CHAPTER7: PROCESS COSTING

A Problem
To have a better understanding of the various terms that we come across in process costing let us
consider an example.

A product is finally obtained after it passes through three distinct processes. The following
information is available from the cost records.
Process I Process II Process III Total
Rs. Rs. Rs. Rs.
Materials 2,600 2,000 1,025 5,625
Direct Wages 2,250 3,680 1,400 7,330
Production Overheads 7,330
500 units @ Rs. 4 per unit were introduced in process I. Production overheads are absorbed as a
percentage of direct wages.

The actual output and normal loss of the respective processes are given below:
Normal loss
Value of scrap
Output as a
(Units) percentage
(per unit)
of input
Process I 450 10% Rs. 2
Process II 340 20% Rs. 4
Process III 270 25% Rs. 5
Prepare the process accounts and the other relevant accounts.

Process Accounts
A separate ledger account is used for each process.

Since the processes are named in the problem itself, we will use the same names for the process
accounts.

Thus the three process accounts would be

 Process I a/c
 Process II a/c
 Process III a/c

Direct Material and Labor/Labour Costs

There is a primary material input into the process to the extent of 500 units costing Rs. 4 per unit

 Primary Material Cost chargeable to Process I = Rs. 2,000 (500 units × Rs. 4/unit).
There is a secondary Direct Material input into each process which is to be debited to the relevant
process accounts.

 Process I : Rs. 2,600

 Process II : Rs. 2,000
 Process III : Rs. 1,025

Direct Labor/Labour Costs incurred for each process are to be debited to the relevant process accounts

 Process I : Rs. 2,250

 Process II : Rs. 3,680
 Process III : Rs. 1,400

All these costs are debited to the process account.

Apportionment of Production Overhead

Production overheads are absorbed as a % of direct wages.
=
Total Production Overheads
Rate of Absorption of Production Overhead × 100
Total Direct Wages

=
Rs. 7,330
× 100
Rs. 7,330

= 100%
⇒ Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the Process × 100%

Thus,

Production Overheads chargeable to: Process I = Rs. 2,250 × 100%

= Rs. 2,250
Process II = Rs. 3,680 × 100%
= Rs. 3,680
Process III = Rs. 1,400 × 100%
= Rs. 1,400