process of accounting costing

Process Costing

This system of cost determination is used in those firms and industries, where the raw material passes through various processes and stages before it is converted to a manufactured goods or finished commodity and where the cost of every process is to be found out. In this system, a separate account is made for every process in which the expenses of that particular process are written and the cost of every process is found out. This system is used specifisteel, colour, paper etc. cally in industries manufacturing oil, soap, vanaspati, sugar;

Definitions

Some definitions of process costing are as follows-

According to Sharles, “Process cost accounting is
used in those industries which produce goods that have to pass through various processes and where it is necessary to find out the cost of every process.”

According to W.S. Wood, “Process costing is used in those industries which has many such departments in which various methods of production are used.”

Characteristics of Process Cost Accounting

1.In this, the product has to pass through more than one process.

2.The manufactured goods of every previous process forms the raw material for the next process.

3.The production cost of every process is found out separately, and hence an account is kept of the loss in weight and wastage that occurs in every process.

4.In this system, an account of by-products and joint-products is also kept.

Principles of Process Cost Accounting

Process Cost Accounting is based on the following general principles

(1) The main objective of Process Cost Accounting is to determine the production cost of the various processes. Therefore, firstly the entire production work is divided into various processes according to the nature of production.

(2) After the processes have determined according to their requirement, a separate process cost account is made for every process.

(3) In every process, the appropriate direct and indirect expenditure related to the process is written.

(4) In every process, an accurate account of the loss weight and wastage is kept and its accounting is done in that process itself.

(5) The product of one process is sent as raw material for the next process. Sometimes, it is sent to the store from where it is sent to the next process according to requirement.

(6) After the product passes through the final process, it becomes a finished goods and from here it is sent to the store from where it is sold.

(7) Sometimes, the goods is sold before its production is finished or completed. The sale of scrap is done in this manner; therefore it is necessary to keep this in mind.

(8) On the basis of normal wastage, abnormal wastage and abnormal gain should also be properly accounted for in process cost account.

Need for Determination of Process Cost

In industries, where the production work is done
through various processes, determination of process cost is necessary because of the following reasons

(1) Valuation of every process- When production is done through various processes, then the efficiency, cost etc. of every process is different. Hence, an exact valuation is possible only when separate accounts for each process are kept and this also helps in taking corrective measures and in becoming economical.

(2) Account of profit and loss- The amount of ex-
penses and the nature of expenses are different for every process. In the same way, the loss in weight and wastage is different’ and so, the loss that occurs due to it is also different. Therefore, in order to keep their accounts separately process, cost accounts are necessary.

(3) To find out cost of by-products and joint productsIn some goods along with the main product, by-products and joint products are also produced by itself and in such situations, in order to find out the cost of the main product, it becomes necessary to find out the cost of the by-productand the joint product. All these costs can be found out through process cost accounts.

(4) For deciding production and sale- Sometimes,
some goods are available in the market in an unfurnished or half-finished form, hence the cost from raw materials upto the unfinished stage can be determined only through process cost accounts. After this, the cost price and market price of the unfinished product can be compared and decision can be taken whether the goods should be produced or whether it should be purchased from the market and the further process be undertaken.