Process Costing

Process Costing


1.         Compare Process Costing with Job Costing.


Answer:  Job costing and process costing are the two methods of cost accounting.  Job costing is applied  where production is carried out under specific orders, depending upon customers requirement.  Here each job is considered as a cost unit and to some extent the cost centre also.


Process costing is applied in cases where the identity of individual orders is lost in the general flow of production.  Industries to which process costing is applied produce uniform products without reference to the specific requirements of customers.


The main points of comparison between job costing and process costing are as follows :


i.    Job costing is applicable to goods produced/manufactured to customers specifications.  However, process costing is applicable to production consisting of succession of continuous operations or processes.


ii.    Costs are accumulated by a job or work order irrespective of its time of completion under job costing.  When a job is finished all costs associated with it are charged to it in full.  Whereas under process costing costs are accumulated by processes for a particular period regardless of the number of units produced.


            iii.   Each job will be different from the other under job costing whereas in the case of process costing units of product are homogenous and indistinguishable, because goods are produced an a mass scale.


iv.  Job is normally a single unit, the whole unit is taken as one  for costing purposes.  Even if job consists of number of parts, cost of job is calculated only after all the parts, are complete.  As such there is no question of work-in-progress merely because some parts are not yet completed.  In the case of process costing, the unit of production may remain incomplete at various stages of production.  It is therefore necessary to compute at the end of the period not only the cost of the finished units but of work in progress also.


v.   Job costing does not involve transfer of costs from one job to another.  Where as in the case of process costing transfer of output from one process to another involves the transfer of its costs as well.


vi.  Job costs are ascertained only after the completion of job and not at the end of a particular period.  Whereas in the case of process costing costs are ascertained at the end of the accounting period and not when the process is complete, since production is a continuous flow constituting itself into cycle.


vii.  Since each job may be different from other therefore they will not involved the use of identical material and labour, costs of jobs cannot be ascertained by averaging.  In the case of process costing since units f production are uniform and are at the same stage of production therefore, costs are computed by averaging the total cost of each stage of production.


viii. Control becomes difficult in the case of job costing because each job is different from the other.  Whereas control over production and costs is easier in the case of process costing since production is a standardised one.



2.         Explain normal wastage, abnormal wastage and abnormal gain and state, how they should be dealt within process Cost Accounts.


Answer:  Normal wastage:  It is defined as the loss of material which is inherent in the nature of work.  Such wastage can be estimated in advance on the basis of past experience or technical specifications.  If the wastage is  within the specified limit, it is considered as normal.  Suppose a company states that the normal wastage in Process A will be 5% of input.  In such a case wastage up to 5% of input will be considered as normal wastage of the process.


When the wastage fetches no value, the cost of normal wastage is absorbed by good production units of the process and the cost per unit of good production is increased accordingly.  If the normal wastage realises some value, the value is credited to the process account to arrive  at normal cost of normal output.


Abnormal wastage : It is defined as the wastage which is not inherent to manufacturing operations.  This type of wastage may occur due to the carelessness of workers, a bad plant, design etc.  Such a wastage cannot be estimated in advance.


The units representing abnormal wastage are valued like good units produced and debited  to the separate account which is known as abnormal wastage account.  If the abnormal wastage fetches some value, the same is credited to abnormal wastage account.  The balance of abnormal wastage account i.e. difference between value of units representing abnormal wastage minus realisation value is transferred to Costing profit and loss account for the year.


Abnormal gains:  It is defined as unexpected gain in production under conditions.  In other words, if the actual process waste is less than the estimated normal waste, the difference  is considered as abnormal gain. 


Suppose, a Company states that 10% of its input will be normal loss of process A.  If input of this company is 100 units then its normal should be 90 units.  If actual output is 95 units, then 5 units will represent its abnormal gain.  These units which represents abnormal gain are valued like normal output of the process.  The concerned process account is debited with the quantity and value of abnormal gain.  The abnormal gain account is credited with the figure of abnormal gain amount.


Abnormal gain being the result of actual wastage or loss being less than the normal.  The scrap realisation shown against normal wastage gets reduced by the scrap value of abnormal gain.  Consequently, there is an apparent loss by  way of reduction in the scrap realisation attributable to abnormal effective.  This loss is set off against abnormal effective by debiting the account.  The balance of this account becomes abnormal gain and is transferred to costing profit and loss account.


3.         “ The value of scrap generated in a process should be credited to the process account. “  Do you agree with this statement ?  give reason.


Answer: This statement is not correct.  The value of scrap (as normal loss) received from its sale is credited to the process account.  But the value of scrap received from its sale under abnormal conditions should be credited to Abnormal Loss Account.


4.         Equivalent Production :


In arriving at the cost of finished output of each process in a system of process costing, normally there exists opening work a progress as well as closing work in progress. The degree of completion of opening work in progress is not the same as the degree of completion of the work in progress at the end of the period. In order to arrive at the overall cost of production opening work in progress as well as the work in progress at the end of the period will have to be expressed in terms of common units.


For this purpose the concept of equivalent or effective production comes into picture. Equivalent or effective production represents production in terms of completed units. For example in a process where one thousand units are introduced during a month out of which 200 units remain as work in process at the end of the period which is complete to the extent of 40% only, the equivalent production at the end of the period would as follows :-


                        Units fully completed              800

                        200 units 40% complete           80

                        Total Equivalent Production   880


If the total cost of the process is 1760 than the per unit cost of completed production will be Rs. 2 and the value of closing stock of 200 units (40% complete) will be Rs. 160.


In a large number of cases the opening and closing work in progress may remain at different stages of completion as regards material, labour and overheads. In such cases equivalent production will have to be arrived at for each element of cost separately.


Process costing is a method of costing applicable to those industries where production follows a continuous flow i.e. goods are transferred from one process to another for e.g. Chemical industry or oil refinery etc


In each process there are some input and the final product is known as output. Any loss during the process of manufacturing is known as


Normal loss i.e. within the expected unit and it is generally calculated on total input or throughput (opening + introduction  - closing)


Any loss beyond the expected limit is known as abnormal loss.

Abnormal gain arises when the actual loss is less than the normal expected loss. It appears on the debit side.


5.            What is operation costing ?


                It is  refinement of process costing. It is concerned with the determination of cost of each operation. It is used those industries where a process consist of distinct operation. It is concerned with the determination of cost of each operation rather than process. It offers scope for computation of unit operation cost at the end of each operation by dividing the total operation cost by total output of units.



Every process A/C is debited with the costs incurred and credited buy the losses, transfer, sale & closing stock. Both sides will tally unless the transfer is made at a profit (known as inter profit transfer)


    Dr                                                                            Process  ---- A/C                                                Cr.

                                   Units        Rate            Amt.

                              Units        Rate         Amt.

To Opening Stock

To Transfer

To Introduce

To Conv. Cost

To Abnormal gain

By Normal loss

By Transfer

By Abnormal Loss

By Closing Stock


          How to value abnormal gain or abnormal loss or transfer to other process.


Rate   per unit           

                        = Total Input cost-Scrap value of normal loss & By product                        

                           Total units introduced-Normal loss units.& by-product units


          For re-cycle material , the issue rate is the weighted average rate of the virgin materials.


          Journals for loss  & gains


                       1.         Abnormal gains A/c ---------------------------Dr

            To Normal loss A/c

Abnormal gain unit’s  are out of normal loss


2.         Rest of the normal loss units is sold off at their corresponding scrap value

     Cost ledger control A/c (i.e. cash)--------Dr

     Or general ledger adjustment A/c---------Dr

     To Normal loss A/c


            Abnormal units are sold out as scrap & difference of  this account is transferred to  P& L ac


            Difference of Abnormal Gain ac is transferred to P&L ac.


      Valuation of Work-in-process:

The valuation of work-in-process can be made in the fo0llowing three ways, depending upon the assumptions made regarding the flow of costs:


-        First-in-first out (FIFO) Method

-        Last-in-first out (LIFO) Method

                                       -        Average cost method


A brief account of the procedure followed for the valuation of work-in-process under the above three methods is as follows:


FIFO method: According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.


The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period.,  The closing inventory of work-in-;process is valued at its current cost


LIFO method: According to this method units last entering the process are to be completed first.  The completed units will be shown at their current cost and the closing-work-in-progress along with current cost of work in progress if any.

Average cost method: According to this method opening inventory of work-in-process and Its costs are merged with the production and cost of the current period, respectively.  An average cost per uniyts is determined by dividing the total cost by the total equivalent units, to ascertain the value of the units completed and units in process.

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