3. • Process costing is a form of operation costing
where production follows a series of
sequential processes.
• According to Horngren, “It is a system for
applying costs to like products that are mass
produced in continuous fashion through a
series of production steps called processes”
4. • This type of costing is used in a variety of
industries like food processing, oil refining,
drug manufacturing, milk dairy etc.
6. • From the Fig. (previous slide), it can be
inferred that the total cost of Process I
becomes the cost of materials of Process II &
the total cost of Process II is transferred to
Process III as the cost of materials for Process
III. Finally, the total cost of Process III is the
cost of the finished product.
7. • Elements of Process Costs
❖ Material Cost
Materials required for production are issued to
the first process.
The finished goods of Process I becomes the raw
material of Process II.
8. In some cases extra or new materials may be added to the
finished goods passed from earlier process until
completion.
❖Labour cost
Direct & indirect wages paid to direct workers & indirect
workers (supervisory staff) are debited to the Process A/c.
When workers are engaged in more than one process the
gross wages are distributed to each process on the basis of
time spent on each process.
9. ❖ Direct Expenses
Expenses which can be directly allocated to a
particular process are known as direct expenses.
Eg.: Cost of design, cost of electricity, hire
charges of equipment etc.
10. ❖ Production Overhead
Overheads are to be apportioned where they
cannot be directly allocated & actual overhead
with respect to a particular process should be
charged or debited to the Process A/c.
11. Costing Procedure
• A separate A/c is maintained for each process
in respect of which the costs are to be
ascertained.
• A proforma of a process A/c is given in the
next slide
13. • Following steps are followed in costing
procedure:
❖ Debit the cost of basic raw materials to the
first process A/c showing both quantity &
amount
❖ Debit costs of other materials, direct labour &
direct expenses pertaining to each processes
14. ❖ Debit each process A/c with production
overheads as given or on some equitable basis
❖ Credit the process A/c with realisable value of
scrap
❖ Ascertain the total cost of the process &
calculate the average cost per unit
❖If the whole output of the process is transferred
show the total cost on the credit side as transfer
to the next process & the same should be shown
on the debit side of the next process A/c.
15. ❖ If a portion of the output is earmarked for sale
or has been sold show its cost as transfer to
Costing P&L A/c & the balance as transfer to the
next process.
When a portion of the output has been sold the
process A/c should be credited only with its cost
& not the sale value.
16. ❖ The cost of containers used for packaging the
finished goods should be debited to the last
process A/c.
❖ The total cost of the last process should be
transferred to Finished Stock A/c.
17. Treatment of Process Losses
• Normal Process Loss
Losses occurred due to pilferage, evaporation
which cannot be avoided in large scale production.
This loss includes scraps & waste. The amount of
loss is reduced by selling the scrap & waste.
If any value can be recouped from the sale of scrap
then the amount should be credited to relevant
Process A/c .
19. Particulars Units Amount
(Rs)
Particulars Units Amount
(Rs)
To Materials
To Labour &
Overheads
200 5,000
3,000
By Normal
Loss
(200*5%)
By Next
Process A/c
10
190
100
7,900
200 8,000 200 8,000
Process A/c
20. Normal Loss A/c
Particulars Units Amount
(Rs)
Particulars Units Amount
(Rs)
To Process
A/c
10 100 By Bank 10 100
10 100 10 100
21. • Abnormal Process Loss
It is caused by unexpected or abnormal
conditions like substandard materials, accidents.
Any wastage exceeding the normal wastage is
abnormal loss.
Abnormal Loss = Actual Loss – Normal Loss
Its value is credited to the concerned Process A/c
& debited to the Costing Profit & Loss A/c
22. Formula
(Normal Cost of Normal Production/Units of
Normal Production) * Units of abnormal wastage
24. Particulars Units
Amount
(Rs) Particulars Units
Amount
(Rs)
To Materials
To Wages
To Overheads
1,000 50,000
20,000
10,000
By Normal
Loss
(1,000 * 5%)
By Abnormal
Loss
(Note 1)
By Next
Process A/c
50
50
900
250
4,197
75,553
1,000 80,000 1,000 80,000
Process A/c
25. Abnormal Loss A/c
Particulars Units Amount
(Rs)
Particulars Units Amount
(Rs)
To Process A/c 50 4,197 By Bank
(Sale of
scraps:
50*5 )
By P&L A/c
50 250
3,947
50 4,197 50 4,197
26. Working Notes:
1) Abnormal Loss (in units) = (100-50) = 50 units
Value of abnormal loss:
Rs
TC = 80,000
Less: Amount realised from Normal Loss = 250
Value of 950 units (normal units) 79,750
Hence, value of abnormal loss = (79,750/950) *50 = Rs 4,197
27. • Abnormal Process Gain
It arises when the actual loss is less than the
estimated loss.
Abnormal Gain = Normal Loss – Actual Loss
The value of abnormal gain is calculated at the rate at
which effective output would have been valued if
normal loss had taken place according to expectation.
28. Relevant Process A/c is debited by the value of
the Abnormal gain.
Formula
(Normal Cost of Normal Production/Normal
Units) * Units of Abnormal Effectiveness
