Group 3:- Sunil

Bhatia
Archana
Patnaik
Nitisha
Process Costing …
Raw materials move down the production line through
a number of processes in a particular sequence and
costs are compiled for each process or department by
preparing a separate account for each process.

Used in mass production industries producing

standard products and having standard procedures.

E.g.
 Textile mills
 Chemical works
 Oil refineries
 Cement manufacture
 Paper manufacture etc…
Characteristics…
 The production is continuous and the final product is the
result of a sequence of processes.

 Costs are accumulated process wise.

 The products are standardized and homogeneous .

 The cost per unit produced is the average cost.

 The finished product of each but last process becomes the

raw material for the next process in sequence and that of
the last process is transferred to the finished goods stock.

 Processing of raw materials may give rise to the production

of several products called joint products or by products.
Process costing
procedure…
 The factory is divided into number of processes and an
account is maintained for each process.

 Each process account is debited with material cost, labour

cost, direct expenses and overheads allocated to the process.

 The output of a process is transferred to the next process in

the sequence .

 The finished output of the last process is transferred to the

Finished Goods Account.
Process costing
procedure…
Process A Process B Process C Finished
A/c A/c A/c Goods A/c

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

I/P O/P I/P O/P I/P O/P

Process losses and
wastages…
In industries a certain amount of loss occurs
at various stages of production.
It is therefore necessary to keep accurate
records of both input and output.
When loss occurs at a late stage of
manufacture, it accounts to a greater financial
loss.
Process losses may be classified into:-
Normal losses
Abnormal losses
Normal Loss…
That amount of loss which cannot be avoided
because of the nature of material or process is
normal process loss.
It is caused by factors like chemical change,
evaporation, withdrawals for tests or
sampling, unavoidable spoiled quantities, etc.
Normal loss is determined as a percentage of
input.
Accounting treatment of
Normal Loss…
When normal loss is physically present in the
form of scrap, it may have some value, i.e. it
may be sold at some price.
Whenever scrapped material has any value, it
is credited to the Process Account.
Example…
Q. Material 1000 kg @
Rs.6 per kg
labour Rs. 5000
direct expenses Rs. 1000
indirect expenses Rs. 1000
normal wastage 10% of input.
Prepare process account when :-
scrap arising out of normal loss has a sale
value of Re.1 per unit.
Solution…
Process A Account
Particulars kg Rs. Particulars kg Rs.

To material 1000 6000 By normal loss 100 100

To labour 5000 By transfer to B A/c 900
12,900
To direct expense 1000
To indirect expense 1000

1,000 13,000
1,000 13,000

Cost per unit = 12900/ 900 = Rs. 14.33

Abnormal Loss…
This type of loss consists of loss due to
carelessness, machine breakdown, accident,
use of defective materials etc.
It represents losses which are over and above
the normal losses.
Abnormal loss is not absorbed by goods
production, rather it is transferred to Costing
Profit & Loss Account.
Accounting treatment of
Abnormal loss …
Allow for normal loss as before.
Find out the cost per unit in the process by
the formula:-
 Cost per unit= (Total Cost- Value of Normal loss)/(Units
introduced- Normal loss Units)
Multiply the cost per unit by the number of
units of abnormal loss.
Credit the relevant Process A/c with the
quantity and value of abnormal loss.
The balance figure in the Process A/c is the
cost of good units produced in the process.
Example…
50 units are introduced into a process at a
cost of Re.1 each.
Total expenses incurred by the process is
Rs.30.
Of the units introduces, 10% are normally
spoiled and possess a scrap value of Re.0.25
each.
Owing to an accident, only 40 units are
produced.
Prepare Process A/c and Abnormal loss A/c.
Solution…
Process Account
Particulars units Rs. Particulars units Rs.
To materials 50 50 By normal loss 5 1.25
To expenses --- 30 By abnormal loss 5 8.75
By transfer to X a/c 40 70
50 80 50 80

Cost per unit = (80-1.25)/(50-5) = 78.75/45 = Rs.1.75

Cost of abnormal loss = 5 * 1.75 = 8.75
Contd…
Abnormal loss a/c
Particulars units Rs. Particulars
units Rs.
To Process a/c 5 8.75 By sales
5 1.25
By profit and
loss a/c 7.50
5 8.75
5 8.75
Abnormal Gain…
If the loss is greater than the normal loss it is
called abnormal loss but if it is less than the
normal loss, it is called Abnormal Gain or
effectiveness.
The calculations is same as abnormal loss.
It is debited in the process A/c and credited in
the Abnormal Gain A/c.
Ultimately it is transferred to Costing profit &
Loss A/c.
Example…
50 units are introduced into a process at a
cost of Re.1 each.
Total expenses incurred by the process is
Rs.30.
Of the units introduces, 10% are normally
spoiled and possess a scrap value of Re.0.25
each.
 Only 47 units are produced.
Prepare Process A/c and Abnormal gain A/c.
Solution…
Process Account
Particulars units Rs. Particulars units Rs.
To materials 50 50 By normal loss 5 1.25
To expenses --- 30 By transfer to X a/c 47 82.25
To abnormal gain 2 3.50
52 83.50 52 83.50

Cost per unit = (80-1.25)/(50-5) = 78.75/45 = Rs.1.75

Cost of abnormal gain = 2 * 1.75 = 3.50
Contd…
Abnormal gain a/c
Particulars units Rs. Particulars
units Rs.
To normal loss 2 0.50 By process a/c
2 3.50
To profit & loss 3.00
2 3.50
2 3.50
Work-in-progress
(equivalent production)…
Equivalent production represents the production
of a process in terms of completed units.
Work-in-progress at the end of an accounting
period are converted into equivalent completed
units.
Equivalent completed units=no. of units of
work-in-progress * degree of completion in %.
In each process, an estimate is made of the
degree of completion of work-in-progress in terms
of %.
Evaluation of equivalent
production…
Find out the total cost for each element of cost
i.e.material, labour and overhead.
Scrap value of normal loss is deducted from the
material cost.
Ascertain the cost per unit of equivalent production
separately for each element of cost. This is done by
dividing the total cost of each element by the
respective no. of equivalent units.
At this rate of cost per unit, ascertain the value of
finished production and work-in-progress.
Contd…
Statement of production, cost and
evaluation is prepared which comprises of :-
 Statement of equivalent production.
 Statement of cost (per unit).
 Statement of evaluation.
Equivalent production can be classified into :-
 When there is no opening stock.
 When there is opening as well as closing
stock.
Contd…
When there is no opening stock – it means there is only
closing stock of work-in-progress. In such a situation, there
may or may not be process losses.
When there is no opening stock of W-I-P but there
are process losses-
 Normal loss – equivalent units of normal loss are taken as
nil. Net material cost = cost of material – scrap value
 Abnormal loss – it is added to equivalent production with
due consideration to its degree of completion
Contd…
 Abnormal gain – units of abnormal gain are
represented by good finished production. It is
always taken as 100% complete in respect of
all elements of cost i.e. material, labour and
overhead.
• When there is opening as well as closing
stock of work-in-progress –
 FIFO method.
 Average cost method.
Internal process profits…
It is a practice to charge the output of each
process to the next process not at cost but at
a price showing profit to the transferor
process.
This transfer price may be either the current
market price or cost plus a fixed %.
They have the disadvantage of complicating
the costing records.