Process Costing

Q. # 1. What is process costing?
Explain its essentials and give

examples.
Process costing in probably the most widely used costing methods. It represents
a type of costing procedure for mass production, industries producing standard
products. Typically, in such industries are goods produced are for stock, units
produced or identical goods move down the production line in various
processes. In a particular sequence and all factory procedures are standardized.
Cost for compiled for each process, if department by preparing a separate
account for each process.
Essentials / characteristics of process costing:
1. The production is continuous and the final product is the result of a
sequence of operations or processes.
2. Cost are accumulated by processes.
3. The product are standardized and homogenous.
4. The cost per unit produced is the average cost which is calculated by
divided the total process cost by the number of units produced.
5. The finished product of each but last process becomes the raw material
for the next process in sequence and that of the last processes transferred
to the finished goods stock.
6. The sequence of processes is specific and predetermined some loss of
material in process (due to camical actions, evaporation etc.) is
unavoidable.
7. Processing of raw material may give rise to the production of . These
several product produced from the same raw material may be turned as
joint product or byproducts.
Example of process costing enterprises:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
Camical works
Oil refineries
Textile mills
Cement manufacture
Paper manufacture
Food processes
Flour mills
Paint manufacture
Soap making
Sugar mills
xi.
Plastic manufacture
Q. # 2. Describe the difference between process costing and job

costing.
Difference between process costing & job order costing
Process costing
Job costing
Cost are compiled process wise and Cost are separately ascertained for
cost per unit is the average cost.
each job which is lost unit.
Production is of standardized products Production is of non-standardized
and cost units are identical
items
with
specifications
and
Production is for stocks
instructions from the customers.

Production is against orders from
customers.
Cost are computed at the end of Cost are calculated when a job is
specific period.
completed.
The cost of one process is transferred Cost a job is
not transferred to
to the next process in the sequence.

another job.
On account of continuous nature of There may or not may be work in
production, work in process is the process is the beginning and at the
beginning
and
end
of
accounting end of accounting period.
period is a regular feature.

Cost control is comparatively easier. Cost control is comparatively more
This is because factory processes and difficult because each cost of unit are
product are standardized.
job needs individual intentions.
Q. # 3. What is cost of production report? Explain its important
elements in details.
Cost of production report
CPR is also called process cost sheet. It is prepared at the end of cost of
production. At the end of costing period this report shows in summarized form
cost of material, labor and FOH charged to each department. The main purpose
of CPR is the determination of total cost and unit cost.
There are following elements of CPR discussed in detailed.
Quantity Schedule:
Shows the total number of units for which a department is held accountable.
The information in quantity schedule is presented in the following order.
1)
2)
3)
4)
5)
6)
Number of units started or received proceeding department

Units added in the department
Number of units completed and transferred to the next department
The number of units incomplete and still in the department
Number of units loss in the process
The number of units still in process
Cost charged to the department:

1)
2)
3)
4)
In process at the beginning of the period

Received in from proceeding department
Cost of direct materials, direct labor and FOH added by the department
If there is normal loss of units, unit cost received from the proceeding
department required adjustments. This adjustment of loss of units, also
shown in
5) Adjustment in unit cost after adding is also made
Which part shows distribution of total cost of department as showed in cost
charged to the department. The total cost for which distribution is made in the
part is a same total cost presented to the cost charged to department. The total
cost charged to the department is distributed in the following head:
I.
II.
III.
IV.
V.
Cost
Cost
Cost
Cost
transferred to the next department or to finished goods

of work completed but still in the department
of work still in process at the end of period
of abnormal loss if any charged to FOH or to income summary
account
Cost of normal loss at the end of process
Computation explanation:
This part presents to management detailed computation of the figures
contained in 2nd and 3rd section of the cost of production report. This
computation includes:
i.
ii.
iii.
iv.
v.
vi.
Equalent of production
Unit cost
Adjustment for loss units for normal loss if any
Cost of transferred out units
Cost of abnormal loss units
Cost of work in process ending inventory
Loss units:
In continuous operating and processing, there is possibility of wastage shrinkage
and other factors which may result into spoiled or lost units. This loss of units is
divided into two categories.
1. Normal loss
2. Abnormal loss
Normal loss:
Normal loss mean inherent loss or unavoidable loss in manufacturing
operations. It may arise even under efficient operation conditions. The normal
loss is absorbed by the remaining plus increasing unit cost of the completed
good unit. In 1st department there will be no adjustment for units loss. As no
cost from proceeding department has been received by it. The adjustment for
units loss in the 2nd department will be made. The cost to be adjusted for units
loss can be calculated with the help of following formula:
Total cost received
proceeding department
Total units received

unit cost received
( proceeding department )
proceeding department
Abnormal loss:
Abnormal loss is accidental or may arrive due to carelessness. This loss
represents in efficiencies in the manufacturing process. This loss is not absorbed
by good units and is debited to FOH control account or to separate expense
account and credited to work in process account of respective department.

Process Costing

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Q. # 1. What is process costing?

Explain its essentials and give

Q. # 2. Describe the difference between process costing and job

Production is for stocks

instructions from the customers.

to the next process in the sequence.

accounting end of accounting period.

period is a regular feature.

Number of units started or received proceeding department

Cost charged to the department:

In process at the beginning of the period

transferred to the next department or to finished goods

Total units received

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