Process Costing

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Process costing is a costing method used when it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. Process costing traces and accumulates direct cost, and allocates indirect cost incurred during a manufacturing process.

The following are examples of some of the industries which use process costing:

1. Oil refineries
2. SoapÂ manufacturers
3. Paint manufacturers
4. Sugar manufacturers

Features of Process Costing

The following features distinguish process costing from other costing methods:

a) The continuous nature of production in many processes means that there will usually be closing work in progress which must be valued. In process costing it is not possible to build up a cost record of the cost incurred on individual units of output because production in progress is an indistinguishable homogeneous mass.

b) The output of one process becomes the input of the next,unless it is the final process, culminating in the finish product.

c) Losses often occur during the process due to spoilage, wastage, evaporation and so on.

d) Output from production may be a single product, but depending on the industry there may also be by-products and joint products.

Process accounts are used to accumulate the cost incurred during a process. The following four step approach is used to complete the process accounts, minimizing the chances of error:

i. Determine output and losses

ii. Calculate cost per unit of output, losses and work in progress

iii. Calculate total cost of output, losses and work in progress

iv. Complete accounts

Example:

The input to a process is 2,000 units at a cost of \$ 9,000. Normal loss is 10%. No opening and closing stocks. Complete the process accounts if output is 1660 units

Solution:

Before solving the example, the following points should be noted.

a. Normal loss is given no share of cost. Therefore, the cost of output will be based on 90% of units completed i.e. 2,000 @ 90% = 1,800

b. Abnormal loss will be given a cost. Abnormal loss = Total loss – Normal loss

Step 1:

Now, to complete the process account the first step is to determine output and losses

Total Input = 2,000
Output = 1,660
Normal Loss = 200
Abnormal Loss = 140

Step 2:

Calculate cost per unit of output and losses

Total Cost Incurred / Expected Output = 9,000 / 1,800 = \$5 per unit

Step 3:

Calculate total cost of output and losses

Output = \$8,300
Normal Loss = Nil
Abnormal Loss = \$700

Step 4:

Process accounts

 Particular Units Amount (\$) Particular Units Amount (\$) Cost Incurred 2,000 9,000 Normal Loss 200 0 Abnormal Loss 140 700 Output 1,660 8,300 2,000 9,000 2,000 9,000

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Quote Wayne Rooney, 3 February, 2018
Hi, somebody help me solve the question below.

Timau Ltd produces a detergent which passes through two processes namely mixing and refining to completion.  The following data relate to the refining process for the month of June 2000.

Cost of opening stock:               shs.
Materials.                               100,000
Labour.                                  25,000

During the month 20,000 units were passed from the mixing to the refining process.  Costs incurred during the month were:
Shs.
Labour.       125,000
Other materials.  45,300

At the end of the month 21000 units had been completed and passed to finished goods while 4000 were still in process having reached the following  stages:

Materials 100%
Labour 40%