Process Costing

 Process costing refers to one or more processes involved while converting a raw material
to a finished product.
 This is usually employed in process industries like paper mils, chemical mills, oil refineries
etc.,
 This method is employed where it is not possible to trace the prime cost of a particular
product. That is, its identity is lost in the volume of continuous production.
 In case of job costing, goods are made to specific customer’s orders and can be identified
in the volume of production.

Different costs involved in process costing are:

1. Direct Material cost (DM)
2. Direct Labour cost (DL)
3. Direct Expenses (DE)
4. Production Overheads (POH)

Types of process losses and gains in process costing:-

a) Normal Process Losses (NPL)
b) Abnormal Process Losses (APL)
c) Abnormal Gain (AG)

 Normal Process Losses (NPL): If the loss is inevitable and within the limit, then it is called
NPL.

 Abnormal Process Losses (APL): When the loss is caused by unexpected or abnormal
conditions such as substandard material, bad design, etc., then it is called APL.

 Abnormal Gain (AG): When the losses are less than the normal expected loss, then there is
said to be an abnormal gain.

Differences between job costing & process costing:-

JOB COSTING
Production is made by specific order
The jobs may be independent of each
other.
Each job is allotted a number, and the
costs are calculated against the same job
number.
PROCESS COSTING
Uniform production in a continuous flow.
Being manufactured in a continuous flow,
the jobs lose their individual identity.
Unit cost for processes is calculated by
dividing the total cost of period by the
total output.
The job cost is calculated when the job is
completed.
There is generally no transfer of cost from
one job to another.
The process costs are calculated at the end
of a particular period.
The costs are transferred from one process
to another, until the goods are completely
manufactured.

1) Product A is produced after 3 distinct processes, and the following information is

obtained after a particular period:
PARTICULARS TOTAL AMT. PROCESS 1 PROCESS 2 PROCESS 3
Direct Material 2200 1800 300 100
Direct Wages 400 100 200 100
Direct Expenses 500 300 - 200
POH 800 - - -

The POH are recovered on 200% of the direct wages. The production during the period
was 100 kg. Prepare the various process accounts.

Solution:-
Process 1 account
PARTICULAR COST/KG TOTAL PARTICULAR COST/KG AMOUNT
S AMOUNT S (Rs.)
(Rs.)
To input P1 18 1800 Output 24 2400
transferred to
P2
To direct 1 100
wages
To direct 3 300
expenses
To POH 2 200
24 2400 24 2400

Process 2 account
PARTICULARS COST/KG TOTAL PARTICULARS COST/KG AMOUNT
AMOUNT (Rs.)
(Rs.)
Output 24 2400 Output 33 3300
transferred transferred to
from P1 P3
To direct 3 300
material
To direct 2 200
Wages
To POH 4 400
33 3300 33 3300

Process 3 account
PARTICULARS COST/KG TOTAL PARTICULARS COST/KG AMOUNT
AMOUNT (Rs.)
(Rs.)
Output 33 3300 Output 39 3900
transferred transferred to
from P2 finished stock
account
To direct 1 100
material
To direct wages 1 100
To direct 2 200
expenses
To POH 2 200
39 3900 39 3900

2) Product A requires 3 different processes. After the three processes the product is
transferred to finished stock account. You are required to prepare the various process
accounts from below.
PARTICULARS TOTAL AMT. PROCESS 1 PROCESS 2 PROCESS 3
(Rs.)
Direct Material 5000 4000 600 400
Direct Wages 4000 1500 1600 900
Direct Expenses 800 500 300 -
POH 6000 - - -

POH can be allocated to different processes on the basis of 150% direct labour. The
production during the period was 200 units. Prepare the various accounts.
Solution:-
Process 1 account
PARTICULAR COST/KG TOTAL PARTICULAR COST/KG AMOUNT
S AMOUNT S (Rs.)
(Rs.)
To direct 20 4000 Output 41.25 8250
material transferred to
P2
To direct 7.5 1500
wages
To direct 2.5 500
expenses
To POH 11.25 2250
41.25 8250 41.25 8250

Process 2 account
PARTICULARS COST/KG TOTAL PARTICULARS COST/KG AMOUNT
AMOUNT (Rs.)
(Rs.)
Output 41.25 8250 Output 65.75 13150
transferred transferred to
from P1 P3
To direct 3 600
material
To direct 8 1600
labour
To direct 1.5 300
expenses
To POH 12 2400
65.75 13150 65.75 13150

Process 3 account
PARTICULARS COST/KG TOTAL PARTICULARS COST/KG AMOUNT
AMOUNT (Rs.)
(Rs.)
Output 65.75 13150 Output 79 15800
transferred transferred to
from P2 finished stock
 account
To direct 2 400
material
To direct wages 4.5 900
To POH 6.75 1350
79 15800 79 15800

3) In the process B, 75 units of commodity were transferred from process A at a cost of

Rs.1308/-. The additional expenses incurred during the production were Rs.202/-. 20% of the
units entered are normal losses which are sold at the rate of Rs.4/unit. The output of process B
was 70 units. Find whether there is an abnormal gain or loss in the cost.
Solution:-
Total input to the process B = 75 units.
Normal losses in process B = 20% of input = 0.2 * 75 = 15 units.
The expected output from process B = 75 – 15 = 60 units.
But, actual output of process B = 70 units.
Therefore, there is an abnormal gain of 70 – 60 = 10 units.
1) Processing cost in process B = Rs. 1308/-
2) Additional expenses incurred = Rs. 202/-
Total processing cost = Rs. 1510/-
Scrap value/unit = Rs.4/-
Total scrap value = 15*4 = Rs.60/-
Actual processing cost for process B = (1510 – 60) ÷ (75 - 15)
= Rs. 24.17
Therefore, the value of abnormal gain = 24.17 * 10 = Rs.241.7/-

4) A certain product is processed through three stages P1, P2 & P3 during a period, for
which the various elements of cost were as follows:
PARTICULARS TOTAL P1 P2 P3
AMOUNT (Rs.)
DM 7542 2600 1980 2962
DL 9000 2000 3000 4000
POH 9000 - - -
1000 units at Rs.3/- per unit were introduced to the Process 1. The output of each process
directly passes to the next process and finally to the finished stock account. POH are
recovered on 100% of the direct labour.
PROCESS OUTPUT % OF NORMAL VALUE OF SCRAP
LOSSES PER UNIT IN Rs.
1 950 5 2
 2 840 10 4
3 750 15 5
Prepare the various process accounts and the finished stock account.

Solution:-
Process 1 account
PARTICULARS QTY COST AMT. PARTICULARS QTY COST TOTAL
/KG PER AMT.
UNIT
Input to P1 100 3 3000 By normal 50 2 100
0 losses
To DM 2600 Output 950 9500
transferred to
P2
To DL 2000
To POH 2000
100 9600 1000 9600
0
Actual processing cost per unit in P1 = (9600 – 100) ÷ (1000 - 50) =Rs. 10/-

Process 2 account
PARTICULARS QTY COST AMT. PARTICULARS QTY COST TOTAL
/KG PER AMT.
UNIT
Input to P2 950 10 9500 By normal 95 4 380
losses
To DM 1980 Abnormal 15 20 300
losses
To DL 3000 Output 840 20 16800
transferred to
P3
To POH 3000
950 1748 950 17480
0
Actual processing cost in P2 = (17480 – 380) ÷ (950 – 95) = Rs. 20/-
 Process 3 account
PARTICULARS QTY COST AMT. PARTICULARS QTY COST TOTAL
/KG PER AMT.
UNIT
Input to P3 840 20 16800 By normal 126 5 630
losses
To DM 2962
To DL 4000 Output 750 38 28500
transferred to
P3
To POH 4000
Abnormal gain 36 38 1368
876 2913 876 29130
0

Therefore, actual processing cost per unit = (27762 – 630) ÷ (840 – 126) = Rs.38/-

5) A certain product is processed through 3 processes P1, P2, and P3 during a period for
which various elements of costs are as follows:
PARTICULARS TOTAL P1 P2 P3
AMOUNT(Rs.)
DM 84,820 20,000 30,200 34,620
DL 1,20,000 30,000 40,000 50,000
DE 7,260 5,000 2,260 -

The total POH is Rs. 60,000/-. 1000 units at Rs.5/- each were introduced at P1. The output of
each process is P1: 920, P2: 870, P3: 800. The normal losses are estimated at P1: 10%, P2: 5%,
P3: 10%. The scrap value/unit is given as P1: 3, P2: 5, P3: 6. The output of each process passes
directly to the next process and finally to the finished stock account. The POH are recovered
on 50% of DL. Prepare the various process accounts.
Solution:-
Process 1 account
PARTICULARS QTY COST AMT. PARTICULARS QTY COST TOTAL
/KG PER AMT.
UNIT
Input to P1 100 5 5000 By normal 100 3 300
0 losses
To DM 20,00 Output 920 83 76,360
0 transferred to
P2
To DL 30,00
0
To DE 5,000
To POH 2000
To abnormal 20 1,660
gain @ 83/-
102 76,66 1020 76,660
0 0

Actual processing cost per unit in P1 = (75000 – 300) ÷ (1000 - 100) =Rs. 83/-

Process 2 account
PARTICULAR QTY COST AMT. PARTICULAR QTY COST TOTAL
S . /KG S PER AMT.
UNIT
Input to P2 920 83 76,360 By abnormal 46 5 230
losses
To DM 30,200 Output 870 16788.18
transferred to
P3
To DL 40,000 By abnormal 4 771.6
losses @
Rs.192.89/-
To DE 2,260
To POH 20000
920 16882 920 168820
0

Actual processing cost in P2 = (168820– 230) ÷ (920 – 46) = Rs. 192.89/-

6) The following details are taken from the books of an oil mill for one month ending on 31 st
March 1986. Purchase of 100 tons of oil seeds is at Rs. 1000/ ton.
PARTICULARS CRUSHING REFINING FINISHING
Wages 1000 700 900
Sundry stores 200 600 100
Electricity 400 350 200
Steam 300 250 200
Factory expenses 500 400 300
Containers - - 2,350

1) 60 tons of crude oil was produced.

2) 51 tons of oil was produced in the refinery process.
3) 50 tons of refined oil was finished for delivery.
4) Empty bags of oil seeds were sold for Rs.100/-
5) 35 tons of oil cakes were sold at Rs.60/- per ton.
6) Loss in weight in crushing is 5 tons.
7) 8.5 tons by-products from refinery process were valued at Rs.2550/-

Prepare the accounts with respect to each of the processes and calculate cost of
production at the end of each process.

Solution:
Crushing process account
PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT
TONS TONS (Rs.)
Input to P1 100 1,00,000 By sale of 100
empty bags of
oil seeds
To wages 1,000 By loss in 5
weight
To sundry 200 By sale of oil 35 2,200
stores cakes
To electricity 400 Cost of crude 60 100,200
oil per ton @
Rs. 1670 per
ton
To steam 300
To factory 500
expenses
100 102,400 100 102,400

Cost of crude oil per ton = (102,400 – 2,200) ÷ (100 – 40) = Rs. 1670/-
 Refinery process account

PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT

TONS TONS (Rs.)
Input to P2 60 1,00,200 By by- 8.5 2,550
products in
refinery
process
To wages 700 By loss in 0.5
weight
To sundry 600 By cost of 50 99,950
stores refined oil/ton
@ Rs. 1959.8/-
To electricity 350
To steam 250
To factory 400
expenses
60 102,500 60 102,500

Cost of refined oil per ton = (102,500 – 2,550) ÷ (60 – 9) = Rs. 1959.8/-

Finishing process account

PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT

TONS TONS (Rs.)
Input to P3 51 99950 By loss in 1
weight
To wages 900 Cost of 50 104,000
finished oil per
ton @ Rs.
2080/-
(including
container)
To sundry 100
stores
 To electricity 200
To steam 200
To sundry 300
expenses
To container 2,350
51 104,000 51 104,000

Cost of finished oil per ton = (104,000 –0) ÷ (51 – 1) = Rs. 2080/-
Ans.: Cost of crude oil per ton = Rs. 1670/-
Cost of refined oil per ton = Rs. 1959.8/-
Cost of finished oil per ton = Rs. 2080/-

7) The following details were extracted from an oil refinery for the month of September
1988. Purchase of 500 tons of oil seeds is at Rs. 200,000/-
PARTICULARS CRUSHING REFINING FINISHING
Cost of labor 2,500 1,000 1,500
Electricity 600 360 240
Sundry material 100 2,000 -
Repairs to plant & 280 330 140
machinery
Steam 600 450 450
Factory expenses 1,320 660 220
Cost of containers - - 750

1) 300 tons of crude oil was produced.

2) 250 tons of oil was produced in the refinery process.
3) 248 tons of refined oil was finished for delivery.
4) Empty bags of oil seeds were sold for Rs.400/-
5) 175 tons of oil seed residue was sold at Rs.11,000/-
6) Loss in weight in crushing is 25 tons.
7) 45 tons by-products from refinery process were valued at Rs.6,750/-

Prepare the accounts with respect to each of the processes and calculate cost of
production at the end of each process.

Solution:-
Crushing process account
PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT
TONS TONS (Rs.)
To oil seeds 500 200,000 By sale of - 400
empty bags of
oil seeds
To labor 2,500 By loss in 25 -
weight
To electricity 600 By residue 175 11,000
sold
To sundry 100 Cost of crude 300 194,000
material oil per ton @
Rs. 646.66 per
ton
To repair of 280
plant and
machinery
To steam 600
To factory 1,320
expenses
500 205,400 500 205,400

Cost of crude oil per ton = (205,400 – (11,000+4000)) ÷ (500 – 200) = Rs. 647/-

Refinery process account

PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT

TONS TONS (Rs.)
Input to P2 300 194,000 By by- 45 6,750
products in
refinery
process
To labor 1000 By loss in 5 -
weight
To electricity 360 By cost of 250 192,050
refined oil/ton
@ Rs. 768.2/-
To sundry 2000
material
To repairs to 330
plant and
machinery
To steam 450
To factory 660
expenses
300 198,800 300 198,800

Cost of refined oil per ton = (198,800 – 6750) ÷ (300 – 50) = Rs. 768.2/-

Finishing process account

PARTICULARS No. OF AMT (Rs.) PARTICULARS No. OF AMT

TONS TONS (Rs.)
Input to P3 250 192,050 By loss in 2 -
weight
To labor 1500 Cost of 248 195,350
finished oil per
ton (including
container)
To electricity 240
To repairs to 140
plant and
machinery
To steam 450
To factory 1320
expenses
To container 750
250 195,350 250 195,350