Process Costing

Process costing method is used to ascertain the cost of the product at each process or stage of a manufacturing process, which involves a sequence of continuous processes or operations.

Chemical Industries e.g., pharmaceutical, paint, soap, etc)

Steel Industries, Cement Industries Rubber Industries Distilleries Dairy, food processing Confectioneries Paper, Oil refineries, Textile weaving

etc

The production is continuous and the final product is the result of a sequence of activities.

Costs are accumulated process-wise. The products are standardised and

homogeneous The finished product of each but last

process becomes the raw material of next process.

Normal loss: That amount of loss which cannot be avoided due to the inherent quality of goods or due to evaporation or chemical reaction in the process.Such loss may recover some scrap value, rest amount will be recovered through the good units sold.

This type of loss occurs due to the carelessness, machine breakdown, accident, or use of defective materials. Such loss can not be charged to the customers, it is to be born be the manufacturer.

This is over and above the normal loss.

No treatment only if there will be any recovery then it is to be deducted from the process cost.

Abnormal loss is to be removed from the process cost and should be charged to costing profit and loss account.

Cost per unit of abnormal loss= Total cost – Value of normal loss Units introduced – Normal loss units

When the work is done at an accepted norm then there will be a certain rate of normal loss and there will be expected production, but some time it may happen that the actual production will be more than the expected (normal) production. Such gain in output is termed as Abnormal gain.

The amount of abnormal gain is debited to Process A/c and credited to Abnormal Gain A/c.

The calculation of abnormal gain is done in the same way as in the case of abnormal loss, i.e.,

Total cost – normal loss realisation Total units– units of normal loss

“Equivalent Production” is a technique by which work done on unfinished units is expressed in terms of “completed units” only.The concept of “equivalent production” is used for assigning cost of process to both finished units and unfinished units.

When work done in process includes work done on unfinished units also, it is advisable to prepare a statement of equivalent production. This statement shows elementwise (material, Labour, overhead) details of work done in terms of completed units only.

FIFO Method LIFO Method Average Method

The effect of using FIFO/LIFO/Average method will be different on cost per unit of the process.

Here when we go to prepare the Process A/c, we found it can not be completed as value of finished goods and unfinished goods are to be ascertained. Therefore our approach will be as follows: Statement of Equivalent Production Statement of Cost for each element Statement of Apportionment of Cost Process A/c.

Sometimes, output of one process is transferred to next process and the transfer price includes element of profit relating to that process. This practice of including profit in transfer price is resorted to for the following reasons:

Each process is treated as a separate profit centre. Gets the benefits of economies effected in the

preceding process. Induces competition in different processes, which

leads to economy.

The term joint products is used for two or more products of almost equal economic value which are simultaneously produced from the same manufacturing process and the same raw material. They cannot be separated until the process has reached a certain stage of completion.

Industry Joint productsOil Refining - Petrol, diesel, kerosene,

LPG, grease, lubricating oilDairy - Cream, butter, skimmed milk,

ice creamFlour Mill - White flour, brown flour,

animal feeding stuffsMining - Several metals from the same

ore e.g., copper, silver, zinc etcSaw mill - several grades of lumber and slabs