Advantages and Disadvantages of Process Costing

Process costing is a method used for determining unit product cost. Unlike job costing (traditional costing) method, process costing determines the cost of a product or service by assigning costs to masses of similar units. Unit costs are then computed on average basis. Process costing is appropriate to be used in industries that convert raw materials into homogeneous products, for example: chemical industries, oil refining, pharmaceuticals industries, cement industries, beverages industries, etc. Process costing provides companies with advantages and disadvantages as follow.

Advantages

Process costing is relatively easier to use compared to job costing or activity based costing, especially in deal with bulk homogenous product. Costs allocated according to the number of processes each good travels through in the production system. It collects the overall costs from each department and ignores costs related to specific jobs within a department. This reduces the volume of data, and makes data collection easy and quick. The analysis is likewise simple and straightforward, does not require any specialized skills other than normal accounting skills, inexpensive, and does not drain the companies’ time and resources. 

Process costing also relatively more flexible because it allows companies to add or remove a process as necessary. This flexibility then allows companies to operate at the most competitive cost by eliminating redundant process or improve product quality by adding processes. The use of process costing may help companies control their production process effectively. Process costing allows budgeting of uniform output and usage costs as standard costs, making it possible to track deviations from such standard costs with ease. It becomes possible to track the inefficiency or discrepancy to a specific process or department without checking each department or process

Disadvantages

One disadvantage of process costing is the accuracy of the method in determining the production cost. Process costing can cause cost error because it does not directly applies a specific amount of raw materials, production labor, and manufacturing overhead to each individual goods or service. This method may cause over-cost or under-cost and may let to the product cannot compete in the market or let to lower business profits. Process costing also only suitable for homogenous products. It cannot provide an accurate estimate of product when a single process produces many different good or for customized orders.

Process costing is not very useful for managerial control and decision making. The costs obtained by this method are historical costs instead of current cost. It makes the use of this method for managerial decision making remains limited. Moreover, process costing is based on average cost method, which is not suitable for performance analysis and evaluation. Evaluation of the efficiency of individual process or worker also becomes more difficult because individual product costs may be taken as only approximation and not reliable.

In conclusion, despite of those advantages and disadvantages, process costing remains useful for certain companies, especially for companies producing homogenous bulk product continuously.

Sources:

http://smallbusiness.chron.com/advantages-disadvantages-process-costing-4098.html
http://www.brighthub.com/office/finance/articles/78918.aspx

http://www.mu.ac.in/myweb_test/MCOM-Ac-%20Paper%20-%20II.pdf

http://www.ukessays.com/essays/accounting/what-is-process-costing-and-the-methods-used-accounting-essay.php#ixzz2N7i4hSV1 

Garrison, R. H.; Noreen, E. W.; Brewer. P. C., “Managerial Accounting”, 13^th Ed., McGraw Hill, Singapore, 2010