 Process Costing is ‘ the costing method

applicable where goods or services result

from a sequence of continuous or repetitive
operations or process.
 Process costing is used to ascertain the cost
of products at each stage of production
where the material is passed through various
operations to obtain a final product.
 Manufacturing industries such as iron & steel,
cement, paper, rubber, ceramics etc
 Chemical industries for chemical, perfume
oil, medicines etc.
 Mining industries for mineral oils, coal and
gold etc
 Public utility works, electricity generation
and distribution etc
 The factory works are divided into different
processes and a separate account is
maintained for each process.
 Step 1 : Prepare a separate account for each
process to find out profit.
 Step 2 : Debit the process account by
following expenses.
 Materials
 Wages
 Direct Expenses
 Production Overheads
 Step 3 : Credit the process account by
 Normal loss or scrap value
 Sale of by-product
 Sale of output
 Value of abnormal loss
 Cost of the output transferred to the next
process or finished stock
 Itis the part of the process loss which is
caused under normal circumstances and it
cannot be avoided by any steps or measures
by the management. (Non-controllable loss)
 Normal loss is calculated as a certain
percentage of input (on units introduced) in
the respective process.
 It is the part of the process loss which is caused due to
abnormal circumstances. For e.g. labour strike, work to
rule, go slow, breakdown of machinery, power failure,
accidents etc
 Abnormal loss is avoidable and controllable by the
management by taking precautionary measures.
 Abnormal loss occurs in addition to normal loss. It is
determined by the following formula.

Input
Less: Normal loss
Expected output
Less : Actual output
Abnormal loss
 In other words when ,
Actual output
Actual < Expected
output < Expected output
output ==Abnormal
Abnormallossloss

 For abnormal loss rate is calculated by the following

formula.

Rate = Cost of process – scrap value of normal loss

Input in units – normal loss (in units)
 Abnormal gain arises when,

Actual output > expected output = Abnormal gain

 For
abnormal gain rate is calculated by the
same manner as per Abnormal loss.