Process Costing

10/2/2014 1 Chandrakant@SOM,KIIT University

Meaning and Definition
The costing method applicable where goods or
services result from a sequence of continuous or
repetitive operations or processes, costs are
averaged over the units produced during the year.
Applicable where the production moves from one
process or department to the next until its final
completion and there is a continuous mass
production of identical units through a series of
processing operations.

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Illustrating Process Costing
Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods Cost of Goods Sold
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Applicability of Process Costing
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
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Five Steps in Process Costing
Step 1: Summarize the flow of physical units of
output.
Step 2: Compute unit costs taking into consideration both
direct and indirect cost.
Step 3: Adjust for Normal Loss, then compare with Actual
Loss
Step 4: Assign total costs to units completed and transferred
To next process. Value Abnormal Loss @ cost of good units.
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Process losses and wastages
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.
Otherwise, cost of normal loss should be
borne by the good production.

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Abnormal Loss
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.
These are not included in the process costs but
are removed from the appropriate process
account and reported separately as an abnormal
loss.

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Treatment of abnormal loss:
Cost per unit of abnormal loss
= Total cost Value of normal loss
Units introduced Normal loss units
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Abnormal Gain or Effectiveness
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.
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Treatment of abnormal gain
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
10/2/2014 10 Chandrakant@SOM,KIIT University