Process Costing and Management Accounting in Today's Business Environment
Strategic Finance › Vol. 92 Nbr. 2, August 2010
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Summary
It's the classic "either/or" proposition in manufacturing settings, where assembly practices generally follow one of two tracks: job or process. The difference between the two is the ability to trace input costs to finished goods. Process costing is defined as an accounting methodology that tracks the production of large quantities of identical units. At the end of the period, units in production and completed units must be valued for the balance sheet and income statement as required for external reporting. Textbook theory of process costing focuses on valuing work-in-process and finished goods inventory at the end of the period. A primary reason for this focus is to support external reporting of the financial statements. Additionally, the use of standard input costs allows management to determine if the company is making the most of raw materials and other resources deployed for production. Companies need to be nimble in their ability to react to the current business environment. Standards help management of both large and small companies stay focused on effectively running the business for long-term viability.
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Process Costing and Management Accounting in Today's Business Environment
It's the classic "either/or" proposition in manufacturing settings, where assembly practices generally follow one of two tracks: job or process. The difference between the two is the ability to trace input costs to finished goods. A manufacturing process that requires specific amounts of raw materials and labor to complete a unit is the job method.With job costing, the amount of raw materials and labor placed into production can be traced or specifically identified to the finished good.
A process method, on the other hand, involves the manufacture of large or mass quantities of identical units and is more complex because specific amounts of raw materials and labor can't be traced to finished goods. In a process manufacturing environment, raw materials, labor, and overhead placed into production need to be allocated to inventory. Given the difference in the ability to trace input costs of these two methods, the valuations of work-in-process and finished goods inventories differ significantly.The topic of process costing as often presented in textbooks is simplified and doesn't reflect indust...See the full content of this document
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