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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
Chemical Industries e.g.,
pharmaceutical, paint, soap, etc)
Steel Industries, Cement Industries
Rubber Industries
Dairy, food processing
Paper, Oil refineries, Textile weaving
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
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
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
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 products
Oil Refining - Petrol, diesel, kerosene,
LPG, grease, lubricating oil
Dairy - Cream, butter, skimmed milk,
ice cream
Flour Mill - White flour, brown flour,
animal feeding stuffs
Mining - Several metals from the same
ore e.g., copper, silver,
zinc etc
Saw mill - several grades of lumber and

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