2. Content to be covered in the topic
Meaning of process costing
Features of process costing
Areas where process costing can be applied
Methods of process costing
Process losses
Meaning of equivalent production
3. LEARNING OUTCOMES:
After this presentation student will be able to understand
theoretical aspects of process costing.
What process costing is all about basically meaning ,objectives
features process, applications and important terms used in the
costing like process losses an equivalent production.
4. Meaning of process costing:
Meaning: Process costing is that aspect of costing which is used to
ascertain the cost of the product at each process or stage of production.
This method of costing is used in industries where manufacturing
process is divided into two or more process. Thus process costing is
applied in the industries where production process moves from one
process to another till final completion of a product and there is
continuous mass production of identical(homogeneous ) units through
series of processes.
5. Points to remember:
So it can be concluded that process costing can be applied
1. where production process involves series of process or stage of manufacture.
2. There is continuous production of homogeneous or identical units through
series of operations.
3. The objective of process costing is to find out or ascertain the total cost of
each process and unit cost of product for each and every process.
For example:
There is a company that bottles cola, now it would not be feasible or worthwhile
to separate and record the cost of each bottle of cola in the bottling process.
Therefore, the company would assign costs to the bottling process as a whole for a
period of time. Then they would divide that overall process cost by the number of
bottles produced during that period of time to assign production costs to each
bottle of cola.
6. FEATURES OF PROCESS COSTING:
The process cost centres are clearly defined and all costs relating to each
process cost centre are accumulated.
The cost and stock records for each process cost centre are maintained
accurately.
The total costs of each process are averaged over the total production of that
process, including partly completed units.
The charging of the cost of the output of one process as the raw materials input
cost of the following process.
Appropriate method is used in absorption of overheads to the process cost
centres.
The process loss may arise due to wastage, spoilage, evaporation etc.
Since the production is continuous in nature, there will be closing work-in-
progress which must be valued separately.
7. Application of process costing :
Process costing can be used in all industries except where job, batch, unit or contract
costing is necessary.
It can be used in textile industry, Oil refining , pharmaceuticals, chemical works, coke
works, Biscuit works, food products etc.
8. PROCESS COSTING METHOD:
There are five steps in process costing methods which are as
follows:
Analyze inventory flow: The first step is to analyze how much inventory was
there at the beginning of the period, how much inventory completed at the end
of the period and how much is left as work in progress at the end of the period.
Convert in-process inventory to equivalent units: convert the work-in-
process ending inventory into a number of equivalent units produced. This
means if there are 1,000 units of inventory in work-in-process, and these units
are all 50% complete, then you consider this as the equivalent of 500 units
produced (500 = .50 x 1,000).
Compute all applicable costs: compute the total direct and indirect
costs incurred by the production process that need to be assigned to the units
completed and the units still in process
9. • Calculate the cost per unit of finished and in-process inventory: calculate the
amount of cost assigned to the completed units of output and the equivalent of
completed units of output still in the ending inventory. For example, if a company
completed 2,000 units, and left 1,000 units half-finished(work in progress), then
divide the applicable costs by 2,500 units.(2000 completed +work in process 50%
complete to be treated as equivalent completed units 50% of 1000 = 500 consider
step 2).
Allocate costs to units of finished and in-process inventory: allocate the
relevant costs to the units of product completed and to the units
of product remaining in the work-in-process account.
10. PROCESS LOSSES:
PROCESS LOSSES Can be divided into two types:
Normal process loss: It is the loss which is unavoidable on account of inherent nature of
production process. Such loss can be estimated in advance. This loss is shared by all usable
units.( like uncontrollable loss)
Abnormal process loss: Any loss caused by unexpected or abnormal conditions such as break
down of plant,accidents, carelessness etc should be regarded as abnormal process loss.
(controllable).
Units of abnormal loss or gain can be calculated as follows:
Total loss – Normal loss
Value of abnormal loss=(Normal cost of normal output)/(Normal
output)*Units of abnormal loss.
Abnormal Gain: Always an estimate of loss is made and when this actual loss is smaller than that
was expected,an abnormal gain results. This is also calculated in similar manner as abnormal loss.
11. Equivalent production:
This represents production of a process in terms of completed units.It means completing
incomplete production into its equivalent of complete units.
Equivalent units of work in progress= Actual number of units in process f manufacture *
percentage of work completed ( consider step 2 process costing)
12. SUMMARY:
So students through this presentation we have covered theoretical aspect of
the chapter:
What is process costing
Objective of process costing
Features of process costing
Steps of process costing and other important terminologies linked with
process costing.
Now for practical questions I will be providing my video lectures to you and
will show you through notes also how to solve the questions .
Will give you questions to solve on your official class groups (wtsapp) you
have to solve those question and get your doubts cleared by me.
Process costing is a technique like any other costing techniques to determine per unit cost of the product and total cost of each process involved in manufacturing of product. Under this costing unit cost of a product is assigned to various process through which it passes for manufacturing.
To understand the concept of process costing it is necessary to above mentioned three points so that it can be easily distinguished from other form of costing.
Above mentioned points are foundation of process costing numericals. So for solving numerical questions these steps should be understood and followed.
PROCESS LOSSES AND EQUIVALENT PRODUCTION are important terms under process costing without knowledge of these terms you will not be able to apply process costing. Just remember equivalent production are those work in process inventory in which 50% of work is complete due to which they are taken as completed units and not as work in process inventory.so word equivalent is used because those work in process inventory is treated as equivalent to completed units.