Process Costing: Definition, Features

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. Process costing is also used in the assembly type of industries. It
is assumed in process costing that the average cost presents the cost per unit.

The 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.

CIMA London defines process costing as “that form of operation costing,

which applies where to standardize goods are produced.”

Features of Process Costing

1. The production is continuous

2. The product is homogeneous

3. The process is standardized

4. The output of one process becomes the raw material of another process

5. The output of the last process is transferred to finished stock

6. Costs are collected process-wise

7. Both direct and indirect costs are accumulated in each process

8. If there is a stock of semi-finished goods, it is expressed in terms of
equivalent units

9. The total cost of each process is divided by the normal output of that
process to find out the cost per unit of that process.

In what types of industries is process costing

adopted?
So many industries use process costing except those industries where
job, batch, or unit operation costing is necessary. The following are
examples of industries where process costing is practices-

1. Industries involved in chemical works, textile, weaving, spinning, etc.

2. Industries are producing gas, electricity, water, ice, steel, paper, cement,
rubber, bread, etc.

3. Industries are producing bakeries, confectionery, flour mills, canners,

manufacturers of medicine, fabricators, etc.

4. Industries involved in foundries, laundries, dyers, cleaners, etc.

5. Industries are producing spare parts, fittings, equipment, fertilizer

industries, etc.

6. Industries involved in box making, paper mills, biscuit factories, oil

refining, milk dairy, meat product factory.

Advantages of Process Costing

Advantages of process costing are;

1. Costs are be computed periodically at the end of a particular period

2. It is simple and involves less clerical work that job costing

3. It is easy to allocate the expenses to processes to have accurate costs.

4. Use of standard costing systems in very effective in process costing

situations.

5. Process costing helps in the preparation of tender quotations.

6. Since cost data is available for each process, operation and department,
good managerial control is possible.

Distinguish between job costing and process

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;

Basis of Job order costing Process costing

Distinction

Specific order Performed against specific orders Production is contentious

Nature Each job may be different. The product is homogeneous and

Standardized.

Cost Cost is determined for each job Costs are complied with for each
determination separately. process for the department on a time
basis, i.e., for a given accounting
period.

Cost Cost complies when a job is Cost is calculated at the end of the
calculations completed. cost period.
 Control Proper control is comparatively Proper control is comparatively
difficult as each product unit is easier as the production is
different, and the production is not standardized and is more suitable.
continuous.

Transfer There is usually not transfer from The output of one process is
one job to another unless there is transferred to another process as
some surplus work. input.

Work-in- There may or may not be work-in- There is always some work-in-
progress progress. progress because of continuous
production.

Suitability Suitable to industries where Suitable where goods are made for
production is intermittent, and stock and production is continuous.
customer orders can be identified in
the value of production.

Normal Loss
The cost of the units representing normal loss is borne by the good units
produced. If the normal loss has any realizable scrap value, such value is
credited to the process accounting.

Thus normal loss is treated by neglect. Suppose there is neither any scrap
value nor any abnormal gain. If, however, there is abnormal gain, a separate
account for normal loss has to be opened.

Abnormal Loss
The cost of the process is to be apportioned between the units lost
abnormally and good units in the ratio of such units. The cost of units
representing abnormal loss is debited to abnormal loss account and credited
to process account.

Thus, good units are not to bear abnormal losses.

If there is scarp value of the units lost, such value is credited to an abnormal
loss account, and the balance remaining after that in that account is written
off to costing profit and loss account.

How does a manufacturing company experience Abnormal Loss

and Abnormal

There may also be loss of a different nature, i.e., loss arising out of unexpected
or abnormal conditions. This type of loss is termed abnormal loss.

Substandard materials, breakdown, accidents, wrong plant design,

carelessness, etc. are the abnormal loss. Normal loss and abnormal loss are
relative terms. They widely vary from industry to industry, depending upon the
nature of materials used.

Production technique, preventive measures against incidents, etc. Loss of the

same nature may be treated as normal in some industries and as abnormal in
some other industry.

Abnormal Gain
Abnormal gain is not allowed to affect the process cost. The value of units
representing abnormal gain is debited to process accounts and credited to an
abnormal gain account.

At the same time, the scrap value of the units representing normal loss is
debited to normal loss account’ and credited to the process account.

To the extent of loss of income, the abnormal gain is transferred to a normal

loss account, and the balance of abnormal gain is transferred to costing profit
and loss account.

Inter-Process Profit
Some process industries transfer the finished goods from one process to the
next process at a price above cost. The excess of the transfer price over cost
represents inter-process profit.

The last process also transfers the finished goods to finished stock account at
a price higher than cost.

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