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Process Costing

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Process Costing

Introduction and Discussion

Process costing is the best method for allocating costs in a sewing company specializing in the production of skirts. This is because, process costing is used where homogeneous goods are manufactured like in the textile industry (Horngren et.al, 2002). All costs are accumulated in every phase of production and the cost per unit relevant to each stage of production is ascertained by dividing the total cost incurred in that stage with the normal output in each phase. Such stages in skirt production include; laying, marking, cutting, embroidery, screen printing, sewing, checking, fusing and pressing and packaging.

This method of costing is ideal for skirt production because skirt as a product and the process has the following characteristics; the process is continuous and standardized, products are homogeneous, the output of one process say cutting is the raw material for the next process i.e. embroidery and output of the last phase is the finished good, direct and indirect costs of the skirt production are allocated process-wise and the total cost of the skirt is divide by the normal output of skirts in each stage to determine the cost per unit of each skirt.

Job costing method allocated costs to a product by separating the costs into direct materials, direct labor, and overhead and estimating them based on their actual value (Horngren et.al, 2002). This method is ideal when producing heterogeneous products making it an ideal costing method to allocate the cost of each product. This is method is not ideal for skirt production as the method processes homogeneous goods.

Activity-Based Costing (ABC) method, assigns indirect costs, and overheads to a product or a service (Horngren et.al, 2002). Further, the method considers the relationship between overhead activities, products produced, and their associated costs and assigns indirect costs to the product. This is not ideal for a skirt producing company because the company needs to establish the relevant cost per stage effectively manage the operations.

Reference

Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.

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