Chapter 17

Process costing

Departmental Production Report

Analysis of
physical flow
of units.

In our illustration, production requires

two sequential production
operations: cutting and stitching.

Calculation
of equivalent
units.

The cost of goods completed and

transferred out of the Cutting
Department must remain assigned to
the partially completed product units
as they undergo further processing in
the Stitching Department.

Although the process-costing procedures for the

second department are similar to those illustrated for
the first, there is one additional complication.

Computation
of unit costs.

Analysis of
total costs.

Process-costing procedures for

subsequent production departments are
covered in Cost Accounting texts
4-2

Actual Costing
Actual costs of
manufacturing overhead
are entered in Work-inProcess Inventory

vs.

Normal Costing
Manufacturing
overhead is applied
to Work-in-Process
Inventory using a
predetermined
overhead rate

Both actual and normal costing can be used in conjunction with a process costing system. Our
illustration used a predetermined overhead rate based on direct-labor cost, which is normal
costing.
In our illustration, production requires two sequential production operations: cutting and
stitching. Although the process-costing procedures for the second department are similar to
those illustrated for the first, there is one additional complication. The cost of goods completed
and transferred out of the Cutting Department must remain assigned to the partially completed
product units as they undergo further processing in the Stitching Department. Process-costing
procedures for subsequent production departments may be studied now.
4-3

Normal and abnormal loss and abnormal gain

In a processing operation loss of material is a normal phenomenon. The
amount of loss inherent in the process is called normal loss. Normal loss
can be fairly marked from the type and property of materials used, nature
of process involved etc.
If the loss happened due to unexpected events or abnormal conditions
such as, sub-standard materials, accident , faulty plant design, the loss is
called abnormal loss. In effect, if any loss happens over and above the
normal loss, it is called abnormal loss. Normal and abnormal loss vary
according to industry type, level of efficiency, nature of production etc.
In some cases, actual loss is less than normal loss, in such cases, it is the
difference between normal loss and actual loss is called abnormal gain.

Treatment in accounts

Normal loss : The cost of normal loss is absorbed by

units produced. When normal loss has a scrap value,
the same is credited in the process account.
Generally , if there is no abnormal gain, it may not be
necessary to maintain a separate account for normal
loss.

Abnormal loss
Abnormal loss is charged to the respective cost of production.
The process account is credited by abnormal loss account with cost
of materials, labours and overheads equivalent to good units.
Abnormal loss units rank equal with normal units. The normal loss
units is deducted from the total units and the scrap value is
deducted from the total costs.
The net costs is divided by the normal production, including
abnormal loss units which are converted to equivalent units, to
arrive at the unit costs.
The units are then transferred to subsequent process or as finished
products.
Abnormal loss units to abnormal loss accounts.
Abnormal loss account is credited by realizable scrap value and the
balance is written off to costing Profit and Loss Account as
abnormal loss.

Abnormal gain
Abnormal gain does not affect cost of normal production. The
process account is debited with full cost of abnormal gain. The
total cost is deducted by normal loss and then it is divided by
the input units minus the normal loss units.
The abnormal gain account is debited and normal process loss
account is credited. The balance is transferred to costing
Profit and Loss account as abnormal gain.

From the following particulars of two processes Process X and Process Y

prepare process accounts of X and Y
Process X
Process Y
Input (units)
5000
4600
Normal Loss
10%
?
Cost incurred (Rs.)
Materials
8000
1500
Direct Labours
3000
4000
Overheads
2750
3010
Scrap value per unit
0.50
2
Output of Process Y was 4300 units and cost is Rs.5 and there is no WIP,
closing or opening stocks.

Process X Account
Dr
-------------------------------------------------Units Cost/unit
Amount
To Mat 5000 1.60
8000
To Lab
3000
To OH
2750
-----------------------5000
13750
To
Abnormal
Gain
100
3.00
300
--------------------5100
14050
Cost per unit = (Total process cost scrap
value of normal loss)/ (Inputs normal
loss)
= 13750 250 / 5000 500
= 3.00

Cr.
-------------------------------------------------------Units Cost/unit Amount
By Normal loss 500 0.50
250
By process YA/c 4600 3.00 13800
-----------------------5100
14050

Process Y Account
Dr
-------------------------------------------------Units Cost/unit Amount
To Process A
A/c.
4600 3.00
13800
To Mat
1500
To Lab
4000
To OH
3010
-----------------------4600
22310
Cost per unit = (Total process cost scrap
value of normal loss)/ (Inputs normal
loss)
5 = 22310 2x / 4600 x
x = 230 units

Cr.
-------------------------------------------------------Units Cost/unit Amount
By Normal loss 230 2.00
460
By Abnormal
Loss
70
5.00
350
By Finished
goods A/c
4300 5.00 21500
-----------------------4600
22310

Transferred-in Costs

Are costs incurred in previous departments that are

carried forward as the products cost when it moves to a
subsequent process in the production cycle
Also called Previous Department Costs
Journal entries are made to mirror the progress in
production from department to department
Transferred-in costs are treated as if they are a
separate type of direct material added at the beginning
of the process

Inter-Process Profit
Output of one process when transferred to
the next process at cost plus a mark-up
percentage as profit, the difference between
the cost and transfer price is known as the
inter-process profit.

Example
Following details are available for two processes X and Y

in Rupees
Process X
Process Y
Materials
15000
-Labour
10000
15000
Overheads
10000
15000
Closing stock (at cost)
5000
7500
The output from process X is transferred to process Y at cost plus 25%
mark-up basis and also the output from Y is also charged at 25% mark-up
basis. Finished stock sold at Rs.90000 and stocks worth of Rs.15000
remained unsold. No opening, closing work-in-progress.
Show process Accounts and profits.

Process X Account
Dr.
--------------------------------------------Rs.
Rs.
To Mat 15000
Lab 10000
OH
10000
Total cost
35000
Less Cl. Stock
5000
Cost of transfer
30000
Profit (25%)
7500
37500

Cr.
--------------------------------------------Rs.
To Process
Y A/c.
37500

------------37500
--------------

Process Y Account
Dr.
--------------------------------------------Rs.
Rs.
To Process
X A/c. 37500
Lab 15000
OH
15000
Total cost
67500
Less Cl. Stock
7500
Cost of transfer
60000
Profit (25%)
15000
75000

Cr.
--------------------------------------------Rs.
By Finished
Stock A/c.
75000

----------------75000
-------------------

Finished Stock Account

Dr.
--------------------------------------------Rs.
To Process Y A/c 75000
To Profit &
Loss A/c.
30000
--------------105000
-----------------

Cr.
--------------------------------------------Rs.
By Sales
By Stock

90000
15000
-------------105000
----------------

Total Profit
Process X
7500
Process Y
15000
Finished Goods 30000
52500

Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing

Operation Costing
(Products produced in batches)

Process
Costing

Job-order and process costing represent the polar extremes of product-costing systems. But some
production processes exhibit characteristics of both job-order and process costing environments. These
production processes often are referred to as batch manufacturing processes. Such processes are
characterized by high-volume production of several product lines that differ in some important ways but are
nearly identical in others. Since batch manufacturing operations have characteristics of both job-order
costing and process-costing environments, a hybrid product-costing system is required. One common
approach is called operation costing.
4-17

Hybrid Costing Systems

A Hybrid-Costing System blends characteristics from

both job-costing and process-costing systems
Many actual production systems are in fact hybrids
Examples

include

manufacturers

of

televisions,

dishwashers and washing machines, as well as Adidas

Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order
Costing

Operation Costing
(Products produced in batches)

Material Costs charged

to batches as in
job-order costing.

Process
Costing

Conversion costs
assigned to batches
as in process costing.
4-19

 This product-costing system is used when

conversion activities are very similar across
product lines, but the direct materials differ
significantly.
Conversion costs are accumulated by
department, and process costing methods are
used to assign these costs to products.
In contrast, direct-material costs are
accumulated by job order or batch, and job-order
costing is used to assign material costs to
products.

Im ready to process
some leisure time.

4-21