Process Costing
Introduction:
• CIMA - Process costing as ‘the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or process.’
• Costs are arranged over the units produced during the period.
• Process costing is used to determine the cost of a product at each operation, process, or stage of manufacture.
Applicability:
• This method of costing is used by those concerns which manufacture articles of uniform standards.
• These firms manufacture articles on a continuous flow basis.
• Under the following conditions, process costing can be followed favorably:
– Production of a single product.
– Processing of a single product for a certain period.
– Production of several products of a standard design in the same plant.
– Division of a factory into separate operations or processes.
Characteristics:
• The factory is divided into different processes which are the cost centres.
• The production is continuous and the final product is the end result of a series of processes.
• The sequence of operations for processing the product is specific and predetermined.
• A separate account is maintained for each process.
• All costs, direct and indirect, are recorded for each process separately.
Job Costing and Process Costing:
Job Costing
Process Costing
Production is against some specific orders
Process is in continuous flow and Homogenous
Each Job is separate and independent of each other
Products lose their individual entity, as they are manufactured on a continuous flow
Costs are calculated when a job is completed
Costs are calculated at the end of a cost period
It involves more paperwork
It involves less paperwork
Costing Procedure:
• The factory works are divided into different processes and a separate account is maintained for each process.
• Materials
• Wages
• Direct Expenses
• Production Overheads
Normal Loss:
• It is a part of the process loss which is caused under normal circumstances, and an inevitable loss.
• It can not be avoided by any steps or measures by the management.
• It is also referred to as a non-controllable loss.
• Normal loss may have a scrap value.
• The cost of normal loss after deducting scrap value, if any, is to be borne by the output of the respective process.
Abnormal Loss:
• It is a part of the process loss which is caused due to abnormal circumstances.
• Abnormal loss is avoidable and controllable by the management by establishing proper precautionary measures.
• Abnormal loss occurs in addition to normal loss.
Abnormal Gain:
• Abnormal gain arises when the actual wastage (loss) is less than the normal wastage or when the actual output is more than the normal output.
• Abnormal gain arises due to rise in the efficiency of the production department, so the benefit of abnormal gain will not be transferred to customers.
Inter – Process Profits:
• The output of one process is transferred to the next process, not at cost, but at market value or at an inflated cost or cost plus a percentage of profit. - Inter-process profits.
• Advantages
– Discloses the efficiency
– Assistance in Decision making
– Facilitate comparison
• Disadvantages
– Unnecessary complications
– No useful purpose is served
Joint Products and By-Products:
• A joint product is two or more products derived from the same raw material, each having an equal importance.
• A by-product is a secondary product obtained during the course of manufacture, having a relatively small importance as compared with that of the chief product or products.
• By-products have saleable value or usable value.
Joint Costs:
• The common cost of services employed in the output is known as the joint cost.
• All costs incurred prior to the split off point are joint costs.
• The distribution of the joint costs to the various joint products is a major problem to the management.
• Joint costs influence managerial decisions of two types:
– Decision relating to the joint products as a group,
– Decisions relating to the additional processing to be applied to individual joint products,
Costing of Joint Products:
• Average Unit Cost Method
• Physical Unit Method
• Survey Method
• Market Value Method
– Market value at separation point
– Market value after further processing
– Net realizable value method
Costing Of By–Products:
• By-products mean secondary products arising in the course of manufacturing the main products.
• By-products should be distinguished from waste.
• The latter is of less economic importance than the former.
Accounting Methods for By – Products:
• Non – Cost Methods
– Other income method
– By – product value deducted from total cost
– Reverse cost method
• Cost Methods
– Opportunity cost method
– Standard cost method
– Apportionment on suitable bases
Equivalent Production:
• In process costing, unit product cost is determined for each process.
• This is simple and involves only arithmetical calculation when the costs of the process and the output thereof are known, provided all the units started are completed within the period under review.
• Since the incomplete or semi-finished units or work-in-progress cannot have the same costs as the completed units, these incomplete units require to be converted into equivalent of completed units.
• This is popularly known as equivalent production or effective units.
Procedure to Evaluate Equivalent Production:
• State the opening work-in-progress
• Add to the number of units started and completed during the period.
• Add to the above, the equivalent completed units of closing work-in-progress.
Procedure of Evaluation:
• Find out the equivalent production after taking into consideration the process losses, degree of completion of opening and closing stock.
• Find out the net process cost according to elements of costs, i.e. materials, labour, and overheads.
• Evaluate the output finished and transferred, and work-in-progress.
Statements to Prepare:
• Statement of Equivalent Production
• Statement of Cost
• Statement of Evaluation
ICSI
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