Meaning
Process Costing is a
method of costing under which all costs are accumulated for each stage of
production and cost per unit of product is ascertained by dividing the total cost
of each process by the normal output of that process.
Definition-
i) According to ICMA, London Process Costing is “that form of
operation costing which applies where standardized goods are produced”
ii) Kohler defines Process Costing as “a
method of costing whereby costs are charged to processes or operations and
averaged over units produced”.
Applicability
–
It is suitable for
1. Cotton, wool jute
textile mill
2. Sugar Industry
3. Food processing
Industry
4. Cement industry
5. Chemical plants
6. Mining industries
such as coal and oil
Features
of Process Costing
1. Each plant is divided into a number of process cost centers or departments.
2. Output
of one process becomes the input of the next process.
3. It
is not possible to distinguish finished products while they are in the stage of
processing.
4. Cost
incurred in the earlier process are transferred to the later process along with
the output
5. Each process is treated as a separate cost center.
6. Under
process costing method every process is treated as a cost unit.
7. Total
cost of the finished product in the last process is cumulative i.e. It comprises of costs of all processes.
8. The
cost of normal loss is included in the cost of the total units produced.
9. Due
to continuous nature of production, work in progress is a regular feature of
process costing
10. Production
of one article may give rise to two or more by-products or joint products.
11. The
finished products are homogeneous in all respect such as shape, size, color,
weight etc
Process Loss
Process Losses and
wastages are usually of two types viz. Normal Process Loss and Abnormal
Process Loss.
The
term process loss may be defined as “the difference
between the input quantity of raw material and the output quantity.
ICMA
defines ‘waste and scrap from the recovery point of view as
follows-
Waste:
“Discarded substances having no value”.
Scrap: Discarded material having some recovery value
which is usually disposed of without further treatment or re-introduced into
the production process in the place of raw material”
Normal
Loss:
Normal loss is the loss
which is expected under normal conditions
Because of nature
of the raw material, some loss is inherent and unavoidable. This is known as
normal wastage or normal loss.
Features-
1. Normal loss is
unavoidable.
2. Normal loss arises
under efficient operating conditions.
3. Normal loss consists
of losses that are inherent in the production process.
4. It is caused by the
factors such as evaporation, chemical change, and withdrawals for test or
testing, unavoidable spoilage, due to the nature of raw material
5. Normal loss can be
estimated in advance
6. Normal loss is
recorded in terms of quantity.
7. Normal loss is
generally calculated at a certain percentage of the input of units introduced
in the respective process.
8. The normal loss cost
is borne by the good units produced.
Accounting
treatment of normal loss
The units of normal
loss are recorded on the credit side of a process account in the quantity column
only. The value of the normal loss, if any, should be included in the amount column
on the credit side of the process account as a realizable value. This reduces the
cost of normal output.
Example
1 (Normal loss without scrap value)
The cost of production
of 40 units consisting of material Rs 1500; labor Rs 1300 and overhead Rs 164
the normal waste is 5% of input. Show
process Account
Process
Account
|
|
Units |
Amount |
|
Units |
Amount |
|
To material To
Labour To
overhead |
40 |
1500 1300 164 2964 |
By normal loss
|
2 38 40 |
- 2964 2964 |
Per
Unit Rate = 2964
(40-2)
=
Rs 78
Example
2 (Normal loss with scrap value)
Material
(200 units) Rs 4000
Labour Rs 3000
Indirect
Expenses Rs 2000
Normal
wastage is 5% of the input. One unit of wastage is sold at Rs 16.50. Prepare
Process Account.
Process Account
|
|
units |
Amount |
|
Units |
Amount |
|
To
material To
labor To
indirect expenses |
200 |
4000 3000 2000 9000 |
By normal loss By Next process Rs 46.50 |
10
200 |
165 8835 9000 |
When
the normal wastage has a scrap value, good unit rate is calculated as follows
Rs
9000-165=8835
8835/190=46.50
Abnormal Loss
Any loss exceeding the normal loss is called
abnormal loss. Where the loss is caused by unexpected or abnormal conditions
and if it is beyond the limit, it is called an abnormal loss. eg use of defective
material, carelessness, fire, machine breakdown, power failure, strike,
accidents, natural calamities like floods, fire, cyclone, etc.
Features
1. Abnormal
loss is avoidable.
2.
It can be controlled by management action.
3.
The difference between normal output and actual output is termed abnormal
loss
4.
Abnormal loss is valued just like good units and transferred to separate an account called abnormal loss
Accounting Treatment of
Abnormal Loss
The
amount of abnormal loss is credited to a process account. A separate Abnormal Loss Account is opened and scraps value, if any, is credited to Abnormal Loss
Account and balance on it transferred to costing profit loss Account.
Value of Abnormal Loss
is calculated as follows –
Step 1.
Cost per unit = Normal cost of Normal Output
Normal
Output
Step 2. Value
of Abnormal Loss = Cost P U × unit of Abnormal loss
·
Normal Output = Input – Normal Loss
·
Normal Cost = Total Process Cost – scrap value of Normal
loss if any
Normal
Loss and abnormal loss with no scrap value
Prepare
Process Account from the following
Material
issued 1000 kg @ Rs 125
Wages Rs 28000
Overheads
Rs 8000
Normal
loss 5% of input
Output
900 kg
Process Account
|
|
Units |
Amount |
|
Units |
Amount |
|
To
material To
wages To
overheads
|
1000 (input) 1000 |
1,25,000 28,000 8000 1,61,000 |
By normal loss(5% of Input ) By Abnormal loss By Next Process c.p.u
= 169.47 |
50 50
1000 |
---- 8474 1,52,526 1,61,000 |
Note
– Normal output = 1000 kg -50 kg =
950 kg
Actual Output
= 900 units
Unit of Normal Loss
= 5% of 1000 =50 kg
Unit of abnormal loss
= normal output – actual output
950kg -900 kg
= 50 kg
Normal cost of Normal
output = 1, 61,000-nil = 1, 61,000
Cost per unit
= 161000/950= 169.47
Value of abnormal loss=
unit of abnormal loss × cost per unit
Amount of Good units
= actual output × cost per unit
900×
169.47= 1, 52,526
