Process costing is a method of assigning costs to products in a manufacturing environment where standardized goods are produced continuously. Costs are accumulated for each stage of production, or process, and then averaged across all units produced during an accounting period. This allows costs to be tracked by production department and allocated to individual units. Process costing is commonly used for industries that produce homogeneous goods like chemicals, textiles, food products, and more.

1. PROCESS COSTING
Process costing is famous topic of cost accounting. It is that method of costing which
is used at that industry where production is done in step by step process. Every finished goods
of one process will be the raw material of other process and production is continually
operating in factory. At that time we calculate first process cost by making process account. A
process account is made for every process of production.
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. Process costing is also used
in the assembly type of industries also. It is assumed in process costing that the
average cost presents the cost per unit. 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.
Process costing is an accounting methodology that traces and accumulates direct costs, and
allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in
a large batch, which might include an entire month's production. Eventually, costs have to be
allocated to individual units of product. It assigns average costs to each unit, and is the
opposite extreme of Job costing which attempts to measure individual costs of production of
each unit. Process costing is usually a significant chapter.
Process costing is a type of operation costing which is used to ascertain the cost of a product
at each process or stage of manufacture. CIMA defines process costing as "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 period".
Process costing is suitable for industries producing homogeneous products and where
production is a continuous flow. A process can be referred to as the sub-unit of an
organization specifically defined for cost collection purpose.
Following are main industries where we use process costing method:
1. Chemical industry
2. Soap industry
3. Clothes industry
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2. 4. Paper industry
5. Dairy Industry
MEANING 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 2 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.
Definition:
CIMA London defines process costing as “that form of operation costing which applies where
standardize goods are produced”
Features of Process Costing:
(a) The production is continuous
(b) The product is homogeneous
(c) The process is standardized
(d) Output of one process become raw material of another process
(e) The output of the last process is transferred to finished stock
(f) Costs are collected process-wise
(g) Both direct and indirect costs are accumulated in each process
(h) If there is a stock of semi-finished goods, it is expressed in terms of equivalent units
(i) The total cost of each process is divided by the normal output of that process to find out
cost per unit of that process.
Advantages of process costing:
1. Costs are be computed periodically at the end of a particular period
2. It is simple and involves less clerical work that job costing
3. It is easy to allocate the expenses to processes in order to have accurate costs.
4. Use of standard costing systems in very effective in process costing situations.
5. Process costing helps in preparation of tender, quotations
6. Since cost data is available for each process, operation and department, good managerial
control is possible.
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3. Limitations:
1. Cost obtained at each process is only historical cost and are not very useful for effective
control.
2. Process costing is based on average cost method, which is not that suitable for performance
analysis, evaluation and managerial control.
3. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total
cost calculations.
4. 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.
5. 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.
The characteristics of process costing system:
1. A cost of production report is used to collect, summarize and compute total and unit costs.
2. Production is accumulated and reported by departments.
3. Costs are posted to departmental work in process accounts.
4. Production in process at the end of a period is restated in terms of completed units.
5. Total cost charged to a department is divided by total computed production of the department in
order to determine a unit cost for a specific period.
6.
Costs of completed units of a department are transferred to the next processing department in
order to arrive at the total costs of the finished products during a period. At the same time, costs
are assigned to units still in process.
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4. The procedures of process costing are designed to:
1. Accumulate materials, labor, and factory overhead costs by departments.
2. Determine a unit cost for each department.
3. Transfer costs from one department to the next and to finished goods.
4. Assign costs to the inventory of work in process (WIP)
5. If accurate units and inventory costs are to be established by process costing
procedures, costs of a period must be identified with units produced in the same period
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5. DISTINCTION BETWEEN JOB COSTING AND PROCESS
COSTING
Job order c o st i n g a n d p r o c e s s c o s t i n g a r e t w o d i f f e r e n t systems.
Both t h e s ys t em s a r e us ed fo r c o s t c a l c u l a t i o n 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
Basis of
Distinction
1. Specific order
2. Nature
3. Cost determination
4. Cost calculations
5. Control
6. Transfer
7. Work-in-Progress
8. Suitability
Job order costing
Performed
against
specific orders
Each job many be
different.
Process costing
Production is
contentious
Product is homogeneous
and standardized.
Cost is determined for
each job separately.
Costs are complied for
each
process
for
department
on time
basis i.e. for a given
accounting period.
Cost is complied when a Cost is c a l c u l a t e d a t
job is completed.
the end o f t h e c o s t
period.
Proper
control
is Proper
controlis
comparatively
comparatively
easier
d i f f i c u l t as each
as the production is
product unit is different standardized
and is
and
the more suitable.
production is not
continuous.
There is usually not
The output of one
transfer from one job to process is transferred to
another
unless another process as input.
there is some surplus
work.
There may or may not
There is always some
be work-in-progress.
work-in-progress because
of continuous production.
Suitable to industries
where production is
intermittent
and
customer o r d e r s c a n
be identified in the
value of production.
Suitable, where goods
are made for stock and
productions
is
continuous.
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6. Difference between job costing & process costing
The primary goal of both job costing and process costing in the manufacturing profession
is to determine the actual cost per unit. Job costing basically refers to the costs that are
encountered in the businesses related to manufacturing goods. Job Costing ledgers,
wherein such costs are recorded, form an integral part of the final account statement of the
manufacturers. This type of costing involves recording the costs as per the specific jobs
rather than a particular process. However, Process Costing refers to the methodology
involved in calculating the costs that are incurred while performing a particular task or
undertaking a specific process. This might involve the costs that are either incurred directly
or indirectly.
Job Costing involves the costs of every individual unit of production. However, Process
Costing involves the costs that are averaged for each production unit. As per the definition,
Process Costing is a method that is applied to the manufacture business that is held
together by various continuous or repetitive processes. Process Costing works efficiently
for the industries that are known to produce a single type of product. Both of these terms
signify the costs related to labor, material and overhead costs.
Process Costing helps to keep a tight reign over the monthly expenditures in a
manufacturing business. As an example, Job Costing involves the costs that form salaries
of labors working in a particular process whereas Process Costing involves the costs of the
processed or manufactured goods undertaken by different departments.
One of the major differences between Job Costing and Process Costing is that the Job
Costing can be carried out while a particular job is going on. However, Process Costing
can be achieved only when all the processes are completed. Moreover, when it comes to
documentation, in case of Job Costing, the job cost sheet is important whereas in Process
Costing a document having deposition and accumulation of various costs is important.
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7. In summary, there are various differences between Job Costing and Process Costing
methods. Some of these are listed below:
1. Job Costing signifies the costs encountered for each and every job whereas Process
Costing signifies the costs encountered for different departments.
2. In case of Job Costing, a final value of the costs can be calculated beforehand
whereas in Process Costing, the final value of the costs is calculated only at the end of
the complete process.
3. The important documents needed to carry out Job Costing are much different from
those needed for Process Costing.
4. Job Costing is typically used by industries that manufacture customized and
heterogenous products whereas Process Costing method is used by the industries that
are involved in mass production of homogenous products.
This is a method of job costing used by fabricators and manufacturers who produce unique
special orders, customized products and even standardized products that are produced in
small batches.
Essentially, job order costing is attempting to measure the cost of manufacturing a single
unit for a particular job order. It is simple to find the cost per widget. Take the sum of the
cost of materials (including unusable scrap), cost of labor and allocated overhead and
divide by the number of widgets produced for a particular job order. The math is easy, the
tricky part is accurately tracking the material, labor and overhead with efficiency.
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8. Process Costing
Unlike job order costing, process costing is a used by manufacturers who mass produce
large quantities of the exact same "widget" in one continuous process flow.
How this differs from job order costing is that for process costing, the cost per unit is
accumulated within a specific time period for a specific department. The formula is similar
to job order costing. Divide the sum of the cost of material, cost of labor and allocated
overhead for a month (arbitrary time frame) by the number of widgets produced within that
same month.
Following are the main differences between process costing and
job costing:
1. Applicability
Process costing is applied to ascertain the cost of standardized products produced in mass.
So, naturally, materials, labor and other facilities remain indifferent. Job costing is applied
to ascertain the cost of a specific order received. The quality and quantity of materials and
labor and other facilities between jobs vary.
2. Cost Collection
Process costing accumulates manufacturing costs for departments or processes. Job costing
uses cost sheet and accumulates manufacturing costs for each job or batch separately.
3. Time Period
Process costing has a time frame of certain months or years for which costs are
accumulated. Job costing has no time frame. It ends after the completion of a particular job
so that costs are accumulated for each job.
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9. 4. Unit Cost Ascertainment
Process costing divides total departmental process costs by the departmental process output
to derive the unit cost. Job costing obtains unit cost by dividing the total cost of the job by
the job order units.
Necessary of process costing
Manufacturing and production companies use process costing to allocate production costs
to consumer goods. Process costing is most common in business industries where
manufacturers produce homogenous goods. Homogenous goods represent items that are
extremely similar to each other. Gasoline, kidney beans, soda pop, cotton tee shirts and
plywood are a few examples of homogenous products. Business owners use process
costing because it offers several advantages in the manufacturing and production
environment.
Saves Time
Process costing saves management accountants copious amounts of time. Many types of
cost allocation systems require accountants should to identify specific costs or cost drivers
when allocating production costs. Process costing avoids these actions because it allocates
costs based on the number of production processes a good travels through. Management
accountants focus on the production costs for each manufacturing process. The number of
goods leaving a production process will usually have the total process costs applied to each
product. Process costing allows management accounts to apply an average per-unit cost for
the direct materials, production labor and manufacturing overhead to each product.
Flexible
Manufacturing and production companies can have a few or several production processes
based on the type good. Production processes can include selling, refining, training,
filtering, bottling, labeling and shipping. The type of production process depends on the
goods being produced and how much time must be spent on converting raw materials to
valuable consumer goods. Companies who use process costing often have a flexible
production environment. New production processes may be added to the production system
and costs will be allocated for the new process. This concept also works in reverse.
Companies can eliminate extemporaneous production processes and decrease product costs
by reducing the total production system.
Easier Than Other Costing Systems
Process costing is usually an easier costing system for manufacturing and production
companies. Using a basic process cost allocation system allows companies to hire and train
new accounting employees in less time than other companies. Process costing may also
require less paperwork and other information for management decisions. Management and
9

10. cost accounting is usually responsible for providing business owners and managers with
financial information for business decisions. Process costing usually provides information
on current work-in-process (unfinished products) and the number of 100 percent complete
goods produced. Additional information is often easy to include this process costing
includes products in large batches rather than individual units.
Process costing is an accounting system that gathers direct and indirect costs of
manufacturing and then averages them out into a "cost per unit" for each product. Process
costing is the opposite of job costing, which determines the specific cost for each task in a
procedure of creating a product. Many large companies that create the same product over
and over again like Coca Cola or Kellogg's use process accounting for their products, as
there are many benefits for a large and active company.
The Importance of process costing
Costing is an important process that many companies engage in to keep track of where
their money is being spent in the production and distribution processes. Understanding
these costs is the first step in being able to control them. It is very important that a
company chooses the appropriate type of costing system for their product type and
industry. One type of costing system that is used in certain industries is process
costing that varies from other types of costing (such as job costing) in some ways. In
Process costing unit costs are more like averages, the process-costing system requires less
bookkeeping than does a job-order costing system. So, a lot of companies prefer to use
process-costing system.
When process costing is applied?
Process costing is appropriate for companies that produce a continuous mass of like units
through series of operations or process. Also, when one order does not affect the
production process and a standardization of the process and product exists. However, if
there are significant differences among the costs of various products, a process costing
system would not provide adequate product-cost information. Costing is generally used in
such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass,
and food.
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11. Reasons for use
Companies need to allocate total product costs to units of product for the following
reasons:

A company may manufacture thousands or millions of units of product in a given
period of time.

Products are manufactured in large quantities, but products may be sold in small
quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a
time (eggs, cookies), etc.

Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales
are made. This requires a correct and accurate accounting of product costs per unit, to
have a proper matching of product costs against related sales revenue.

Managers need to maintain cost control over the manufacturing process. Process
costing provides managers with feedback that can be used to compare similar product
costs from one month to the next, keeping costs in line with projected manufacturing
budgets.

A fraction-of-a-cent cost change can represent a large dollar change in
overall profitability, when selling millions of units of product a month. Managers must
carefully watch per unit costs on a daily basis through the production process, while at
the same time dealing with materials and output in huge quantities.

Materials part way through a process (e.g. chemicals) might need to be given a value,
process costing allows for this. By determining what cost the part processed material
has incurred such as labor or overhead an "equivalent unit" relative to the value of a
finished process can be calculated.
Process cost procedures
There are four basic steps in accounting for Process cost:

Summarize the flow of physical units of output.

Compute output in terms of equivalent units.
11

12. 
Summarize total costs to account for and Compute equivalent unit costs.

Assign total costs to units completed and to units in ending work in process inventory.
Format of process a/c
Particulars
To Direct material
To Direct Labour
To Indirect material
To Other Expenses
Unit
Rate
Rs.
To Abnormal
gain(B/F)
Total
Particulars
By Normal Loss
By Units transferred
to other process
By Abnormal loss
(B/F)
Unit
Rate
Rs.
Total
Format of Abnormal loss
Particulars
To Process a/c
Unit
Rs.
Total
Particulars
By Sale of wasted units
By costing P & L a/c
Total
Unit
Rs.
Format of Abnormal gain a/c
Particulars
To Normal Loss a/c
To costing P&la/c
Total
Units
Rs.
Particulars
By Process a/c (names of different
process)
Total
Units
Rs.
12

13. 1)To find the cost per unit for valuation of units to be trans. to next process and also
for abnormal, loss or gain = Total process cost – Salvage value of normal spoilage
Total units introduced – Normal loss in units
2) To find abnormal loss (or) gain (all in units):
= Units from previous process + fresh units introduced – Normal loss – units
transferred to next process (If the result is positive then abnormal loss. If
negative then abnormal gain)
3) In case of opening WIP and closing WIP are given then there are different
methods of valuation of closing WIP
i) FIFO Method
ii) LIFO Method
iii) Average Method
iv) Weighted Average Method
4) Various statements to be prepared while WIP is given:
i) Statement of equivalent production
ii) Statement of cost
iii) Statement of apportionment of cost
iv) Process cost a/c
5) FIFO Method: In these method total units transferred to next process includes
full opening stock units and the closing stock includes the units
introduced during the process. In this method the cost incurred
during the process is assumed as to be used
a) First to complete the units already in process
b) Then to complete the newly introduced units
c) For the work done to bring closing inventory to given state of completion
6) LIFO Method = Cost incurred in process is used for:
a) First to complete newly introduced units
b) Then to complete units already in process in this method closing stock is
divided into two :
i) Units which represent opening stock but lie at the end of the period
ii) Newly introduced units in closing stock.
7) Average Method: In this method
a) No distinction is made between opening stock and newly introduced material.
b) In finding cost per unit, cost incurred for opening stock is also to be added with
current cost. (This addition is not done in LIFO & FIFO method as cost
incurred in that process is only taken)
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14. 8) Weighted average method: This method is only used when varied product in
processed through a single process. General procedure is adopted here.
a) Statement of weighted average production should be prepared. Under this
statement output of each products is expressed in terms of points.
b) Cost of each type of product is computed on basis of Points.
Points of vital importance in case of Abnormal Gain / Loss:
a) Calculate cost per unit by assuming there is no abnormal loss / gain
b) Cost per unit arrived above should be applied for valuation of both abnormal
Loss/gain units and output of the process.
c) Separate a/c for both abnormal loss/gain is to be prepared.
In process costing, we study mainly following important matters
1. Process Loss
It is sure that some losses will happen in processing industries. These losses may be
happened due to natural activities of chemical or leakage. So, for effective control, it is
necessary to record all the raw materials in each process. Normal process loss will
increase the cost of unit produced in any process. So, we will credited normal wastage
units only (not amount) in the credit side of process account.
If there is abnormal loss which has happened due to ignorance, then we calculate value of
abnormal loss and its no. of units and cost will be credited to process account.
Formula of calculating the Value of Abnormal Loss
14

15. If there is any cash received due to selling of scrap, then this will be credited to abnormal
loss account and balance of abnormal loss account will be credited to costing profit and
loss account.
2. Normal Loss:
Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials
and production process under normal conditions. It is normally estimated on the basis of
past experience of the industry. It may be in the form of normal wastage, normal scrap,
normal spoilage, and normal defectiveness. It may occur at any time of the process.
No of units of normal loss: Input x Expected percentage of
Normal Loss.
Cost of good unit:
Total cost increased – Sale Value of Scrap
Input – Normal Loss units
The cost of normal loss is a process. If the normal loss units can be sold as a crap then the
sale value is credited with process account. If some rectification is required before the sale
of the normal loss, then debit that cost in the process account. After adjusting the normal
loss the cost per unit is calculates with the help of the following formula:
3. Abnormal Loss:
Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard
material, carelessness, accident etc. such losses are in excess of pre-determined normal
losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are
more than expected losses. The units of abnormal losses in calculated as under:
Abnormal Losses = Actual Loss – Normal Loss
The value of abnormal loss is done with the help of following
formula:
Value of Abnormal Loss:
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16. Total Cost increase – Scrap Value of normal Loss x Units of abnormal loss
Input units – Normal Loss Units
Abnormal Process loss should not be allowed to affect the cost of production as
it is caused by abnormal (or) unexpected conditions. Such loss representing the
cost of materials, labour and overhead charges called abnormal loss account. The
sales value of the abnormal loss is credited to Abnormal Loss Account and the
balance is written off to costing P & L A/c.
Dr.
Particulars
To Process A/c.
Abnormal Loss A/c.
Units Rs.
Particulars
xx
xx By Bank
By Costing P & L
A/c.
xx
xxx
Cr.
Units
xx
xx
Rs.
xx
xx
xx
xx
:
4. Abnormal Gains:
The margin allowed for normal loss is an estimate (i.e. on the basis of
expectation in process industries in normal conditions) and slight differences
are bound to occur between the actual output of a process and that anticipates.
This difference may be positive or negative. If it is negative it is called ad
abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss
is less than the normal loss then it is called as abnormal gain. The value of
the abnormal gain calculated in the similar manner of abnormal loss. The
formula used for abnormal gain is:
Abnormal Gain
Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain Unites
Input units – Normal Loss Units
The sales values of abnormal gain units are transferred to
Normal Loss Account since it arrive out of the savings of Normal Loss.
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17. The difference is transferred to Costing P & L A/c. as a Real Gain.
Dr.
Abnormal Gain A/c.
Particulars
Units Rs.
Particulars
To Normal Loss
xx
xx By Process A/c.
A/c.
xx
xx
To Costing P & L
A/c.
xx
xx
Cr.
Units
xx
Rs.
xx
xx
xx
5. Inter - Process Profits
If transfer from one process to another process is not on cost, then to calculate of inter process profits is very important because we will show it in process account's separated
column.
With this, next process will not get benefit of previous process. This inter-process profits
do not show in balance sheet. It is just for deep analysis in process accounting.
{* One important thing, you must remember that you have to deduct closing stock's profit
from total profit earned in any process.}
This profit on closing stock can be calculated with following formula :
Difference between normal and abnormal loss
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18. (a) Normal spoilage arises under normal, efficient operating conditions; i.e., it is
inherent in the production process and is uncontrollable in the short run. Abnormal
spoilage is not expected under the normal, efficient operating conditions; i.e., it is not
inherent in the production process and management usually considers it avoidable or
controllable. Thus, by definition, the critical factor in distinguishing between normal
and abnormal spoilage is the degree of controllability of units spoiled. Any spoilage
that occurs during a production process functioning within the expected usual range
of performance is considered normal. Any spoilage occurring in amounts in excess of
the defined usual range is considered abnormal (controllable).
(b) Conceptually the cost of normal loss should be included in the cost of good units
produced because of its association with normal production. Likewise, the cost of
abnormal loss should be accounted for as a loss because of its abnormal unusual
nature and should be separately identified as a loss on reports for management.
For practical reasons, there may be no distinction between normal and abnormal loss
in reports for management, since it is sometimes very difficult (or impossible) to do
so. The production process may be relatively new or the process may be altered often
enough to make such a distinction impractical or too costly. Whenever possible,
however should be made and accounted for as discussed in the preceding paragraphs.
Formulas:
1. Cost of Abnormal Wastage = Normal cost ÷ Normal output x Abnormal Wastage inn
units
2. Cost of Abnormal Effectives = Normal Cost ÷ Normal Output x Abnormal Effectives in
units
3. Computation of Abnormal loss : Quantity of abnormal loss = Normal output – Actual
output Normal output = Input – normal loss
4. Value of abnormal loss = Normal cost of the normal output ÷ Normal output x units of
Abnormal loss
5.Value of normal cost of normal output = Expenditure of the process – Scrap value of
normal Loss
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19. Definition and Explanation of Equivalent Units of Production:
After materials, labor and overhead costs have been accumulated in a department, the
department's output must be determined so that unit cost can be computed. A department
usually has some partially completed units in its ending inventory. It does not seem
reasonable to count these partially completed units as equivalent to fully completed units
when counting the department's out put. These partially converted units are mathematically
converted into an equivalent number of fully completed units. In process costing this is
done by using the following formula:
Equivalent Units = Number of partially Completed Units × Percentage of Completion
Equivalent units of production for a period can be calculated in two different ways
1. Weighted Average method
2. First in First Out (FIFO) method
Equivalent Units―Weighted Average Method:
Weighted Average method blends together units and costs from the current period with
units and costs from the prior period. In a weighted average method the equivalent units of
production for a department are the number of units transferred to the next department of
finished goods plus the equivalent units in the department's ending work in process
inventory.
VALUATION OF WORK-IN-PROGRESS
Meaning of Work-in-Progress:
Since production is a continuous activity, there may be some incomplete
production at the end of an accounting period. Incomplete units mean those
units on which percentage of completion with regular to all elements of cost
(i.e. material, labour and overhead) is not 100%. Such incomplete production
units are known as Work-in-Progress. Such Work-in-Progress is valued in terms
of equivalent or effective production units.
Meaning of equivalent production units :
This represents the production of a process in terms of complete
units. In other words, it means converting the incomplete production into its
equivalent of complete units. The term equivalent unit means a notional quantity
of completed units substituted for an actual quantity of incomplete physical
units in progress, when the aggregate work content of the incomplete units is
deemed to be equivalent to that of the substituted quantity. The principle
applies when operation costs are apportioned between work in progress and
19

20. completed units.
Equivalent unit should be calculated separately for each element of cost (viz.
material, labour and overheads) because the percentage of completion of the
different cost component may be different.
Accounting Procedure:
The following procedure is followed when there is Work-inProgress
(1) Find out equivalent production after taking into account of the process losses, degree
of completion of opening and / or closing stock.
(2) Find out net process cost according to elements of costs i.e. material, labour and
overheads.
(3) Ascertain cost per unit of equivalent production of each element of cost separately by
dividing each element of costs by respective equivalent production units.
(4) Evaluate the cost of output finished and transferred work in progress The total cost per
unit of equivalent units will be equal to the total cost divided by effective units and cost of
workinprogress will be equal to the equivalent units of work-inprogress multiply by the
cost per unit of effective production.
In short the following from steps an involved.
Step 1 – prepare statement of Equivalent production
Step 2 – Prepare statement of cost per Equivalent unit
Step 3 – Prepare of Evaluation
Step 4 – Prepare process account The problem on equivalent production may be divided
into four groups.
I. when there is only closing work-in-progress but without process losses
II. when there is only closing work-in-progress but with process losses
III. when there is only opening as well as closing work-inprogress without process
losses
IV. when there is opening as well as closing work-inprogress with process losses
Situation I :
Only closing work-in-progress without process losses : In this case, the existence of
process loss is ignored. Closing work-in-progress is converted into equivalent units on the
basis of estimates on degree of completion of materials, labour and production overhead.
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21. Afterwards, the cost pr equivalent unit is calculated and the same is used to value the
finished output transferred and the closing work-in-progress
Situation II:
When there is closing work-in-progress with process loss or gain. If there are process
losses the treatment is same as already discussed in this chapter. In case of normal loss
nothing should be
added to equivalent production. If abnormal loss is there, it should be considered as good
units completed during the period. If units scrapped (normal loss) have any reliable value,
the amount should be deducted from the cost of materials in the cost statement before
dividing by equivalent production units. Abnormal gain will be deducted to obtain
equivalent production.
Situation III:
Opening and closing work-in-progress without process losses. Since the production is a
continuous activity there is possibility of opening as well as closing work-in-progress. The
procedure of conversion of opening work-in-progress will vary depending on the method
of apportionment of cost followed viz, FIFO, Average cost Method and LIFO. Let us
discuss the methods of valuation of work-in-progress one by one.
(a) FIFO Method: The FIFO method of costing is based on the assumption of that
the opening work-in-progress units are the first to be completed. Equivalent production of
opening work-in-progress can be calculated as follows:
Equivalent Production = Units of Opening WIP x Percentage of work needed to
finish the units
(b) Average Cost Method: This method is useful when price fluctuate from period
to period. The closing valuation of work-in-progress in the old period is added to the cost
of new period and an average rate obtained. In calculating the equivalent production
opening units will not be shown separately as units of work-in-progress but included in the
units completed and transferred.
(c) Weighted Average Cost Method: In this method no distinction is made
between completed units from opening inventory and completed units from new
production. All units
finished during the current accounting period are treated as if they were started and
finished during that period. The weighted average cost per unit is determined by dividing
the total cost (opening work-in-progress cost + current cost) by equivalent production.
(d) LIFO Method: In LIFO method the assumption is that the units entering into
the process is the last one first to be completed. The cost of opening work-in-progress is
21

22. charged to the closing work-in-progress and thus the closing work-in progress appears cost
of opening work-in-progress. The completed units are at their current cost.
(1) Format of statement of Equivalent Production:
Input
Particulars
Opening
Stock
Units
Introduced
Output
Equivalent
Production
Units Particulars Units Material
Labour
Overheads
% Units % Units % Units
xx
Units
xx
xx xx
xx xx
completed
xx
Normal
xx
----Loss
Abnormal
xx
xx xx
xx xx
Loss
xx
Equivalent xx
xx xx
xx xx
xx
Xx
Units
(2) Statement of cost per Equivalent Units :
Element of costing
Material Cost (Net)
Labour Cost
Overheads Cost
Cost
Rs.
Equivalent
Units
Xx
Xx
Xx
xx
Xx
Xx
xx
Cost per
Equivalent
Units Rs
Xx
Xx
Xx
Xx
(3) Statement of Evaluation
Particulars
Cost
Rs.
Material
xx
xx
xx
xx
xx
xx
Overheads
Closing WIP
Cost per
equivalent
units
Rs.
Labour
Units completed
Equivalent
Units
xx
xx
xx
Material
xx
xx
xx
Labour
xx
xx
xx
Element of
cost
Total
Cost
Rs.
Xx
22

23. Overheads
xx
xx
Material
xx
xx
xx
Labour
xx
xx
xx
Overheads
Abnormal Loss
xx
xx
xx
Xx
xx
Xx
Illustration 1: (Normal / Abnormal Loss and Abnormal Gain)
The product of a company passes through 3 distinct
process. The following information is obtained from the accounts for the
month ending January 31, 2008.
Process – A
Particulars
Process – B
Process – C
Direct Material
7800
5940
8886
Direct Wages
6000
9000
12000
Production Overheads
6000
9000
12000
3000 units @ Rs. 3 each were introduced to process – I. There was no
stock of materials or work in progress. The output of each process
passes directly to the next process and finally to finished stock A/c.
The following additional data is obtained :
Process
Output
Percentage of
Normal Loss to
Input
Value of Scrap per unit
(Rs.)
Process – I
2850
5%
2
Process – II
2520
10 %
4
23

24. Process – III
2250
15 %
5
Prepare Process Cost Account, Normal Cost Account and
Abnormal Gain or Loss Account.
Solution:
Process – A A/c.
Dr.
Particulars
Units
Rs.
Particulars
To
Units
introduced
3000
9000
By Normal Loss
A/c.
7800
By Process – B A/c.
6000
Cr.
(Units
transferred
To
Material
Direct
To Direct Wages
To Production
Direct
300
2850
28500
3000
28800
Process – B A/c.
Dr.
To
Material
150
28800
6000
3000
To Process – I A/c.
Rs.
@ Rs. 10/-)
Overheads
Particulars
Units
Units
Rs.
Particulars
2850
28500
By Normal Loss
A/c.
5940
By
Abnormal
Loss A/c.
Cr.
Units
Rs.
285
1140
45
9000
24

25. To Direct Wages
9000
By Process – C A/c.
2520
50400
2850
52440
To Production
Overheads
9000
2850
52440
25

26. Process – C A/c.
Dr.
Particulars
To Process – II
A/c.
To
Direct
Material A/c
To Direct Wages
To Production
Overheads
To
Abnormal
Gain A/c.
Units
2520
Rs.
50400
8886
Particulars
To Normal Loss
A/c.
To Costing P&L
A/c.
Rs.
1890
2250
85500
108
2628
87390
12000
4104
87390
Abnormal Gain A/c.
Units
108
Rs.
540
Particulars
By Process – C
A/c.
Cr.
Units
108
Rs.
4104
108
4104
3564
108
Dr.
Particulars
To Process – A
A/c.
To Process – B
A/c.
To Process – C
A/c.
Units
378
12000
2628
Dr.
Particulars
By Normal Loss
A/c.
By
Finished
Stock A/c.
Cr.
4104
Normal Loss A/c.
Units
150
Rs.
300
285
1140
378
1890
Particulars
Units
By Bank
A/c.
(Sales)
150
Process
–
A
A/c.
Process – B A/c.
285
Process
– C
A/c.
By
Abnormal
Gain A/c.
813
3330
Cr.
Rs.
300
1140
270
1350
108
540
813
3330
26

27. Illustration 2 (Average Costing)
Prepare a statement of equivalent production, statement of
cost, process account from the following information using average
costing method.
Opening Stock
Material
25000
Labour
10000
Overheads
25000
Units Introduced
Material
Wages
75000
Overheads
70000
50000 Units
Rs.
Rs.
Rs.
2000000 Units
Rs. 100000
Rs.
Rs.
During the period 1,50,000 units were completed and transferred to
Process II.
Closing stock 1,00,000 units. Degree of
completion. Material 100 %
Labour
50 % Overheads
40 %
Solution :
Input
Particulars
Units
Opening
Stock
Introduced
Output
Particula Units
rs
Units
50,000 Produced
200,000 Closing
Stock
250000
Equivalent Production
Material
Labour
Overheads
%
Units
%
Units
%
Units
150000 100
150000 100
100000 100
100000
250000
250000
50
150000 100
50000
200000
40
150000
40000
190000
27

28. Statement of Cost :
Element
Opening
cost Rs.
Current
cost Rs.
Total
Cost
Rs.
Equivalent
units
Cost
per
unit
Material
25,000
1,00,000
1,25,000
2,50,000
0.500
Labour
10,000
75,000
85,000
2,00,000
0.425
Overheads
25,000
70,000
95,000
1,90,000
0.500
60,000
2,45,000
3,05,000
1.425
Statement of Apportionment of Cost
Particulars
Units
1. Units introduced & 1,50,000
transferred
2. Closing work-in-progress
Material
1,00,000
Labour
50,000
Overheads
40,000
Dr.
Cost per
unit
1.425
0.500
0.425
0.500
Cost
50,000
21,250
20,000
Total
cost
213750
91,250
3,05,000
Process I A/c.
Particulars
Units
Rs.
Particulars
Units
To Opening
50,000
60,000 By
Units
completed
Stock
To Materials 2,00,000 1,00,000 & transfer
50,000
To Labour
75,000 By Closing Stock
50,000
To
70,000
Overheads
2,50,000 3,05,000
2,50,000
Cr.
Rs.
2,13,750
91,250
3,05,000
28

29. Illustration 3: (FIFO Method)
From the following information relating to KKN Company Ltd.
Prepare Process Cost Account for Process III for the year 2008.
Opening Stock IN Process III
Transfer from Process II
Direct Material added in Process III
Direct Wages
Production Overhead
Units Scrap
Transferred to Process IV
Closing Stock
5000 units of
Rs. 36,000
2,13,000 units of
Rs. 8,27,000
Rs. 4,01,800
Rs. 1,98,100
Rs. 99,050
11,000 units
1,89,000 units
18,000 units
29

30. Degree of Completion:
Opening
Stock
Material
70 %
Labour
50 %
Overhead
50 %
Closing
Stock
80 %
60 %
60 %
Scrap
100 %
80 %
80 %
There was a normal loss of 5% production and unit scraped were
sold at Rs. 1.50
Solution :
Input
Particular Units
s
Opening
Stock
5,000
Process II
Transfer
213,000
218000
Output
Particulars
Units
Normal
Loss
Op. Stock
Processed
Introduces &
Completed
Abnormal
Loss
Closing
Stock
Equivalent Production
Material
Labour
Overheads
%
Units
%
Units
%
Units
10000
5000 -
-
184000 100
30
1500
50
2500
184000 100
184000
184000
100
100
1000
100
1000
80
800
18000 100
218000
18000
203000
80
14400
200900
60
10800
198100
1000
Note : Units Produced: Opening stock + units introduced – closing stock
: 5000 +213000 – 18000 = 200000
Normal Loss : 5 % of 200000 = 10000 units
30

31. Statement of Cost
Cost
Rs.
Particulars
Material – I
Transfer from
process
Previous
15,000
Cost
Per
Unit
Rs.
8,27,000
Less – Value of scrap
(normal)
Material – II
Aded+ in the process
Direct Wages
Overheads
Equivalent
Units Rs.
8,12,000
2,03,000
4.00
4,01,800
1,98,100
99,050
2,00,900
1,98,100
1,98,100
2.00
1.00
0.50
7.50
31

32. Statement of Apportionment of Cost
Particulars
Op.
Processed
Stock
Units
introduced
and
Completed
Closing stock
Abnormal loss
Elements
Equivalent
Units
Cost
Per Unit
Rs.
Material I --
Cost
Rs.
Total cost
Rs.
--
Material II
Wages
Overheads
Material I
1,500
2,500
2,500
1,84,000
2.00
1.00
0.50
4.00
3,000
2,500
1,250
7,36,000
Material II
Wages
Overheads
Material I
Material II
Wages
Overheads
Material I
Material II
Wages
Overheads
1,84,000
1,84,000
1,84,000
18,000
14,400
10,800
10,800
1,000
1,000
800
800
2.00
1.00
0.50
4.00
2.00
1.00
0.50
4.00
2.00
1.00
0.50
3,68,000
1,84,000
92,000 13,80,000
72,000 13,86,750
28,800
10,800
5,400 1,17,000
4,000
2,000
800
400
7,200
15,10,950
TOTAL
Dr.
Process III A/c.
Particulars
To Balance
b/d.
Units
5,000
Rs.
36,000
To Process
II A/c.
To Materials
2,13,000
8,27,000
4,01,800
To Wages
1,98,100
To
Overheads
Particulars
By Normal
Loss
By Process
IV A/c.
By
Abnormal
Loss
Cr.
Units
10,000
Rs.
15,000
1,89,000
14,22,750
1,000
7,200
18,000
1,17,000
2,18,000
15,61,950
99,050
2,18,000
15,61,950
By Closing
Stock
6,750
32

33. Illustration 4
The following information is given in respect of Process
costing 10 : 3 for the month of January 2009.
Opening stock – 2,000 units made up of
Direct Material – I
Direct Material – II
Direct Labour
Overheads
Rs.
12,350
13,200
17,500
11,000
Transferred from Process 2 – 20,000 units @ Rs. 6 per unit.
Transferred to Process 4 – 17,000 units
Expenditure incurred in process – 3
Direct Material
Direct Labour
Overheads
Rs.
30,000
60,000
60,000
Scrap:1,000 units-Direct Materials 100%,Direct Labour 60%,
Overheads 40%.
Normal Loss 10 % of Production. Scrapped
units realized Rs. 4/- per unit
Closing stock : 4,000 units – Degree of completion. Direct
Materials 80 %, Direct Labour 60 % and Overheads 40 %. Prepare
Process 3 Account using average price method along
with necessary supporting statements.
Solution :
33

34. Statement
Material)
of Equivalent
Production
Total
Units
Material – I
17000
100
1800
800
Closing Stock
4000
Particulars
Material – II
Average
cost
--
Abnormal Gain
(weighted
Labour
Overheads
%
Units
%
Units
%
Units
17000
100
17000
100
17000
100
17000
100
800
100
800
100
800
100
800
100
4000
80
3200
60
2400
40
1600
Units
Completely
Processed
Normal Loss
10% of (2000 +
20000 – 4000)
22000
20200
19400
18600
17800
34

35. Statement of Cost
Particulars
Cost
Rs.
Material – I :
Opening balance 2000 units
Cost of 20000 units @ Rs. 6
Per unit
Equivalent
Units
Rate / Equivalent
Units
Rs.
12,350
1,20,000
1,25,150
20,200
6.1955
13,200
30,000
43,200
19,400
2.2268
17,500
60,000
77,500
18,600
4.1667
11,000
60,000
71,000
17,800
3.9888
16.5778
Material – II :
Opening Stock
In Process II
Labour :
Opening Labour
In Process II
Overheads :
Opening Stocks
In Process II
Total cost per unit
Valuation of Equivalent Unit
Finished goods
Abnormal Units
Workinprogress
Material I
Material II
Labour
Overheads
(17000 units x Rs. 16.5778)
(800 units x Rs. 16.5778)
(4000 units x Rs. 6.1955)
(3200 units x Rs. 2.2268)
(2400 units x Rs. 4.1667)
(1600 units x Rs. 3.9888)
Dr.
Particulars
To
Opening
WIP
To Process 2
To Direct
Material II
Rs.
2,81,822
13,262
24,782
7,126
10,000
6,382
Process III A/c.
Units
2,000
Rs.
57,050
20,000
1,20,000
30,000
48,290
Cr.
Particulars
By Normal Loss
Units
1,800
Rs.
7,200
By Finished Goods
Units
By Closing Balance
17,000
4,000
2,81,822
48,290
35

36. To
Direct
Labour
To Overheads
To Abnormal
Gain
60,000
800
60,000
13,262
22,800
3,37,312
22,800
3,37,312
36

37. Illustration.5
The finished product of a factory pass through two
processes : the entire material being placed in process at the
beginning of the first process. From the following production and last
data relating to the first process, work out the value of the
closing inventory and the value of the materials transferred to the
second process.
Process I
Opening inventory
Material
Labour
Manufacturing Overheads
Opening inventory (25 percent complete)
Put into Process
Transferred to II Process
Closing inventory (20 percent completed)
Spoilage during process
Rs.
10,000
27,500
50,000
40,000
4,000
12,000
10,000
5,000
1,000
[I.C.W.A., Final]
Solution :
Process I A/c
Particulars
Opening
Inventory
Material
Labour
Kg.
Amount
Particulars
Rs.
4,000
10,000 Transferred
to Process II
12,000
27,500 Normal Loss
50,000 Closing
Inventory
Manufacturing
Overheads
16,000
40,000
1,27,500
Kg.
10,000
Amount
Rs.
1,15,750
1,000 -5,000
11,750
16,000
1,27,500
37

38. Working Note :
Statement of Equivalent Production Units
Particulars
Opening
Processed
Stock
Completely
Processed
Normal Loss
Closing Inventory
Output
Kg.
4,000
Material
Qty.
%
3,000
75
Labour
Qty.
%
3,000
75
Overheads
Qty.
%
3,000
75
6,000
6,000
6,000
6,000
1,000 --5,000
1,000
16,000 10,000
100
-20
1,000
10,000
100
-- --20
1,000
10,000
100
20
38

39. Statement of Element of Cost on the basis of Equivalent
Production
Particulars
Cost
Rs.
27,500
50,000
40,000
Material
Labour
Overheads
Total
Equivalent
Cost per Unit
Units
Rs.
10,000 2.75
10,000 5.00
10,000 4.00
11.75
Statement of Apportionment of Cost
Particulars
Op.
Stock
Processed
Elements
Equivalent
Units
Cost
Per
Unit
Rs.
Cost
Rs.
Material
3,000
2.75
8,250
Labour
3,000
5.00
15,000
3,000
4.00
12,000
Material
6,000
2.75
16,500
Labour
6,000
5.00
30,000
6,000
4.00
24,000
Material
1,000
2.75
2,750
Labour
1,000
5.00
5,000
1,000
4.00
4,000
Overheads
Completely
Processed
Overheads
Closing
Inventory
Overheads
TOTAL
Total
cost Rs.
35,250
70,500
11,750
1,17,500
39

40. Value of goods transferred to next process
Rs.
Units
10,000
35,250
70,500
4,000
6,000
1,15,750
Value of opening stock (given) Additional
cost on opening stock Value of completely
processed units
10,000
Illustration 6
ABC Limited manufactures a product „2X‟ by using the process
normally R. T. for the month of May 2009, the following data is available.
Process R. T.
Material Introduced
16,000 units
Transfer to next process
14,000 units
Work-in-Process
4,000 units
At the beginning of the month (4/5 completed)
3,000 units
At the end of the month (2/3 completed)
Cost records:
Work-n-Process at the beginning of the month
Material
Rs. 30,000
Conversion cost
Rs. 29,200
Cost during the month
Materials
Rs. 1,20,000
Conversion cost
Rs. 1,60,800
Normal spoiled units are
transferred to next process.
10%
of goods
finished
output
Defects in these units are identified in their finished state. Materials for
the product is put in the process at the beginning of
the cycle of operation, whereas labour and other indirect cost flow
evenly over the year. It has no realizable value for spoiled units.
Required :
(1) Statement of equivalent production (average cost method) (2)
Statement of cost and distribution of cost
(3) Process accounts
40

41. Solution :
Statement of Equivalent Production (average cost method)
Input
units
Particulars
Output
Units
Equivalent Production
Materials
Conversion cost
% completed Equivalet
Units
4000 Opening WIP --
%
Complted
Equivalent
Units
--
16000 Introduced and
14,400
100
14,400
100
14,400
Completed to
next
Normal
spoilage
Abnorma
l spoilage
1,440
100
1,440
100
1,440
1,160
100
1,160
100
1,160
Closing WIP
3,000
100
3,000
66.67
2,000
20000
20000
20000
19000
Statement showing cost of each element
Particulars
Opening
Cost in process
Total
Equivalent Units
Cost per unit
Materials
(a)
(b)
(a ÷ b)
30,000
1,20,000
1,50,000
20,000
7.50
Conversion
cost
29,200
1,60,800
1,90,000
19,000
10.00
41

42. Statement showing distribution of cost
Particulars
Units completed
Materials
Conversion cost
Normal spoilage
(10 %)
Closing stock :
Material
Conversion cost
Abnormal Stock:
Material
Conversion Stock
Dr.
Particulars
To Opening WIP
To Material
Introduced
To Conversion cost
Incurred
Equivalent
Units
Cost per
unit
(Rs.)
14,400
14,400
1,440
7.50
10.00
17.50
1,08,000
1,44,000
3,000
2,000
7.50
10.00
22,500
20,000
42,500
1,160
1,160
7.50
10.00
8,700
11,600
20,300
2,52,000
25,200
Process A/c.
Rs.
59,200
Particulars
By Profit and Loss
A/c. (abnormal)
1,20,000
1,60,800
340000
Cr.
Rs.
20,300
By Transfer to Next
Process
By Closing WIP
2,77,200
42,500
3,40,000
42

43. INTER PROCESS PROFITS:
Normally the output of one process is transferred to another process at cost
but sometimes at a price showing a profit to the transfer process. The transfer
price may be made at a price corresponding to current wholesale market price or
at cost plus an agreed percentage. The advantage of the method is to find out
whether the particular process is making profit (or) loss. This will help the
management whether to process the product or to buy the product from the market. If
the transfer price is higher than the cost price then the process account will show a
profit. The complexity brought into the accounting arises from the fact that the
inter process profits introduced remain a part of the prices of process stocks, finished
stocks and work-in-progress. The balance cannot show the stock with profit. To
avoid the complication a provision must be created to reduce the stock at actual
cost prices. This problem arises only in respect of stock on hand at the end of the
period because goods sold must have realized the internal profits. The unrealized
profit in the closing stock is eliminated by creating a stock reserve. The amount of
stock reserve is calculated by the following formula.
Stock Reserve = Transfer Value of stock x Profit included in transfer price
Transfer Price
Illustration 7
A product passes through three processes before its completion. The
output of each process s charged to the next process at a price calculated to give
a profit of 20% on transfer price. The output of Process III is transferred to
finished stock account on a similar basis. There was no work-in-progress at the
beginning of the years. Stock in each process has been valued at prime cost of the
process. The following data is available at the end of 31st March, 2009.
Process
I
Direct Material
Direct Wages
Stock on 31st March
2009
Sale during the year
Process
II
Process
III
20000
30000
10000
30000
20000
20000
10000
40000
30000
--15000
--
--
--
180000
Finished
Stock Rs.
From above information prepare:
1. Process Cost Account showing the profit at each stage.
2. Actual realized profit and
3. Stock Valuation as would appear in the balance sheet
43

44. Solution:
Dr.
Particulars
To Materials
To Wages
Total
Les Closing
Stock c/d
Prime Cost
To Gross
Profit
(20% on
Transfer
Price)
ToStockB/d.
Process – I A/c.
Total
Rs.
20000
Cost Profit
Rs.
Rs.
20000 --
30000
50000
30000 -50000 --
10000
40000
10000 -40000 --
10000 --
50000
10000
To Process
– I A/c.
To Material
To Wages
Less
:
Closing
Stock
C/d.
Prime Cost
To Gross
Profit
(20% on
Transfer
Price)
To Stock
B/d.
Total
Rs.
50000
Cost
Rs.
40000
Profit
Rs.
10000
50000
By Process
IIA/c.
(Transfer)
40000
10000
10000
40000 10000
10000 --
Process – II A/c.
Dr.
Particulars
Particulars
Cr.
Total
Rs.
50000
Cost
Rs.
40000
30000
20000
100000
Profit
Rs.
10000
30000 -20000 -90000
10000
20000
18000
72000
By
Process-III
A/c.
(Transfer)
Total
Rs.
Cost
Rs.
Profit
Rs.
100000
72000
28000
100000
72000
28000
2000
80000
Particulars
Cr.
8000
20000 -100000
20000
20000
72000
18000
28000
2000
44

45. Process III A/c
Particulars
ToprocessII
A/c
To Material
To Wages
TOTAL
Less.Closing
stock
To
Gross
profit
(20%of
transfer
price)
To Stock b/d
Total
Rs.
100000
Cost
Rs.
72000
Profit
Rs.
28000
10000
40000
10000
40000
-------
150000
122000
28000
30000
120000
24400
97600
5600
22400
30000
--------
30000
150000
30000
97600
24000
Particulars
52400
5600
Cost
Rs.
97600
Profit
Rs.
52400
150000
ByFinished
stock A/c
Total
Rs.
150000
97600
52400
Finished stock
A/c
Particulars
Total
Rs.
Cost
Rs.
Profit
Rs.
Particulars
To process
III A/c
(-)Stock
To gross
profit
115000
97600
52400
By Sales
15000
9760
5240
135000
87840
92160
45000
180000
15000
--87840
9760
45000
92160
5240
To
A/c
Stock
Total
Rs.
Cost
Rs.
Profit
Rs.
180000
87840
92160
180000
87840
92160
45

46. .
46

47. 47

48. 48

49. 49

50. 50

51. 3
0
51

52. 2
2
52

53. 53