Process costs

1. SRM INSTITUTE OF SCIENCE AND TECHNOLOGY
DEPARTMENT OF COMMERCE
COST ACCOUNTING
Mr. ENOCK I
ASSISTANT PROFESSOR
UNIT II PROCESS COSTING

2. INTRODUCTION
• Process costing is a special BRANCH of costing used by the manufacturing
industries.
• Who are involved in converting the RAW MATERIAL into the FINISHED
PRODUCT.
• Such work of conversation is done step by step , each step called “a process” .
• Process costing is a method of allocating manufacturing cost to products to
determine an average cost per unit.
DEFINITION OF PROCESS COSTING:
According to I.C.M.A., London, “ Process Costing is that form of operation
costing, where standardized goods are produced.”

3. FEATURES OF PROCESS COST:
(a)The process cost centres are clearly defined and all costs relating to each process
cost centre are accumulated.
(b)The cost and stock records for each process cost centre are maintained accurately.
The records give clear picture of the units introduced in the process or received
from the preceding process cost centre and also units passed to the next process.
(c) The total costs of each process are averaged over the total production of that
process, including partly completed units.
(d) The charging of the cost of the output of one process as the raw materials input
cost of the following process.
(e) Appropriate method is used in absorption of overheads to the process cost
centres.

4. (f) The process loss may arise due to wastage, spoilage, evaporation etc.
(g) Since the production is continuous in nature, there will be closing work-in-
progress which must be valued separately.
(h) The output from the process may be a single product, but there may also be by-
products and/or joint products.

5. BASIS FOR COMPARISON JOB COSTING PROCESS COSTING
Meaning Job costing refers to
calculating the cost of a
special contract, work order
where work is performed as
per client's or customer's
instructions.
A costing method, in which
the costs which are charged
to various processes and
operations is ascertained, is
known as Process Costing.
Nature Customized production Standardized production
Assignment of cost Calculating cost of each job. First of all, cost is
determined for the process,
thereafter spread over the
produced units.
Cost Center Job Process
Scope of cost reduction Less High

6. Transfer of Cost No transfer Cost is transferred from one
process to another
Identity Each job is different from
another.
Products are manufactured
consecutively and so they lose
their identity.
Cost Ascertainment Completion of the job. End of the cost period.
Industry type Job costing is suitable for the
industries which manufactures
products as per customer's
order
Process costing is perfect for
the industry where mass
production is done.
Losses Losses are usually not
segregated.
Normal losses are carefully
ascertained and abnormal
losses are bifurcated.
Work-in-progress (WIP) WIP may or may not exist at
the beginning or at the end of
the financial year.
WIP will always be present in
the beginning or at the end of
the accounting period.

7. COSTING PROCEDURE:
(a) Materials: Materials are issued to the processes on the basis of material requisitions. Bulk
issues also may be made from stores to processes in which case departmental stocks of
materials may be maintained. Each process is debited for the output received form the
previous process as it is like raw material. Additional materials may also be used by processes
which are also debited to them.
(b) Labour: Automation is the order of the day in most of the process industries.
Proportion of direct labour is generally very low in the total cost of a process.
Remuneration of workers engaged in production in each process is debited
to the process as direct wages. If any workers assist in two or more processes,
their wages may be allocated on the basis of time-booking.

8. (c) Direct Expenses: Expenses such as electricity, depreciation, etc., can be easily determined for
each process and allocated directly.
(d) Overheads: Common expenses can be apportioned to different processes on suitable basis. They
may be recovered at predetermined rates also, based on past experience.
PROCESS LOSSES:
a) Wastage: According to terminology of cost accounting 1.C.M.A
London, "Waste is discarded substance having no value. Charles T. Horngren
say's "wastage is material that either is lost, evaporates or shrinks in a
manufacturing process or is a residue that has no measurable recovery value”.
Thus, wastage has neither recovery value nor has any use.
b) Scrap: According to I.C.M.A terminology, "Scrap is discarded material
having some recovery value which is usually disposed off without further treatment

9. C) NORMAL PROCESS LOSS OR NORMAL WASTAGE: It is the process loss which is
unavoidable and uncontrollable. It is to be expected in normal conditions of the
process. As a part of cost control, management estimates such loss in advance
on the basis of past experience. The normal loss should be absorbed by good
units produced.
(d) ABNORMAL PROCESS LOSS OR ABNORMAL WASTAGE: When process loss is in
excess of predetermined loss, such additional loss is called Abnormal loss or
Abnormal wastage. Such loss may be caused by Abnormal reasons such as
substandard material, faulty tools and equipment, plant breakdown, etc.
Abnormal loss should not be allowed to affect the normal cost of production.
Therefore it is valued just like good units produced. The abnormal loss is
controllable and not repetitive in nature. The firm should take all the necessary
steps to avoid the recurrence of abnormal loss.

10. COMPUTATION OF ABNORMAL LOSS

11. (e) ABNORMAL GAIN OR ABNORMAL EFFECTIVES: When process loss is less than the
predetermined normal loss, the additional output resulting therefrom is called Abnormal gain or
Abnormal Effectives. Abnormal gain can occur because of superior quality material, better
workmanship, improved method, tools and equipment's, etc. As a part of cost control process, the
causes for abnormal effectives should also be investigated. Where it is warranted, the normal loss
percentage can be revised for future operations.
Computation of Abnormal gain
Quantity of abnormal gain = Normal output -Actual output
Normal output = Input -Normal loss
If actual output is more, the balance is a negative figure, representing abnormal gain in units.
Normal cost of normal output = Expenditure of the process - Scrap value of normal loss

12. WORK IN PROGRESS AND EQUIVALENT PRODUCTION
Work in progress, is usually measured and categorized as a current asset or a long-term asset on a
company's balance sheet, depending on how the asset will be used.
Work in progress can be thought of as inventory that's still on the factory floor. Manufacturing the
goods has started but has not yet been completed and can't be categorized as inventory or finished
goods.
Work in progress inventory is more valuable than raw materials that have yet to be put into
manufacturing use but is not more valuable than a company's finished goods or finished inventory
ready for sale. In essence, work in progress inventory is the middle stage of the production process
between raw materials and the finished product.

13. EQUIVALENT PRODUCTION
An equivalent unit of production is an expression of the amount of work done by a manufacturer on
units of output that are partially completed at the end of an accounting period. Basically the fully
completed units and the partially completed units are expressed in terms of fully completed units.
METHOD OF COMPUTATION OF EQUIVALENT UNITS:
• In each process the opening work-in-progress at the beginning of the
period and its degree of completion relating to material, labour and overheads
should be noted.
• The number of units introduced into the process should be recorded.
• Any predetermined rate of normal loss and the normal loss in units should
be taken into account.
• The actual final output for the period should be noted.

14. • Any abnormal loss or gain in units and its degree of completion in terms of
materials, labour and overheads should be ascertained.
• Closing work-in-progress in units and its degree of completion in terms of
material,labour and overheads should be ascertained.
• The degree of completion of the scrapped units and realisation from the sale
of scrap of normal loss units should be noted.
TYPES OF EQUIVALENT PRODUCTION PROCESS:
I, When there is only closing work in progress without process losses.
II, When there is only closing work in progress, but with process losses.
a, When there is normal loss only.
b, When there are both normal and abnormal losses.

15. III, When there is opening, as well as closing work in progress, without process losses.
a, Average Cost Method
b, FIFO Method
c, LIFO Method
IV, When there is opening as well as closing work in progress with process losses.
JOINT PRODUCTS
Joint products are two or more products separated in the course of processing, each having a
sufficiently high saleable value to merit recognition as a main product.
• Joint products include products produced as a result of the oil-refining process, for example,
petrol and paraffin.
• Petrol and paraffin have similar sales values and are therefore equally important (joint) products.

16. BY-PRODUCTS
By-products are outputs of some value produced incidentally in manufacturing something else
(main products).
• By-products, such as sawdust and bark, are secondary products from the timber industry
(where timber is the main or principal product from the process).
• Sawdust and bark have a relatively low sales value compared to the timber which is produced
and are therefore classified as by-products