PROCESS COSTING

                    Process Costing is a method of costing that is used in those industries where a product passes through different stages of manufacture before it becomes a finished product. Each stage of manufacture/production is known as process & ascertainment of cost at each stage is called process costing. 
         

            This method of costing is suitable for industries engaged in the continuous production of identical & uniform-size products. The output of one process is passed on to the next process &  the output of the last process becomes the finished product. The raw material is introduced in the first process & its output is passed on to the second process & so on unless it reaches the final process where the finished product is obtained. Some materials may be introduced in different processes also. The cost (P.U) at each process can be obtained by dividing the total cost by the no.of units produced there. The cost of the final product is calculated by adding the cost of different processes. Process costing is suitable for the following industries :
Textile, Spinning, Food products, milk dairy, etc.

Methods :
   In process costing there are four methods which are as follows : 
1. Process losses
2. Interprocess profit
3. Equivalent production
4. Joint products & by-products

1. Process losses : 
      The difference between the input of quantity of material & output of quantity of material is termed as process loss. Any loss of such type should be measured and recorded. In the case of scrap, it should be disposed of immediately. A proper recording of process losses is essential for cost control proposes. The loss may arise on account of 

(a) evaporation and (b) unavoidable handling, breakage, & spoilage losses. It may be normal or abnormal.

Normal process loss :
It is the loss that is unavoidable on account of the inherent nature of production processes. Such loss can be estimated in advance on the basis of past experience or data. The normal process loss is recorded only in items of quantity and the cost per unit of usable production is increased accordingly. Where scrap possesses some value as a waste product / as raw material for an earlier process, the value thereof is credited to the process a\c. This reduces the cost of normal output; process loss is shared by usable units.

Abnormal process loss :
Any loss caused by unexpected/abnormal conditions such as machinery breakdown, defective materials, accidents, carelessness, other operational inefficiencies, etc.
       Abnormal loss=Actual loss-Normal loss

2. Interprocess profit :
       In some industries, the output of one process is transferred to the next process, not at cost, but at a price showing a profit to the transferer process. The difference between the cost & the transfer price is known as inter-process profit.
            In order to compute the profit element in closing inventories & to obtain the net realized profit for a period, 3 columns have been shown on each side of process a\c's & closing stock has been deducted from the debit side of process a\cs instead of showing it on the credit side. The cost of closing stock can be easily obtained if we compare the accumulated cost & total in any process. The cost of stock can be obtained by the formula :
                        Cost of closing stock=Cost÷Total ×Value of closing stock
          The profit on closing stock can then be easily obtained by deducting the cost of stock thus arriving at the value of the stock.

3. Equivalent production :
     This represents the production of a process in terms of completed units. In other words, it means converting the uncompleted production into its equivalent of completed units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity. The principle applies when operating costs are being apportioned between work-in-progress & completed output. Thus, in each process, an estimate is made of the percentage completion of any work-in-progress. A production schedule & a cost schedule will then be prepared. The work-in-progress is inspected & an estimate is made of the degree of completion, usually on a percentage basis. It is most important that this estimate is as accurate as possible because a mistake at this stage would affect the stock valuation used in the preparation of final accounts.

Equivalent units of WIP=Actual no.of units in the progress of manufacture × Percentage of work completed

    For example, if 70% of work has been done on average on 200 units still in process, then 200 such units will be equal to 140 complete units. The cost of work-in-progress will be equal to 140 completed units.

In short, the following 3 statements are to be prepared.
1. Statement of equivalent production
2. Statement of cost
3. Statement of evaluation(i.e.apportionment)
        The problems with equivalent production may be divided into 4 groups.
I.When there is only closing WIP but with no process losses.
II.When there is only closing WIP but with process losses.
III.When there is opening as well as closing WIP with no process losses.
IV.When there is an opening as well as closing WIP with process losses.

4. Joint products & by-products:
       When two or more products of equal importance are simultaneously produced from a single process then, it is known as joint products.
Example: In the oil industry, fuel oil, lubricants, coaltar & kerosene are all produced from crude petroleum. These are known as joint products.

      "By-products" are incidentally produced in addition to the main products.
For example, Molasses is in the manufacture of sugar, and glycerin is obtained in the manufacture of soaps, buttermilk is in the manufacture of butter.

1Q) DIFFERENCE BETWEEN JOB AND BATCH COSTING

Sr. No	Job Costing	Batch Costing
1	Method of costing used for non-standard and non-repetitive products produced as per customer specifications and against specific orders	Homogeneous products are produced in a continuous production flow in lots.
2	Cost determined for each Job	Cost is determined in aggregate for the entire Batch and then arrived at on per unit basis
3	Jobs are different from each other and independent of each other. Each Job is unique	Products produced in a batch are homogeneous and lack individuality

 

 

2Q)  Difference between Job Costing and Process Costing.

The main points which distinguish job costing and process costing are as below:

Sr. No	Job Costing	Process Costing
1	A Job is carried out or a product is produced by specific orders.	The process of producing the product has a continuous flow and the product produced is homogeneous.
2	Costs are determined for each job.	Costs are compiled on a time basis i.e., for the production of a given accounting period for each process or department
3	Each job is separate and independent of other jobs	Products lose their individual identity as they are manufactured in a continuous flow.
4	Each job or order has a number and costs are collected against the same job number.	The unit cost of the process is the average cost for the period.
5	Costs are computed when a job is completed. The cost of a job may be determined by adding all costs against the job	Costs are calculated at the end of the cost period. The unit cost of a process may be computed by dividing the total cost for the period by the output of the process during that period.
6	As production is not continuous and each job may be different, more managerial attention is required for effective control.	The process of production is usually standardized and is, therefore, quite stable. Hence control here is comparatively easier.