59processcosting.docx

59processcosting.docx

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59processcosting

Introduction

Processcostingisamethodofcostingusedtoascertainthecostofproductionofeachprocess,operationorstageofmanufacturewhereprocessesarecarriedinhavingoneormoreofthefollowingfeatures

✓Wheretheproductofoneprocessbecomesthematerialofanotherprocessoroperation

✓Wherethereissimultaneousproductionatoneormoreprocessofdifferentproducts,withorwithoutbyproduct,

✓Where,duringoneormoreprocessesoroperationsofaseries,theproductsormaterialsarenotdistinguishablefromoneanother,asforinstancewhenfinishedproductsdifferfinallyonlyinshapeorform’.

Therearenumberofindustrieswhere:

✓Thefinalproductmergesonlyaftertwoormoreprocesssuchaspaper-therawmaterial,bambooorsabaigrassoranyother,ismadeintopulp;pulpisamadeintopaperandthenitisfinished,glazedetc.forsale;

✓Theproductofoneprocessbecomestherawmaterialofanotherprocessoroperation（forexamplerefinedgroundnutoilisthematerialformakingvegetableghee）and

✓Differentproductsmayhaveacommonpriorprocess（forexample,brassgoodswillrequiremeltingofbrasscommonlyforallgoods）.Anotherexampleispetroleumproductsbythesamerefinery.

Acommonfeatureisthatproductiongoesonwithoutinterruptionandnormally,specialproductionisnotarrangedformeetinganyparticularorder.Inasteelmill,forexample,whenacustomerordersacertainquantity,nospecialarrangementswillbemadeforhim-hisorderwillbeexecutedoutofthequantityproducedingeneral.Thus,100tonnesofsteelsheetsofacertainsizecannotbedistinguishedfromtheremainingquantityofsteelsheetsofthatsizei.e.goodsareproducedwithoutwaitingforanyinstructionsorordersfromcustomersandareputintowarehouseforsale.

Further,often-importantby-productsareproducedautomaticallyattheendofeachprocess.Theseby-productsmayhaveanimportancealmostequaltothatofthemainproduct.

Considerkeroseneoil,dieseloil,napthaandpetrolwhichareallproducedfromthesamecrudeoil,inadditiontohostofsmallerproducts.

InsuchindustriesthemethodofcostaccountingusedusknownasProcessAccounts.itmaybepossibletofindoutthetotalcostwithoutdistinguishingthecostofeachprocessbutitisnotdesirabletodoso.Wastagesandby-productsofdifferentnaturemayriseoutofeachoperationorprocess.Eachprocessislikelytoentaildifferenttypesofexpenses.Itwouldthusbeadvisabletofindoutthecostofeachprocessoroperationseparately.Sometimes,itispossibletoeitherprocessthematerialsourselvesorbuythemreadyforuseinthenextprocess,forinstance,ifonewantstomarketperfumedcastoroil,onecanbuycastorseedandcarryoutallnecessaryperfumeandcolourandbottleitandmarketit.Thedecisionwilldependuponthecostandthepriceprevailinginthemarket.Thisisanotherreasonwhycostofeachprocessshouldbeascertained.

Definition

Inhis“ADictionaryforAccounts”,EricL.KohlerDefinesprocessas:

1.Anyunbrokenseriesofacts,steps,oreventsoranyunchangingpersistingcondition.

2.Hence,thesequenceofoperations

3.Makingupaplanofproduction,asonanassemblyline;andcontinuoussysteminvolvinganunbrokenchainofactivities

4.Andamoreorlesscontinuousoperationonconstant,asdistinguishedfromajobordersystemofproduction.”

ProcesscostingisdefinedbyKohleras:

“Amethodofaccountingwherebycostsarechargedtopprocessesoroperationsandaveragedoverunitsproduced;itisemployedprincipallywhereafinishedproductistheresultofamoreorlesscontinuousoperation,asinpapermills,refineries,canneriesandchemicalplants;distinguishedfromjobcosting,wherecostsareassignedtospecificorders,lotsorunits.

Features/CharacteristicsofProcessCosting

ØProcessCostingMethodisapplicablewheretheoutputresultsfromasequenceofcontinuousorrepetitiveoperationsorprocessesandproductsareidenticalandcannotbesegregated.

ØItenablestheascertainmentofcostoftheproductateachprocessorstageofmanufacture.Thefollowingfeaturesmaybeidentifiedwithprocesscosting:

ØTheoutputconsistsofproducts,whicharehomogenous.

ØProductioniscarriedonindifferentstages（eachofwhichiscalledaprocess）havingacontinuousflow.

ØProductiontakesplacecontinuouslyexceptincaseswheretheplantandmachineryareshutdownformaintenanceetc.Outputisuniformandallunitsareidenticalduringeachprocess.Itwouldnotbepossibletotracetheidentityofanyparticularlotofoutputtoanylotofinput.

ØTheinputwillpassthroughtwoormoreprocessesbeforeittakestheshapeoftheoutput.Theoutputofeachprocessbecomestheinputforthenextprocessuntilthefinalproductisobtained,withthelastprocessgivingthefinalproduct.

ØTheoutputofaprocess（exceptthelast）mayalsobesaleableinwhichcasetheprocessmaygeneratesomeprofit.

ØTheinputofaprocess（exceptthefirst）maybecapableofbeingacquiredfromtheoutsidesources.

ØTheoutputofaprocessistransferredtothenextprocessgenerallyatcosttotheprocess.Itmayalsobetransferredatmarketpricetoenablecheckingefficiencyofoperationsincomparisontothemarketconditions.

ØNormalandabnormallossesmayariseintheprocesses

Elements/ComponentsofCost

Forthepurposeofcostaccounting,theprocessindustryisdividedintoseparatedepartmentswitheachdepartmentrepresentingaspecificprocess.TheDirectMaterialandDirectLabourCostsarecollectedforeachdepartmentseparatelyandtheoverheads,whicharecollectedoverallthedepartments/processes,areapportionedoverthevariousdepartments/processesonsomerationalbasis

Thefollowingarethemainelements/componentsofcostsinvolvedinthemanufacturingprocesswhereprocesscostingisadopted.

DirectMaterials

Therearetwotypesofmaterialsthatwecomeacrossinprocesscosting.

✓PrimaryMaterial

Materialsthatareintroducedintheinitialprocess,whichispassedontothenextprocessaftercompletionofprocessing.

✓SecondaryMaterialMaterials,whichareintroducedinthefirstorsubsequentprocessesinadditionto,themainmaterialintroducedintheinitialprocess.Thisgetsmixedupwiththemainmaterialandispassedontothesubsequentprocessesasapartoftheoutput.

DirectLabour

Thedirectlabourcostisincurredineveryprocess.IdentificationofdirectLabourcostisalsorelativelyeasyinprocesscostingindustry

DirectExpenses

ExpensesinadditiontoDirectMaterialandLabor,whichcanbedirectlyattributabletoaparticularprocess.Thesearecostsrelevanttospecificprocesses.

ProductionOverheads

Theoverheadexpensesaregenerallyexpendedoveralltheprocessesinvolvedinproduction.Thesearetobeapportionedoverthevariousprocessesinanamicablemanner.

MethodologyofRecording/AccountingCosts

FinancialAccountingMethodologyisadoptedforrecordingcostsinvolved.

Anominalaccountrepresentingeachprocessisusedtorecordallthecostsrelevanttoaprocess.Theyarenamed"ProcessIa/c","ProcessAa/c","RefiningProcessAa/c",etc.,Numbers,Alphabetsoranywordorphraserepresentingtheprocessareusedassuffixes/prefixestodistinguishtheprocessesfromoneanother.

Stocksrelevanttoaprocessaremaintainedinaseparatestockaccount.

Wheretheoutputrelevanttoaprocessissoldapartfrombeingtransferredtothenextprocess,itgeneratesrevenue.Theserevenuesrelevanttoaprocess,aregenerallyrecordedusingtheprocessaccountorthestockaccount.

Eachprocessaccountis

Debitedwith

ThePrimaryDirectMaterialCost,SecondaryDirectMaterialCost,DirectLaborCost,DirectExpensesandproportionofProductionOverheadsapportionedtotheprocess.

Creditedwith

Thevalueofoutputtransferredtothesubsequentprocessorfinishedstocks.

Dr

ProcessIa/c

Cr

Particulars

Quantity

（inUnits）

Amount

（inRs）

Particulars

Quantity

（inUnits）

Amount

（inRs）

ToDirectMaterial

ToOtherMaterial

ToDirectLabour/Labor

ToProductionOverheads

10,000

4,00,000

50,000

1,20,000

54,000

ByProcessIIa/c

10,000

6,24,000

6,24,000

6,24,000

Thisisthesimplestformoftheprocessaccountthatwesee.Thereismoretoprocesscostingthanpreparingthissimpleledgeraccount.

Tohaveabetterunderstandingofthevarioustermsthatwecomeacrossinprocesscostingletuslearnusinganexample.Aproductisfinallyobtainedafteritpassesthroughthreedistinctprocesses.Thefollowinginformationisavailablefromthecostrecords.

ProcessI

Rs.

ProcessII

Rs.

ProcessIII

Rs.

Total

Rs.

Materials

DirectWages

ProductionOverheads

2,600

2,250

2,000

3,680

1,025

1,400

5,625

7,330

7,330

500units@Rs.4perunitwereintroducedinprocessI.Productionoverheadsareabsorbedasapercentageofdirectwages.

Theactualoutputandnormallossoftherespectiveprocessesaregivenbelow:

Output

（Units）

Normalloss

asapercentage

ofinput

Valueofscrap

（perunit）

ProcessI

ProcessII

ProcessIII

450

340

270

10%

20%

25%

Rs.2

Rs.4

Rs.5

Preparetheprocessaccountsandtheotherrelevantaccounts.

PreparationofProcessIa/cDirectMaterialandLabourCosts

Thereisaprimarymaterialinputintotheprocesstotheextentof500unitscostingRs.4peruniti.e.atatotalcostofRs.2,000（500units×Rs.4/unit）.InadditiontothisthereisasecondaryDirectMaterialinputintotheprocess,whichcostRs.2,600,andDirectLabourCostsareincur