MA2-Managing Costs & Finances

PROCESS COSTING
Process costing is a costing method which is applicable in industries producing homogeneous products in
large quantities. The purpose of process costing is a typical one for example stock valuation. It is also
called continuous order costing.

FEATURES OF PROCESS COSTING

➢ Homogeneous production (Large Quantities) identical
products.
➢ Production is continuous (2 or 3 or more processes) like oil refining, paper making and chemical
manufacturing.

Some important terms and concepts related to process costing are as

follows:
▪ If finished products are produced by more than one process, then output of first process becomes
the input of the next process.
▪ There might be some incomplete products at the end of the period; they are called work in
progress units.
▪ Work in progress might not be complete with respect to all the cost so equivalent units should be
calculated.
▪ Conversion cost = Direct labour cost + Direct expenses + Production
overheads.
▪ During production process, some units might get lost, and if the loss is not more than the expected
loss then it is called as NORMAL Loss.
▪ If the loss is more than the expected loss, then it is called as ABNORMAL Loss of the process.
▪ If the output units are greater than the expected output, then the extra units produced are called
as ABNORMAL GAIN.
▪ In some industries, there might be a chance of joint and By-products. By-products should be
treated as NORMAL LOSS.
▪ Loses might have a certain resale value, that value is called the “Scrap
Value”.
▪ Losses might have to dispose of at some cost to company, that cost is called “Disposal
value”.

JOINT AND BY PRODUCTS

Joint Products: Joint Products are produced from the same process but which have significant sales
value at point of separation.

By Products: By Products on the other hand are the output of the same process but they have a very
small sales value as compared with the value of main products.

APPORTIONMENT OF JOINT COST INTO JOINT PRODUCTS

Process account will be as normal. The joint cost of the joint products is distributed according to these
methods:
1. Physical measurement/volume at point of separation
2. Sales value at point of separation
3. Net realizable value at point of separation

Compiled by: Muzzamil Malik Page 1

 MA2-Managing Costs & Finances

ACCOUNTING TREATMENT FOR BY-PRODUCTS

In process costing, By Products are treated as normal losses and the sales value of By Product is treated
as scrap value of normal loss.
1. Income from by product added to sales of main product
2. Income from by product treated as a separate source of income
3. Sales income of by product deducted from the cost of production
4. Net realisable value of by product deducted from the cost of production

Joint product By product

Nature It’s a main product Supplementary product
Realizable value High sales value Low sales value

Point of Separation/Split Point

A £ 20
Joint Products
£ 22
Process B

£ 0.5
C By Product

Compiled by: Muzzamil Malik Page 2