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Process Costing

F
FR Prashanth Reddy
25/05/2017 0 0

Introduction

  1. Process Costing is a method of Costing used in industries where the material has to pass through two or more processes for being converted into final product.
  2. It is defined as a method of Cost accounting where by Costs are charged to processes or operations and averaged over the units produced.

Features of process Costing:

Process Costing can be applied in such industries having following features:

  1. They should be number of processes to manufacture a product.
  2. Output of one process becomes input of another process.
  3. All the end products will be similar units & it is not possible to trace the identity of any particular lot of output to a particular lot of input.
  4. Production of a product may give rise to joint products and By - products.

Treatment of normal loss, abnormal loss abnormal gain.     

A Introduction: 

Loss of material is inherent during the process of operation. They are two types of losses:

  1. Normal loss
  2. Abnormal loss

  1. Normal loss is defined as loss which is inherent in the nature of work & loss which can be reasonably predetermined

Accounting treatment: 

(a)  Cost of normal loss is absorbed by good units produced under the process.

(b)  Any amount realised by sale of normal loss is to be credited to the process account.

  1. Abnormal loss: It is defined as loss in excess of predetermined loss.

                 Abnormal loss may occur due to:

  • (a) Carelessness of worker
  • (b) Bad plant design

Accounting treatment: Cost of abnormal process loss is to be computed as we compute cost of the good units.

  1. Total Abnormal process loss is credited to process account from which it arises.

Entry :             Abnormal loss       A/c   …   Dr.

                                          To process       A/c

  1. Total cost of the abnormal process loss is debited to costing profit & loss A/c

Costing P & L    A/c   …   Dr.

      To Abnormal process loss    A/c

  1. Any amount absorbed by sale of abnormal loss should be transferred to Costing P & L A/c.

Abnormal loss can be controlled by taking suitable measures.

Abnormal gain:  If in a process the actual loss (which is inherent in a process i.e., normal loss) is less than the estimated normal loss the difference is considered as Abnormal gain.

Accounting treatment:  Abnormal gain is accounted in the same way as abnormal loss.

The value of abnormal gain units should be computed in the same way we complete cost of good units.

Entry :             Process   A/c   …   Dr.

                              To Abnormal gain    A/c

  1. Abnormal gain Account is debited with a figure of reduced normal loss (in units & value).

The balance in abnormal gain will be transferred to costing P & L A/c.

            Entry :             Abnormal gain   A/c   …   Dr.

                                          To costing P&L   A/c

 

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