Your understanding of costs is essential to product pricing, strategy design and operations management. If your firm mass-produces identical items, process costing may be used to track product costs. Your firm’s process costing system may not be as simple as it could be, and it may not provide all of the information managers need to make vital decisions, manage costs and reduce taxes.
Your firm can choose from different process costing methods, including first in, first out (FIFO); last in, first out (LIFO); and the weighted average method. Understanding these methods and considering some of the complexities that arise in process costing systems, such as normal spoilage, abnormal spoilage and rework, are important for you to accurately cost your products.
Your selection of process costing method should be what best suits your firm. You may use the FIFO method of process costing, which provides you with the best information for decision-making purposes. Or you may choose the LIFO method of process costing, which could potentially help your firm reduce taxes. Or you could use the weighted average method of process costing, which is arguably the easiest method to use. You need to make sure you are tracking the costs of spoilage appropriately, including accounting for spoilage that is normal and expected, as well as spoilage that is abnormal.
If you ignore these issues, it can lead to several complications, including incorrect product costing, unnecessary complexity, higher taxes and poor decision making. You need to consider the pros and cons of each process costing method and use the most appropriate and accurate methods for tracking spoilage costs that can both help decrease costs and improve operational performance.
What method of process costing is your firm using? Is it the best choice to meet your firm’s specific needs? The Accenture Academy courses Process Costing Using the Weighted Average Method, Process Costing Using the Last In, First Out (LIFO) Method, and Spoilage and Rework in Process Costing will identify the pros and cons of each method and help you choose the right process costing system for your firm.
Accenture Academy offers proven, cost-effective learning solutions for a more versatile workforce and a more agile organization. We provide a flexible learning approach that helps your people be more versatile and your entire organization be more agile in the marketplace. Curriculum includes Supply Chain Management, Finance, Procurement, Analytics, Leadership & Management and Specialty Skills.