Process Costing | Terminology | Users | Types | Job vs Process Costing

 

  

Process Costing

The cost accounting system used by process is called process costing.

To prepare bread, we need mixing of white flour, ghee, sugar, eggs, baking powder etc.

From this mixture, different size of bread can be prepared.

These sized are baked in oven.

Baked bread cut and packed.

 

Process costing is applied in the oil refinery, chemical, timber, textile, sugar mill and food processing industries.

These companies set the right prices for their products and determine whether costs are tracking in line with forecasts.

 

A separate process account is prepared for each process.

Materials, labour, overhead, machine expenses etc are debited in each process.

Process costing helps to determine the cost of their products at each stage of the process of manufacturing.

It helps to control costs, evaluate performance and check the products at each stage.

 

 

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Cost Flow in Process Costing

With process costing, company tracks the flow of costs from department to department, rather than tracking costs for each individual item.

Each department adds direct labour and manufacturing overhead costs, plus the cost of any raw materials it uses.

Company may use separate work-in-process inventory accounts for each department or stage in the process.

 

 

 

 

  

Types of Process Costing

In process costing

There are three types of process costing to calculate costs.

They are weighted average costs, standard costing and first-in first-out (FIFO).

 

Weighted average costs

It is the simplest method of calculating cost.

Company adds all costs for the current process and finds out total cost.

Total cost is divided by the total number of output units.

Weighted average costs are used where cost fluctuations from period to period.

 

Standard costs

Instead of actual costs, standard costs method uses an estimated standard cost for each process.

The estimated costs are compared to actual costs after a production run is finished.

The difference between actual cost and standard cost is charged to a variance account.

This method is too difficult and time-consuming to collect current information about the actual costs.

Therefore, the company typically uses this method.

 

First in, first out (FIFO) 

FIFO is the most complicated process costing approach.

FIFO is used to obtain more precise product costing, especially in situations where costs change significantly from one period to the next.

The uncompleted product (work in progress) and current process products are calculated together.

FIFO assumes that work in progress at the beginning of the current period are to be completed first.

 

 

 

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Terminology of Process Costing

There are different kinds of terminology (vocabulary, language) in contract account.

Out of them, some important are given below:

 

 

Direct and indirect materials

Materials are used for producing products.

Required materials are issued to process first account.

The output of process first transfers to process second.

In second process, additional materials can be introduced.

This process will be continuous upto finished goods are realized.

Materials are: raw materials and work in progress materials

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Materials account
	(Being: materials introduced or purchase for process)

 

 

Direct and indirect labour

The expenses related or involved in process work is called labour cost.

Such as, wages paid to workers and supervisor etc.

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Labour account
	(Being: labour expenses paid)

 

 

Direct and indirect expenses

Expenses except materials and labour are direct and indirect expenses.

Such as electricity, hire charge, depreciation on machinery etc.

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Direct expenses account
	To Indirect expenses account
	(Being: direct and indirect expenses paid

 

 

 

Overheads

Expenses other than materials and labour (wages) are overheads.

Expenses related to head office, legal, store, canteen, security etc are the overheads of process account.

These expenses may be on materials, labour and wages etc.

 

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Overhead account
	(Being: overhead expenses paid

 

 

Machine expenses

Expenses related to manufacturing by machine are called machine expense.

These expenses may be on machine hour basis.

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Machine expenses account
	(Being: machine expenses paid

 

 

 

Works overhead

The expenses related to manufacturing are called works overhead.

It is also called factory cost and works cost.

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Process account	Dr
	To Works overhead account
	(Being: work overhead paid

 

 

 

Waste or wastage

Waste does not have any value in processing; it is loss in quantity.

The main wastes are shrinkage, smoked, evaporation etc.

Example:

10 kg potato makes only 4 kg chips.

Here, 10 – 4 = 6 kg is waste loss.

 

1 liter (900 gram) milk makes 200 gram khowa.

Here, 900 – 200 = 700 gram is waste.

 

 

Keep in Mind

Although value of materials increase in waste but we do not record value.

We record only loss in quantity.

 

 

Users of Process Costing

The main process costing users are given below:

Manufacturing industries

Such as flour mills, iron and steel, paper, rubber, textile, soap, food product, meat product etc.

 

Assemble industries

Like computers, automobiles, electrical and electronics appliances such as radio, televisions etc.

 

Mining industries

Such as fuel oil, coal, iron, sand etc.

 

Chemical industries

Such as medicines, herbal products etc.

 

Public service

Such as electricity, water supply, gas supply etc.

 

 

 

Differences between Job Costing and Process Costing

The main differences between job costing and process costing are given below:

Bases	Job costing	Process costing
Production	Production is not according to in process basis.	Production is in continuous process but is uniform.
Cost determination	Costs are determined for each job separately.	Costs are determined in each process as total cost and cost per unit for given accounting period.
Entity	Each job is separate and independent of others	One process is related to other viz they are dependents.
Transfer	Generally, goods are not transferred to other job.	Goods are transferred to next process till completed.
Work in progress	There may or may not be work in progress	Generally, there is work in progress in process.
Time period	Job costing has not time frame.	Process costing has time costing; time may be week, month or year.
Quality and quantity	Job costing is for specific order received; quality and quantity is different between jobs.	Process costing is for mass production; there is standard product quality and quantity.

 

 

Advantages of Process Costing

The main advantages of process costing are:

It is simple and less expensive to find out process cost.

Process costing can be calculated daily, weekly, monthly or yearly.

Management can control and evaluate the performance at each process.

It is easy to fix standard price through process costing.

 

Disadvantages of Process Costing

The main disadvantages of process costing are:

Process cost in based on average so it may be not accurate calculation.

If there is an error in one process, it is carried to next process also.

Cost is based on historical value so difficult to effective control.

It does not evaluate the efficiency of individual worker.

 

 

Procedures of potato chips making in Process Costing

Potato

Potato washing

Potato peeler

Potato cutting

Chips frying

Chips

Chips flavouring

Chips packing

Chips

 

 

 

 

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