PROCESS COSTING
PRESENTED BY: ARPIT PAL
ENROLLMENT NO.: 25LMMB9026
MBA – DATA SCIENCE & ARTIFICIAL INTELLIGENCE
SCHOOL OF BUSINESS & MANAGEMENT
CHANDIGARH UNIVERSITY
UTTAR PRADESH CAMPUS
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
[Link] Mills [Link] mills
[Link] Works [Link] making
[Link] manufacture [Link] Works
[Link] Manufacturing [Link]
[Link] processing [Link] 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.
• 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:
[Link] factory is divided into a number of processes and an account is maintained for
each process.
[Link] process account is debited with material cost, labour cost, direct expenses, &
overheads allocated to the process.
[Link] 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.
[Link] 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
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 . How ever when normal
loss is present in the form of scrap it may have some value , i.e. it may be sold at some
price. Then 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. It arises due to abnormal factors and represents a loss
which is over and above the normal loss.
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.
Calculation of abnormal loss
Cost per unit = Total cost – Value of
normal loss 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 units 9,100 units 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 A/C
Particulars Units Rs Particulars Units Rs
To Process A 9,500 1,625 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 Direct Exp 1,118
To abnormal gain 75 225*
9,575 27,538 9,575 27,538
Abnormal gain = Rs 27,313 – Rs 2,38X 75 uts = RS 225
9,500 - 475
• Process C A/C
Particulars Units Rs Particulars Units Rs
To Process C 9,100 27,300 By N.W, 728 728
To Materials 500 By Abnormal W 272 1156*
To Labour 6,500 By Finished 8,100 34,325
To Direct Exp, 2,009 goods (transfer)
9,100 36,309 9,100 36,309
Abnormal Wastage = RS 36,309 – Rs 728 X 272 units = Rs , 1156
9,100 – 728 units
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.
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 centers each
performing standard operation.
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