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Process costing

Meaning
A business in which product passes through various
stages of production, each distinct and well
defined, process costing is employed. A separate
account is prepared for each process and the cost
of production is found at each stage.

Job costing

Process costing

1.Cost are computed for each job


separately

Cost are computed for each process


over a period of time

2. The cost unit is a job

The cost unit is a process

3. Each job may be different.


Production is not continuous

Each process for total output is same


and generally production is
continuous

4. More supervision and control is


required by management.

Comparatively less control and


supervision is required

5. Jobs are executed against orders

It is not done in process costing

TYPES OF PROCESSING
Continuous sequential processing : In case of this processing a
product has to pass through different cost centres or stages of
manufacturing continuously and in succession one after the other during
a period. The processing being continuous and identical, the costing units
for each centre or stage are identical during any period. Examples of this
type of processing are cement-making, paper-making, refining of crude
petroleum, etc.
(ii) Discontinuous Processing: In case of this processing, a process is
independently operated for the individual product as such at frequent
intervals. The costing unit in case of this processing, dependent upon the
product may vary even for the same cost centre. Examples of this type of
processing are dye manufacturing, fruit preservation, vegetable canning,
yam spinning, etc.
.
i)

(iii) Parallel Processing : In case of this processing,


the operations or stages through which the product
has to pass run parallel and separately. All these
parallel processes ultimately join with the end
process. Examples of this type of processing are
manufacturing different components which ultimately
join in the assembly process to make a product, meat
packing etc.
(iv) Selective Processing : In case of this processing,
the combination of the processes or stages of
operation depend upon the end-product to be
commercialised. Examples of this type of processing
are cooked meat, chloride compounds like bleaching
power of zinc chloride or hydrochloric acid, etc

Advantages of Process Costing


1 The cost of different processes as well as finished product can
be computed conveniently at short intervals, say, daily or
weekly.
2. Control cost and production can be advantageously effected
as predetermined and actual data are available for each
department or process.
3.It involves less clerical work because of the simplicity of cost
records.
4. The average costs of homogeneous products can easily be
computed
5 Expenses can be allocated to different processes on rational
basis and accurate cost, thus, can be ascertained.
6. It enables the correct valuation of closing inventories.

Disadvantage of process costing


1. The cost ascertained at the end of the process is called historical
cost which is of very small use for managerial control. Since it is
based on historical costs, it has all the weaknesses of historical
costing.
2. The system of costing conceals weakness and inefficiencies in
processing.
3. It does not evaluate the efforts of individual workers or supervisors.
4. The valuation of Work-in-progress on the basis of degree of
completion is merely a guess work.
5. If production is not homogeneous, as in the case of foundries
making castings of different sizes and shapes, the average cost
may give an incorrect picture of cost.

PROCESS LOSSES AND WASTAGES


The loss can be classified as a) normal b) abnormal
Normal loss - Because of the nature of the raw
materials, some loss is inherent and is
unavoidable. The percentage of such losses is
anticipated from past experience by the
management. Loss of this type should be
absorbed by good units produced, i.e. the cost of
units lost in charged to the good units output. Any
value realisable on the normal loss will be credited
to the process account.

Abnormal loss - Any loss exceeding the normal is


called abnormal loss. It is caused by accidents,
sub-standard materials, carelessness etc.
Therefore, abnormal loss is valued just like good
units and transferred to a separate account called
Abnormal Loss Account
Value of Abnormal loss =
Normal cost of production Units of abnormal loss
Normal output

Illustration 1:
A company produces two products - P and R. They undergo two processes,
namely Factory and Finishing. Raw materials used in the factory and general
expenses incurred are apportioned in the ratio of output of each class. Factory
and finishing overheads are apportioned on the basis of direct labour ratio in
each process. The selling price of the article per unit P- 400 and Q - 450
Opening stock-: factory 10,600
finishing 5,000
Purchases
- factory 3,17,400
finishing- 1,35,000
Opening stock-: factory 82,000
finishing 44,000
Factory wages P - 1,60,000
Q 1,20,000
Finishing wages P - 90,000
Q 30,000
Factory overheads 63,000
Finishing overheads 24,000
General expenses - 1,44,000
Output
P 2000 units
Q 1000 units

From the following figures show the cost of three


processes. The production of each process is
passed on to next till completion

Wages and material


Works overhead
Production ( in units)
Stock ( units from
preceding process on 1st
july,95)
Stock ( units from
preceding process on 31st
july,95)

Process A

Process B

Process C

60,800
11,200
72,000

24,000
10,500
75,000

58,500
12,000
96,000

8,000

33,000

2,000

11,000

At the end of process A, carried in a factory during the


week ending July 31,2001 the number of units produced
were 850 excluding 50 units damaged at the very end of
process. The damaged units realized 3 per unit as
scrap. A normal wastage of 10% occurs during
the process, the wastage realised 2 per unit.
A unit of raw material cost 4. The other expenses
of the week were :
Wages
500
Power
200
General expenses
450
40% of the output is sold as to show a profit of 16
2/3 % on the selling price , rest of the output is
transferred to process B. Prepare process A
account.

The following data are available pertaining to a product


after passing through two processes A and B
Output transferred to process C 9120 units for 49263
Expenses incurred in process C :
Materials
1,480
Direct labour
6,500
Direct expenses
1,605
The wastage of process C is sold at 1 per unit.
The overhead charges were 168% of direct
labour. The final product was sold at 10 per
unit fetching a profit of 20% on sales.
Find the %age of wastage in process C and
prepare process C account

Q- A product passes through 3 processes A, B and C. The normal


wastage of each process is as follows: Process A- 3%, Process B5%, Process C- 8%.
Wastage of process A was sold at 25 p. per unit. That of process B at
50 p. per unit and that of process C at 1 per unit. 10,000 units
were issued to process A in the beginning of October at I per unit.
Other expenses are as follows ;
Materials
Labo
ur
Direct expenses
Output

Process A
1,000
5,000
1,050
9500 units

Process B
1,500
8,000
1,188
9,100 units

Process C
500
6,500
2,009
8100 units

Prepare abnormal wastage and abnormal effectiveness account

Work in progress manufacturing a product is a


continuous process. At the end of accounting
period generally there is some work in progress.
The cost of such work is determined by calculating
effective or equivalent production
Effective or equivalent production it implies the
production of a process in terms of completed
units. For example if 60 units are in complete in
process A, and they have been estimated as 75%
complete, the stock at the end of accounting
period be taken as equivalent to 45 complete
units.