Process costing is a system used by manufacturing businesses to determine the cost of their products in an operation that produces large quantities of the same product. The management can determine which section of the operation is making the business incur huge production losses that may affect the final selling price of the product.
Chewing gum production at Wrigley is a type of business that employs the process costing method (Anderson, 2009). Right from the mixing of the chewing gum ingredients at the mixing section to the sheeting of the gum loaves into pellets the process is monitored and all the inputs from direct labor, materials, and overheads are calculated. The pellets coating and packaging sections are similarly evaluated to determine the cost of the process before the products are released to the customers through the warehouse. While the chewing gum pellets are homogenous in size and weight, the difference is in their tastes and appearance something that the production process must capture and factor in the cost of the product (Anderson, 2009).
The basic production operations the company can use in calculating the cost of the product by considering the cost of the input materials and the selling price of the products to the customers (Anderson, 2009). From that analysis, the company will can determine its profit, but it will not understand which sections of the entire production process is costly and require improvement. Calculating the cost of each process section is important in understanding the areas of the production process that can be modified or improved to add value to the product and probably reduce its price. That reduction will improve the sales and the revenue returns (Anderson, 2009).
In conclusion, process costing is a method that is instrumental in the analysis of process improvements. It also helps or guides the management to make decisions related to labor distribution in the factory and the cost of the final product.
Reference
Anderson, J. (2009). Determining manufacturing costs. CEP, 27-31.
