If the loss is caused due to unexpected or abnormal conditions e.g., substandard materials, accidents, carelessness, bad workmanship, bad design, etc., it is called abnormal loss. In fact, any loss exceeding normal allowance is considered as abnormal loss in process costing. Normal loss depends on the type and property of materials, nature of operation involved and other technical factors. It can be estimated in advance on the basis of past experience and its cost is added to good units of production.
- Manufacturing departments are often organized by the various stages of the production process.
- Abnormal loss is closed by its transfer to profit and loss account at the year end.
- It allows companies to track product cost performance by production location or department—information that can be used to help determine which products are most profitable.
- The company assumes that each product requires the same overhead cost.
(ii) Calculate the process cost according to the elements of cost. For the purpose of simplicity say (work in progress) on which work started but not completed. To convert the work in progress or partly completed (manufactured) units accumulated depreciation and depreciation expense into fully complete units (assumption only) is known as Equivalent Production. The cost incurred in this process during the period is Rs.25,000. (a) Units introduced in process both in the form of opening inventory and fresh units.
Use of Process Costing
Completing opening work-in-process, i.e., opening W.I.P. which was completed during process. (a) Production of a variety of products using the same production facilities. Standardised Products – Products and processes are completely standardised. (g) Since the production is continuous in nature, there will be closing work-in-progress which must be valued separately. (f) The process loss may arise due to wastage, spoilage, evaporation etc. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
Under process costing, there is a finished product at each stage. This becomes the raw material of the subsequent stage until the final stage of completion. Process costing is appropriate for companies that produce a continuous mass of like units through series of operations or process. Also, when one order does not affect the production process and a standardization of the process and product exists. However, if there are significant differences among the costs of various products, a process costing system would not provide adequate product-cost information.
A process costing system accumulates the costs of a production process and assigns them to the products that the business outputs. A production report has to be made under the process costing system. This loss increases the cost of production of the product produced in the process.
How Is Process Costing Used to Track Production Costs?
So equivalent unit may represent the production of a process in terms of completed unit. It also means converting the uncompleted units into equivalent of completed units. Equivalent Units – In order to obtain accurate average cost, it is necessary to measure the production at various stages of manufacture.
Process costing
This necessitates the employment of a separate Work in Process account for each major manufacturing activity. Examine the graphic below that compares job and process costing, noting in particular the difference in how costs are shifted out of work in process. Process costing entails handing off accumulated costs from one department to the next.
The cost for the direct material, direct labor, and overheads is assigned to the process which is then allocated for the batch of production. Process costing and job order costing are both acceptable methods for tracking costs and production levels. Some companies use a single method, while some companies use both, which creates a hybrid costing system. The system a company uses depends on the nature of the product the company manufactures. In the case of a not-for-profit company, the same process could be used to determine the average costs incurred by a department that performs interviews. The department’s costs would be allocated based on the number of cases processed.
Managerial Accounting
Apart from this, there occur abnormal wastages and abnormal gains. Process costing can be applied in chemical works, oil refining, food manufacturing, paint works, canning, textiles, paper, dairy, sugar, bakeries, breweries, mining industries, public utility services etc. When a product is manufactured through various processes, the output of each process is transferred to the subsequent process and that of last process is transferred to the finished stock. When a product is manufactured through various processes, the output of each process is transferred to the subsequent process and that of the last process is transferred to the finished stock. For manufacturing with great work in progress, there will be a problem as management needs to estimate the equivalent of finished goods. Any error in estimation will impact the entire cost of inventory in that assembly line.
Calculating Unit Cost Under Process Costing
No reference is made to normal loss in process, because it is shared by good production. Material can be introduced in the beginning, in the middle or at the end of the process. The stage at which material is introduced will significantly affect cost per unit of the process. The effect of using LIFO method, FIFO method and average method will be different on the unit cost of the process. The share of the overheads of each process is shown in the debit of the concerned process account. (b) Separate products are produced, but the second product uses some of the first product in its manufacturing operations.
When there is abnormal gain, value of units representing abnormal gain should be debited to process account. For valuation purpose, abnormal gain is treated at par with good units. Normal production in process A should have been 90 units, if there had not been abnormal gain of 5 units. For the purpose of valuation, 5 units should be valued at the rate, at which 90 units would have been valued. Abnormal loss represents good units, which could have been produced, if operation had been carried out according to accepted norms relating to manufacturing operations. For this reason, units representing abnormal loss are treated at par with good units for the purpose of valuation.
Let’s briefly understand the core difference between job costing and process costing. Today, process costing software alternatives are available to simplify this activity. Process costing software enables precise allocation of costs to individual processes, allowing businesses to accurately determine the cost of each unit produced. This helps in understanding the profitability of different processes and making informed decisions. Process costing is the only reasonable approach to determining product costs in many industries.
The finished products are transferred to storage until they are sold. Each unit’s cost is determined based on the overall cost of each department or stage involved in the manufacturing process. Errors can occur when non-production costs are also included in the calculation.
Where several dissimilar products are produced in the same process, a close study of production and costs of each variety of products is essential. The relative importance of one as compared to others should also be indicated in terms of points. For example, in a Chicken processing plant, all products start at the cutting process.
