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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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.
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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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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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 |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Materials account |
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(Being: materials introduced or purchase for process) |
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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 |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Labour account |
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(Being: labour expenses paid) |
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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 |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Direct expenses account |
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To Indirect expenses account |
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(Being: direct and indirect expenses paid |
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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 |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Overhead account |
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(Being: overhead expenses paid |
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Machine expenses
Expenses related to manufacturing by machine are called machine expense.
These expenses may be on machine hour basis.
Journal Entry
Date |
Particulars |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Machine expenses account |
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(Being: machine expenses paid |
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Works overhead
The expenses related to manufacturing are called works overhead.
It is also called factory cost and works cost.
Journal Entry
Date |
Particulars |
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LF |
Amount Dr |
Amount Cr |
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Process account |
Dr |
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To Works overhead account |
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(Being: work overhead paid |
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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. |
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.
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. |
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.
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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