Chapter 10

Process Costing

Introduction
CIMA - Process costing as the costing method
applicable where goods or services result from
a sequence of continuous or repetitive
operations or process.
Costs are arranged over the units produced
during the period.
Process costing is used to determine the cost
of a product at each operation, process, or
stage of manufacture.
Management Accounting
By Paresh Shah
Oxford University Press

Applicability
This method of costing is used by those concerns which
manufacture articles of uniform standards.
These firms manufacture articles on a continuous flow
basis.
Under the following conditions, process costing can be
followed favourably:
Production of a single product.
Processing of a single product for a certain period.
Production of several products of a standard design in the
same plant.
Division of a factory into separate operations or processes.
Management Accounting
By Paresh Shah
Oxford University Press

Characteristics
The factory is divided into different processes
which are the cost centres.
The production is continuous and the final
product is the end result of a series of processes.
The sequence of operations for processing the
product is specific and predetermined.
A separate account is maintained for each
process.
All costs, direct and indirect, are recorded for
each process separately.
Management Accounting
By Paresh Shah
Oxford University Press

Job Costing And Process Costing

Job Costing

Process Costing

Production is against some specific orders

Process is in continuous flow and

Homogenous

Each Job is separate and independent of

each other

Products lose their individual entity, as

they are manufactured on a continuous
flow

Costs are calculated when a job is

completed

Costs are calculated at the end of a cost

period

It involves more paperwork

It involves less paperwork

Management Accounting
By Paresh Shah
Oxford University Press

Costing Procedure
The factory works are divided into different
processes and a separate account is
maintained for each process.
Materials
Wages
Direct Expenses
Production Overheads
Management Accounting
By Paresh Shah
Oxford University Press

Normal Loss
It is a part of the process loss which is caused
under normal circumstances, and an inevitable
loss.
It can not be avoided by any steps or measures by
the management.
It is also referred to as a non-controllable loss.
Normal loss may have a scrap value.
The cost of normal loss after deducting scrap
value, if any, is to be borne by the output of the
respective process.
Management Accounting
By Paresh Shah
Oxford University Press

Abnormal Loss
It is a part of the process loss which is caused
due to abnormal circumstances.
Abnormal loss is avoidable and controllable by
the management by establishing proper
precautionary measures.
Abnormal loss occurs in addition to normal
loss.

Management Accounting
By Paresh Shah
Oxford University Press

Abnormal Gain
Abnormal gain arises when the actual wastage
(loss) is less than the normal wastage or when
the actual output is more than the normal
output.
Abnormal gain arises due to rise in the
efficiency of the production department, so
the benefit of abnormal gain will not be
transferred to customers.
Management Accounting
By Paresh Shah
Oxford University Press

Inter Process Profits

The output of one process is transferred to the
next process, not at cost, but at market value or
at an inflated cost or cost plus a percentage of
profit. - Inter-process profits.
Advantages
Discloses the efficiency
Assistance in Decision making
Facilitate comparison

Disadvantages
Unnecessary complications
No useful purpose is served
Management Accounting
By Paresh Shah
Oxford University Press

Joint Products And By-Products

A joint product is two or more products
derived from the same raw material, each
having an equal importance.
A by-product is a secondary product obtained
during the course of manufacture, having a
relatively small importance as compared with
that of the chief product or products.
By-products have saleable value or usable
value.
Management Accounting
By Paresh Shah
Oxford University Press

Joint Costs
The common cost of services employed in the output is
known as the joint cost.
All costs incurred prior to the split off point are joint
costs.
The distribution of the joint costs to the various joint
products is a major problem to the management.
Joint costs influence managerial decisions of two types:
Decision relating to the joint products as a group,
Decisions relating to the additional processing to be
applied to individual joint products,
Management Accounting
By Paresh Shah
Oxford University Press

Costing of Joint Products

Average Unit Cost Method

Physical Unit Method
Survey Method
Market Value Method
Market value at separation point
Market value after further processing
Net realizable value method
Management Accounting
By Paresh Shah
Oxford University Press

Costing Of ByProducts
By-products mean secondary products arising
in the course of manufacturing the main
products.
By-products should be distinguished from
waste.
The latter is of less economic importance than
the former.

Management Accounting
By Paresh Shah
Oxford University Press

Accounting Methods for By

Products
Non Cost Methods
Other income method
By product value deducted from total cost
Reverse cost method

Cost Methods
Opportunity cost method
Standard cost method
Apportionment on suitable bases
Management Accounting
By Paresh Shah
Oxford University Press

Equivalent Production
In process costing, unit product cost is determined for
each process.
This is simple and involves only arithmetical calculation
when the costs of the process and the output thereof
are known, provided all the units started are
completed within the period under review.
Since the incomplete or semi-finished units or work-inprogress cannot have the same costs as the completed
units, these incomplete units require to be converted
into equivalent of completed units.
This is popularly known as equivalent production or
effective units.
Management Accounting
By Paresh Shah
Oxford University Press

Procedure To Evaluate
Equivalent Production
State the opening work-in-progress
Add to the number of units started and
completed during the period.
Add to the above, the equivalent completed
units of closing work-in-progress.

Management Accounting
By Paresh Shah
Oxford University Press

Procedure Of Evaluation
Find out the equivalent production after
taking into consideration the process losses,
degree of completion of opening and closing
stock.
Find out the net process cost according to
elements of costs, i.e. materials, labour, and
overheads.
Evaluate the output finished and transferred,
and work-in-progress.
Management Accounting
By Paresh Shah
Oxford University Press

Statements To Prepare
Statement of Equivalent Production
Statement of Cost
Statement of Evaluation

Management Accounting
By Paresh Shah
Oxford University Press