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MODULE | 3, , PROCESS COSTING, JOINT PRODUCTS |, & BY-PRODUCTS, , UNIT -1, PROCESS COSTING, , Process costing is a method of costing. This method is used to ascertain the, cost of a product at each stage of production. There are certain industries in which, one or more products are manufactured in a continuous flow or on mass production, basis. The raw material passes from process to process until the finished product, comes out. Similarly the output of the first process becomes the raw material of the, second process and the output of the second process becomes the raw material of, the third process and so on, until the finished product is obtained., , According to CIMA, England, “Process costing is that form of operation, costing which applies where standardised goods are produced”. This method is, highly useful for cost ascertainment and cost control., , Features of Process Costing, , Process costing is a method of costing used to ascertain the cost of a product, at each process or stage of production. The following are the important features:, 1. Production is continuous and output is uniform., , 2. Each plant of factory is divided into a number of process cost centres or, departments and each such division is a stage of production or a process., , 3. The output of one process becomes the raw material of the next process., 4. Production of a particular product may give rise to Joint Products or By, products., Avoidable and unavoidable losses may arise at a particular stage., , 6. Work in progress and the concept of equivalent units will arise.

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COST ACCOUNT, Thy, 1 it. rn: ING.), , 7. The cost of any particular unit is the averabe oe = A ds ux fae, 8. The finished products are identical units, which req! NE Amount oy, material, labour and overhead pet unit., Process Costing, , rypes of industries W}, , iron and steel, COP, cuits, milk dairy, ete,, , Industries Suitable for, The following are the t, , Metallurgical industries like e, s like chocolates, bis:, hemicals, perfumes, medicines ete,, , tile mills, paper mills, paint ey,, , here process costing is applieg:, , per, manganese, ete,, , 1, , 2 Food processing industrie, , 3. Chemical Industries like oil, soap, ©, 4. Other industries like distillation process, tex’, , Objectives of Process Costing, , The following are the important objectives of pr, , he cost of production of each process., rmal loss, abnormal loss and abnormal gain, , oduction., , ‘ocess costing:, , To ascertain t, 2. To identify and account for no!, occurring during the course of pr, 3. To account for joint products and by products., Difference Between Job Costing and Process Costing, awl Process Costing ], , Production is continuous and the products, being standardised |, |, , Job Costing, , (1) Production is against specific orders, , , , , , Costs are compiled for each process or, department, , Products lose their individual identity. |, , (2) Costs are determined for each job, separately, , (3) Each job is separate and independent, of the other, , (4) Proper control is comparatively, , , , , , Proper control is comparatively easier. |, , , , difficult., (5) Costs are computed when a job is Costs are calculated at the end of eath, complete. process. |, , , , (6) Since every job is to be costed | It involves less paper work., separately when the work is more, , (7) There may or may not be work in | There is always some work in progress i, progress at the beginning or at the | the beginning or at the end., end. ‘, , (8) Joint products or By-products do not | Production may give rise to Joint products, arise in Job works or By-products., , (9) There is no transfer of partly finished | The output of he raW, ; one process becomes the, goods from one job to another. materials of the Be process.

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process, , Advantages of Process Costing, , process costing has the following advantages:, , It is easy to compute the cost of each department or process periodically at, short intervals., , Computation of cost is very simple., , : It is more economical than job costing., , 4, _ Effective control over production can easily be executed., , 5, Expenses can be allocated to process easily and costs become accurate., Disadvantages, , Process costing has the following limitations., 1. Since the process costs are average costs, they are not always accurate., , 2, Costs accumulated at the end of the period are only historical costs and are, not of much use of managerial control., , 3. Computation of average cost becomes more difficult when more than one, type of product is manufactured., , 4. There is lack of precise and commonly accepted criterian for the allocation of, joint costs among different types of products., , ELEMENTS OF PROCESS COSTING, , The factory is divided in to various processes or departments and a separate, account is maintained for each process. The following are the usual cost elements, charged to it:, (1) Direct Materials, , Generally all materials required for production are issued to the first process., After processing, it is passed to the next process and so on. That means the finished, product of the first process will become the raw material of the second process and, the finished product of the second process becomes the raw material of the third, process and so on., , (2) Direct Labour, , Wages paid to labourers who are engaged in a particular process are directly, allocated to the process. If workers are engaged in a number of processes, the wages, paid may be apportioned., , (3) Direct Expenses, , Direct expenses which can be identified with the specific process are directly, allocated to the respective process account.

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¥, , ae ee ee — COST ACC OUNTy,, 112 ", , (4) Overheads, , The proportion of overhead expenses, high in process costing. Great care is require!, with a reasonable share of cost. HOB eet tap, , ; th Di aterial, Direct Labo, , Thus process account is debited with Direct M Ur, Dire, , Expense and Overheads., , PROCESS ACCOUNT, , Under process costing a separate account is kept fo :, account is debited with te aie tne ne labour and overheads relating ¢, the, Process, It is credited with normal loss and the value of by product. The balance, representing the cost of partly finished product, 1s transferred so the NEXt Proces,, till the finished product is produced. The output of one process 1s the input of y,,, next process. Cost per unit it obtained by dividing the total cost of each proces. by, the number of units produced., , i, , in total cost of product is norm,y), ;, , Ch, , d to ensure that each process j, char, , eq, , r each process. The Proc, Ces,, , Process I Account, , , , , , , , , , '. Ptr, Particulars Units | Amount Particulars Units | Amour], z zg, To Direct Material xx XxX By Normal loss xx Teor], To Direct Labour xxx | By Abnormal loss, if any xX Kay, To Direct Expense XXX By Process II a/c xx XK, To Factory overheads xxx | (output transferred to) |, next process (B.F), xx XXX Xx, , , , Process II Account, , , , , , , , , , , , , , , , , , , , , , Particulars Units | Amount Particulars Units Amount,, z ceil, To Process I (cost of xx Xxx By Normal loss xx xxx |, output transferred, from Process I), To Direct Materials xXx, To Direct Labour XXX, To Direct expense By Process III a/c or, To Factory overheads XXX Finished stock a/c xx xxx |, To Abnormal Gain ifany| xx xxx | (BF) |, Xx XXX xx | xe, , , , Illustration 1, , A product has to pass through three processes for, , : completion. During a mont, 1,000 units were produced for which the following w:, , as the expenditure:

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process Costing, , , , , , , , , , , , , , Processes, , I il, , , , , , , , , , , , , . z, , ole 2,500 5,000 | 2,500, abour 12,500 | 10,000 | 7,500, , Direct Expenses 1,250 1,500 2,500, , 113, , dhere was @ common expenditure of % 15,000 which has to be allocated on, the basis of Direct wages, Raw materials worth & 15,000 were issued to process ‘I’., Ignoring the question of stock prepare the Process accounts showing cost per unit, , in each process., , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Solution:, PROCESS ‘I’ ACCOUNT, Particulars Cost per | Amount Particulars Cost per | Amount, unit z unit, To Raw Materials 15.0 15,000 | By Output transferred, To Materials 25 2,500 | to Process ‘II’ a/c 37S 37,500, To Labour 12.5 12,500, To Direct Expenses 1.25 1,250, To Indirect Expenses 6.25 6,250, 35: 37,500 37.5 37,500, PROCESS ‘Il’ ACCOUNT, Particulars Cost per | Amount Particulars Cost per | Amount, unit < unit, To Output transferred By Ouput transferred, from Process ‘I’ a/c B75 37,500 | to Process ‘III’ a/c 59.0 59,000, To Materials 5.0 5,000, To Labour 10.0 10,000, To Direct Expenses Wo. 1,500, To Indirect Expenses 5.0 5,000,, 59.0 59,000 59.0 59,000, PROCESS ‘III’ ACCOUNT, Particulars Cost per | Amount Particulars Cost per Amount |, unit unit, To Output transferred By Output transferred, from Process ‘II’ a/c 59.0 59,000 | to Finished Stock a/c 15.25 1\979,250, To Materials 2,5, 2,500, To Labour a 7,500, To Direct Expenses 25 2,500, To Indirect Expenses 3.75_|__ 3,750, jiea’ Toe) 75,250 15.25 | 75,250