In this article we will discuss about:- 1. Definition of Process Costing 2. Features of Process Costing 3. Process Losses and Gains.
Definition of Process Costing:
CIMA defines Process Costing as “the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes, costs are averaged over the units produced during the period.”
Process Costing is used where the production moves from one process or department to the next until its final completion and there is a continuous mass production of identical units through a series of processing operations. It is applied for various industries like chemicals and drugs, oil refining, food processing, paints and varnish, plastics, soaps, textiles, paper etc.
Process Costing method may also be adopted in firms that produce a variety of products, provided that the overall production process can be broken down into sub-operations of a continuous repetitive nature like automobile, toy, plastics etc.
Features of Process Costing:
The distinctive features of Process Costing are as follows:
(a) The process cost centres are clearly defined and all costs relating to each process cost centre are accumulated.
(b) The cost and stock records for each process cost centre are maintained accurately. The records give clear picture of the units introduced in the process or received from the preceding process cost centre and also units passed to the next process.
(c) The total costs of each process are averaged over the total production of that process, including partly completed units.
(d) The charging of the cost of the output of one process as the raw materials input cost of the following process.
(e) Appropriate method is used in absorption of overheads to the process cost centres.
(f) The process loss may arise due to wastage, spoilage, evaporation etc.
(g) Since the production is continuous in nature, there will be closing work-in-progress which must be valued separately.
(h) The output from the process may be a single product, but there may also be by-products and/or joint products.
Process Losses and Gains:
It is usual that a certain amount of material introduced into the processes are lost, scrapped or wasted. There are many ways in which losses may arise e.g., evaporation, shrinkage, breakages, spoilage for various reasons.
The process loss can be categorized into:
(1) Normal process loss, and
(2) Abnormal process loss.
1. Normal Loss:
The loss expected during the normal course of operations, for unavoidable reasons is called ‘normal loss’ and this is due to inherent result of the particular process and thus uncontrollable in the short-run. Management usually able to identify an average percentage of normal losses expected to arise from the production process.
For example, 100 kgs. introduced into the production process and on an average 95 kgs. comes out after the process, we can say that the normal process loss is 5%. The normal losses are absorbed by the completed production.
The cost of normal losses should be borne by the good production. If any value can be recouped from sale of scrap or wastage or spoilage etc., then this would be credited to the Process Account thus reducing the overall cost of the process.
2. Abnormal Loss:
Abnormal losses are those losses above the level deemed to be the normal loss rate for the process. The abnormal loss is the amount by which the actual loss exceeds the normal loss and it is expected to arise under inefficient operating conditions.
For example, if 100 kgs. of material introduced into the process and the expected normal loss is 5%, and if the actual output from the process is 92 kgs. the abnormal loss is calculated as below:
The abnormal losses are not included in the process costs but are removed from the appropriate Process Account and reported separately as an abnormal loss. The abnormal loss is treated as a period cost and written off to the Profit and Loss Account at the end of the period.
Abnormal losses are credited out of the Process Account into an abnormal loss account at the full unit cost value. Abnormal losses will be costed on the same basis as good production and therefore, like good production, will carry a share of cost of normal losses.
If the loss is less than the normal expected loss, the difference is considered as abnormal gain. Abnormal gain is accounted similar to that abnormal loss.
Abnormal gains will be debited to the Process Account and credited to Abnormal Gain Account. The Abnormal Gain Account is debited with the figure of reduced normal loss in quantity and value. At the end of the accounting year the balance in the Abnormal Gain Account will be carried to Profit and Loss Account.
Value of Scrap:
The value of scrap, treated as normal loss, received from its sale is credited to the Process A/c. But the value of scrap received from its sale under abnormal conditions should be credited to Abnormal Loss A/c.
The product of a company passes through three distinct processes to completion. From past experience, it is ascertained that normal wastage in each process is as under:
4,000 units were initially introduced in process A at a cost of Rs. 13,560. The output of each process was as under: