Chapter - 9 2.

The products are homogeneous

3. It is easy to compute average cot
PROCESS COSTING because the products are
homogeneous in Process Costing.
Process costing is the method of 4. It is possible to ascertain the
costingapplied in the industries where a process
product passes through different stages costs at short intervals.
of manufacture before it becomes a 5. Process Costing is simple and less
finished product expensive in relation to job
According to Kohler, “Process costing is costing.
a method of costing whereby costs are 6. By evaluating the performance of
charged to processes or operations and each process effective managerial
averaged over units produced. control impossible.

According to ICMA terminology, “Process Disadvantages of Process Costing

Costing is that form of operation costing 1. Valuation of work in progress is
which applies where standardized goods difficult.
are produced”. 2. It is not easy to value losses, wastes,
scraps etc.
Characteristics of Process Costing
3. Process costs are only historical.
1. Production is continuous 4. These are not accurate. It’s only an
2. Product passes through different average cost.
processes 5. The apportionment of total cost
3. Products are standardised and among joint products and by-
homogeneous products is difficult.
4. Products are not distinguishable in
processing stage Difference between job costing
5. The finished goods of a process and process costing
become the raw material of the next
processes. The output of last process
is transferred to the finished stock
account.
6. Cost of material, labour and overheads
are collected for each process and
charged accordingly

Advantages of Process Costing

1. The cost of each process can be

easily computed
Procedure of Process Costing Simple Process Account: Under this
(Principles of Process Costing) case it
is very easy to prepare process account.
1. Each process is separately A
identified. Separate process account separate account is opened for each
is opened for each process. process.All costs are debited to the
2. Along with ‘Particulars Column’, process account.The total cost of the
two columns are provided on both process is transferred tothe next
process. At the end of each processthe
sides of the process account – units
cost per unit is obtained by dividing
(quantity) and amount (Rupees). thetotal cost by the number of units
3. All the expenses are debited in the
respective process account.
4. Wastage, sale of scrap, by-products
etc are reordered on the credit side
0f the process account.
5. The difference between debit and
credit side shows the cost of
production and output of that Process losses:
particular process which is 1. Normal process loss: This is the
transferred to the next process. loss which is unavoidable on
account of inherent nature of
6. The cost per unit in every process is
production process. It arises
calculated by dividing the net cost under normal conditions. It is
by the output. usually calculated as a certain
7. The output of last process is percentage of input. Normal
transferred to the Finished Stock process loss includes either waste
Account. or scrap or both. Waste is
8. Incomplete units at the end of the unsalable and has no value. Loss in
weight is an example of waste. Loss
each period ion every process s
in weight should be credited to the
converted in terms of completed concerned process account. It
units. should be recorded only in terms of
quantity.
The preparation of Process Account Loss in weight = Opening Stock +
depends upon the following output from the preceding process –
situations (output of the
1. Simple Process Account Concerned process + closing stock)
2. Process costing with normal
process loss 2. Abnormal Process Loss: Any loss
3. Process costing with abnormal caused by unexpected or abnormal
process loss conditions such as plant break don,
4. Process costing with abnormal substandard materials, carelessness,
processgains accident etc. or loss in exceeds of
the margin anticipated for normal
 process loss can be called as
abnormal process loss. When actual Normal cost of normal output = Total
loss in the process is greater than expenditure– Sale Proceeds of scrap
the estimated normal loss, it is a Normal output = Input – Units of normal
case of abnormal loss. It may also loss
be determined by comparing actual
output with expected or normal Units of Abnormal gain = Normal loss-
output. If actual output is less than Actual loss or = Actual output -
the normal output, the difference is Normal output
abnormal loss.
Value of Abnormal loss = Normal cost
of normal output x Units of Abnormal
loss/
Normal output

Normal cost of normal output = Total

expenditure (i.e., total debit of process
A/c) – SaleProceeds of scrap (i.e.
Value of normal loss)

Normal output = Input – Units of

normal loss

Abnormal Gain (or Abnormal

Effective):
Sometimes actual loss or wastage in a
processis less than expected normal
loss. In this casethe difference between
actual loss andexpected loss is known as
abnormal gainorabnormal effective. It is
the excess of actual production over
normal output. Abnormal gain is valued
in the same manner as abnormal loss. The
value of abnormal gain is debited to
process A/c and credited to abnormal gain
A/c. the value of scrap is debited to
abnormal gain A/.c and credited to normal
loss A/c. finally abnormal loss A/c is
closed by transferring the credit balance to
Costing P&L A/c.

Value of Abnormal Gain = Normal cost of

normal output / Normal output x Units of
Abnormal gain