(viii) If the half manufactured goods or work in progress is sold during any process then it is shown in the credit of the concerned process account. Hitherto discussion was confined to a situation where actual production of the process was less than production expected as per norms either due to normal factors or due to abnormal factors. process costing suitable for A reverse situation may be experienced, where actual production may happen to be more than the norms of the company permit. By past experience and data available relating to industry, a rate of normal loss is always mentioned with specification of production techniques.
The quantity as well as the values of these losses can be known through the process costing. For example, in case of mud-guard making, the various operations can be tin cutting, bending, colouring, etc. The material, labour and overhead costs accumulated for each operation are transferred to the next operation as in the case of process costing. Process costing can be applied in chemical works, oil refining, food manufacturing, paint works, canning, textiles, paper, dairy, sugar, bakeries, breweries, mining industries, public utility services etc.
- (b) Separate products are produced, but the second product uses some of the first product in its manufacturing operations.
- Amount of scrap value relating to five units will be debited to abnormal gain account and the balance thus arrived at will be transferred to profit and loss account for the year.
- It is assumed that the same amount of materials, labour and overhead is chargeable to each unit processed.
- Here each one of these activities is an operation and it is possible to determine the cost of each operation separately.
The statement showing physical flow of units will also indicate normal or abnormal loss. The waste, rejects and scrap are also accounted for in the same way as in- process costing. Thus, basically there is no difference between process costing and operation costing and the two terms are often used interchangeably.
In process costing system the emphasis is on the period of time and the number of units completed during that period.
Finished products at the end are homogeneous i.e., indistinguishable. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.
Process Costing – By-Products and Joint Products (With Accounting Methods)
(ii) Standard cost method – A standard cost is fixed on the basis of technical assessment for each by-product and credit is given to the process account on this basis. Because of the stability of this method, effective control would be exercised on the cost of the main product. (iii) By-product sales added to the main product sales – In this case all costs incurred on main and by-products are deducted from the combined sales of the main product and by-products.
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Rock City Percussion uses a process cost system because the drumsticks are produced in batches, and it is not economically feasible to trace the direct labor or direct material, like hickory, to a specific drumstick. Therefore, the costs are maintained by each department, rather than by job, as they are in job order costing. In this chapter, you will learn when and why process costing is used. You’ll also learn the concepts of conversion costs and equivalent units of production and how to use these for calculating the unit and total cost of items produced using a process costing system.
Multiply equivalent units by cost per equivalent unit to determine the cost of completed production and work-in-progress. To find cost of production in this method, statements of weighted average production in terms of points and cost for each variety of products should be prepared. When weights or points are considered, the calculation of weighted average process cost becomes easy. Here WIP moves on a first-in-first-out basis, i.e., unfinished work on opening WIP units is first completed before taking up work on any new units.
1: Compare and Contrast Job Order Costing and Process Costing
In certain industries, there arise by-products or joint-products, which require further processing. Further Processing of By-Products – In certain industries, the by-products may require further processing before they can be sold. If the product is processed in more than one process, the output of the first process is transferred to the second process. The output of the first process becomes the input of the second process. The output of second process is transferred to third process and so on.
If actual production of process A happen to be 95 units, will 5 units represent abnormal gain in process A? Abnormal gain represents good units, which should not have been produced if the production in the process had been strictly according to accepted norms. This situation arises when output of the process is more than normal production of that process. (b) Determine the total accumulated cost relating to the process, i.e., cost transferred + cost introduced in the process (material, labour and proportionate share of overhead) – scrap value of normal loss. Abnormal loss refers to the loss which is not inherent to manufacturing operations.
That is, the production and processing of products begin in the Mixing Department. From the Mixing Department, products go to the Baking Department. From the Baking Department, products go to the Packing Department. Each Department inputs direct materials and further processes the products. Then the Packaging Department transfers the products to Finished Goods Inventory. Both systems maintain and use same basic accounts such as – raw materials control account, wages control account, production overhead account and finished stock account.
From the above statement it is clear that element-wise details of cost should be collected and it should be divided by number of equivalent units to arrive at cost per unit for each element. Work done in process is represented by completed units as well as partly finished units. The difficulty experienced in allocating the cost, when work done is expressed both in terms of finished units and unfinished units, can be visualised by comparative study of statements in case A and case B.
Costs are compiled for each process or department by preparing a separate account for each process. When two or more products are produced in the same process, the joint costs are prorated to the various products using some weightage say in terms of points. Giving weightage in terms of points is a subjective decision, which will give rise to approximate costs and cannot be taken as fully reliable. Absence of scientific base makes the process costing inadequate for managerial purposes.
Process costing is used most often when manufacturing a product in batches. Each department or production process or batch process tracks its direct material and direct labor costs as well as the number of units in production. The actual cost to produce each unit through a process costing system varies, but the average result is an adequate determination of the cost for each manufactured unit. The units representing abnormal loss are valued like good units produced up to the stage of manufacture when the units are scrapped and debited to a separate account called abnormal loss account. Hence, the degree of completion of abnormal loss units is first identified and then they are converted into equivalent production units to arrive at the element wise cost. If the abnormal loss units have realisable value, then that value is credited to abnormal loss account.
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