Process Costing

Meaning -Process costing is a method of costing under which all costs are
accumulated for each stage of production or process, and the cost per unit of
product is ascertained at each stage of production.

Features of Process Costing:

(a) The production is continuous
(b) The product is homogeneous
(d) Output of one process become raw material of another process
(e) The output of the last process is transferred to finished stock
(f) Costs are collected process-wise
(g) Both direct and indirect costs are accumulated in each process

In which industries process costing is applied

(a) Paper industries (b) oil refining industries (c) chemicals industries
(d) Textiles industries (e) Sugar industries (f) food processing (g)
paint manufacture

Advantages of process costing:

1. Costs are be computed periodically at the end of a particular period
2. It is easy to allocate the expenses to processes in order to have accurate
costs.
3. Process costing helps in preparation of tender, quotations
4. Since cost data is available for each process, operation and department, good
managerial control is possible.
Process of Process costing
Process C a/c Finished goods a/c
Process A a/c Process B a/c
Dr. Cr. Dr. Cr
Dr. Cr. Dr. Cr.

Input Output Inpu Output

Input output
t

Items on the Debit side of Process A/c.

a) Cost of materials used in that process. b) Cost of labour incurred in that
process. c) Direct expenses incurred in that process. d) Overheads charged to
that process on some pre determined. e) Cost of abnormal gain (if any arises in
that process)
Items on the Credit side
a) Output transfer to the next process
b) Scrap value of Normal Loss (if any) occurs in that process.
c) Cost of Abnormal Loss (if any occurs in that process)

Process Losses and Wastages

In industries which employ process costing, a certain amount of loss occurs at
various stages of production. Process losses may be classified into
(a) Normal loss (b) abnormal loss

(a) Normal loss

That amount of loss which cannot be avoided, it is quite expected under normal
conditions. It can be estimated in advance on the basis of past experience of the
industry. It may be in form of normal waste, normal scrap, normal spoilage,
 (b) Abnormal loss
An avoidable loss which occurs due to abnormal reasons, like- sub standard
materials, carelessness of workers, machinery breakdown and unplanned
operations. Abnormal losses arise when actual losses are more than
expected losses
Total no of units 1000
Normal loss expected = 100, Total no. of units for losses/ Actual loss = 150,
Abnormal loss = 150 – 100 = 50 units

Calculation of value of abnormal loss=

total cost incurred- scrap value of normal loss/ units introduced- units of
normal loss x units of abnormal loss

Abnormal Gain (abnormal effectiveness)

If actual loss is greater than normal loss, it is known as abnormal loss, But
when actual losses are less than the expected normal losses, a gain is obtained
which is termed as abnormal gain.
Calculation of value of abnormal gain= total cost incurred- scrap value of
normal loss/ units introduced- units of normal loss x units of abnormal gain

By-product:
A secondary product obtained during the course of manufacture, having a
relatively small importance as compared with that of the main product 

Any product that is the incidental result of the process of production is called a by-
product. Derived from pre-existing material used to manufacture the main
products, a by-product has a lower net realizable value as compared to the sale
value of main product.

Suppose that a company uses sugarcane to produce sugar, then sugar is the main
product and molasses used to make paper and alcohol is a by-product of the
process.

When the process begins to crush sugarcane so as to derive the juice to process, the
crushed waste is simply of no value to the sugar mill. Hence, this is sold off to
paper mills and alcohol distillery at scrap value without further processing

Example-
Industry Main Product By product
Rice mill Rice Husk
Sugar Sugar Molasses
Cotton textile Cotton Cotton seed

Difference between Joint product and By- Product

Joint Product By product

They are of almost equal value They are of relatively small value

These are produced simultaneously These emerge incidentally in the course

of manufacturing the main product

Q.1: (Without Normal/Abnormal losses)

Ans: 5000: 4000: 5,000 = 14,000

P1= 5,000/ 14,000 X 2,800 = 1,000, P2= 4,000/14,000 X 2800= 800, P3=
5,000/14,000 X 2800 = 1,000

Process 1 Account

Output 1,000 units

Particulars Per unit Total (Rs.) Particulars Per unit Total

(Rs) (Rs.) (Rs.)

To Materials 6 6000 BY output 13 13000

transferred to
To Labour 5 5000
P-2
To Direct Expenses 1 1,000

To indirect expenses 1 1000

TOTAL 13 13,000 13 13,000

 Process 2 Account

Output 1,000 units

Particulars Per unit Total (Rs.) Particulars Per unit Total (Rs.)
(Rs) (Rs.)

To process 1 ( Transfer) 13 13000 By output 21 21,000

Transferred to
To materials
Process-3
To labour 3 3000

To DE 4 4,000

To IE 0.20 200

Total 0.80 800

21.00 21,000 21 21,000

Process 3 Account

Output 1,000 units

Particulars Per unit (Rs) Total (Rs.) Particulars Per unit Total (Rs.)
(Rs.)

To process 2 21 21,000 By output 30 30,000

(Transfer) transferred to
Finished goods a/c
To materials
2 2000
To labour
5 5,000
To DE
1 1000
To IE
1 1000
Total
30 30,000 30 30,000
 Finished stock account

Particulars unit Total (Rs.) Particulars unit Total (Rs.)

To process 3 1,000 30,000

Q.2: Prepare a Process Account, from the following information.

Input of Raw material 1000 units @ Rs. 6 per unit, Direct Material Rs. 5,200,
Direct Wages Rs. 4,000, Production Overheads Rs. 4,000, Actual output
transferred to process II - 950 units, Normal Loss 5%, Value of Scrap per unit Rs.
4.

1000@5% = 50 units, Process 1 Account

Particulars units Total Particulars units Total

(Rs.) (Rs.)

To units introduces 1000 6,000 By normal loss 5% 50 200 ( 50X

@6 of 1,000 4)
5,200
To direct material By process II 19,000
4,000 950
account ( 950
To direct wages
4,000 units@ Rs. 20)
To production cost 19,200
1,000 19,200 1,000
Total
Q.3: Prepare a Process Account, from the following information.

Input of Raw material 950 units @ Rs. 20 per unit, Direct Material Rs. 3,960,
Direct Wages Rs. 6,000, Production Overheads Rs. 6,000, Actual output
transferred to process II - 840 units, Normal Loss 10%, Value of Scrap per unit
Rs. 8.

950 – 840 = 110 units, only 95 units normal loss, 110 -95 normal loss units =
15

Normal loss units= 95 units, Value of normal loss = 95 x 8 = 760

950 (input) – 95 (normal loss) = 855 units, units transferred to next process=
840,

Process 1 Account

Particulars units Total Particulars units Total

(Rs.) (Rs.)

To units introduces 950 19000 By normal loss 10% 95 760

@20 of 950

To direct material By abnormal loss

3,960 15 600
To direct wages By process II account
6,000 840 33,600
To production cost
6,000
Total
950 34,960 950 34,960
 total cost incurred- scrap value of normal loss/ units introduced- units of
normal loss x units of abnormal loss

Value of abnormal loss= 34,960- 760/ 950- 95 = 40 x 15 = 600

Q.4: A product passes through three processes A, B and C. the normal wastage of
each process is as follows: Process A – 3%, B- 5%, C-8%. Scrap value of process
A -25 p. per unit, Process B- at 50 p. per unit and that of process C at Rs. 1 per
unit.

1000 units were issued to process A in the beginning of October 2019, at a cost of
Rs. 1 per unit. The other expenses were as follows:

Process-A Process-B Process-C

Materials Rs. 1,000 Rs. 1,500 Rs. 500

Labour 5,000 8,000 6,500

Direct expenses 1050 1188 2009

Actual output 9,500 units 9,100 units 8,100 units

Prepare the process accounts

 Process A Account

Particulars units Total Particulars units Total

(Rs.) (Rs.)

To units introduces 10,000 10,000 By normal loss 3% 300 75

of 10,000
To direct material 1,000
By abnormal loss
To direct wages 5,000 200 350
By process B
To direct expenses 1050 9500 16,625
transfer
Total 10,000 17,050 10,000 17,050

Value of abnormal loss= 17050-75/10,000-300 x 200 units= 350

Process B Account

Particulars units Total Particulars units Total

(Rs.) (Rs.)

To Process A 9500 16,625 By normal loss 5 % 475 238

of 9500
To direct material 1,500 9,100 27,300
By process C
To direct wages 8,000
transfer
To direct expenses 1118

Abnormal gain 75 225

Total 9,575 27,538 9,575 27,538

Value of abnormal gain= 27313 -238/9500-475 x 75 = 225

 Process C Account

Particulars units Total Particulars units Total

(Rs.) (Rs.)

To Process B transfer 9,100 27300 By normal loss 8% 728 728

of 9,100
To direct material 500
By abnormal loss
To direct wages 6,500 272 1156
By finished goods
To direct expenses 2009 8,100 34,425
transfer
Total 9100 36,309 9100 36,309

Value of abnormal loss= 36,309-728/9,100-728 x 272 units= 1,156

Q.5: The product of a company passes through 3 distinct process. The following information is
obtained from the accounts for the month ending January 31, 2018.

Particulars- Process – A Process – B Process – C

Direct Material- Process A = 2600 Process B= 1980 Process C= 2962. Direct

Wages 2000, 3000, 4000 respectively. Production Overheads- 2000, 3000, 4000
respectively.

1000 units @ Rs. 3 each were introduced to process – I. The output of each process
passes directly to the next process and finally to finished stock A/c.

The following additional data is obtained:

Process A Output -950 units, Normal Loss 5 % scrap per unit 2, Process – B
Output- 840 units, Normal loss 10 % scrap per unit. 4, Process C- 750, Normal
loss 15 % Scrap per unit. 5
Prepare Process Cost Account,