Process Costing

Process costing is famous topic of cost accounting. It is that method of costing which is used at that industry where production is done in step by step process. Every finished goods of one process will be the raw material of other process and production is continually operating in factory. At that time we calculate first process cost by making process account. A process account is made for every process of production.

For example

There are three process for manufacturing of biscuits it means we will make three process accounts for this. First process account's raw material cost, labor cost, direct expenses and overheads total will be credited by second process account. In other words, we will credit process second Account in process first account. Total cost of first process will bring in the debit side and other new raw material cost and other cost will be added in debit side. After making second process account, its total will also transfer to second process account and In final and third process account's total will transfer to finished stock account.

Following are main industries where we use process costing method:

1. Chemical industry
2. Soap industry
3. Clothes industry
4. Paper industry
5. Dairy Industry

In process costing, we study mainly following important matters

1. Process Loss

It is sure that some losses will happen in processing industries. These losses may be happened due to natural activities of chemical or leakage. So, for effective control, it is necessary to record all the raw materials in each process. Normal process loss will increase the cost of unit produced in any process. So, we will credited normal wastage units only (not amount) in the credit side of process account.

If there is abnormal loss which has happened due to ignorance, then we calculate value of abnormal loss and its no. of units and cost will be credited to process account.

Formula of calculating the Value of Abnormal Loss

If there is any cash received due to selling of scrap, then this will be credited to abnormal loss account and balance of abnormal loss account will be credited to costing profit and loss account. 

2. Inter - Process Profits

If transfer from one process to another process is not on cost, then to calculate of inter - process profits is very important because we will show it in process account's separated column.

With this, next process will not get benefit of previous process. This inter-process profits do not show in balance sheet. It is just for deep analysis in process accounting.

{* One important thing, you must remember that you have to deduct closing stock's profit from total profit earned in any process.}

This profit on closing stock can be calculated with following formula :