Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also.
The following are limitations of process costing
- Cost obtained at each process is only historical cost and are not very useful for effective control.
- Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.
- Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.
- The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.
- Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.