HI5017 The Process Costing And Its Features Assessment Answer

Answer :

Managerial Accounting

Abstract 

Process costing is defined as a costing method of accounting used in the industries to analyze the cost incurring due to the number of processes. A manufacturing unit involves many processes that use different resources. Having a thorough knowledge of all the steps and the cost incurring in them is important to identify the cost effective and non-effective processes. When the organization have a clear picture of the steps of the processes then it can establish changes to accommodate beneficial processes for manufacturing goods and services. This costing system is taken into consideration when the industry manufactures mass production of identical units. The unit cost of the material and the conversion is identified and it is then applied on all the processing cost. Therefore, the use of the process costing is defined in the given report. 

Introduction 

The costing methods are exploited by the manufacturing organizations to identify the areas that need changes to attain higher profitability and for feasible functioning of the organization. The process costing is applied when the company is involved in mass production of the identical products (Langfield et al, 2018). The application of the process costing assist organizations to evaluate the cost of production incurring in whatever number of products they are manufacturing. The process costing and its features are discussed in the report for detailed information of the costing method. The report also identifies how the implementation of the process costing can be effective in the organizations. At the end of the report, the concluding points of the report are also defined. 

Part A

Features of process costing 

Process costing is a method of cost accounting and it is implemented by the organizations where the identical goods are produced in mass (Elaoud and Jarboui, 2017). The process costing calculate and evaluate all the fixed and variable and direct and indirect cost that incur during the production. The cost incurring for finalized product and left in-process products vary therefore, a proper information should be available. It can be exploited in chemical, steel, textile, shoes, petrol, etc. industries where the production is homogenous. Important features of process costing are (Basu, 2020):

• Accumulation of costs: the main feature of process costing is that is calculate both direct and indirect costs in the production process. All these costs are collectively applied on each process of the goods production. 
• Provide better managerial control: this method tends to provide a better control to the manager on the processes and the whole organization because the cost data of all the processes, departments and the operations is available to the mangers for use. 
• Continuous process: the process costing is a continuous process and it is used by the organization to where the stock has to be maintained. 

Suitability of process costing 

The process costing is suitable for the companies that are not indulged in continuous production of the homogenous process. It is suitable to be used by the companies to maintain the competition. The cost information of the company is used to ascertain the benefits in the market. Two Australia based companies that can exploit the process costing are omega industries and AI Bader Pvt ltd. 

Omega industries: it is a paint manufacturing company and similarly there are other number of renowned companies of paints. Therefore, it can be generalized that the competition is high in the market thus it is required that the cost information of each process should evaluated and it should be applied to the respective departments (Cooper, 2017). The first process in the paint manufacture is mixing of the chemicals and in the later steps, the colors are added. Thus there will be two processes and the company can identify the processes that are feasible and those where costs is high. 

AI Bader Pvt ltd: it is a chewing gum manufacturing company. The final product that is chewing gums are not costly et al to the customers. However, if the production process is experiencing high costs such as high labor cost then there is a possibility that the company may not make good revenues. There exist different steps in the production of the gums and in the first process, the batter is mixed and then it is further converted to final product where different flavors are added if needed. Therefore, to increase the revenue and to make the process more efficient, the company can use the process costing (Hla and Teru, 2015). Thus it would be suitable for these both companies to use the process costing to achieve the competitive advantage and to measure the ways in which benefits can be made. 

Potential uses of the cost information 

The cost information in the organization is important to prevent the companies from any sort of loss in the organization. The companies that use the process costing are those where homogenous products such as shoes are manufactured. The companies use the cost information for its various uses. Important uses of the process costing includes cost ascertainment, cost control, decision making and so on. The companies discussed above can exploit process costing due to these uses of the method.

Omega industries: the painting market is very competitive and new innovative decisions are required to be taken by the management of the company to discover modes of success. The usefulness of the costing system is in ascertaining the price of the final product in such a way that the organization achieves success as well as competitive edge (Xu et al, 2019). The customer number can be increased when the prices are lower than same products of other companies. Another important usefulness of the method of process costing is to assist in management decisions-making process. Decisions such as if the process need amendments or new talented officials are required to regulate the process are taken by properly viewing the cost data of the company. 

AI Bader Pvt ltd: this company is at competition risk because the product is cheap and the profit -making process is difficult. It can use the process costing method for two purposes. Firstly, it can use it to ascertain profit in all the activities (Fabozzi, Drake and Polimeni, 2015). It can be identified by comparing the cost incurred in a specific activity and the revenue generated through that activity. Secondly, it can control the cost of the product. The cost is controlled by setting the goals with proper guidance and support from the company. 

Plan B 

Article in use: “Process Costing Of Shell Manufacture” 

Design and implementation of process costing 

The real-life example company chosen in the article uses the process costing method to analyze the feasibility of the manufacturing process. The design of the process contained all the important pieces of information that will be used in the implementation of the process costing. The shell manufacturing company is implementing the costing system to attain higher profitability and a control over the cost of the homogenous product manufacture. The implementation of the costing system is done with a set of steps. Firstly, the flow of the units is analyzed to proceed for the implementation. Secondly, the process involves the conversion of the inventory. The shells are forged and are produced in the final product. The third step of implementation involves the identification of the total cost. The direct and the indirect activities incurs high costs therefore, the costs are identified so that they can be managed and controlled. In the fourth step, the average cost was calculated of the units and it is applied equally on all the processes. The last and final step is allocation of the costs on the finished products and other process that are still in the process. These implementation steps are used by the shell manufactures. The implementation of the process thus provided useful information to the management of the company to make strategic decisions. 

Contentment with the features 

The features discussed earlier in the report are the most common features of the process costing that deliver benefits to the companies that use them. The selected article implemented process costing to make itself sustainable and successful (Kelly and Shoemaker, 2018). The discussed features can whether fulfilled or not can be identified from the given examples where process costing was used. The first example it is shown that the costs of the activities and the individual processes were accumulated. The process were divided into two main processes so that the company can eventually have the cost information of production at the end of the month. By using the process costing it effectively accumulated the cost on the activities. Furthermore, having a proper cost data led to the better control of the costs in the processes. By proper information of the processes, the company identified the spoilage in the processes. This will provide the management to make proper changes in the process so that the management find it easier to control these processes so that the cost wasted on such spoilage can be prevented. Thus the article in use have satisfied the spoken features of the process costing (Zhai and Wang, 2016). The organization determined the cost of burden on the various activities such as labor. Therefore, it can be realized that the process costing method is favorable to be used in the companies to control the cost and to accumulate it in the process units. 

Usefulness of process costing for internal users 

The management of the company relies on the costing systems to make financial decisions. The costing system is chosen as basis for the same because it takes every single process under consideration and then they are accumulated to the unit processes. The benefit of having this cost information using process costing is that the management got to know the cost of the individual process how the extra cost can be reduced. The internal users of the shell manufacture used the information to identify the need to extend the labor need in the individual processes. The process costing also helped the internal users to identify the accumulating cost so that it can determine the unit and total cost of the manufacture in all the departments individually at the end of each month. The use of the process costing method is also done by the users to prepare monthly reports for the cost incurred and the report help them to determine the processes that are in progress and those that have been completed. Since the process is continuous therefore, it is important to have all the data of the processes that are completed, in progress, or will be completing soon (Mashayekhi and Ara, 2017). The users used identified the forgings that were rejected because of the spoilage. These rejected forgings are required to be rechecked and should be forged again before selling. Therefore, the process costing provide this outlook to the managers differently and they also calculate this cost as extra cost occurring. Thus the management has used the information from the process costing for two reasons. The first is that the incomplete shells or rough forgings that require to be converted to finished goods will require a process cost. Another reason of using the method is to identify the spoilage occurred and the amount it will use to be remade into perfect end product. 

Key lessons to the contemporary organizations

The contemporary organizations need to be more specific in their functioning to operate in the competition bound market (Netten and Beecham, 2018). The survival of the organizations has become difficult because the competition is high and without proper knowledge and use of the innovative tools, success is difficult. The organizations can take a few special learnings from the given article and the literature provided. The first learning that the contemporary organizations can utilize is that it is very important to have a thorough knowledge of the processes that are included in the manufacturing. This is important because if there are steps that are of no use and adding no value to the end product then they are simply waste of the resources and manpower. The organization in the article used the process costing to determine the need of extending the labor number in each department. Similarly, the contemporary organizations can utilize this information for valid use of the resources. This will save the expenses that leading to loss of the resources and revenue of these organization (Romney, 2018). Moreover, in such a competitive market, it would be too costly to make decisions using hit and trial method. Furthermore, to increase the customer number, the contemporary organizations are needed to use the process costing. This is because the spoiled product will be identified and they will be again processed. Its benefit is that the customers will be provided better products and thus a trusted customer range will form (Langfield-Smith, Thorne and Hilton, 2018). In the case of the organization in article, they identified the spoiled forges and again processed them. This identification was a result of the process costing. 

Conclusions

The points that can be inferred from the report are that process costing is a beneficial method of costing. This method assist the managers to calculate the cost of the processes that are involved in manufacture and thus the cost is allocated to the individual processes department-wise. An important aspect of the process costing that can be concluded is that the process is continuous and the organizations that produce homogenous products can use them properly and efficiently. It is favorable for the chemical manufacturing, food manufacturing and so on companies. The report concludes the features of process costing that makes the process effective to be used in the manufacturing companies. Thus the report can overall conclude that the process costing method is highly suitable for the manufacturing industries where multiple processes are functioning to manufacture the identical products.