Process Costing

Process Costing Terminologies – What Is Process Costing?

This article was created to help you with an insight into Process Costing. Here, we explain the concept of Process Costing, the industries where Process Costing is applicable, The Features of Process Costing, Terminologies, and formulas of Process Costing.

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What is Process Costing?

Process costing is normally used where the production will move from one process or one department to another before the final products are produced. It involves a situation where there will be continuous mass production of identical units through a series or production process.

According to Wikipedia, Process costing is an accounting methodology that traces and accumulates direct costs and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month’s production.

Industries Where Process Costing is Used/Applied.

Process costing is normally used where production will move from one stage to another. Examples are;

  1. Meat processing industries.
  2. Furniture processing industries.
  3. Chemical processing industries.
  4. Oil industries.
  5. Textile industries.
  6. Glass cutting industries.
  7. Papercutting industries.
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Features of Process Costing

  • Under process costing, there should be provision for wastage, damages, or evaporation.
  • Appropriate records should be kept for the cost centre and the cost unit.
  • The cost of the unit chosen should be relevant to the production process.
  • Under process costing, the end of a process is the beginning of another process.
  • The output from the process is expected to be a single product. Sometimes, there could be a by-product of work in process.
  • Appropriate methods are always used in recording the overhead cost.
  • Accurate records are always kept for the finished products or semi-finished product.

Terminologies Under Process Costing

  • Normal loss.
  • Abnormal loss.
  • Abnormal gain.
  • Scrap.
  • Waste.
  • Defective units.
  • Spoilage.

Normal Loss

This is also called expected loss in the production process. They are always provided for in the production budget and the normal loss is always sold using scrap value that will be provided by the management.

Causes of Normal Loss

  1. The inefficiency of workers.
  2. Machine breakdown.
  3. Power failure.
  4. Industrial action (strike).
  5. Defective raw materials.
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Abnormal Loss

This is also called an unexpected loss in the production process. They represent the losses that are deemed to be above the normal loss. An abnormal loss is difficult to be predicted hence they are not always provided for in the production budget. They are always valued using the value of the good unit.

Abnormal Gain

This is when the final output is greater than the expected output/units. They are also valued using the value of the good unit.

Scrap Value

These are parts of the raw materials that are no longer required for production because they are outdated or useless as a result of the production process.

Waste

These are also part of the raw material that is no longer used in production and their value is always small if they are to be sold.

Defective Units

These are unit produced but are not up to the standard set by the management hence they are returned for reprocessing to meet the standard.

Spoilage

These are the unit produced but they are not up to the standard set by the management hence they are sold up immediately.

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Process Costing Formulas

  1. TOTAL COST OF PRODUCTION: Summation of all costs incurred, and transfer from a determined process.
  2. EXPECTED UNIT: Input material minus (-) Normal loss.
  3. DETERMINE ABNORMAL LOSS OR ABNORMAL GAIN: Expected unit minus (-) Final output.
  4. COST PER UNIT: Total cost divided by (÷) Expected unit
  5. VALUE OF GOOD UNIT: Final output multiplied by (×) Cost per unit.
  6. VALUE OF ABNORMAL LOSS: Quantity of abnormal loss multiplied by (×) Cost per unit.

Video Guide on Process Costing

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