BBM 201 Unit 2, Lesson 6
LESSON 6 PROCESS COSTING
TABLE OF CONTENTS:
6.0 OBJECTIVES
6.1 DEFINITION
6.2 FEATURES/CHARACTERISTICS OF PROCESS COSTING
6.2.1 THE FOLLOWING FEATURES MAY BE IDENTIFIED WITH PROCESS
COSTING:
6.2.2 ELEMENTS OF COST
6.3 COSTING OF JOINT PRODUCT AND BY PRODUCT
6.3.1 TERMINOLOGY
6.3.2 COSTING PRINCIPLES FOR JOINT PRODUCT / BY-PRODUCT
COSTING:
6.3.3 RECOGNITION OF A PRODUCT AS JOINT PRODUCT OR BY-
PRODUCT
6.3.4 METHODS OF APPORTIONMENT OF JOINT COSTS
1
,BBM 201 Unit 2, Lesson 6
6..PROCESS COSTING
This lesson deals with process costing method which is a part of continuous
operating method and is applied in those industries where production is carried on a
regular basis and production is done on mass scale. The output is received after a
sequence of process whereby the output of one process becomes the input of the
next process.
6.0 Objectives
Meaning of process costing.
Features of process costing.
Component of cost in case of process costing method.
Terminologies used in process costing and there treatment in process
account
6.1 Definition
Process costing is a method for ascertaining the total unit cost of the output of
a continuous production run (such as in food processing, petroleum, and textile
industries) in which a product passes through various processes. It is a method that
aggregates manufacturing costs by departments or by production processes. Total
manufacturing costs are accumulated in form of - direct materials, direct labor, and
factory overhead incurred. Unit cost is determined by dividing the total costs charged
to a process by the output of that process. Process costing is applied in those
industries that produce a continuous mass of similar units through a series of
operations or processes-generally used in such industries as petroleum, chemicals,
oil refinery, textiles, and food processing.
CIMA’s definition: ‘The costing method applicable where goods or services result
from a sequence of continuous or repetitive operations or processes. Costs are
average over the units produced during the period, being initially charged to the
operation or process’.
6.2 Features/Characteristics Of Process Costing
Process Costing Method is applicable where the output results from a
sequence of continuous or repetitive operations or processes and products are
identical and cannot be segregated.
2
,BBM 201 Unit 2, Lesson 6
Process Costing enables the ascertainment of cost of the product at each process or
stage of manufacture.
6.2.1 The Following Features May Be Identified With Process Costing:
1. The output consists of products which are homogenous.
2. Production is carried on in different stages (each of which is called a process)
having a continuous flow.
3. Production takes place continuously except in cases where the plant and
machinery are shut down for maintenance etc. Output is uniform and all units
are identical during each process. It would not be possible to trace the identity
of any particular lot of output to any lot of input.
4. The input will pass through two or more processes before it takes the shape
of the output. The output of each process becomes the input for the next
process until the final product is obtained, with the last process giving the final
product.
5. The output of a process (except the last) may also be saleable in which case
the process may generate some profit.
6. The input of a process (except the first) may be capable of being acquired
from the outside sources.
7. The output of a process is transferred to the next process generally at cost to
the process. It may also be transferred at market price to enable checking
efficiency of operations in comparison to the market conditions.
8. Normal and abnormal losses may arise in the processes
9. An account called a process account is maintained for each process.
6.2.2 Elements Of Cost
For the purpose of cost accounting, the process industry is divided into separate
division or departments with each division or department representing a specific
process. The Direct Material and Direct Labour costs are collected for each division
or department individually and the total overheads collected are apportioned over
the various departments/processes on some suitable basis.
The following are the main elements of costs involved in the manufacturing
organisation where process costing method is adopted.
1. Direct Materials
In industries where process costing method is used the direct material can be
classified into two parts:
o Primary Material
3
, BBM 201 Unit 2, Lesson 6
Primary materials are those materials which are introduced in the initial
process and passed on to the next process as a part of output after
completion of processing.
o Secondary Material
Secondary materials are those materials which are introduced in the
first or subsequent processes in addition to the main material
introduced in the initial process. The secondary material gets mixed up
with the main material and is passed on to the subsequent processes
as a part of the output.
2. Direct Labour Cost
The direct labour cost is generally incurred in every process for the purpose of
conversion of the shape of raw material. Identification of direct labour cost is
also relatively easy in process costing industry
3. Direct Expenses
All those expenses which are relevant to a specific process and are expenses
which are incurred in addition to direct material and labor and which can be
directly attributable to a particular process are termed as direct expenses.
Production Overheads
The overhead expenses are generally expended over all the processes
involved in production. These are to be apportioned over the various
processes in an suitable manner.
Preparation of Process Accounts
A nominal account for each process is prepared to record all the costs related
to the process.
Each process account is Debited with the cost of:
o Primary Direct Material
o Secondary Direct Material
o Direct Labor
o Direct Expenses and
o Production Overheads allocated and/or apportioned to the
process.
Each process account is Credited with:
The value of output transferred to the subsequent process or finished stocks.
Process Stock Accounts
Stocks relevant to a process are maintained in a separate stock account.
Stock accounts for input may be maintained where all the input
4
LESSON 6 PROCESS COSTING
TABLE OF CONTENTS:
6.0 OBJECTIVES
6.1 DEFINITION
6.2 FEATURES/CHARACTERISTICS OF PROCESS COSTING
6.2.1 THE FOLLOWING FEATURES MAY BE IDENTIFIED WITH PROCESS
COSTING:
6.2.2 ELEMENTS OF COST
6.3 COSTING OF JOINT PRODUCT AND BY PRODUCT
6.3.1 TERMINOLOGY
6.3.2 COSTING PRINCIPLES FOR JOINT PRODUCT / BY-PRODUCT
COSTING:
6.3.3 RECOGNITION OF A PRODUCT AS JOINT PRODUCT OR BY-
PRODUCT
6.3.4 METHODS OF APPORTIONMENT OF JOINT COSTS
1
,BBM 201 Unit 2, Lesson 6
6..PROCESS COSTING
This lesson deals with process costing method which is a part of continuous
operating method and is applied in those industries where production is carried on a
regular basis and production is done on mass scale. The output is received after a
sequence of process whereby the output of one process becomes the input of the
next process.
6.0 Objectives
Meaning of process costing.
Features of process costing.
Component of cost in case of process costing method.
Terminologies used in process costing and there treatment in process
account
6.1 Definition
Process costing is a method for ascertaining the total unit cost of the output of
a continuous production run (such as in food processing, petroleum, and textile
industries) in which a product passes through various processes. It is a method that
aggregates manufacturing costs by departments or by production processes. Total
manufacturing costs are accumulated in form of - direct materials, direct labor, and
factory overhead incurred. Unit cost is determined by dividing the total costs charged
to a process by the output of that process. Process costing is applied in those
industries that produce a continuous mass of similar units through a series of
operations or processes-generally used in such industries as petroleum, chemicals,
oil refinery, textiles, and food processing.
CIMA’s definition: ‘The costing method applicable where goods or services result
from a sequence of continuous or repetitive operations or processes. Costs are
average over the units produced during the period, being initially charged to the
operation or process’.
6.2 Features/Characteristics Of Process Costing
Process Costing Method is applicable where the output results from a
sequence of continuous or repetitive operations or processes and products are
identical and cannot be segregated.
2
,BBM 201 Unit 2, Lesson 6
Process Costing enables the ascertainment of cost of the product at each process or
stage of manufacture.
6.2.1 The Following Features May Be Identified With Process Costing:
1. The output consists of products which are homogenous.
2. Production is carried on in different stages (each of which is called a process)
having a continuous flow.
3. Production takes place continuously except in cases where the plant and
machinery are shut down for maintenance etc. Output is uniform and all units
are identical during each process. It would not be possible to trace the identity
of any particular lot of output to any lot of input.
4. The input will pass through two or more processes before it takes the shape
of the output. The output of each process becomes the input for the next
process until the final product is obtained, with the last process giving the final
product.
5. The output of a process (except the last) may also be saleable in which case
the process may generate some profit.
6. The input of a process (except the first) may be capable of being acquired
from the outside sources.
7. The output of a process is transferred to the next process generally at cost to
the process. It may also be transferred at market price to enable checking
efficiency of operations in comparison to the market conditions.
8. Normal and abnormal losses may arise in the processes
9. An account called a process account is maintained for each process.
6.2.2 Elements Of Cost
For the purpose of cost accounting, the process industry is divided into separate
division or departments with each division or department representing a specific
process. The Direct Material and Direct Labour costs are collected for each division
or department individually and the total overheads collected are apportioned over
the various departments/processes on some suitable basis.
The following are the main elements of costs involved in the manufacturing
organisation where process costing method is adopted.
1. Direct Materials
In industries where process costing method is used the direct material can be
classified into two parts:
o Primary Material
3
, BBM 201 Unit 2, Lesson 6
Primary materials are those materials which are introduced in the initial
process and passed on to the next process as a part of output after
completion of processing.
o Secondary Material
Secondary materials are those materials which are introduced in the
first or subsequent processes in addition to the main material
introduced in the initial process. The secondary material gets mixed up
with the main material and is passed on to the subsequent processes
as a part of the output.
2. Direct Labour Cost
The direct labour cost is generally incurred in every process for the purpose of
conversion of the shape of raw material. Identification of direct labour cost is
also relatively easy in process costing industry
3. Direct Expenses
All those expenses which are relevant to a specific process and are expenses
which are incurred in addition to direct material and labor and which can be
directly attributable to a particular process are termed as direct expenses.
Production Overheads
The overhead expenses are generally expended over all the processes
involved in production. These are to be apportioned over the various
processes in an suitable manner.
Preparation of Process Accounts
A nominal account for each process is prepared to record all the costs related
to the process.
Each process account is Debited with the cost of:
o Primary Direct Material
o Secondary Direct Material
o Direct Labor
o Direct Expenses and
o Production Overheads allocated and/or apportioned to the
process.
Each process account is Credited with:
The value of output transferred to the subsequent process or finished stocks.
Process Stock Accounts
Stocks relevant to a process are maintained in a separate stock account.
Stock accounts for input may be maintained where all the input
4
