Today we will talk about the Process Costs System, looking at its characteristics, advantages and disadvantages. Before continuing, we must know What is a process cost system? It is a term that is used in cost accounting, which describes a method that allocates and collects, the manufacturing costs of units produced, by the manufacturing industry, this in order to determine the total cost of producing a unit of a product.
When a large number of similar units are produced, the cost system accumulates these costs. For these cases, it is better to group costs on an aggregate level, that of the large batch of units, then if each unit is individually cataloged. This happens because this system It is based on calculating the cost of a product that must be the same as any other produced.
Knowing already that it is a process cost system, we can continue to mention its characteristics, advantages and disadvantages. We will mention and explain some of them.
What are the characteristics of the process cost system?
The cost system it is used generally, when speaking of a mass production of similar products, where costs with individual units do not differ from each other. This system accumulates costs for a period of time, and then constantly allocates it to the units produced.
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In this process costs system, it is in charge of the flow of the units, passing through various departments and operations, where additional costs are added in their journey. Now, we will see some of the characteristics of this cost system.
- For each department or cost center, the total costs that accrue are recorded.
- The finished units are transferred with their costs to the next department. When the units leave the last department, the costs of the period were accumulated, then are used to calculate the individual cost of each product.
- The own account of each department has these in process in the ledger, this account is charged, the costs of the process incurred in the department
What are the advantages and disadvantages of the process cost system?
The process cost system, affects decision-making at the executive level, either with the purchase or sale of some good, when the sectors that the company has are increased, among other matters related to production, facilitating the achievement of the company’s goals. Seeing that it influences the decision-making of a company, we can begin to see the advantages and disadvantages of this cost system.
Advantages of the process cost system
This system can bring several benefits to companies that decide to use them, we will talk about some, so that you consider using this cost system in your business plan.
- The costs calculated by this system, speed up setting prices for sale, which allows you to gather important information to make a budget that is solid.
- Due to the fact that similar products are calculated, the calculation of their unit costs is considerably facilitated.
- This cost system is more affordable for industrial companiesSince it is economical, it does not require a large investment of time, and it does not require great technical capacity on the part of the staff, which is why it is easy to implement this cost system in these companies.
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Disadvantages of the process cost system
As it has positive aspects, it has negative aspects, as a result of the little flexibility it has, figures that are not 100% accurate to be averaged, etc. We will see some of the disadvantages of the process cost system.
- This cost system is not very flexible, which can affect the first months of the year, which are months when companies have changes, which can affect the cost of the products, so the standard cost you are not sure in this situation.
- Due to the instruments and tools that are constantly used, implement this cost system, it can be expensive at first.
- This cost system can be used in a better way by companies that have exceptional internal control.
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