Difficulties Encountered in Process Costing Procedures

Difficulties Encountered in Process Costing Procedures:

Learning objectives of this article:

  1. What are the difficulties or Limitations in a process costing procedure?

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures:

  1. The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data generally come to the cost department from operating personnel often working under circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the basis for the determination of inventory costs.
  2. Materials cost computations frequently require careful analysis In the illustrations materials are generally considered to the the cost of first department. In certain industries, materials costs are not even entered on production reports. When materials prices are influenced by fluctuating  market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the materials market.
  3. The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the completed unit cost. Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period.
  4. Industries using process cost procedures are generally of the multiple product type. Joint processing cost must be allocated the the products resulting from the processes. Weighted unit averages or other bases are used to prorate the joint cost to the several products. If units manufactured are used as a basis for cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used for charging overhead to work in process. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures.

It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by a company must be based on reliable production and performance data which, when combined with output, budget, or standard cost data, will provide the foundation for effective cost control and analysis.

You may also be interested in other useful articles from “process costing system – addition of materials and beginning inventory” chapter:

  1. Increase in Unit Cost Due to Addition of Materials
  2. Addition of Materials – Increase in units and Change is Unit Cost
  3. Beginning Work in Process Inventories – Average Costing Method
  4. Cost of Production Report FIFO
  5. Average Costing Method Versus FIFO Costing Method – Process Costing
  6. Difficulties Encountered in Process Costing Procedure
  7. Discussion Questions and Answers
  8. Similarities and Differences between Job Order and Process Costing System

  9. Operation Costing /Hybrid Costing System

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