PROCESS COSTING

BY : SUDHA PANDEY
 MEANING OF PROCESS COSTING

Process costing refers to a method of accumulating cost of

production process by process. It represents a method of cost
procedure applicable to continuous or mass production industries.
Output in such industries consists of like units and every unit of
product undergoes similar operation in the process.
 PROCESS COSTING IS APPLICABLE FOR

1.Textile Mills 6. Steel mills

2.Chemical Works 7. Soap making

3.Cement manufacture 8. Sugar Works
4.Paper Manufacturing 9. Plastic
5.Food processing 10.Oil refining
ESSENTIAL CHARACTERISTICS OF PROCESS COSTING

• The production is continuous and the final product is the result of a sequence of
processes.
• The product are standardized & homogenous
• The finished product of each process becomes the raw material for the next
process in sequence & that of the last process is transferred to the finished
goods stock.
 …..CONTD

• The sequence of operations or processes is specific & pre – determined.

• The cost per unit produced is the average cost which is calculated by dividing
the total process by the number of units produced.
• Some loss of materials in processes is due to chemical action, evaporation etc
is unavoidable.
 PROCESS COSTING PROCEDURE

The essential stages in process costing procedure are:

1.The factory is divided into a number of processes and an account is maintained
for each process.
2.Each process account is debited with material cost, labour cost, direct expenses,
& overheads allocated to the process.
3.The output of a process is transferred to the next process in the sequence. In
other words finished output of one process becomes input of the next process.
4.The finished output of the last process that is the final product is transferred to
finished goods account.
DIAGRAMMATIC REPRESENTATION OF
PROCESS COSTING
 PROCEDURES FOR PREPARING PROCESS COSTING

1.The process costing is prepared in ‘T’ form containing debit side &
credit side. All expenses are debited in the process account. The opening
stock in each process is also debited. The transfer of completed work to
next process and the closing stock in the process are credited. If the
process is last one than instead of crediting the completed work to next
process, it is credited to the finished stock account. The number of
process account prepared depends upon the number of processes.
• 2. The expenses debited in the process account contain direct material
cost, direct labour cost, direct expenses and factory overhead . The
material usually debited only in the first process a/c. But in some cases
the second and subsequent processes also require some material. This
material cost is also debited in the respective process a/c.
3. The factory overhead debited in the process account may be incurred
commonly for all the processes.

The work of each process is to supply its output as an input to the next
process. Hence each process a/c is closed by transferring to the next process
account. Transfer to next process a/c is credited to close the accounts. But the
last process account is credited to closed by finished goods account instead of
transfer to next process account.

Normal process loss will not be shown in the process account & it will
automatically be adjusted in the process cost. Due to this, per unit cost of the
process increases to the extent of normal loss. But any realization due to sale
of scrap of normal loss is credited in the process account. It reduces the normal
loss.
FORMAT OF PROCESS A/C
 ILLUSTRATION
A product passes through three distinct processes to completion. These processes are numbered
respectively 1,2 and 3. During the week ended 15th January 2017, 500 units are produced. The
following information is obtained :
Process I Process 2 Process 3
Direct Materials Rs 3,000 Rs 1,500 Rs 1,000
Direct Labour 2,500 2,000 2,500
Direct Expenses 500 100 500
The overhead expenses for the period were Rs 1,400 apportioned to the processes on the basis of
wages.
No work- in –progress or process stocks existed at the beginning or at the end of the week.
Prepare Process Accounts.
 NORMAL WASTAGE/ NORMAL LOSS
• That amount of loss which cannot be avoided because of the nature
of material or process. Such a loss is quite expected under normal
conditions.
Factors that causes normal losses are chemical change , evaporation,
spoilage etc.
Normal loss is generally determined as a percentage of input .
However when normal loss is present in the form of scrap it may have
some value , i.e. it may be sold at some price. Than it is to be
credited to the process a/c
 ABNORMAL WASTAGE/ LOSS

• This type of loss consists of loss due to carelessness,

machine breakdown, accident, use of defective materials,
etc. Thus it arises due to abnormal factors and represents a
loss which is over and above the normal loss .
Units introduced 600
Less Normal loss (10%) 60
Normal Output expected 540
Less Output achieved 500
Abnormal loss 40 units
 ABNORMAL EFFECTIVENESS OR GAIN

The normal process loss represents the loss that would be expected under
normal conditions. It is an estimated figure. The actual loss may be greater
or less than the normal loss. If the actual loss is greater than normal loss, it
is known as abnormal loss. But if actual loss is less than normal loss , a gain
is obtained which is termed as abnormal gain or effectiveness. The value of
abnormal gain is calculated in a manner similar to abnormal loss. It is
shown on the debit side of the Process Account & credit side of the
Abnormal Gain Account.
Units introduced 600
Less Normal loss (10%) 60
Normal Output expected 540
Less Output achieved 580
Abnormal gain 40 units
 CALCULATION OF ABNORMAL LOSS

Total cost – Value of normal loss

Cost per unit =
Units introduced – Normal units
 ILLUSTRATION
A product passes through three processes A, B and C . The normal wastage of each
process is as follows : Process A-3% , Process B – 5 % , and Process C – 8 %.
Wastage of Process A was sold at Rs 25 paise per unit, that of Process B at 50 P per
unit and that of Process C at Re. 1 per unit.
10,000 units were introduced to process A in the beginning of October 2005 at a cost
of Re. 1 per unit. The other expenses were as follows:
Process A , Process B Process c
Materials Rs. 1000 Rs 1,500 Rs 500
Labour 5000 8,000 6,500
Direct Exp. 1,050 1,188 2,009
Actual Output 9,500 uts 9,100 uts 8,100 units
• Process A A/C
Particulars Units Rs Particulars Units Rs
To units intro 10,000 10,000 By N.W. 300 75
To Materials 1,000 By Ab. Wastage 200 350*
To Labour 5,000 By Process B (transfer) 9500 16625
To Direct Exp 1,050
10,000 17,050 10,000 17,050
Value of abnormal wastage = Rs 17,050 – Rs 75
_______________ X 200 units = Rs. 350
10,000 – 300 units
 PROCESS B ACCOUNT
Particulars Uts Rs Particulars Uts Rs
To Process A 9,500 16,625 By N.W. 475 238
To Mat 1,500 (5% of 9500)
To Labour 8,000 By Process C(Transfer) 9,100 27,300
To D.Exp 1,118
To abnormal gain 75 225*

9,575 27,538 9,575 27,538

Abnormal gain - Rs 27,313 – Rs 2,38

X 75 uts = RS 225
9,500 - 475
 PROCESS C ACCOUNT
Particulars Uts Rs Particulars units Rs
To Process C 9,100 27,300 By N.W, 728 728
To Materias 500 By Abnormal W. 272 1156*
To Labour 6,500 By Finished goods 8,100 34,325
To D,Exp, 2,009 (transfer)
9,100 36,309 9,100 36,309
Abnormal Wastage = RS 36,309 – Rs 728
X 272 units = Rs , 1156
9,100 – 728 uts
 APPLICATION OF PROCESS COSTING

Under the following circumstances process costing method is most

suitable:
1.Where the product of one process becomes the materials of
another process.
2.Where production undertaken is simultaneous.
3.Where identical units are produced through an ongoing series of
uniform production process.
 …..Contd
4.Where production is continuous and undertaken on large scale
basis.
5. Production of a single product in a plant.
6. Division of a plant into processes or departments, each
responsible for the manufacture of a single product.
7. Division of a factory into separate operation or production
centres each performing standard operation.
 JOINT PRODUCTS
Meaning : The term joint product is used for two or more products of almost
equal economic value which are simultaneously produced from the same
manufacturing process.
Features :
1.Produced from the same raw material
2.Common process
3.Equal value
 EXAMPLES OF JOINT PRODUCTS

Industry Joint Products

Oil refining Petrol, diesel, kerosene, grease, lubricating oil etc.

Diary Skimmed milk, butter

Mining Several metals from the same ore, e.g., copper, silver
 BY- PRODUCTS

By- products are products of relatively small value which are

incidentally and unavoidably produced in the course of manufacturing
the main product.
The sales value of these by- products is much as less as compared to
the main product.
 EXAMPLES OF BY- PRODUCTS

Industry By-products
Sugar Bagasse, Molasses
Cotton textile Cotton seed
Meat Bones

Edible oil Oil cake

 IMPORTANT CONCEPT FOR PROCESS COSTING

By products should not be confused with scrap or waste.

Waste is a material which has no value or negative value. Ex: gases, smoke and other
unsaleable residues from the manufacturing process.
Scrap is also different from by- products in the sense that is the leftover part of the
raw materials . Ex: Small pieces of wood left in the furniture manufacture or metal
sheet pieces left in utensil manufacture are ex. of scrap.
Sale value of scrap is relatively less than that of by-products. Accounting treatment for
both are quite similar.
 CONCLUSION

A system of costing applicable to organizations where product pass through

different processes. A process costing system is used in those industries where
masses of similar products or services are produced.
Thank You