Process Costing

Meaning

Process cost accounts are applied in concerns which produce a commodity that has to go through several processes and which require to know the cost of each process.

Characteristics

The production is continuous and the and product is the result of sequence of processes. The product is homogeneous and units produced are identical and standardized. The sequence of operation for processing the product is specific and predetermined. The finished product of preceding process becomes the raw material for the next process. Costs are collected process wise and the cost of a unit at the end of any manufacturing process can be readily determined.

Industries where process costing is suitable

Industries Chemical Oil Cloth Sugar Iron and steel Medicines Soap Varnish Ghee Food products Flour mills Bottling companies Gas Petroleum items Paper Tyre Paint Rubber Canning plants Breweries Mining of gold Mining of silver Mining of sulpher Other manufacturing units

Objectives

To find out the cost of each process separately. To find out the wastage in each process of production. To find out the value of by-product. To find out the efficiency of each process. To find out the profit or loss of each process.

Merits

It is possible to compute the costs periodically This method is simpler and involves less clerical efforts and expenses as compared to job costing. Managerial control is comparatively easier as the budgeted and actual figures are available for each process. Average costs are computed easily, provided the product is homogeneous

Demerits

It provides an average cost per unit and average cost is not of much use for the purpose of detailed analysis and the evaluation of operating efficiency. Costs are available on a historical basis. They are not of much use for managerial control. At the time of joint products, problem of joint expenses apportionment arises. Average cost are not always accurate because in many cases the units are not fully homogeneous.

Main problems of process accounts

Loss in weight and sale of scrap Valuation of opening and closing stock Finding out quantity of output in different processes Some part of process output transferred to warehouses Normal wastage, abnormal wastage and abnormal effectiveness Valuation of stock of units produced in process Process amounts of oil industry Joint products and by-products Apportionment of joint expenses Transfer of goods to next process in cost plus profit

Main problems of process accounts

Reserve for unrealized profit Work in progress and equivalent production

Thank you..