Process costing (1)
- 1. Process Costing Presentation By- Bhushan Bankar IES MCRC, Mumbai
- 2. Introduction • Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. • This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. • Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit.
- 3. Definition of Process Costing • Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process. • CIMA London defines process costing as “that form of operation costing which applies where standardize goods are produced”
- 4. Terms to understand • Normal loss Normal expected wastage under usual operating conditions(evaporation, testing or rejects) • Abnormal loss A loss occurred over and above the normal expected loss(as faulty machinery or errors by labourers) • Abnormal gain The actual loss is lower than the normal loss(efficiency of newly-purchased machinery)
- 5. • Work in progress (WIP) Units that are not yet complete at the end of the period.(Opening WIP & closing WIP) • Scrap value The outcome of a loss can be sold for a small value(e.g. Metal Scrap) • Equivalent units A conversion of part-completed units into an equivalent number of wholly-completed units. e.g.-If 1,000 cars are 40% complete then the equivalent number of completed cars would be 1,000 x 40% = 400 cars. Terms to understand
- 6. Features of Process Costing • The production is continuous, homogeneous, standardized • Output of one process become raw material of another process • The output of the last process is transferred to finished stock • Costs are collected process-wise • Both direct and indirect costs are accumulated in each process • If there is a stock of semi-finished goods, it is expressed in terms of equalent units • The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.
- 7. Advantages • Costs are be computed periodically at the end of a particular period • It is simple and involves less clerical work that job costing • It is easy to allocate the expenses to processes in order to have accurate costs • Use of standard costing systems in very effective in process costing situations • Process costing helps in preparation of tender, quotations • Process costing helps in preparation of tender, quotations
- 8. Limitations • Cost obtained at each process is only historical cost and are not very useful for effective control • Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control • Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations • The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary • Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable
- 9. Process Costing vs. Job Costing • Job order costing and process costing are two different systems. • Both the systems are used for cost calculation and attachment of cost to each unit completed, but both the systems are suitable in different situations • The basic difference between job costing and process costing are…
- 10. Basis of Distinction Process costing Job order costing 1)Specific order Performed against specific orders Production is contentious 2) Nature Each job many be different Product is homogeneous and standardized. 3) Cost determination Cost is determined for each job separately Costs are complied for each process for department on time basis 4) Cost calculations Cost is complied when a job is completed Cost is calculated at the end of the cost period 5) Control Proper control is difficult as each product is different and the production is not continuous Proper control is easier as the production is standardized and is more suitable 6) Work-in-Progress There may or may not be work-in-progress There is always some work- in-progress due to continuous production