Process costing is also known as “Activity-based costing.”
The quick definition of process costing is that it considers all the direct and indirect cost of producing, delivering, and selling a product or service. Process costing separates costs into two categories: fixed costs and variable costs. Fixed costs represent overhead or indirect expenses that do not change with the quantity of production. Variable costs are those associated with production.”
With this article I am going to be explaining what process costing entails for companies, as well as how they can use process costing to help them stay profitable in their industry.
(1) The more accurate a company is in allocating fixed costs, the more likely their profit margin will be increased.
(2) The most profitable companies can spend more of the revenue on variable costs, which enables them to increase the quantity of output sold at minimal cost.
(3) When a company uses process costing, they can lower overhead by reducing overhead accounts and by reducing working capital.
(4) Variance analysis is performed to satisfy regulators and balance the company’s books.
(5) A company uses a certain process to create a product or service that is unique and can be differentiated from other companies in the industry. The product created will be used to sell their products and services while also taking advantage of their customers’ needs.
Some of the Companies that Applies Process Costing :
1. Amazon :
Amazon is a company that applies process costing with regards to their warehouse and customer service. They create a product that they call Amazon Prime, which is their membership program. The product that they create allows customers to receive delivery on 1 day by having them pay a fee and they also get free shipping.
Amazon can increase the quantity of products delivered because it only counts the variable costs associated with the product and not the fixed costs associated with their warehouse. The goal is to have more customers buying more products from them for a cheaper price than other companies in their industry.
2. Wal-Mart :
Wal-mart applies process costing with regards to their buying, storage, and delivery of goods from suppliers in China . They create a product called Wal-Mart, which can be differentiated from other companies in their industry because they have low prices and free in-store pickup. Wal-Mart’s goal with process costing is to have more customers buying their product than any other company in the market.
3. McDonald’s :
McDonalds applies process costing by creating a product called the Dollar Menu, which allows customers to buy products for $1-$2 per item. McDonalds has different types of food that they provide at different dollar amounts. Their goal is to increase their number of sales by having consumers buy more products from them for cheap prices than any other company in the industry.
Starbucks applies process costing by creating a product called the Venti, which costs $2.95 and is a salted caramel flavored coffee. The beverage is an alternative to other coffees because of its different taste than other coffees.
Starbucks has been able to increase their sales by appealing to their customers’ needs.
Their goal is to have loyal customers that keep going back to Starbucks because they want to buy the same products they have before at a cheaper price than any other company in the industry.
5. Mercedes Benz
Mercedes Benz applies process costing in their manufacturing process by creating a product called “the E-class” luxury sedan for around $40,000 – $50,000. The goal of Mercedes Benz is to have the largest profit margin than any other company in their industry by creating a product that can be differentiated from other companies in their market.
The product created is of high quality, luxury, and safety features. Their goal is to have customers keep coming back to them with their unique products that they cannot get anywhere else.
Apple applies process costing by creating a product called the iPhone XR, which sells for $792 and has a space gray frame and white glass back. The goal of Apple is to create a unique product that can be used to sell more products than any other company in the industry because they are able to appeal to customers’ uniqueness.
Hewlett-Packard applies process costing by creating a product called “the HP envy dv7,” which sells for around $799. The goal of Hewlett-Packard is to make the same types of products they have before while also appealing to customers’ desire to have the newest technology at an affordable price.