PROCESS COSTING:

Meaning: Process costing is a method of costing used to ascertain the costs of each process or
operation or stage of manufacture. Process costing can be defined as costing method which
ascertains the cost of a product at the stage of manufacturing. In simple words under process
costing the product of one process becomes the input of next process. Here is the list of the
features of process costing –

 Production under process costing is done through continuous flow of products which are
identical or homogeneous.
 Costs are computed periodically and also average cost can be easily computed under this
method of costing.

 Under this cost data is available process as well as departments thus enabling a better
control over costs by the management
 In process costing sometimes by-products may emerge which have to be further
processed in order to make them marketable and hence accordingly accounting
adjustment needs to be made for such by- products.
 There is always some work in progress under proves costing both at the beginning and at
the end of the accounting period because it is a continuous process.

Advantages of Process Costing:

 Process costing helps determination of cost in each process and of the final product at
short intervals. If overhead rates are predetermined, unit costs can be computed very
promptly even at weekly or monthly.
 The average cost can be easily determined when the methods of production are
standardized. Price quotations can be submitted more promptly with standardization of
processes.
 It involves less clerical work and cost than job costing. Cost finding is simpler and less
expensive.
 Allocation of expenses can be easily made and the costs in each process accurately
determined.
  Use of standard costing system is very effective in process costing.

Limitations of Process Costing:

 Process costing is based on historical cost. The available cost information may not be
useful for future managerial decision-making.
 Unfinished units (work in process) at the end of the period are expressed in equivalent
production units. This introduces subjective element in scientific cost determination.
 The whole concept of process costing system is based on average costs. Average costs do
not always reflect the true costs. If there is an error in cost determination in one process,
it will affect the cost estimation in subsequent processes as well as the cost of work in
process and finished products.

Concept of Process Loss, Normal Loss and Abnormal Loss:

The loss that occurs in the course of converting an input raw material into finished products is
known as process loss. Such a loss may occur because of the nature of the raw materials. This
type of loss occurs in terms of the difference between the input quantity and the output quantity.
The difference between the input quantity and the output quantity arising on account of
production operation is called process loss.

Process Loss = Normal process loss + Abnormal process loss

1. NORMAL PROCESS LOSS: The loss expected or anticipated prior to production is a

normal process loss. It is thus called a standard loss. A provision for such a loss is made
before starting production. Weight losses, shrinkage, evaporation, rusting etc. are the
examples of normal loss. Normal loss increases the cost of production of the usable
goods realized.
2. ABNORMAL PROCESS LOSS: The loss realized over the normal loss is called an
abnormal loss. Abnormal loss arises because of abnormal working conditions, bad
working condition, carelessness, rough handling, lack of proper knowledge, low quality
raw material, machine breakdown, accident etc. Therefore an abnormal loss is an
unanticipated loss. Abnormal loss is a controllable loss and thus can be avoided if
corrective measures are taken. Therefore, abnormal loss is also called an avoidable loss.
 The value of an abnormal loss is assessed on the basis of the production cost with which
the profit and loss account is charged. Value of abnormal loss = (Normal cost of normal
output/Normal output) X Abnormal loss qty.
3. ABNORMAL GAIN: More output over the expected or normal output realized is called
an abnormal gain. Abnormal gain arises because of an abnormal effective in the use of
raw material or efficiency in performance so it is known as abnormal effective. Abnormal
gain reduces the normal loss quantity so it comes in the form of profit to the industry. The
value of an abnormal gain is assessed on the basis of production cost. Value of abnormal
gain = (Normal cost of normal output/Normal output) Abnormal gain qty