process cost accounting

process cost accounting

The Importance and Implementation of Process Cost Accounting in Modern Businesses

1. Introduction to Process Cost Accounting

The Importance and Implementation of Process Cost Accounting in Modern Businesses

What has driven you to this article? The chances are that the primary reason is the realization that cost control is one of the most important tasks for a manager. This is totally understandable. True, our modern, rather developed world of economics offers fabulous opportunities and possibilities. But it does come at a price. And at a high one. Or perhaps, mainly because of this fact, the actual competitive conditions on the market are constantly sharpened. And certainly, the way to survive in such an environment is not through ensuring the endless sales of any sort of goods, services or commodities. At what price they are offered has evolved into one of the most principled paradoxes of the contemporary relationships between supply and demand. Herein costs control poses the major problem. Costs, these two-sided runners in the vicious circle of making, marketing and selling products, only increase if randomly managed. The approaches by which such management is attained are part of the contents of what we call Cost Accounting.

2. Key Concepts and Components of Process Cost Accounting

Every business emanates from a specific location, and physical measurement of inputs and outputs is essential for all audience deliberations. And as with any similar cost accounting, record retention is an essential component to ensure transparency of process performance for internal and median purposes when required. On a longitudinal scale, acceptance of benchmark ratings enables external systems evaluation, maintaining the bond between the company and statutory as well as historical database requirements. In the same vein, except under very specialized circumstances, public access to information remains a critical component requirement of the developed system. These ten components form the backbone of the architecture of process cost accounting in general business practice.

The primary component of process cost accounting is the core concept: the process. Every business is understood as an agglomeration of several processes, each performing one critical aspect of the business. Every process is designed to possess a recognized beginning and a well-established end, thereby allowing clear demarcation of input and output vis-à-vis the performance of each process. Use of a common denominator is another component of process cost accounting. Successful conduct and subsequent analysis of process cost challenges necessitate use of a common denominator as the basis of assessment to distinguish between various components of input and output of processes. To enable better inter-process comparison in a business context, value equivalence of inputs becomes an important component. It calls for application of a similar pricing model for the units developed. Another component, often ignored but essential, calls for control information in all aspects of the conduct of any process. Its significance lies in the fact that various components are necessary inputs for successful implementation of process cost accounting, and without any one, the system collapses.

Facilitating successful execution of process cost accounting in modern businesses is done largely through implementation of components inherent in the concept. These elements are designed to assist in the application and seamless functioning of process cost accounting in a real business setting.

3. Methods and Techniques of Process Cost Accounting

2. Statement of Equivalent Units The most significant technical aid in process costing is the statement of equivalent production. Such a statement provides management with the means of expressing the results of operations in a uniform manner. Equivalent production statistics give assurance to management about the relations among three variables: a. Physical units (i.e., production input work in progress and the flow of physical units through the process flow) b. Costs (materials, labor, and overhead used to process physical units) c. Price (value of goods in process units and the cost of units of goods)

1. Cost Reporting The process cost accounting report relates to information on four types of operations: (a) physical operations (input, transfers, losses, and output); (b) equivalent production; (c) costs (direct materials, direct labor, and factory overhead); and (d) value of production and ending inventory. Accountants have developed a variety of formats for accumulation of process operating data. Among the numerous documents and journals used by cost accountants in process costing are the production order document, journal vouchers, which provide valuable links in the process costing chain by recording material, time, and overhead expenditures against production orders and overhead accounts. Records of labor expended can be obtained easily from time tickets maintained as input data for payroll compliance purposes. Similarly, data on materials drawn and returned should be readily available from material requisitions.

4. Benefits and Challenges of Implementing Process Cost Accounting

Despite the benefits associated with the use of process cost accounting, many businesses and production departments have yet to successfully implement PCA in order to deliver the indicated benefits. Given the many, if not numerous, challenges, it involves an investment of time in order to start, a certain skill set so that the activity proceeds professionally, and management support in order to ensure general success. A high level of commitment from management is therefore needed. Fully incorporating PCA, like any freestanding major project, is quite challenging and because of its technical nature, high cost, complexity, and it will take a long time to realize the expected outcomes. The process also requires a blend of ethical professional responsibilities, research, and practices, process accountability, and effectiveness of the individual, teams, and various departments. The suggested consulting phases are perhaps better understood when integrated into individual phases. Properly incorporating process cost accounting, therefore, requires an understanding of why the outcomes of the project are so important.

Despite the numerous benefits of using process cost accounting (PCA), many businesses have not implemented it, and some that have implemented it face numerous challenges which we will review in this chapter. The objective is to provide insights into the various benefits and challenges with implementing PCA in order to inspire businesses to introduce it despite the challenges. If many businesses adopt PCA, it will better facilitate supply chain costing. The costing of production process cost is critical for costing, pricing, and commercial and management decision-making. The chapter is organized into definitional and conceptual clarity, benefits of introducing PCA, and lastly the challenges and risks of implementing PCA respectively.

5. Case Studies and Real-World Applications

In 2015, the leadership of Acosta Refrescos attempted to partially overcome some of its cost accounting concerns by introducing process cost accounting in the company’s ice manufacturing plant, known as “Frigorfico de Guatemala” (Frigorfico). The immense interest that process cost accounting has aroused within the organization, as well as the factors that have driven its implementation and the functions it fulfills, govern its characteristics, justify its operation, and provided both benefits and suggestions that will make for a better use of the same, is fully explained through this case study. The company’s name has been disguised to protect its confidentiality.

Process cost accounting was first used in the U.S. in the first half of the 20th century when manufacturing was in its heyday and could be found in food processing, textiles, chemicals, and other processing industries. As manufacturers modernize and create new products, process cost accounting will tend to be neglected because of its association with smokestack industries and mass production utilizing hand labor. Manufacturers will tend to rely heavily on financial accounting as a kind of crutch which will not provide important cost data deserving of their attention, and unfortunately also implies that they will have limited data to use in profit planning and decision-making skills. Ironically, the interest process cost accounting sparks in the service sector will likely cause it to experience a resurgence in manufacturing because of the need for more sophisticated and better cost data.