# Process Costing

Process Costing

In industries where similar types of products are produced, the process costing is the best cost accounting system. The products consume the same amount of overheads and direct costs. It would not be wise to apportioned cost to individual units. So, in process costing we calculate average cost per unit of output.

Average cost per unit of output = Total cost assigned to the product / number of units of output

In a manufacturing process, goods are not completed in a single process. Instead, they move from one process to the second process and from there to the third process. At the end, the finished goods are produced in the last process. So, in process costing we calculate cost per unit of each process.

For the manufacturing of any goods, we need materials, labors and overheads. So, we charge these elements of cost to each process account. In every process, it happens that the output received from the process is different from the input to the process. This means that the output would be less than the input to the process. This results in a loss. Loss can be of two types:

Normal Loss - This is the loss which manufacturer is already aware of. This cannot be avoided or controlled.

Abnormal Loss – This is the loss which is not of routine nature and which can be controlled by exercising some sort of cost and internal controls.

Abnormal Gain – This is the gain which arises due to total loss less than the normal loss.

Example

1.ABC produces chemicals for industrial usage. In its 1st process, ABC input 1,000 Kg of raw materials, but the actual output from this process is 800 Kg. The normal loss of this process is estimated @ 10 %.

As you can see normal loss in process = 10 % x 1,000 = 100 Kg

But total loss = 1,000 – 800 = 200 Kg

So, the extra 100 Kg is abnormal loss.

2.ABC produces chemicals for industrial usage. In its 1st process, ABC input 1,000 Kg of raw materials, but the actual output from this process is 920 Kg. The normal loss of this process is estimated @ 10 %.

As you can see normal loss in process = 10 % x 1,000 = 100 Kg

But total loss = 1,000 – 920 = 80 Kg

So, the 20 Kg is abnormal gain.

Specimen Process Account

 Debit Credit Materials Labor Overhead Abnormal gain Normal loss Abnormal loss Transferred out to next Process

In process account, we valued normal loss at Scrap value. Abnormal loss and transferred out units are measured at cost per unit.

Example

Input to the process = 10,000 units introduced in the process costing \$ 50,000

Various process related expenses = \$ 5,000

Direct labor = \$20,000

Unit produced from the Process = 9,000 units

Other direct expenses = \$ 11,000

Normal loss is estimated @ 10 %. Normal loss scrape value is \$ 1.

Solution

Total loss = 10,000 – 9,000 = \$ 1,000

Abnormal loss = total loss – normal loss = 1,000 – 5,000 = \$ 500

Scrap value of normal loss = 500 x 1 = \$ 500

Cost per unit

= {(50,000 + 5,000 + 20,000 + 11,000) – 500} / 10,000 – 500 = 86,000 / 9,500 = 9 per unit

Process Account

 Units Debit Units Credit Materials Labor Overhead Direct expenses Abnormal gain 10,000 50,000 5,000 20,000 11,000 - Normal loss – scrap value Abnormal loss (500x10.47) Transferred out to next Process (9,000 x 9) 500 500 9,000 500 4,500 81,000 86,000 86,000
Contents