Chapter 5, Problem 1Q

Under what conditions would it be appropriate to use a process costing system?

To determine

Process Costing: It is a method of cost allocation and calculation used when the types of goods produced are similar in nature and in large quantities. The advantage of this method is that, it allows for simple and efficient cost allocation and calculation, especially when the variations in the types of goods produced are minimal.

Conditions where it would be appropriate to use a process costing system.

Answer to Problem 1Q

Solution:

The process costing system can be used in the following conditions:

• The types of goods produced are similar in nature and have very little difference in their specifications and manufacturing processes.

• The quantity of goods produced must be substantial enough to warrant implementation of the process costing system.

Explanation of Solution

Process costing: It is a cost allocation and cost calculation system, where costs are allocated to goods of a similar nature, based on certain standard cost estimates.

• These cost estimates are derived by analyzing historical data and ascertaining the various types of costs incurred in the manufacturing processes related to such goods.

• These goods are often similar in nature and the manufacturing processes pertaining to these goods are also standard in nature.

• The goods are produced in large quantities and the costs are allocated to all goods manufactured regardless of the actual costs per unit of output.

• Examples of industries where this system may be applied are Food production industry, Refinery industry, Mining industry, etc.

• The cost of extraction or production of one unit of goods of the industries cannot be determined on per unit of output basis and hence, this system is appropriate.

Conclusion

Hence, it can be seen that the process costing is appropriate for goods that are produced in large quantities and are similar in nature.