PROCESS COSTING-BRANCH OPERATION COSTING

PROCESS COSTING
 Process Costing is defined as a branch
of operation costing, that determines the cost
of a product at each stage, i.e. process of
production.
 It is an accounting method which is adopted
by the factories or industries where the
standardized identical product is produced, as
well as it passes through multiple processes for
being transformed into the final product.

PROCESS COSTING
 Process costing is used in mass production producing
standard products such as cement , sugar, steel , oil refining
etc
 In such industries goods produced are identical and
processes are standardized.
 For manufacturing a product, the raw material has to pass
several stages of manufacture in a pre determined sequence .
 Such stage of manufacture is called process .
 Methods of cost ascertainment in such industries is called
process costing

MEANING OF PROCESS COSTING
In simple words,
Process costing is a cost accounting technique, in
which the costs incurred during production are charged to
processes and averaged over the total units manufactured.
For this purpose, process accounts are opened in the
books of accounts, for each process and all the expenses
relating to the process for the period is charged to the respective
process account.

FEATURES OF PROCESS COSTING
 The finished product of each process becomes
the input for the next process
 Predetermined sequenContinuous production
 Costs are accumulated by processes
 Standardized products
 ce of process
 Unavoidable loss
 Production of by-products

APPLICATION OF PROCESS COSTING
Process costing is applied in the following
industries :
Chemical works Textiles
Soap making Food products
Paper mils Oil refining
Milk dairy Distillation
process

Advantages of Process costing
 Simple and less expensive
 Better managerial control
 Easy to allocate the expenses to processes
 Easy to quote prices with standardization of
process
AVANTAGES OF PROCESS COSTING

Sum 2
Process I A/c
output – 500 units

Sum 3
Process I A/c
units - 200

PROCESS LOSS
 The loss that occurs in the course of
converting an input raw material into finished
products is known as process loss.
 Such a loss may occur because of the nature of
the raw materials.
The difference between the input quantity and
the output quantity arising on account of
production operation is called process loss.

TYPES OF PROCESS LOSS
 NORMAL LOSS
 ABNORMAL LOSS
NORMAL LOSS
Normal loss means that loss which is inherent in the
processing operations. It can be expected or
anticipated in advance i.e. at the time of estimation.
Accounting Treatment: The cost of normal loss is
considered as part of the cost of production in
which it occurs.

Calculation of cost per unit
Cost per unit = normal cost of normal output
normal output
normal cost of normal output = total cost – scrap
value
Normal output = input - normal loss (units)

ABNORMAL PROCESS LOSS
 The loss realized over the normal loss is called
an abnormal loss.
 Abnormal loss arises because of abnormal
working conditions, bad working condition,
carelessness, rough handling, lack of proper
knowledge, low quality raw material, machine
breakdown, accident etc.
 Therefore an abnormal loss is an unanticipated
loss.

 Abnormal loss is a controllable loss and thus
can be avoided if corrective measures are taken.
 Therefore, abnormal loss is also called an
avoidable loss.
 The value of an abnormal loss is assessed on
the basis of the production cost with which the
profit and loss account is charged.

Calculation of abnormal loss
Abnormal loss (units) = normal output – actual
output
Formula for calculating abnormal loss is
Abnormal loss =
normal cost of normal output x units of abnormal loss
normal output

ABNORMAL GAIN
If the actual loss is more than normal loss , it is called
as abnormal loss. But if the actual loss is less than the
normal loss, it is abnormal gain.
Computation of Abnormal gain :
Input units produced xxx units
Less : Normal loss xxx units
Normal production xxx units
Actual production given xxx units
Abnormal gain xxx units

Problems In Normal Loss
Sum 4
Process A A/c

Sum 5
Process A A/c
a) When scrap value of normal loss is nil
Process A A/c
Particulars Units(Kg) Rs. Particulars Units(Kg) Rs.
To materias 1000 6,000 By normal loss 100 -
To labour 5,000 By finished stock
A/c
900 13,000
To d.exp 1,000
To Indirect exp 1,000
13,000 1,000 13,000
Cost per unit = 13,000/900 = Rs.14.4

Process A A/c
b) When scrap has a sale value of Re.1 per unit
Process A A/c
Particulars Units(Kg) Rs. Particulars Units(Kg) Rs.
To materials 1000 6,000 By normal loss 100 100
To labour 5,000 By finished stock
A/c
900 12,900
To d.exp 1,000
To Indirect exp 1,000
1,000 13,000 1,000 13,000
Cost per unit = 12,900/900 = 14.33

Sum 6
Process A A/c
Particulars Units Rs. Particulars Units Rs.
To materials
consumed
37,000 2,400 By normal loss 1,000 -
To D.Wages 640 By Process B A/c
(@ 10 paise)
36,000 3,600
To Mach. Exp 360
To factory
overheads
200
37,000 3,600 37,000 3,600

Process B A/c
To opening stock
(@10 paise per unit)
4,000 400 By normal loss 1,500 -
To Process A A/c 36,000 3,600 By closing stock (@10
paise per unit)
1,000 100
To wages 1,200 By Process C A/c
(@ 15 paise)
37,500 5,625
To mach. Exp 300
To Factory overheads 225
40,000 5,725 40,000 5,725

Process C A/c
To opening stock
(@ 15 paise)
16,500 2,475 By normal loss 500 -
To Process B A/c 37,500 5,625 By closing stock
(@15 paise)
5,500 825
To D.wages 2,925 By transfer to finished
stock A/c
(@23 paise)
48,000 10,800
To Mach. Exp 360
To factory
overheads
240
54,000 11,625 54,000 11,625

Process I A/c
To raw materials 2,750 8,000 By normal loss 150 -
To D.Wages 2,500 By transfer to
Process II A/c
(@Rs.5 per unit)
2,600 13,000
To mach exp 1,400
To fact o/h 1,100
2,750 13,000 2,750 13,000

Process II A/c
To opening stock
(@ Rs.5 )
250 1,250 By normal loss 210 -
To transfer from
Process I A/c
2,600 13,000 By Closing stock
(@Rs.5)
440 2,200
Processs III A/c
(@Rs.9)
2,200 19,800
To Mach exp 1,200
To Fact oh 1,550
2,850 22,000 2,850 22,000

Process III A/c
To opening stock
(@Rs.9)
500 4,500 By normal loss 200 -
To transfer from
Process II A/c
2,200 19,800 By closing stock
(@Rs.9)
100 900
finished stock
(@Rs.13.33)
2,400 32,000
To Mach exp 1,200
To factory oh 900
2,700 32,900 2,700 32,900

Process I A/c
Particulars Units
(tons)
Rs. Particulars Units
(tons)
Rs.
To materials 1,400 14,000 By normal loss 56 -
To wages &
other exp
5,152 By scrap
(6% @Rs.3)
84 252
By transfer to
warehouse (33
1/3 %)(@Ras.15
per ton)
420 6,300
By transfer to
Process II A/c
66 2/3 %)
840 12,600
1,400 19,152 1,400 19152

Process II A/c
Particulars Units
(tons)
(tons)
Rs.
To transfer
from Process I
A/c
840 12,600 By normal loss
(4%)
40 -
To materials
(160 x 16)
160 2,560 By scrap
(6% @Rs.5 per
ton)
60 300
To wages &
other exp
3,140 By transfer to
warehouse (40
%)(@Rs.20 per
ton
360 7,200
By transfer to
Process III A/c
60%)(@Rs.20
per ton
540 10,800
1,000 18,300 1,000 18,300

Process III A/c
Particulars Units
(tons)
(tons)
Rs.
To transfer from
Process II A/c
(4%)
72
To materials
(1260 x 7)
1,260 8,820 By scrap
(6% @Rs.6 per
ton)
108 648
To wages & other
exp
2,898 By transfer to
warehouse for
sale (@Rs.13.5
per ton)
1,620 21.870
1,800 22,518 1,800 22,518
Cost per unit for process I = Rs.15
II – Rs.20
III – Rs.13.5

Process A/c
To materials 50 50 By normal loss
10%
Scrap @20 paise
5 1
To addt. Exp 32 By abnormal loss 5 9
By transfer to
finished stock A/c
40 72
50 82 50 82
Calculation of abnormal loss =
normal cost of normal output x units of abnormal loss
normal output
= 81/45 x 5 = Rs.9

Journal Entries
Particulars Debit Credit
Normal loss A/c Dr
To Process A/c
(Being normal loss realised)
1
1
Abnrmal loss A/c Dr
To Process A/c(
Being abnormal loss valued)
9
9
Cash A/c Dr
To abnormal loss A/c
(Being abnormal loss realised at the rate of 20
paise per unit
1
1
Costing P&l A/c Dr
To Abnormal loss A/c
(Being balance in abnormal loss transferred to
costing P&L A/c)
8
8

Process A A/c
To materials 10,000 60,000 By normal
loss
(5%)
500 -
To labour 10,000 By abnormal
loss
200 1,600
To
overheads
6,000 By Process B
A/c
9,300 74,400
10,000 76,000 10,000 76,000
Value of abnormal loss = 76,000/9,500 x 200 = Rs.1,600

Process B A/c
To Process A
A/c
9,300 74,400 By normal
loss
(2%)
186 -
To materials 6,140 By finished
stock A/c
(@Rs.10)
9,200 92,000
To labour 6,000
To
overheads
4,600
To abnormal
gain
86 860
Value of abnormal gain = 91,140/9,114 x 86 =Rs.860
( 9,300 – 286 = 9,114)
91,140 = 74,400 + 6,140+6,000+4,600)

Profit & Loss A/c for the year April 2001
Pariculars Rs. Particulars Rs.
To cost of finished
goods
92,000 By sales (8000
units@Rs.15 per
unit)
1,20,000
To selling exp
@Rs.2 per unit
(8,000 x 2)
16,000 By closing stock
(92,00 – 8,000 =
1,200)
1,200 x 10
12,000
To Profit 24,000
1,32,000 1,32,000

Statement of Profit
Profit as per P&L A/c 24,000
Less : Abnormal loss 1,600
22,400
Add : Abnormal gain 860
Profit 23,260

Process A A/c
Particulars Units
(tons)
(tons)
Rs.
To materials 1,000 1,25,000 By normal loss
(5%)
50 -
To wages 28,000 By scrap(@Rs.80
)
100 8,000
To manu exp 8,000 By abnormal
loss A/c
20 3,600
By Process B A/c
(@Rs.180 per
ton)
830 1,49,400
1,000 1,61,000 1,000 1,61,000
Value of abnormal loss = 1,53,000/850 x 20 = Rs.3,600
1,61,000 – 8,000 = Rs.1,53,000

Process B A/c
Particulars Units
(tons)
(tons)
Rs.
To transfer
from Process A
A/c
830 1,49,400 By normal loss
(5%)
45 -
To materials 70 14,000 By scrap
(@Rs.200)
90 18,000
To wages 10,000 By finished stock A/c
(@Rs. 210 per ton)
780 1,63,800
To manufac exp 5,250
To abnormal
gain
15 3,150
915 1,81,800 915 1,81,800
Value of abnormal gain = 1,60,650 /765 x 15 = Rs.3,150
1,78,650 -18,000 = 1,60,650

Process B A/c
To Process A
A/c
9,300 74,400 By normal loss
(2%)
186 -
To materials 6,140 By finished stock
A/c (@Rs.10)
9,200 92,000
To labour 6,000
To
overheads
4,600
To abnormal
gain
86 860
9,386 92,000 9,386 92,000
Value of abnormal gain = 91,140/9,114 x 86 =Rs.860
( 9,300 – 286 = 9,114)
91,140 = 74,400 + 6,140+6,000+4,600)

Process A A/c
Particulars Units
(tons)
(tons)
Rs.
To raw
materials
(10%)
(Scrap @Rs.4 per
ton)
180 720
To indir
materials
4,500 By abnormal loss 20 600
To D.Wages 16,000 By process B A/c
(@Rs.30 per ton)
1,600 48,000
To Gen exp 1,820
1,800 49,320 1,800 49,320
Value of abnormal loss = 48,600/1620 x 20 = Rs.600
49,320 – 720 = Rs.48,600

Process B A/c
Particulars Units
(tons)
(tons)
Rs.
To process A A/c 1,600 48,000 By normal loss (5%)
(Scrap @Rs. 5.50 per
ton)
96 528
To raw materials
(@Rs.20 per
unit)
320 6,400 By Finished stock A/c
(@Rs. 37 per ton)
1,850 68,450
To indirect
materials
2,000
To D.Wages 9,000
To Gen exp 2,616
To abnormal gain 26 962
1,946 68,978 1,946 68,978
Value of abnormal gain= 67,488/1,824 x 26 = 962
68,016 – 528 = 67,488

Abnormal loss A/c
Particulars Units
(tons)
(tons)
Rs.
To Process A
A/c
20 600 By cash ( Sale of
scrap @Rs.4 per
ton)
20 80
By net abnormal
loss transferred to
costing P&L A/c
520
20 600 20 600

Abnormal gain A/c
Particulars Units
(tons
)
(tons)
Rs.
To normal loss
(shortfall in sale of
normal loss units)
(@Rs.5.50)
26 143 By Process B A/c 26 962
To net abnormal
gain transferred to
costing P& L A/c
819
26 962 26 962

Normal loss A/c
Particulars Units
(tons)
(tons)
Rs.
To Process A
A/c
180 720 By abnormal gain 26 143
To Process B
A/c
96 528 By cash ( Scrap
realised)
180 720
By cash ( Scrap
realized)
70 385
276 1,248 276 1,248

Process A A/c
To crude
materials
(2%)
(Scrap @Re.1 per unit)
40 40
To materials 8,000 By abnormal loss 10 194
To Direct
labour
12,000 By Process A Stock A/c
(@Rs.19.36)
1,950 37,766
To work
expenses
2,000
2,000 38,000 2,000 38,000
Abnormal loss = 37,960/1960 x 10 = Rs.194

Process A Stock A/c
To balance
b/d
200 3.800 By Process B
A/c
(Rs.19.36)
2,000 38,662
By Process A
A/c
(@Rs.19.36)
1,950 37,766 By balance
c/d
(@Rs.19.36)
150 2,904
2,150 41,566 2,150 41,566

Process B A/c
To Process A
Stock A/c
2,000 38,662 By normal
loss (5% -
@Rs.1)
100 100
To materials 3,000 By Process
B Stock A/c
(@Rs.26.61)
1,925 51,227
To Direct
labour
8,000
To work
expenses
1,000
To abnormal
gain
25 665
2,025 51,327 2,025 51,327
Value of abnormal gain = 50,562/1900 x 25 = Rs.665

Process B Stock A/c
To balance
b/d
300 8,100 By Process C
A/c
(Rs.26.67)
1,825 48,683
By Process B
A/c
(@Rs.26.61)
1,925 51,227 By balance
c/d
(@Rs.26.61)
)
400 10,644
2,225 59,327 2,225 59,327

Process C A/c
To Process B
Stock A/c
1,825 48,683 By normal
loss (10%-
@Rs.4 per
unit)
183 732
To materials 2,000 By abnormal
loss
52 1,867
To Direct
labour
6,000 By process
C Stock A/c (
@Rs. 35.90)
1,590 57,084
To work
expenses
3,000
1,825 59,683 1,825 59,683
Value of abnormal loss = 58,951/1,642 x 52 = Rs.1,867

Process C Stock A/c
To balance
b/d
500 18,250 By transfer
to Finished
stock A/c
2,090 75,334
By Process C
A/c (@Rs.)
1,590 57,084
2,090 75334 2,090 75,334

Process I A/c
To materials
introduced
1,000 3,000 By normal
loss
(5%)
50 100
To materials 2,600 By process II
A/c
(@Rs.10 per
unit)
950 9,500
To D. wages 2,000
To Prodn.
o/h
2,000
1,000 9,600 1,000 9,600

Process II A/c
To transfer
from Process I
A/c
(10%)
95 380
To materials 1,980 By abnormal loss 15 300
To D.Wages 3,000 By Process II A/c
(@Rs.20 per unit)
840 16,800
To Prodn o/h 3,000
950 17,480 950 17,480
Value of abnormal loss = 17,100/855 x 15 = Rs.300
17,100 = 17,480 - 380

Process III A/c
To transfer from
Process II A/c
( 15%)
126 630
To materials 2,962 By finished goods A/c
(@Rs.38)
750 28,500
To wages 4,000
To Prodn. o/h 4,000
To abnormal gain
A/c
36 1,368
876 29,130 876 29,130
Value of abnormal gain = 27,132/714 x 36 = Rs.1,368
27,132 = 27, 762 – 630

Abnormal loss A/c
To Process II
A/c
15 300 By cash 15 60
By costing
P&L A/c
240
15 300 15 300

Abnormal Gain A/c
To normal
loss
36 180 By process
III A/c
36 1,368
To costing
P&L A/c
1,188
36 1,368 36 1,368

Normal Loss A/c
To process I
A/c
50 100 By abnormal
gain
36 180
To Process II
A/c
95 380 By cash 235 930
To Process
III A/c
126 630
271 1,110 271 1,110

MEANING OF JOINT PRODUCTS
• Joint product means the production of two or
more products from the same basic raw
material and separated in the course of same
processing operation usually requiring further
processing, no single product can be
designated as a major product.

JOINT PRODUCTS
• In some industries ,two or more products of
equal importance and value are
produced,simultaneously in a process. Such
products are called joint products.
• Motor spirit,kerosene oil,fuel oil,lubricating
oil,wax,tar are examples of joint products
produced from crude petroleum.

FEATURES OF JOINT COST ANALYSIS
• The main objective of manufacturing
operation is to produce joint products
• The products of simultaneous outcome of joint
products are from the same raw materials.
• The products have equal commercial value.
• The products require further processing to
finish them into more useful and valuable
products.

OBJECTIVES OF JOINT PRODUCTS
• Correct collection, compilation and
classification of process costs.
• The profit or loss of joint products
manufacture is determined.
• The method or pattern of production may be
determined.
• Fixing most profitable product mix may
increase the profit.

OBJECTIVES OF JOINT PRODUCTS
• The relationship between the cost and profit can
be studied to fix the price of joint products.
• The effect of increase or decrease in cost is to be
find out due to increase or decrease in the output
of joint products.
• The profitability in selling of joint products and
by-products can be determined.
• The volume of profit may also be maximized
with the help of marginal contribution analysis.

ACCOUNTING FOR JOINT PRODUCTS
• Generally the products are not identifiable as
different individual products until a certain
stage of production known as split off point
• All the costs incurred prior to the split off
point are called Joint Product cost.
• Accounting for joint products implies the
assignment of a portion of the joint cost to
each of the joint products

METHODS OF APPORTIONMNET OF
COSTS
Average cost method
• Under this method, the total units produced at
that point divide the total cost incurred up to
the split-off point to get average cost per unit
of production.
• All joint products are valued at the average
cost.
• This method can be used when all products
are expressed in terms of same units.

Sum – 1
From the following particulars, find out the cost
of joint products A,B and C under Average unit cost method
Pre Separation point costs - Rs.30,000
Other production data :
Product Units produced Raw Materials used
(units)
A 1,000 4,000
B 400 8,000
C 600 8,000
Total 2,000 20,000

Solution -1
Cost per unit = 30,000/2,000 = Rs.15
Cost of products
Product Units produced Cost per unit Total
A 1,000 15 15,000
B 400 15 6,000
C 600 15 9,000
2,000 30,000

METHODS OF APPORTIONMNET OF
COSTS
Physical unit method
• Under this method the joint costs are apportioned
among the joint products in the ratio of physical units
of output produced at the point of separation.
For example,
the physical base like raw material weight in physical
quantity is used as the base for apportioning the joint
costs.
• This method is very simple and easy to use.
• It is also technically a sound method.

Sum no 2
The following data have been taken out from the books of Mass
Coke Ltd.
• The price of coal is Rs. 800 per tonne; the direct wages and
overhead costs to the point of separation are Rs.400 and Rs.600
respectively per tonne of coal. Calculate the material, labour,
overheads and total cost of each product on the basis of weight.
Joint Products Yield in lbs of recovered product per
tonne of coal
Coke 1,420
Coal tar 120
Benzol 22
Sulphate of Ammonia 26
Gas 412
2,000

Solution 2
Products Yield in lbs Percentag
e of total
Coal Apportioned cost
Dir.Lab Overhead Total
Coke 1,420 71 56.80 28.4 42.6 127.8
Coal tar 120 6 4.80 2.40 3.60 10.8
Benzol 22 1.1 0.88 0.44 0.66 1.98
Sulphate
of
Ammonia
26 1.3 1.04 0.52 0.78 2.34
Gas 412 20.6 16.48 8.24 12.36 37.08
2,000 100 80 40 60 180

PROCESS COSTING-BRANCH OPERATION COSTING

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