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Elements of Production Cost

ELEMENTS OF PRODUCTION COST

The following are the important elements of production cost under process costing :

(i)                 Material

(ii)               Labour

(iii)             Production overhead. 

(1) Material

The material required for production is issued to the first process, then offer processing. Then it can be transferred to next process and so on. In some situations, material may pass from the first process to the next process where an additional material is to be added; it may continue until completion. Normally, material requisitioned in the prescribed form only may be issued. Cost incurred for this operation is treated as material cost.

(ii) Labour

Some of the Labour Forces are directly engaged in manufacturing of a product. But generally employees are utilised continuously on one process and time spent by them is debited to the process account. Amount paid for the utilisation of Labour force is treated as labour cost. Normally the cost of direct labour constitutes a very small part of the cost of production in industries. Because more number of automatic machineries are installed in the industry. 

(iii) Production Overhead

Any expenses incurred for the production other than the material and labour come under the head of production overhead. Normally the overhead element of total constitutes generally a very huge portion in the process costing. So appropriate decision is required to ensure that reasonable share of production is charged to each process.

Material cost, Labour cost, and Production Overhead cost, these three elements taken together are called the cost of production of the product. 

ADVANTAGES OF PROCESS COSTING 

(i)                 To find out the cost of each process in an easy manner without any difficulty and of the final product at short intervals.

(ii)               To find out the cost in simple and economical ways than job costing.

(iii)             To adopt the standard costing principles effectively in process costing.

(iv)              Appropriate allocation of the expenses can be made easily and the costs in each process accurately determined.

(v)                Enables to determine the correct valuation of closing inventories. 

LIMITATIONS OF PROCESS COSTING 

(i)                 It is based on the historical cost system. So, the available cost information may not be useful for further important organisational decision making.

(ii)               The entire process costing system is based on the average cost methods. But average costs do not always reflect the true costs.

(iii)             Any of the unfinished products which are available in any process at the end of the period are expressed in equivalent production units. It develops subjective element in scientific cost determination.

(iv)              Frequently it is very difficult to estimate the normal quantity loss in process.

Process costing system does not evaluate the efforts of individual workers or supervisors.