Around Again is a wooden frame manufacturer. Wood and fastener metals are typically added at the beginning of the process and are easily tracked as direct material. Sometimes, after inspection, the product needs to be reworked and additional pieces are added. Because the frames have already been through each department, the additional work is typically minor and often entails simply adding an additional fastener to keep the back of the frame intact. Other times, all the frame needs is additional glue for a corner piece.

How does a company differentiate between direct and indirect material? Many direct material costs, as the wood in the frame, are easy to identify as direct costs because the material is identifiable in the final product. But not all readily identifiable material is a direct material cost.

Technology makes it easy to track costs as small as one fastener or ounce of glue. However, if each fastener had to be requisitioned and each ounce of glue recorded, the product would take longer to make and the direct labor cost would be higher. So, while it is possible to track the cost of each individual product, the additional information may not be worth the additional expense. Managerial accountants work with management to decide which products should be accounted for as direct material and tracked individually, versus which should be considered indirect material and allocated to the departments through overhead application.

Question: Explain why process costing is likely to be suitable for timber mills