Process Costing

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P E S Institute of Technology
Department of MBA
100 Feet Ring Road, BSK III Stage, Bangalore – 560 085

A TERM PAPER
On

Process Costing

Submitted in fulfillment of the requirements for the 3rd SEM MBA Management Accounting and Control Systems

Submitted to: Submitted by: Prof. G V M Sharma Vandana Rajput Dept. of MBA 1PB11MBA60

INTRODUCTION:
Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. It is assumed in process costing that the average cost presents the cost per unit. Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit. MEANING OF PROCESS COSTING:

Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the 2 cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process. Definition:

CIMA London defines process costing as “that form of operation costing which applies where standardize goods are produced” (a) The production is continuous
(b) The product is homogeneous
(c) The process is standardized
(d) Output of one process become raw material of another process (e) The output of the last process is transferred to finished stock (f) Costs are collected process-wise
(g) Both direct and indirect costs are accumulated in each process (h) If there is a stock of semi-finished goods, it is expressed in terms of equalent units
(i) The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.
Advantages of process costing:
1. Costs are be computed periodically at the end of a particular period 2. It is simple and involves less clerical work that job costing 3. It is easy to allocate the expenses to processes in order to have accurate costs. 4. Use of standard costing systems in very effective in process costing situations. 5. Process costing helps in preparation of tender, quotations 6. Since cost data is available for each process, operation and department, good managerial control is possible. Limitations:

1. Cost obtained at each process is only historical cost and are not very useful for effective control. 2. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control. 3. Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations. 4. The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary. 5. Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable. COSTING PROCEDURE

For each process an individual process account is prepared. Each process of production is treated as a distinct cost centre. Items on the Debit side of Process A/c.
Each process account is debited with –
a) Cost of materials used in that process.
b) Cost of labour incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some pre determined. e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process)
Items on the Credit side:
Each process account is credited with
a) Scrap value of Normal Loss (if any) occurs in that process. b) Cost of Abnormal Loss (if any occurs in...
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