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Outline four limitations of process costing.

Outline four limitations of process costing.

Answers

Limitations of process costing
(i) Historical costs: the costs obtained at the end of the accounting period is historical. Therefore, they are not useful for control purposes unless standard process cost is used. This is, no doubt, true in respect of all other historical systems but the nature of process accounting with its departmental divisions makes this disadvantage more prominent.
(ii) Difficult to calculate average cost where more than one product is manufactured. When different products come out of one and the same process, the common costs are prorated to the various products.
Such cost of individual products is not reliable as they may, at best, be taken to be only approximations.
(iii) No detailed analysis: Being only average costs for the accounting period, process cost cannot be considered to be very accurate for the purpose of detailed analysis, evaluation, and control of individual performance efficiency on a day-to-day basis.
(iv) Estimates: For the purpose of calculation of unit costs of continuous processes, work-in-process is required to be determined at the end of an accounting period. This is done mostly on estimated basis which introduces further inaccuracies in costs.
(v) An error made in computing the average cost will be carried through all the processes to the valuation of work in progress and finished goods.

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francis1897 answered the question on November 14, 2022 at 08:18

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