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