labour forces who are in direct contact with the manufacturing units. Most of the time, workers are constantly used in one production process. Their wages are calculated on the basis of their working time, which is then debited to their process account.
The entire cost which is paid by any industry for using the service of Labour force is regarded as labour cost. As a majority of industries relies on machineries and install them for their process production work, the wage of direct manpower constitutes a very insignificant part in production costing.
- Expenditure related to production
Expenditure related to production mainly focuses on the incurring charges over other overheads of production.It does not involve any manpower charges or material charges.A major portion of process costing comprises the total expenditure of elements.
It is generally advised to the production houses to make anapt resolution to make sure that each process is imposed with equitable production share.
When these three elements; material cost, cost related to manpower and expenditure related to production, are combined together, it is termed as a product’s cost of production.
Benefits of Process Costing
- Process costing helps in obtaining the total expenditure in job costing, that too in reasonable and simplified process.
- It assists industries to find the monetary investment involved in individual processes. For short intervals, it also helps in calculating the cost associated with final products without any complexity.
- It effectively accepts the standard costing principles in process costing.
- It provides assistance to industries for determining the correct cost estimates of closing inventories.
- It aids in assigning appropriate overheads in the most simplified ways. It also helps production houses to determine the costings involved in individual processes.
Limitations associated to Process Costing
- This costing system is based on the findings of previous years’ cost system. So any present information related to process costing may not be of any use to industries who want to utilise them for making future decisions regarding production costs.
- The complete costing system process stands on the foundation of average cost methods. But it may not be useful as average costs fail to mirror the actual costs which are involved in production.
- Even if there are any by-products or any incomplete products which are obtained at the end of the production process, the cost of it is taken as identical and similar to completed products in production units.
If simply stated, these incomplete products become a singular element which determines the systematic costing in production units.
- Very often industries find it difficult to calculate usual quantity loss in a production process via process costing.
- The efforts of employees or managers are not calculated by this system.