Process Costing | Cost Accounting - B Com PDF Download

 Page 1


 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 INTRODUCTION
Job and contract costing methods about which you learnt in Unit 12, are 
used for ascertaining the costs of specific job orders involving special orders 
and individual specifications. These are not considered suitablefor industries 
involving mass production such as chemical plant, paper manufacturing, 
flour mill, cement works, textile mill, etc. Depending upon the nature of 
their product and the production processes involved, the organisations 
engaged in such industries generally use unit costing method or process 
costing method. You have learnt about unit costing method in Unit 10. In 
this unit you will learn about the process costing method under which the 
cost of a product can be ascertained at each stage of production. 
Process	Costing
Page 2


 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 INTRODUCTION
Job and contract costing methods about which you learnt in Unit 12, are 
used for ascertaining the costs of specific job orders involving special orders 
and individual specifications. These are not considered suitablefor industries 
involving mass production such as chemical plant, paper manufacturing, 
flour mill, cement works, textile mill, etc. Depending upon the nature of 
their product and the production processes involved, the organisations 
engaged in such industries generally use unit costing method or process 
costing method. You have learnt about unit costing method in Unit 10. In 
this unit you will learn about the process costing method under which the 
cost of a product can be ascertained at each stage of production. 
Process	Costing
 MEANING AND APPLICATION
Process costing refers to a method of ascertaining the cost of product at 
each stage or process of manufacture where a product passes through 
different consecutive processes of production, each distinct and well 
defined. As a matter of fact, almost every product passes through a series of 
manufacturing operations before it takes the shape of a final product. But, 
in most cases, the operations involved are small and the costs incurred on 
each operation form an insignificant portion of the total cost. Hence, it is 
not considered worthwhile to compute the cost of each operation separately 
and so the process costing is not considered useful. Process costing is 
suitable only where the final product is the result of a series of such 
process that the output of one process passes on as a raw material to 
the next process and may otherwise be saleable as a finished product 
in the market. Take the case of a cotton textile mill, for example where 
production of cloth involves three distinct sequential processes viz., the 
spinning process, the weaving process and the finishing process. The output 
of spinning process (yarn) is passed on as a raw material to the weaving 
process. It can also be sold in the market, if the mill has some surplus. 
Similarly, the output of weaving process (coarse cloth) is passed on to 
the finishing process as a raw material and, if there is surplus, it can be 
sold to other textile mills. For a textile mill, therefore, it will be useful to 
compute the costs of spinning, weaving and finishing processes separately 
and ascertain the cost of yarn, coarse cloth and finished cloth. This will 
also enable them to compare their costs with the market prices thereof.  
Thus, the industries to which process costing can be usefully applied, may 
normally have the following features: 
1)  The production is continuous and passes through a number of 
consecutive operations or processes. 
2)  The output of one process becomes the input for the next process till 
final product is obtained. 
3)  The products are standardised and homogenous. 
4)  The output of each process may be saleable in the market. 
5)  The processing of raw material may give rise to the production of 
joint and/or by-products. 
Hence, process costing is usually employed by the following industries: 
Chemical works Distillaries Textile mills Sugar works
Soap-making Paper mills Food processing Paint manufacturing
Breweries Oil refineries Canning factories Milk dairy
 DIFFERENCE BETWEEN JOB COSTING AND 
PROCESS COSTING
The distinction between job and process costing arises mainly from the 
distinctive nature of the manufacturing systems to which they are applicable. 
The main points of difference can be summarised as follows: 
Page 3


 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 INTRODUCTION
Job and contract costing methods about which you learnt in Unit 12, are 
used for ascertaining the costs of specific job orders involving special orders 
and individual specifications. These are not considered suitablefor industries 
involving mass production such as chemical plant, paper manufacturing, 
flour mill, cement works, textile mill, etc. Depending upon the nature of 
their product and the production processes involved, the organisations 
engaged in such industries generally use unit costing method or process 
costing method. You have learnt about unit costing method in Unit 10. In 
this unit you will learn about the process costing method under which the 
cost of a product can be ascertained at each stage of production. 
Process	Costing
 MEANING AND APPLICATION
Process costing refers to a method of ascertaining the cost of product at 
each stage or process of manufacture where a product passes through 
different consecutive processes of production, each distinct and well 
defined. As a matter of fact, almost every product passes through a series of 
manufacturing operations before it takes the shape of a final product. But, 
in most cases, the operations involved are small and the costs incurred on 
each operation form an insignificant portion of the total cost. Hence, it is 
not considered worthwhile to compute the cost of each operation separately 
and so the process costing is not considered useful. Process costing is 
suitable only where the final product is the result of a series of such 
process that the output of one process passes on as a raw material to 
the next process and may otherwise be saleable as a finished product 
in the market. Take the case of a cotton textile mill, for example where 
production of cloth involves three distinct sequential processes viz., the 
spinning process, the weaving process and the finishing process. The output 
of spinning process (yarn) is passed on as a raw material to the weaving 
process. It can also be sold in the market, if the mill has some surplus. 
Similarly, the output of weaving process (coarse cloth) is passed on to 
the finishing process as a raw material and, if there is surplus, it can be 
sold to other textile mills. For a textile mill, therefore, it will be useful to 
compute the costs of spinning, weaving and finishing processes separately 
and ascertain the cost of yarn, coarse cloth and finished cloth. This will 
also enable them to compare their costs with the market prices thereof.  
Thus, the industries to which process costing can be usefully applied, may 
normally have the following features: 
1)  The production is continuous and passes through a number of 
consecutive operations or processes. 
2)  The output of one process becomes the input for the next process till 
final product is obtained. 
3)  The products are standardised and homogenous. 
4)  The output of each process may be saleable in the market. 
5)  The processing of raw material may give rise to the production of 
joint and/or by-products. 
Hence, process costing is usually employed by the following industries: 
Chemical works Distillaries Textile mills Sugar works
Soap-making Paper mills Food processing Paint manufacturing
Breweries Oil refineries Canning factories Milk dairy
 DIFFERENCE BETWEEN JOB COSTING AND 
PROCESS COSTING
The distinction between job and process costing arises mainly from the 
distinctive nature of the manufacturing systems to which they are applicable. 
The main points of difference can be summarised as follows: 
JOB COSTING PROCESS COSTING
1) Job costing measures 
product coats in industries 
where production is 
intermittant and against 
specific orders from 
customers.
1) Process costing is used in 
industries where production is 
continuous and is meant for stock 
and sale. 
2) Costs are collected and 
analysed by individual jobs 
or work orders regardless of 
the time taken to complete 
them.
2) Costs are accumulated and 
analysed by departments or 
processes on a time basis.
3) The job cost s a terminal 
cost. The accumulation of 
costs in respect of a job is 
stopped when the job is 
completed and disposed off. 
3) Process cost is a period cost. 
Under process costing system, 
costs are computed at the end of 
each specified period.
4) The cost of each job order 
or unit of production can be 
separately identified without 
averaging the total cost of 
production.
4) The unit cost of a process 
represents on average cost for the 
period, obtained after adjustment 
of work-in-progress.
5) There are usually no 
transfers from one job to 
another except in case of 
surplus material. 
5) Costs are transferred from one 
process to another process till 
completion.
6) There may or may not be 
any work-in-progress at 
the end of an accounting 
period. However, the value 
of uncompleted job is easy 
to obtain. 
6) There is always some work-in-
progress at the beginning as well 
as at the end of the period. This 
presents the knotty problem of 
valuation of work-in-progress.  
7) Proper control requires 
greater supervision due to 
discrete nature of the Job.
7) Control of process activities 
is comparatively easy because 
production is more stable and 
standardised.
8) Job costing is applied in any 
situation where “one-off” 
orders are being executed. 
For example, machine-tools, 
general-engineering printing, 
motor-car repairs, etc. 
8) Process costing is applied 
under conditions of continuous 
production, sequential processing 
and uniform outputs. For 
example: cement, chemical 
products, bottling and canning, 
oil refining, soap making, etc
 MAIN CHARACTERISTICS
1)  Process costing applies to industries where production is continuous 
and passes through a series of processes, each distinct and well-defined. 
2)  All costs (material, labour and overheads) are accumulated and 
classified by processes. 
3)  An account is maintained for each process to which all direct and 
indirect costs are allocated or apportioned. 
Page 4


 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 INTRODUCTION
Job and contract costing methods about which you learnt in Unit 12, are 
used for ascertaining the costs of specific job orders involving special orders 
and individual specifications. These are not considered suitablefor industries 
involving mass production such as chemical plant, paper manufacturing, 
flour mill, cement works, textile mill, etc. Depending upon the nature of 
their product and the production processes involved, the organisations 
engaged in such industries generally use unit costing method or process 
costing method. You have learnt about unit costing method in Unit 10. In 
this unit you will learn about the process costing method under which the 
cost of a product can be ascertained at each stage of production. 
Process	Costing
 MEANING AND APPLICATION
Process costing refers to a method of ascertaining the cost of product at 
each stage or process of manufacture where a product passes through 
different consecutive processes of production, each distinct and well 
defined. As a matter of fact, almost every product passes through a series of 
manufacturing operations before it takes the shape of a final product. But, 
in most cases, the operations involved are small and the costs incurred on 
each operation form an insignificant portion of the total cost. Hence, it is 
not considered worthwhile to compute the cost of each operation separately 
and so the process costing is not considered useful. Process costing is 
suitable only where the final product is the result of a series of such 
process that the output of one process passes on as a raw material to 
the next process and may otherwise be saleable as a finished product 
in the market. Take the case of a cotton textile mill, for example where 
production of cloth involves three distinct sequential processes viz., the 
spinning process, the weaving process and the finishing process. The output 
of spinning process (yarn) is passed on as a raw material to the weaving 
process. It can also be sold in the market, if the mill has some surplus. 
Similarly, the output of weaving process (coarse cloth) is passed on to 
the finishing process as a raw material and, if there is surplus, it can be 
sold to other textile mills. For a textile mill, therefore, it will be useful to 
compute the costs of spinning, weaving and finishing processes separately 
and ascertain the cost of yarn, coarse cloth and finished cloth. This will 
also enable them to compare their costs with the market prices thereof.  
Thus, the industries to which process costing can be usefully applied, may 
normally have the following features: 
1)  The production is continuous and passes through a number of 
consecutive operations or processes. 
2)  The output of one process becomes the input for the next process till 
final product is obtained. 
3)  The products are standardised and homogenous. 
4)  The output of each process may be saleable in the market. 
5)  The processing of raw material may give rise to the production of 
joint and/or by-products. 
Hence, process costing is usually employed by the following industries: 
Chemical works Distillaries Textile mills Sugar works
Soap-making Paper mills Food processing Paint manufacturing
Breweries Oil refineries Canning factories Milk dairy
 DIFFERENCE BETWEEN JOB COSTING AND 
PROCESS COSTING
The distinction between job and process costing arises mainly from the 
distinctive nature of the manufacturing systems to which they are applicable. 
The main points of difference can be summarised as follows: 
JOB COSTING PROCESS COSTING
1) Job costing measures 
product coats in industries 
where production is 
intermittant and against 
specific orders from 
customers.
1) Process costing is used in 
industries where production is 
continuous and is meant for stock 
and sale. 
2) Costs are collected and 
analysed by individual jobs 
or work orders regardless of 
the time taken to complete 
them.
2) Costs are accumulated and 
analysed by departments or 
processes on a time basis.
3) The job cost s a terminal 
cost. The accumulation of 
costs in respect of a job is 
stopped when the job is 
completed and disposed off. 
3) Process cost is a period cost. 
Under process costing system, 
costs are computed at the end of 
each specified period.
4) The cost of each job order 
or unit of production can be 
separately identified without 
averaging the total cost of 
production.
4) The unit cost of a process 
represents on average cost for the 
period, obtained after adjustment 
of work-in-progress.
5) There are usually no 
transfers from one job to 
another except in case of 
surplus material. 
5) Costs are transferred from one 
process to another process till 
completion.
6) There may or may not be 
any work-in-progress at 
the end of an accounting 
period. However, the value 
of uncompleted job is easy 
to obtain. 
6) There is always some work-in-
progress at the beginning as well 
as at the end of the period. This 
presents the knotty problem of 
valuation of work-in-progress.  
7) Proper control requires 
greater supervision due to 
discrete nature of the Job.
7) Control of process activities 
is comparatively easy because 
production is more stable and 
standardised.
8) Job costing is applied in any 
situation where “one-off” 
orders are being executed. 
For example, machine-tools, 
general-engineering printing, 
motor-car repairs, etc. 
8) Process costing is applied 
under conditions of continuous 
production, sequential processing 
and uniform outputs. For 
example: cement, chemical 
products, bottling and canning, 
oil refining, soap making, etc
 MAIN CHARACTERISTICS
1)  Process costing applies to industries where production is continuous 
and passes through a series of processes, each distinct and well-defined. 
2)  All costs (material, labour and overheads) are accumulated and 
classified by processes. 
3)  An account is maintained for each process to which all direct and 
indirect costs are allocated or apportioned. 
4)  Production in terms of physical quantities is also recorded in respective 
process accounts. 
5)  Average cost per unit is worked out for each process. 
6)  Since the output of each but last process becomes the input of the 
next process, and that of the last process is transferred to Finished 
Stock Account. The total cost of finished product comprises of the 
cumulative costs of all processes. 
7)  Average cost per unit provides the basis for transfer of costs to 
subsequent process. 
Check Y our Progress A 
1)  What do you mean by process costing? 
2)  Mention any three features relating to industries which adopt process 
costing. 
3)  State whether the following statements are True or False and justify 
your answer.
i)  Process costing is a multi-step method or procedure to 
measure  product costs in mass production industries. 
ii) Process costing is used by industries where each unit of output 
is different from another. 
iii)  In prix costing average cost per unit provides the basis for 
transfer to subsequent process. 
iv)  Process costing is applied to industries where standardised 
goods are produced usually for stock.
v)  Process costing can be usefully employed by a company 
 manufacturing custom- made machinery. 
 COSTING PROCEDURE 
You have learnt that, under process costing method, a separate account is 
opened for each process in respect of which the costs are to be ascertained. 
It should be noted that each process account will have an additional column 
on both debit and credit sides for recording the physical quantities. Look at 
Figure 15.1 which shows the proforma of a process account.  
Figure 15.1 Proforma of Process Account.
Process Account I
                                                                                  Month ended……….. 
Dr.                                                                 Cr.
Particulars Qty 
(Units)
Amount
(Rs.)
Particulars Qty 
(Units)
Amount
(Rs.)
Page 5


 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 INTRODUCTION
Job and contract costing methods about which you learnt in Unit 12, are 
used for ascertaining the costs of specific job orders involving special orders 
and individual specifications. These are not considered suitablefor industries 
involving mass production such as chemical plant, paper manufacturing, 
flour mill, cement works, textile mill, etc. Depending upon the nature of 
their product and the production processes involved, the organisations 
engaged in such industries generally use unit costing method or process 
costing method. You have learnt about unit costing method in Unit 10. In 
this unit you will learn about the process costing method under which the 
cost of a product can be ascertained at each stage of production. 
Process	Costing
 MEANING AND APPLICATION
Process costing refers to a method of ascertaining the cost of product at 
each stage or process of manufacture where a product passes through 
different consecutive processes of production, each distinct and well 
defined. As a matter of fact, almost every product passes through a series of 
manufacturing operations before it takes the shape of a final product. But, 
in most cases, the operations involved are small and the costs incurred on 
each operation form an insignificant portion of the total cost. Hence, it is 
not considered worthwhile to compute the cost of each operation separately 
and so the process costing is not considered useful. Process costing is 
suitable only where the final product is the result of a series of such 
process that the output of one process passes on as a raw material to 
the next process and may otherwise be saleable as a finished product 
in the market. Take the case of a cotton textile mill, for example where 
production of cloth involves three distinct sequential processes viz., the 
spinning process, the weaving process and the finishing process. The output 
of spinning process (yarn) is passed on as a raw material to the weaving 
process. It can also be sold in the market, if the mill has some surplus. 
Similarly, the output of weaving process (coarse cloth) is passed on to 
the finishing process as a raw material and, if there is surplus, it can be 
sold to other textile mills. For a textile mill, therefore, it will be useful to 
compute the costs of spinning, weaving and finishing processes separately 
and ascertain the cost of yarn, coarse cloth and finished cloth. This will 
also enable them to compare their costs with the market prices thereof.  
Thus, the industries to which process costing can be usefully applied, may 
normally have the following features: 
1)  The production is continuous and passes through a number of 
consecutive operations or processes. 
2)  The output of one process becomes the input for the next process till 
final product is obtained. 
3)  The products are standardised and homogenous. 
4)  The output of each process may be saleable in the market. 
5)  The processing of raw material may give rise to the production of 
joint and/or by-products. 
Hence, process costing is usually employed by the following industries: 
Chemical works Distillaries Textile mills Sugar works
Soap-making Paper mills Food processing Paint manufacturing
Breweries Oil refineries Canning factories Milk dairy
 DIFFERENCE BETWEEN JOB COSTING AND 
PROCESS COSTING
The distinction between job and process costing arises mainly from the 
distinctive nature of the manufacturing systems to which they are applicable. 
The main points of difference can be summarised as follows: 
JOB COSTING PROCESS COSTING
1) Job costing measures 
product coats in industries 
where production is 
intermittant and against 
specific orders from 
customers.
1) Process costing is used in 
industries where production is 
continuous and is meant for stock 
and sale. 
2) Costs are collected and 
analysed by individual jobs 
or work orders regardless of 
the time taken to complete 
them.
2) Costs are accumulated and 
analysed by departments or 
processes on a time basis.
3) The job cost s a terminal 
cost. The accumulation of 
costs in respect of a job is 
stopped when the job is 
completed and disposed off. 
3) Process cost is a period cost. 
Under process costing system, 
costs are computed at the end of 
each specified period.
4) The cost of each job order 
or unit of production can be 
separately identified without 
averaging the total cost of 
production.
4) The unit cost of a process 
represents on average cost for the 
period, obtained after adjustment 
of work-in-progress.
5) There are usually no 
transfers from one job to 
another except in case of 
surplus material. 
5) Costs are transferred from one 
process to another process till 
completion.
6) There may or may not be 
any work-in-progress at 
the end of an accounting 
period. However, the value 
of uncompleted job is easy 
to obtain. 
6) There is always some work-in-
progress at the beginning as well 
as at the end of the period. This 
presents the knotty problem of 
valuation of work-in-progress.  
7) Proper control requires 
greater supervision due to 
discrete nature of the Job.
7) Control of process activities 
is comparatively easy because 
production is more stable and 
standardised.
8) Job costing is applied in any 
situation where “one-off” 
orders are being executed. 
For example, machine-tools, 
general-engineering printing, 
motor-car repairs, etc. 
8) Process costing is applied 
under conditions of continuous 
production, sequential processing 
and uniform outputs. For 
example: cement, chemical 
products, bottling and canning, 
oil refining, soap making, etc
 MAIN CHARACTERISTICS
1)  Process costing applies to industries where production is continuous 
and passes through a series of processes, each distinct and well-defined. 
2)  All costs (material, labour and overheads) are accumulated and 
classified by processes. 
3)  An account is maintained for each process to which all direct and 
indirect costs are allocated or apportioned. 
4)  Production in terms of physical quantities is also recorded in respective 
process accounts. 
5)  Average cost per unit is worked out for each process. 
6)  Since the output of each but last process becomes the input of the 
next process, and that of the last process is transferred to Finished 
Stock Account. The total cost of finished product comprises of the 
cumulative costs of all processes. 
7)  Average cost per unit provides the basis for transfer of costs to 
subsequent process. 
Check Y our Progress A 
1)  What do you mean by process costing? 
2)  Mention any three features relating to industries which adopt process 
costing. 
3)  State whether the following statements are True or False and justify 
your answer.
i)  Process costing is a multi-step method or procedure to 
measure  product costs in mass production industries. 
ii) Process costing is used by industries where each unit of output 
is different from another. 
iii)  In prix costing average cost per unit provides the basis for 
transfer to subsequent process. 
iv)  Process costing is applied to industries where standardised 
goods are produced usually for stock.
v)  Process costing can be usefully employed by a company 
 manufacturing custom- made machinery. 
 COSTING PROCEDURE 
You have learnt that, under process costing method, a separate account is 
opened for each process in respect of which the costs are to be ascertained. 
It should be noted that each process account will have an additional column 
on both debit and credit sides for recording the physical quantities. Look at 
Figure 15.1 which shows the proforma of a process account.  
Figure 15.1 Proforma of Process Account.
Process Account I
                                                                                  Month ended……….. 
Dr.                                                                 Cr.
Particulars Qty 
(Units)
Amount
(Rs.)
Particulars Qty 
(Units)
Amount
(Rs.)
The main steps involved in costing procedure are as follows: 
1)  Debit the cost of basic raw material to the first process account 
showing both quantity and amount involved. 
2)  Show costs of other materials, direct labour and direct expenses 
pertaining to each process in their respective process accounts. 
3)  Debit each process account with production overheads as given pr on 
some equitable basis. 
4)  Credit the process account with realisable value of scrap and containers 
of materials returned or sold, if given. Alternatively, their amounts 
can be deducted from cost of raw materials. 
5)  Ascertain the total cost of the process and calculate average cost per 
unit of output. 
6)  If the whole output of a process has been transferred to the next 
process, the total cost may be shown on the credit side as transfer to 
next process. The same shall be shown on the debit side of the next 
process account. 
7)  If a portion of output has been earmarked for sale or has been sold, 
show its cost as transfer to store and the balance as transfer to the next 
process. It should be noted that when a portion of output has been 
sold, the process account should be credited only with its cost, and not 
the sale value. 
8)  The cost of containers used for packaging the finished goods should 
be debited to the last process account. 
9)  The total cost of the last process shall be transferred to Finished Stock 
Account. 
10)  The Finished Stock Account is like the Trading Account. Hence, sales 
will be credited to this account and gross profit ascertained. 
Look at Illustrations 1 and 2 and study how process accounts are prepared. 
Illustration 1  : In the course of manufacture, a product passes through 
three distinct processes, A, B and C. During a four week period, 1,000 units 
are produced and the following information is made available: 
Process A
Rs.
Process B
Rs.
Process C
Rs.
Direct Materials 2,000 1,000 --
Direct Wages 1,500 700 800
Direct Expenses 300 100 --
Indirect production costs were Rs. 4,500 and these are to be apportioned 
to the processes on the basis of direct wage cost. Prepare the necessary 
process accounts.