Process costing is a costing method used when it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. Process costing traces and accumulates direct cost, and allocates indirect cost incurred during a manufacturing process.
The following are examples of some of the industries which use process costing:
- Oil refineries
- Soap manufacturers
- Paint manufacturers
- Sugar manufacturers
Features of Process Costing
The following features distinguish process costing from other costing methods:
a) The continuous nature of production in many processes means that there will usually be closing work in progress which must be valued. In process costing it is not possible to build up a cost record of the cost incurred on individual units of output because production in progress is an indistinguishable homogeneous mass.
b) The output of one process becomes the input of the next,unless it is the final process, culminating in the finish product.
c) Losses often occur during the process due to spoilage, wastage, evaporation and so on.
d) Output from production may be a single product, but depending on the industry there may also be by-products and joint products.
Process accounts are used to accumulate the cost incurred during a process. The following four step approach is used to complete the process accounts, minimizing the chances of error:
i. Determine output and losses
ii. Calculate cost per unit of output, losses and work in progress
iii. Calculate total cost of output, losses and work in progress
iv. Complete accounts
The input to a process is 2,000 units at a cost of $ 9,000. Normal loss is 10%. No opening and closing stocks. Complete the process accounts if output is 1660 units
Before solving the example, the following points should be noted.
a. Normal loss is given no share of cost. Therefore, the cost of output will be based on 90% of units completed i.e. 2,000 @ 90% = 1,800
b. Abnormal loss will be given a cost. Abnormal loss=Total loss – Normal loss
Now, to complete the process account the first step is to determine output and losses
Total Input = 2,000
Output = 1,660
Normal Loss = 200
Abnormal Loss = 140
Calculate cost per unit of output and losses
Total Cost Incurred / Expected Output = 9,000 / 1,800 = $5 per unit
Calculate total cost of output and losses
Output = $8,300
Normal Loss = Nil
Abnormal Loss = $700
Neo Pharma process a product through three distinct stages, these production of on process being passed on to the next process and so on to the finished product. Details of the cost incurred in each process are given below.
|Process A||Process B||Process C|
The overhead expenses or the period amount to RM 3600 and is to be distributed to the process on the basis of direct wages.
There were no stocks in any of the process either at the beginning or at the close of the period.
Assuming the output was 1000 kilos, show the process cost of A, B and C indicating also the cost per kilo of each element of cost and the output in each process.
If 10% of the output is lost in storage and giving samples, what should be the selling price per unit to make a gross profit of 33.33% on the selling price.
Process A Account
|Raw Material||1000||Process B Account||2650|
Process B Account
|Process A Account||2650||Process C Account||5500|
Process C Account
|Process B Account||5500||Finished Stock Account||8300|
If 10% is lost
Total Output = 900 Kgs
Total Cost = RM 8300
Cost Per Kg = 8300 / 900 = RM9.22
Selling Price to earn 33.33% on Selling price
Cost price = 100 – 33.33 = RM66.67
If cost is RM66.67, sale value = 100
If cost is RM1, sale value = 100 / 66.67
If cost is RM 8300, sale value = 100/66.67 X 8300 = 12449.37
Selling price per unit = 12449.37/900 = RM 13.83
– from http://www.svtuition.org