Strengths And Weaknesses Of Product Costing Essay

1177 Words 5 Pages
Register to read the introduction… This method is also used where a number of production processes are involved and the output of one process is the input to a later process, this continuing until the final product is completed. Examples of industries where process costing might be applied are food processing, chemicals and brewing.
The advantage of this system is that it is easier to use in comparison with the other cost allocation methods. As in today’s dynamic world, most of the companies have to be flexible when it comes to production, and a lot of processes are either added or deleted, the process costing helps the management accountants to track and allocate the costs accordingly. This process helps a company to determine selling price/unit by adding profit margin to profits. This method also enables a company to increase efficiency by pointing out the processes where cost is higher than
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In this process as each job is treated as a unique job, the material & labour can be easily traced and allocated to the job. The overheads are allocated on the basis of allocation rate. This method is used not only by manufacturing companies, but also by service industry like hospitals, law firms, etc. This system is a complex one that is prone to error, but it does yield good information about production-specific costs.
The advantages of this system are that it provides the management team with ready access to all the costs incurred pertaining to each completed job. This helps the management in doing a detailed analysis of costs to find why was the cost incurred and how can the cost be controlled to attain maximum profits. This method also provides ongoing results for each job which enables to management to take preventive measures in case of any unnecessary costs being incurred, instead of an identification post the job is
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This method also requires a lot of data entry work, and as it is done by human intervention, any single mistake can result in ineffective results. This method has little relevance in some environments. For example, the soft ware industry has high development costs but almost zero direct costs associated with the sale of its products.
Activity Based Costing Method: This method attempts to divide production into its core activities, define the costs for those activities, and then allocate those costs to products based on how much of a particular activity is needed to produce a product. In this method the costs are assigned to specific activities such as planning, research, or production—and then the activities are linked to relevant products or services. This enables the management to analyse which products or services are profitable or

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