What are the disadvantages of using a process costing system in accounting?

2 Difficulty in tracing costs

Another disadvantage of process costing is that it is difficult to trace the costs of specific inputs or activities to the final products. Since process costing pools the costs of each production stage and divides them by the number of units produced, it does not identify the source or cause of the costs. This can make it hard to analyze the profitability, performance, or improvement opportunities of each product or process. For example, if some inputs or activities are more costly, wasteful, or inefficient than others, but they are not tracked separately, the process costing system will not provide the information needed to make decisions or changes.

3 Loss of information

A third disadvantage of process costing is that it can result in the loss of information due to the aggregation and averaging of costs. Since process costing simplifies the cost calculation by using a single cost driver for each production stage, it does not capture the details or nuances of the cost behavior. This can reduce the relevance and usefulness of the cost information for planning, controlling, or evaluating purposes. For example, if some costs are fixed, variable, or mixed, but they are treated as one, the process costing system will not reflect the impact of changes in output volume, input prices, or production efficiency.

4 Inconsistency in inventory valuation

A fourth disadvantage of process costing is that it can create inconsistency in inventory valuation due to the use of different methods for different production stages. Since process costing applies different cost drivers and rates for each production stage, it can result in different inventory values for the same product at different points in the production process. This can affect the accuracy and comparability of the financial statements and the cost of goods sold. For example, if some production stages use FIFO, LIFO, or weighted average methods, but others do not, the process costing system will not produce consistent inventory values.

5 Complexity in accounting

A fifth disadvantage of process costing is that it can increase the complexity and difficulty of accounting due to the need for multiple calculations and adjustments. Since process costing requires the calculation of equivalent units, cost drivers, and rates for each production stage, it can involve a lot of data and formulas. Moreover, process costing also requires the adjustment of costs for opening and closing inventory, normal and abnormal spoilage, and transfers between production stages. This can make the accounting process more time-consuming, error-prone, and cumbersome.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?