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🞂 Meaning Of Process Costing

🞂 Features of Process Costing

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 LEARNING OUTCOME

SNO Learning Outcomes CO KL PO

1 Meaning Of Process Costing CO5 K3 PO3

2 Treatment Of Process Costing CO5 K3 PO3

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 🞂 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.

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 🞂 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

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 🞂 The plant has various divisions, and each division is a
stage of production.
🞂 The production is carried out continuously, by way of the
simultaneous, standardized and sequential process.
🞂 The output of a process is the input of another.
🞂 The production from the last process is transferred to
finished stock.
🞂 The final product is homogeneous.
🞂 Both direct and indirect costs are charged to the processes.
🞂 The production may result in joint and by-products.
🞂 Losses like normal and abnormal loss occur at
different stages of production which are also
taken into consideration while calculating the unit cost.
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 🞂 The output of one process is transferred to another one at a price
that includes the profit of the previous process and not at the cost.
🞂 At the end of the period, if there remains the stock of finished
goods, then it is also expressed in equivalent completed units. It can
be calculated as:
Equivalent units of semi-finished goods or WIP = Actual
number of units in process × Percentage of work completed
🞂 Process costing is employed by the industries whose
production process is continuous and repetitive, as well as the
output of one process is the input of another process. So,
chemical industry, oil refineries, cement industries,
textile industries, soap manufacturing industries, paper
manufacturing industries use this method.

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Loss of material is inherent during processing operation. The
loss of material under different processes arises due to reasons
like evaporation or a change in the moisture content etc.
Process loss is defined as the loss of material arising during
the course of a processing operation and is equal to the
difference between the input quantity of the material and its
output.
There are two types of material losses viz. (i) Normal loss and
(ii) Abnormal loss

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 (i) Normal Process Loss: It is defined as the loss of
material which is inherent in the nature of work. Such a
loss can be reasonably anticipated from the nature of the
material, nature of operation, the experience and
technical data. It is unavoidable because of nature of the
material or the process. It also includes units withdrawn
from the process for test or sampling.
Treatment in Cost Accounts: The cost of normal
process loss in practice is absorbed by good units
produced under the process. The amount realised by the
sale of normal process loss units should be credited to
the process account.

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 (ii) Abnormal Process Loss: It is defined as the loss in
excess of the pre-determined loss (Normal process loss).
This type of loss may occur due to the carelessness of
workers, a bad plant design or operation, Sabotage etc.
Such a loss cannot obviously be estimated in advance. But
it can be kept under control by taking suitable measures.
Treatment in Cost Accounts: The cost of an abnormal
process loss unit is equal to the cost of a good unit. The
total cost of abnormal process loss is credited to the
process account from which it arise. Cost of abnormal
process loss is not treated as a part of the cost of the
product. In fact, the total cost of abnormal process loss is
debited to costing profit and loss account.

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 KEY LEARNINGS

• Meaning Of Process Costing

• Features of Process Costing

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 REFERENCES

• Maheshwari, S.N. and Mittal, S.N.,Cost Accounting- Theory

and Problems, ShriMahavir Book Depot.
• Arora, M.N., Cost Accounting, Vikas Publishing House.
• Lal, Jawahar and Srivastava, Seema,(Latest Edition), Cost
Accounting, Mc Graw Hill Education.
• Pandey, I.M., Management Accounting, Vikas Publishing
House, Delhi.
• Khan M.Y., Management Accounting, Mc Graw Hill Education.
• P.C. Tulsian, Introduction to Cost Accounting, S. Chand, Delhi.

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