SYBMS :- SEM 3

By Asst Prof Kajal Gala

Direct material
Direct labour
overheads Process 1

Direct material
Direct labour
overheads Process 2

Direct material
Direct labour
Process 3
overheads

Finished goods Cost of goods sold

3
 WHAT IS PROCESS COSTING
• •

-
□ Process costing is a method of costing
used to find out the cost of the product in
each process.
□ It is used to calculate cost per unit of
product is ascertained at each stage of
production.
□ It is a form of operations costing.
Process costing is used in industries l i k
chemicals, textiles, steel, rubber, sug
shoes, petrol, etc.
Introduction
 Process costing is a special BRANCH of costing used by
the manufacturing industries.
 Who are involved in converting the RAW MATERIAL
into the FINISHED PRODUCT.
 Such work of conversation is done step by step , each
step called “a process” .
 Process costing is a method of allocating manufacturing
cost to products to determine an average cost per unit.
Features of process costing
 A separate process account is prepared for each process.

 Where all Inputs and Expenses are recorded in the DEBIT

SIDE and Losses and output are CREDITED.

 The output of one process becomes the input of the next

process and so on until the finished product is obtained.

 When the goods are sold, the amount will be transferred to

the cost of goods sold account .

 When the goods are completed, they will be transferred to

finished goods account.
PURPOSE OF PROCESS

□ To control the process.

□ To know cumulative cost.
□ To calculate the value of inventory of raw
material, work-in- progress and finished goods
at the end of the period.
□ It is also used to assign price of the products.

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 ADVANTAGES LIMITATIONS

PERIODICAL
NO DETAILED ANALYSIS
DETERMINATION OF COST

SIMPLE AND CHEAP HISTORICAL COSTS

r
tt

MANAGERIAL ESTIMATES
CONTROL

I TANDARD PROCESSE DIFFICULT TO

AND PRODUCTS CALCULATE
TERMS IN PROCESS
COSTING
□ NORMAL LOSS
Normal loss is inherent in the processing
operation and which cannot be avoided,
Therefore it is also called as Unavoidable L o s s

□ ABNORMAL LOSS
If the actual loss is greater than normal loss, then
such excess loss over and above the normal loss
is termed as abnormal loss.

□ ABNORMAL GAIN
If the actual loss is less than the normal loss then
such different in the actual and normal loss is
termed as abnormal gains.
 Abnormal Gains:- If the Actual Output in Production Process is more
than the Normal Output ( Input – Normal Loss % ) it indicates Abnormal
Gains.
 Abnormal gain arises because of an Abnormal effective in the use of
Raw Material or Efficiency in performance so it is known as Abnormal
effective.
 Abnormal gain reduces the Normal Loss Quantity so it comes in the
form of Profit to the industry(Abnormal gain credited to Costing Profit &
Loss A/c Whereas, Abnormal Loss Debited to Costing Profit & Loss A/c).
 Abnormal gains may arise due to Efficiency of the Workers, Excellent
Quality of Material, recent repairs of machinery & so on.
Transactions Accounting Accounting
treatment entries
Normal loss Losses within No entry
expected level
Not assigned cost
Abnormal loss Excess loss over Dr. Abnormal
the expected level loss
Assigned cost Cr. Process
account
Abnormal gain Gain resulted when Dr. Process
the actual loss is account
less than the Cr. Abnormal
normal or gain
9
 Proforma Process A/C
Dr. Cr.
Particulars Unit Amount Particulars Unit Amount

To Units introduced X X By Normal Loss A/C X X

(@ Scrap value)
To Process Material X By Abnormal Loss X X
A/C
(@ PCPU)
To Wages X By Unit Transferred X X
to Next Process A/C
To Production X
overheads
To Other Expenses X
To Abnormal Gain X X
A/C (@ PCPU)
X X X X
 Cost Per Unit

Cost Per Unit = Normal Cost =

Normal output

Cost of Process - Scrap value of normal loss

Input - Normal loss
 Abnormal Loss / Abnormal Gains
 Output Transfer to Next Process / Output
Transfer to Warehouse / Output Transfer to
Finished Stock.
 Closing Stock.
 Normal Loss A/C
Dr. Cr.
Particulars Unit Amount Particulars Unit Amount
To Process account X X By Cash account X X
(@ Scrap value) (@ Scrap value)
- - By Abnormal gain X X
(@ Scrap value)
X X X X

Dr. Abnormal Loss A/C Cr.

Particulars Unit Amount Particulars Unit Amount
To Process X X By Cash account X X
account (@ (@ Scrap value)
PCPU)
- - By Costing P&L X X
account
(Balancing Figure)
X X X X
 Abnormal Gain A/C
Dr. Cr.
Particulars Unit Amount Particulars Unit Amount
To Normal loss A/C X X By Process A/C X X
(@ Scrap value) (@ PCPU )
To costing P&L A/C X X - -

X X X X

Calculation of Process Cost Per Unit

Input X
(-)Normal Loss X
Expected Output X

Total cost – Scrap value

PCPU
Expected output