The ppt is about process costing.

1. Process Costing
Presentation By-
Bhushan Bankar
IES MCRC, Mumbai

2. Introduction
• Process costing is a form of operations costing which
is used where standardized homogeneous goods are
produced.
• This costing method is used in industries like
chemicals, textiles, steel, rubber, sugar, shoes, petrol
etc.
• Cost of production during a particular period is
divided by the number of units produced during that
period to arrive at the cost per unit.

3. Definition of Process Costing
• Process costing is a method of costing under
which all costs are accumulated for each stage of
production or process, and the cost per unit of
product is ascertained at each stage of
production by dividing the cost of each process
by the normal output of that process.
• CIMA London defines process costing as “that
form of operation costing which applies where
standardize goods are produced”

4. Terms to understand
• Normal loss
Normal expected wastage under usual operating
conditions(evaporation, testing or rejects)
• Abnormal loss
A loss occurred over and above the normal expected
loss(as faulty machinery or errors by labourers)
• Abnormal gain
The actual loss is lower than the normal
loss(efficiency of newly-purchased machinery)

5. • Work in progress (WIP)
Units that are not yet complete at the end of the
period.(Opening WIP & closing WIP)
• Scrap value
The outcome of a loss can be sold for a small
value(e.g. Metal Scrap)
• Equivalent units
A conversion of part-completed units into an
equivalent number of wholly-completed units.
e.g.-If 1,000 cars are 40% complete then the equivalent number of
completed cars would be 1,000 x 40% = 400 cars.
Terms to understand

6. Features of Process Costing
• The production is continuous, homogeneous, standardized
• Output of one process become raw material of another
process
• The output of the last process is transferred to finished stock
• Costs are collected process-wise
• Both direct and indirect costs are accumulated in each
process
• If there is a stock of semi-finished goods, it is expressed in
terms of equalent units
• The total cost of each process is divided by the normal output
of that process to find out cost per unit of that process.

7. Advantages
• Costs are be computed periodically at the end of a particular
period
• It is simple and involves less clerical work that job costing
• It is easy to allocate the expenses to processes in order to have
accurate costs
• Use of standard costing systems in very effective in process
costing situations
• Process costing helps in preparation of tender, quotations
• Process costing helps in preparation of tender, quotations

8. Limitations
• Cost obtained at each process is only historical cost and are
not very useful for effective control
• Process costing is based on average cost method, which is not
that suitable for performance analysis, evaluation and
managerial control
• Work-in-progress is generally done on estimated basis which
leads to inaccuracy in total cost calculations
• The computation of average cost is more difficult in those
cases where more than one type of products is manufactured
and a division of the cost element is necessary
• Where different products arise in the same process and
common costs are prorated to various costs units. Such
individual products costs may be taken as only approximation
and hence not reliable

9. Process Costing vs. Job Costing
• Job order costing and process costing are two
different systems.
• Both the systems are used for cost calculation
and attachment of cost to each unit completed,
but both the systems are suitable in different
situations
• The basic difference between job costing and
process costing are…

10. Basis of Distinction Process costing Job order costing
1)Specific order Performed against specific
orders
Production is contentious
2) Nature Each job many be different Product is homogeneous
and standardized.
3) Cost determination Cost is determined for each
job separately
Costs are complied for each
process for department on
time basis
4) Cost calculations Cost is complied when a job
is completed
Cost is calculated at the end
of the cost period
5) Control Proper control is difficult as
each product is different
and the production is not
continuous
Proper control is easier as
the production is
standardized and is more
suitable
6) Work-in-Progress There may or may not be
work-in-progress
There is always some work-
in-progress due to
continuous production

11. Normal Loss Example