PROCESS COSTING .

Process costing is a method of costing used to ascertain the cost of

production of each process, operation or stage of manufacture where

processes are carried on having one or more of the following features

:-

➢ Where the final or finished product is obtained from the material

through consecutive steps.

➢Where the product of one process becomes the material of another

process or operation.

➢Where during one or more process ,the product or materials are not

distinguishable from one another.

Advantages of Process Costing: The following are the main advantages of Process Costing:

1. It is possible to determine process costs periodically at short intervals. Average unit cost can be computed weekly or even daily.

2. It is simple and less expensive to find out the process costs.

3. It is possible to have managerial control by evaluating the performance of each process.

4. It is easy to allocate the expenses to processes in order to have accurate costs.

5. It is easy to quote the prices with standardization of process. Standard costing can be established easily in process type of manufacture.

Disadvantages of Process Costing: The following are the main disadvantages of Process Costing:

1. Cost obtained at the end of the accounting period are only of historical value and are not very useful for effective control.

2. Valuation of work-in-progress is generally done of estimated basis which introduces further inaccuracies in total cost.

3. Where different products arise in the same process, it is not possible to exactly ascertain the total cost of the products.

4. If any error occurs while calculating average costs, it will be carried through all the processes to the valuation of work in process and finished goods.

5. The computation of average cost is more difficult in those cases where more than one type of product is manufactured and a division of the cost element is necessary.

PROCESS - I

PROCESS - II

PROCESS - III

MATERIAL

LABOUR

OTHER

EXPENSE

PROCESS - I

MATERIAL

LABOUR

OTHER

EXPENSE

PROCESS - II

MATERIAL

LABOUR

OTHER

EXPENSE

FINISHED

GOOD

•PROFORMA OF ACCOUNTS

AMT

PARTICULARS QTY AMT PARTICULARS QTY AMT

PARTICULARS QTY AMT PARTICULARS QTY

TO , MATERIAL

(INPUT )

TO , DIRECT WAGES

TO , OTHER

EXPENSES

BY , NORMAL LOSS

BY , ABNORMAL

LOSS

BY , NEXT PROCESS /

PROCESS II A/C

TO , PROCESS I A/C

TO , ADD. MATERIAL

TO , DIRECT WAGES

TO , OTHER

EXPENSES

BY , NORMAL LOSS

BY , ABNORMAL

LOSS

BY , FINISHED

GOODS

PROCESS – I A/C

PROCESS – II A/C

AMT

NORMAL & ABNORMAL LOSS. NORMAL LOSS - Normal loss is the loss that occurs due to the

nature of the goods consigned. Its nature is as follows: It occurs due to unavoidable reasons. It is due to natural causes such as losses due to evaporation, normal leakage, spoilage, breakdown, drying etc. It forms the part of cost of goods sold.

ABNORMAL LOSS - Abnormal Losses may arise due to mishap, mischief and inefficiency. This loss is not natural and can be avoided with proper care. Its nature is as follows:It is unnatural and avoidable.

It arises due to reasons like fire, riot, flood, theft, road accident etc.

In case of abnormal loss, the value of stock is not inflated.

It is calculated after taking into consideration the proportionate expenses incurred on it.

BASIS NORMAL LOSS ABNORMAL LOSS

AVOIDAB

LE

Normal loss cannot be

avoided.

Abnormal Loss is avoidable o

account of precautions.

CAUSESThis loss is due to nature of

the goods such as

evaporation, loss of weight,

drying etc.

This loss arises due to external

reasons like loss by theft, fire,

carelessness etc.

INSURAN

CE

Normal loss cannot be

insured.

Abnormal loss can be insured.

TREATME

NT IN

ACCOUNT

S

Cost of normal loss is borne

by remaining goods.

Cost of abnormal losses is not

borne by remaining goods.

PART OF

COSTIt is treated as a part of cost. It is charged to profit and loss

account not being treated as a part

of cost.

ABNORMAL GAIN

Abnormal gain arises because of

an abnormal effective in the use of raw

material or efficiency in performance so it

is known

as abnormal effective. Abnormal

gain reduces the normal loss quantity so

it comes in the form of profit to the

industry. The value of an abnormal

gain is assessed on the basis of

production cost

EXAMPLE :-

From the past experience it is determined that out

of the 1000 units of raw-materials introduced ,

10% units are estimated to get damaged and

units of materials tranferred to the next process

–

a) 850 units

b) 910 units.

Comment.

Units introduced = 1000

units expected to get damaged = (10/100*1000)

= 100.

Units expected to be good and transferred to the next

process = 1000 – 100 = 900.

a) So , it is anticipated that units passed to the next

process is 900 , but actual units passed is 850

Therefore , there must be some extra damage which has

occured so, 900-850 = 50 units (abnormal loss ).

b) The units should have been passed to the next process

is 900 , but the actual units passed is 910 so, the actual

value > anticipated value i.e 10 units, this is Abnormal

gain.

INTER-PROCESS PROFITIn process costing, the usual practice is to transfer the output of one process to

another and finally to finished stock at cost price. In this method of transfer,

process accounts will not reveal any profit or loss. But sometimes, the transfer

is made at transfer price or market price.

This method is adopted in order to measure the efficiency or inefficiency of

individual’s process. When market price cannot be ascertained, certain

percentage of profit margin is added to the cost of processing in order to arrive

at the transfer price. Consequently, each process account reveals a profit and

this profit is known as ‘inter process profit’.

Advantages of Accounting for Inter Process

Profits:

(a) Inter process profits enable to measure the efficiency of each process.

(b) Comparison of costs with market price at each stage assist management to

take ‘make or buy’ decisions.

(c) The efficiency of or inefficiency of one process. In other words, each process

can be assessed separately on that account.

A product passes through two processes A and B. Output of A is transferred to B

at cost plus 25% profit and from B to finished stock at cost plus 25% profit. There

were no work in progress in both processes and opening stock of finished goods at

the end of the period.

Closing stock of finished goods was valued at Rs.45,000 and the balance

was sold for Rs. 1,50,000.

Prepare Process Accounts and Finished Stock Account.

Process A Account

Process B Account

There are two processes in a factory manufacturing a single product.

Following are the particulars of expenses incurred in different

processes:

After crediting the Process I with Rs.5, 000 being the estimated realizable value of

waste and by-product and Rs.8, 000 against process profits the balance is

transferred to process II. There is no wastage of by-product in Process II and the

output is transferred to Finished Stock Account with a margin of 25% on total cost.

The Finished Stock inventories at the end of period showed a balance of Rs. 21,000.