Question

Process costing serves two related purposes. First, it measures the cost of goods manufactured on both a total and per-unit basis. This information is used in valuing inventories and in recording the cost of goods sold. But process costing also provides management with information about the per-unit cost of performing each step in the production process. This information is useful in evaluating the efficiency of production departments and often draws attention to potential cost savings.

Milton Manufacturing uses a process costing system. Products are processed successively by Department × and Department Y and are then transferred to the finished goods warehouse. Shown below is cost information for Department Y during the month of May:

The assignment for this unit will consist of two parts, in a word document of 1-2 pages, addressing the following questions.

1. Briefly explain the operation of process costing, including the way the unit costs of finished goods are determined.
2. Discuss how managers will use the information obtained from process costing

Process costing serves two related purposes. First, it measures the cost of goods manufactured on both a total and per-unit basis. This information is used in valuing inventories and in recording the cost of goods sold. But process costing also provides management with information about the per-unit cost of performing each step in the production process. This information is useful in evaluating the efficiency of production departments and often draws attention to potential cost savings. Milton Manufacturing uses a process costing system. Products are processed successively by Department × and Department Y and are then transferred to the finished goods warehouse. Shown below is cost information for Department Y during the month of May: The assignment for this unit will consist of two parts, in a word document of 1-2 pages, addressing the following questions. Briefly explain the operation of process costing, including the way the unit costs of finished goods are determined. Discuss how managers will use the information obtained from process costing

Answer 1

1. Process costing is useful when like similar units are processed and produced together and cost of each unit cannot be individually and independently determined. It is a system wherein the total costs associated with the production process are accumulated and then summarized. Later these costs are distributed to the units proportionately. Hence, each unit  produced in the same process shall be valued at same cost per unit when they are released from the process.
2. Information obtained from process costing can help the management and managers in several ways. Firstly, the managers can utilise the information and place bulk orders for materials and supplies, thus avail reduced prices/discounts/freebies, etc. Secondly, managers can compare costs of process with that if the previous month or the budgeted information. Lastly, they provide information to managers about normal/abnormal losses and thus investigate into discrepancies generated. Thus, process costing helps managers in several ways to keep the production activities, finance and resources within the planned budgets.