APPLICATIONS OF PROCESS COSTING IN DIFFERENT INDUSTRIES– MEANING OF PROCESS COSTING
Process Costing is that aspect of operation costing which is used to ascertain the cost of the product at each process or stage of manufacture. This method of accounting used in industries where the process of manufacture is divided into two or more processes. The objective of process accounting is to find out the total cost of the process and the unit cost of the process for each and every process. Usually the industries where process costing used are textile, oil industries, cement, pharmaceutical etc.
ACCORDING TO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON
“Process costing is that form of operation costing which applies where standardize goods are produced.”
Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.
APPLICATIONS OF PROCESS COSTING IN DIFFERENT INDUSTRIES
The industries in which process costs may be used are many. In fact, a process costing system can usually be devised in all industries except where job, batch or unit or operation costing is necessary. In particular, the following are examples of industries where process costing is applied:
- IDENTICAL PRODUCTS INDUSTRIES
Process costing is most often used when manufacturers release identical products. 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.
- INDUSTRIES WITH MULTIPLE DEPARTMENTS
Businesses that have multiple departments usually use process costing so that management can assess the costs accumulated by each department. For example, one department can take the raw resources and refine them before turning them into finished parts, another department can assemble the parts and a third department can test the finished product to assess both quality and safety. Materials might need to be shipped from one department to another, which may incur additional costs. When the costs of production go up unexpectedly, process costing can allow management to quickly pinpoint the department responsible for the increased costs and identify the source of the increased cost.
- INDUSTRIES WITH INTERCHANGEABLE PARTS
Process costing comes into play when a factory manufactures identical parts. For example, a computer manufacturing plant will create numerous components that are interchangeable among computers of the same model. Process costing allows manufacturers to sell individual parts separately to computer repair shops or individual buyers, since the manufacturers know the cost of the separate parts.
- INDUSTRIES WITH VARYING PRODUCT FEATURES
Products that have multiple extraneous features can benefit from process costing. Manufacturers can release two versions of the product, with one version costing less but having fewer features and another product costing more but having more features. For example, a manufacturer might release two coffee pots, one with a timer and one without. Process costing lets the manufacturer know how much the timer costs to add to the coffee pot, which enables the manufacturer to gauge how much it must raise the price on the coffee pot with the timer.
- INNOVATIVE INDUSTRIES
Process costs are important in industries that have high innovation. For example, manufacturers cannot determine an appropriate price for a new type of product without knowing how much the product will cost to manufacture overall. In addition, businesses cannot determine if a product will be profitable until they know the overall cost so they can estimate the maximum price that customers will pay for the product.
- FOOD AND BEVERAGE INDUSTRY
Process costing is commonly used in the food and beverage industry for products that undergo various stages of processing, such as baking, brewing, and canning. It helps determine the cost per unit for each process, including ingredients, labor, and overhead costs.
- TEXTILE INDUSTRY
In the textile industry, process costing is applied to track the cost of manufacturing fabrics, clothing, and other textile products. It helps allocate costs to different stages of production, such as spinning, weaving, dyeing, and finishing.
- OIL AND GAS INDUSTRY
Process costing is crucial in the oil and gas industry, where exploration, extraction, refining, and distribution processes are involved. It helps calculate the cost per barrel or unit of oil or gas produced, considering drilling, refining, transportation, and storage costs.
- STEEL INDUSTRY
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.
- PHARMACEUTICAL INDUSTRY
Process costing is applied in the pharmaceutical industry to track the cost of manufacturing drugs and pharmaceutical products. It helps allocate costs to various stages, such as research and development, formulation, testing, packaging, and distribution.
- AUTOMOTIVE INDUSTRY
Process costing is utilized in the automotive industry for manufacturing vehicles. It helps determine the cost of different processes, including assembly, painting, welding, machining, and quality control.
- ELECTRONICS INDUSTRY
Process costing is employed in the electronics industry, where products like smartphones, computers, and televisions are manufactured. It helps allocate costs to processes like assembly, testing, quality control, and packaging.
- PAPER INDUSTRY
Process costing is commonly used in the paper industry, where the manufacturing process includes stages like pulping, bleaching, drying, and cutting. It helps determine the cost per unit of paper produced, considering various inputs and processing stages.
