BUSINESS MANAGEMENT SYSTEMS

Business Management Systems



Business Management Systems

Part One

Costing Processes

Process Costing

Process costing is a method of averages that is used to assign costs to production in situations that cause large manufacturing the same products. The costing process is applicable to that type of production that involves a continuous process resulting in a high volume of production units identical or nearly identical. Although this number of complexities involved in the costing process, the basic idea involves simply calculating an average cost per unit. As such the technique is divided into three stages:

Measurement of the production in a period

Measurement of the costs incurred in the period

Calculating the average cost by spreading the total cost over the entire production.

The costing process is appropriate in the case of companies that manufacture mass products such as bricks, gasoline, detergents and breakfast cereals. In a situation of mass product, the end product of a homogeneous process, thus a given period, a unit of product cannot be easily identified by specific costs of inputs. This characteristic of systems costing process requires the adoption of a cost flow assumption. The cost flow assumptions provide a means that allows accountants to allocate costs to products regardless of the actual physical flow of units (Baker, 1998, 16-29).

Process costing is a system for determining the cost of products made in a process production plant like an oil refinery. The continuous nature of such a process and the uniformity of the products emerging from it make it difficult to identify specific units of output. The cost of any particular unit must, therefore, be taken as the average cost of manufacture over a period. Moreover, in making the main product, by products may arise from the production process, making it difficult to determine the respective cost of main and by-products since they result from ...