Importance of Process Costing - Essay Example

? Process Costing Process Costing Introduction In the contemporary period, process costingis one successfully adopted accounting methodology in organizations. Organizations use process costing for effective cost calculation, especially at times when other costing models (job costing or activity based costing) are futile and not producing desired outcomes. Process costing is applied when activities like cost accumulation, cost assignment and cost assessment are to be performed and conducted. When both cost of fixed and variable natures are to be calculated then process costing comes into organizational application. This paper is a comparative analysis report on process costing. The paper aims to review five scholarly articles to determine that how process costing is a significant and effective cost management procedure. The objective here is to extract the comprehensive knowledge on process costing and its execution. Importance of Process Costing When an organization involves the multi-level production process and manufactures products in departmental sequence, then cost management is really a critical task. Process costing is a methodology than enables such organizations to calculate costs in the critical times. It is one methodology that can effectively be applied in manufacturing firms and organizations. Organizations where information flow is departmental can successfully adapt the strategic approach of process costing. This elaborates the comprehensive application of process costing in processing organizations. Literature Review Journal Article 1: Process-Based Costing: The Best of Activity-Based Costing Aim: Process costing is considered as a cost allocation process. It is known to be as a methodology that assigns cost to different process patterns with respect to assigning cost to process a sequence. The aim of this study is to determine that how process costing is effective in cost allocation procedure. How process costing applies in the activity of assigning costs to sub-sections of the process is answered in this study. Methodology: The study has adapted the case study format to conduct research and assessment. The case of semi conductor manufacturer is observed and analyzed in this study. The company was earlier a R&D unit which later on became a semi conductor manufacturer. This company was selected to understand process costing in a practical manner. The researcher first performed theoretical research to find out the importance of process costing manufacturing firms. Later the researcher analyzed the case of a manufacturer that produces semi conductors in batch forms. Functional activities of the selected company were analyzed to understand the practical implication of process costing(Sievanen & Tornberg, 2002). Conclusion: The study recognizes that a two-dimensional approach can be adopted on the basis of process costing methodology. These two dimensions are strategic and operational information collection. The study identifies that using the process costing with two dimensions, organization’s overall process cost can be calculated. Adopting the two dimension approach of process costing, cost of departmental procedures, functional activities and cost of objects and materials can be calculated. When departmental costs are known, cost allocation is an easy task to perform(Sievanen & Tornberg, 2002). Journal Article 2: Accounting for Process Cost Systems Aim: It has been noted that theories presented on process costing are certainly on a gap with the practical evidence that is present in this subject. There is certainly a gap present between process costing theory and practice as projected by most of the UK and Australian companies. The aim of this study is to understand this gap, which is done by means of understanding the New Zealand environment perspective(Parkinson, 2012). Research Methodology: The researcher adopted a pragmatic research design to conduct this study as both primary and secondary sources were used to perform the research. Using telephone directories, the researcher selected 15 industries in New Zealand to understand the practical application of process costing. Interviews were conducted to understand the respondents’ view from the selected 29 organizations(Parkinson, 2012). Conclusion: The researcher found that process costing is a significantly adopted procedure in industries. Industries such as milking system manufacture, carpet manufacturer, fast moving consumer goods manufacturer and pallet and paint manufacturer use process costing for effective cost calculation. Industries adopt the Resource Based approach with process costing to calculate the cost of fixed and variable nature. Both direct and indirect costs are calculated and assessed by means of process costing(Parkinson, 2012). Journal Article 3: Equivalent units of production: a new look at an old issue Aim: This study has been conducted by Guerreiro, Cornachione and Catelli (2006). The main purpose of the study is to determine the rate for cost completion which is considered when determining the equivalent units of production while making use of the process costing model. In this regard, the researchers have put have two main questions to be answered in the research work, which focus on determining the procedures followed by organizations with respect to determination and application of the equivalent production units and finding out the most appropriate manner in which the percentage for completion level shall be determined in a conceptual manner (Guerreiro, Cornachione, & Catelli, 2006). Research Methodology: In order to carry out this study, the researchers made use of a qualitative research approach, which was based on an exploratory survey. The evaluation and investigation of the research problem has been carried out while taking into account 175 business entities operating in Brazil. All of the companies selected for the survey had annual revenues in excess of $ 100 million. Each company was provided with a survey questionnaire to respond and return to the researchers. The researchers were able to receive 50 complete and usable survey questionnaires for the study. Conclusion: The conclusion reached in the study has been based on both review of literature and findings from the survey. The review of the literature indicated that no particular method, which ensures objectivity in the determination of the rate for cost completion, exists. On the other hand, analysis of responses obtained through survey questionnaire indicated that business entities, in the real world, do not make use of the procedures outlined in the theoretical frameworks. In fact, the study concluded that the existing procedures applied by the business entities have come out to be effective and efficient alternative approach to what has been recommended by theory. This is because they are able to produce same results as expected to be obtained through the implementation of the recommended methods. Journal Article 4: Activity-based costing and process modeling for cost-conscious product design: A case study in a manufacturing company Aim: Katja Tornberg, Mikka Hamsen and Jari Paranki conducted this study in association with Faculty of Industrial Management at Tampere University of Technology. The underlying objective of this research work was to provide product designers with detailed knowledge of cost information. Moreover, the study also aimed at exploring the potential of activity based costing and design modeling techniques for raw material purchase and manufacturing procedures (Tornberg, Jamsen, & Paranko, 2002). Research Methodology: To achieve the aims of the study, the researchers used the case study of a manufacturing and marketing organization in Finland. The research methodology used for this research work outlined three steps to achieve the aims. The first step was to study the activities, that are part of the manufacturing or production process by emphasizing on the most expensive items of one product’s sub-assembly. By doing this, researchers were able to calculate the activity based cost in the manufacturing process. The second step was to graphically presentt the activities of the process in a flowchart format. The third stage was to implicate activity based cost information and process model to the process of product designing in order to test its effectiveness. Conclusion: The major outcome of the research work was that, in order to head towards a cost-conscious product design, product designers should adopt activity based costing technique and implicate process modeling techniques. By doing this, product designers will be acknowledged about the cost of each activity performed within the organization. Journal Article 5: Process Costing and Management Accounting in Today's Business Environment Aim: The authors of this journal article are Dosch and Wilson (2010). In this article, the researchers have discussed the process costing method in light of the modern day business environment. The discussion relates to the process costing method, identification of strategic management of costs in the manufacturing businesses and the management of such costs(Dosch & Wilson, 2010). Methodology: The researchers have considered three business enterprises, which are engaged in the business of consumer packaged goods and make use of process costing techniques and other standards to enhance their profit levels(Dosch & Wilson, 2010). Conclusion: The researchers concluded that there is a 5-step method used in relation to cost allocation by the companies taken into consideration in the study. Moreover, the companies considered do consider process costing and standards as beneficial to their cost management practices(Dosch & Wilson, 2010). Summary From the evaluation of these studies, the author of the research paper is able to understand the concept of process costing and its impact on the operational efficiency of product designers. Moreover, the study of previous studies on process costing also enabled the author of the paper to understand how process costing is effective in cost allocation procedure and how process costing applies in the activity of assigning costs to sub-sections of the process is answered in this study. The review of the previous literature was also beneficial for the author in a way, that it made it easier for understanding the two-dimensional approach towards implicating process costing methodology. By using strategic and operational information, organization’s overall process cost can be calculated. In addition to this, the two-dimension approach of process costing, cost of departmental procedures, functional activities and cost of objects and materials can be calculated. Other studies evaluated by the author of this paper focused on theories presented on process costing. By doing this, the author identified that there are certainly on a gap with the practical evidence that is present in this subject. Upon understanding this concept, the author identified that the gap in the knowledge of process costing can be eliminated by understanding external environmental factors that could affect the pricing of raw material and activities carried out within. Once this knowledge is gathered, it becomes easier for product designers to determine the cost of each stage during the designing process and break up each cost activity wise. Conclusion The author of this research paper evaluated a number of research works pertaining to process costing and its different fields of study. As the author has a keen interest in costing of the products and their designing and manufacturing processes, the evaluation of previous literature is helpful in identifying areas of further study. Additionally, the author now has more knowledge of research methods and techniques that can be utilized to carry out further studies in the field of process costing. The gap identified in the literature is beneficial in a sense that the researcher can use these gaps to identify a topic for future researcher in accordance with his course requirements. The evaluation of available literature on process costing revealed that the inter-organizational multi-level production processes and manufacturing functions holds a critical role in the success of the strategic management and performance of the organization. Moreover, process costing also facilitates organizations to cut down fixed and variable costs in times of financial or economic crisis. Manufacturing sector of global business can take numerous advantages of adopting process costing technique, one of which is bringing the cost of manufacturing one unit of product down, and shifting this benefit to the customers by offering the products at standardized pricing. By comparing the studies evaluated in this paper, the author has also found that there is not a single definite methodology that can be adopted carry out research work in the field of process costing. A researcher can used a quantitative or a qualitative approach depending upon the target audience from which the primary data will be retrieved. But a mixed approach is found to be more appropriate as it would help researchers to collect primary information pertaining to the costing of products or each unit of products, and support the findings by collecting detailed background information on the similar subject. Reference List Dosch, J., & Wilson, J. (2010). Process Costing and Management Accounting in Today's Business Environment. Strategic Finance , 92 (2), 37. Guerreiro, R., Cornachione, E. B., & Catelli, A. (2006). Equivalent units of production: a new look at an old issue. Managerial Auditing , 21 (3), 303-316. Parkinson, J. (2012). Accounting for Process Cost Systems. The Journal of Law and Financial Management , 11 (2), 1446-6899. Sievanen, M., & Tornberg, K. (2002). Process-Based Costing: The Best of Activity-Based Costing. AACE International . Tornberg, K., Jamsen, M., & Paranko, J. (2002). Activity-based costing and process modeling for cost-conscious product design: A case study in a manufacturing company. International Journal of Production Economics , 79 (1), 75-82. Read More