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Process Costing Notes

Process costing is utilized by companies that mass produce identical products, where costs accumulate as products move through various processes until completion. Each process carries over the previous process cost, along with direct material and conversion costs, culminating in a total cost for finished goods. The document also distinguishes between normal losses, which are expected and not valued, and abnormal losses, which are unexpected and treated as expenses.

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3 views2 pages

Process Costing Notes

Process costing is utilized by companies that mass produce identical products, where costs accumulate as products move through various processes until completion. Each process carries over the previous process cost, along with direct material and conversion costs, culminating in a total cost for finished goods. The document also distinguishes between normal losses, which are expected and not valued, and abnormal losses, which are unexpected and treated as expenses.

Uploaded by

ngxabaniyondikhapha
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Process costing

Process costing will be used by companies who mass produce identical products.
Products will move from one process to the next until it is a finished product.
Production will start in the first process with a cost of R0. As soon as products move
out of one process into the next process, it takes with it any cost accumulated in the
process that it is moving out of. Cost accumulated in a previous process is called
previous process cost (P/P).

Mat = Direct material cost


Con = Conversion cost (Direct labour + manufacturing overheads)
P/P = Previous process cost

Example: (All costs are made up just to illustrate the flow of cost
Process 1 cost → Process 2 → Process 3 → Finished goods
Mat = R5 P/P = R7 P/P = R12 R16
Con = R2 Mat = R2 Mat = R2
Total = R7 Con = R3 Con = R2
Total = R12 Total = R16
(By the time the product reaches (The product entered (The product entered process 3

the end of process 1 it has a cost process 2 at a cost of at a cost of R12. We added more

of R7. This R7 is carried over to R7. We added more mat mat and con cost. By the end of

process 2 so when the product rea- and con cost. By the end process 3 it was finished and had

ches process 2 it already has a cost of process 2 it had a cost a cost of R16. It was transferred to

of R7) of R12) finished goods at R16 per unit)

NB! Any process which is not a process 1 already has a previous process cost. All
products do not necessarily need more than 1 process. Some products are started
and completed in a single process.
NB! Previous process is ALWAYS 100% complete.
We know this because previous process represents the cost incurred and work done
in a process that was completed before our products moved into the current process.
If the previous process was not 100% completed, our products could not have
entered the current process where it is in at the moment.
Normal losses are expected, uncontrollable losses that we do not value.
Abnormal losses are unexpected, controllable losses that is valued as an expense in
the statement of comprehensive income.

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