• Process costing is a costing method, which is used to ascertain the cost of the product at each process or

stage of production. It is applied in the industry, where the material has to pass through more than two
processes to being converted into finished goods.

• In process costing, costs are ascertained for each process, and the unit cost is ascertained by averaging the

total cost by the number of units produced in that process.

• It is applied in the industry like oil refining, chemical and drugs, food processing, cement, textiles etc.
• Features of process costing

• Production is continuous.

• Clearly defined process cost centres.

• Separate account for each process is opened.

• Final product of one process becomes the input for the next process.

• Normal and abnormal loss usually arise in different processes.

• Output is uniform and all units are identical.

• Cost per unit is determined by dividing the total cost of each process with normal output.

• Different products with or without by-products are simultaneously produced.

• Materials

Details of the cost of material are drawn from material requisition form/notes. Material issued from stores or
transfer from any other process will appear on the debit side of the concerned process account. The output at the
end of a process generally becomes the input for the next process then the next process's account debited at the
cost of transfer from the first process.

• Labour

Wages paid to labours for carrying out processing activities will appear on the debit side of the process account.
Labour cost may also be apportioned over the different processes on a suitable basis.

• Direct expenses

Expenses such as depreciation, repairs, maintenance, insurance etc. are debited to concerned process account

• Overheads

Overheads expenses apportioned over the different process on suitable bases.

Job costing Process costing
Production is carried out as per customers specific orders. Production is in continuous flow and products are homogenous.

Costs are determined for each job separately. Costs are ascertained for each process at the end of the accounting
period.
Each job is separate and independent of other jobs. Products are identical and manufactured in continuous flow and thus
lose their individual identity.
Work in progress may or may not exist at the beginning or end of Normally, the opening and closing work in progress exist.
the accounting period.
Control is comparatively difficult as each job is different than Proper control is comparatively easier as production is standardized.
others.
Cost of each job is ascertained by adding materials, labour and Per unit cost, is averaged by the number of units produced in the
overheads. process.
There is no transfer from one job to another job except there is Costs are normally transferred from one process to another process,
surplus work or excess production. the end product of one process becomes the input for the next
process.

Joint products or by-products generally do not arise in job costing. Joint products or by-products do arise in process costing.
• Due to the inherent nature of processes some quantities of materials are lost, while they are being
converted in the final product. It may happen due to wastages of material, evaporation of material, quality
of raw material, the technology used in production etc. These are normally unavoidable. These losses
have the following form;
• Normal loss refers to the loss which is unavoidable due to the inherent nature of production or
technology used. This loss can be estimated in advance based on experience and technical data. If
scrap possesses some value, it is credited to the process account. The loss is shared by usable units.
• Abnormal loss refers to the loss which is unexpected or due to abnormal conditions such as machine
break down, accident etc., it is a loss which is beyond the normal loss as estimated in advance. If the
abnormal loss has any scrap value, it is credited to the process account and the loss is transferred to
costing profit and loss account.
 Value of abnormal loss = 

• Abnormal gains arise when the actual loss is less than the normal loss. Since normal loss is an

estimate and hence actual output may differ as per the estimation. Abnormal gain is also called
unexpected gain in production in normal condition. It may arise due to overestimation of normal loss,
work efficiency etc. The amount of abnormal gain is transferred to costing profit and loss account.

Value of abnormal gain =  units of abnormal gain

• In the industries where process costing is applied, the problem of work in progress (WIP) is common.

There would be of incomplete units at the end of the year in each process. Since these units cannot be
treated as identical with the completed units, and it is valued based on the degree of completion,
usually on a percentage basis.

• Equivalent production represents the production of a process in terms of completed units. For example,

300 units are still in progress where 60% of work has been completed. The cost of WIP will be
equivalent to 180 (60% of 300) completed units.

Equivalent units of WIP = Actual No. of units in progress  % of work completed

• The following steps are followed for the determination of equivalent production.

• Calculation of equivalent units for each cost element by considering process loss, opening and

closing WIP and degree of completion.

• Finding out the net process cost for each element of costs.

• Determination of cost per unit of equivalent production for each element of the cost.

• Evaluation of output finished and transferred and WIP.