Understanding Process Costing
Suppose your sister Sandra and her three best friends start a small business making beaded bracelets. They plan to purchase the materials, assemble the jewelry themselves, and sell the finished pieces to friends at school. Other than minor color and design differences, the bracelets will be virtually alike. Your sister realizes that they must cover their costs before they can expect any profit and is trying to determine the cost per bracelet. Sandra thinks that she should include the cost of each individual bead used in a bracelet and is becoming frustrated with the process of tracing each bead.
Required:
Explain to Sandra why she should be using a process costing system to determine the cost of the bracelets. Include a description of process costing as well as reasons that it is appropriate for her business.
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