by Process costing is a costing method applied where goods are produced through a sequence of continuous or repetitive operations or processes. It is used in industries like chemicals, oil refining, textiles, sugar, food processing, paints, etc., where the output of one process becomes the input of the next.
Process Account is a ledger account used to accumulate all costs associated with a specific process. It helps identify the cost per unit and track material, labor, and overheads incurred in each production stage.
Steps in Preparation of a Process Account:
1. Identify the Process Stages
Each stage of production must be separately accounted for. For example, if a product passes through Process 1, Process 2, and Process 3, you need to prepare a separate process account for each.
2. Record Direct Material
Materials consumed in the process are debited to the respective process account.
Example:
₹10,000 worth of raw material is consumed in Process 1.
3. Record Direct Labor
Labor directly involved in a particular process is also debited to that process account.
Example:
₹5,000 is spent on wages in Process 1.
4. Allocate Direct Expenses
Expenses like fuel, power, and maintenance directly related to the process are debited to the process account.
Example:
₹2,000 of fuel and ₹1,000 of maintenance for Process 1.
5. Allocate Overheads
Overheads (indirect costs) are apportioned to each process using a predetermined rate.
Example:
Factory overheads allocated to Process 1: ₹3,000.
6. Account for Losses
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Normal Loss: Unavoidable loss due to the nature of the process.
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Abnormal Loss: Loss beyond the expected limit, recorded separately and transferred to the Abnormal Loss Account.
7. Transfer to Next Process
The output of the process (minus losses) is transferred to the next process or finished goods.
Process Account Table Format:
Let’s assume a company has two processes: Process 1 and Process 2.
Process 1 Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Raw Materials | 10,000 | By Normal Loss (100 units @ ₹0) | 0 |
| To Direct Labour | 5,000 | By Abnormal Loss (50 units) | 1,000 |
| To Fuel & Power | 2,000 | By Transfer to Process 2 | 20,000 |
| To Maintenance Expenses | 1,000 | ||
| To Factory Overhead | 3,000 | ||
| Total | 21,000 | Total | 21,000 |
Note: Abnormal Loss is valued at cost per unit and transferred to the Abnormal Loss Account.
Process 2 Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Transfer from Process 1 | 20,000 | By Normal Loss (200 units @ ₹0) | 0 |
| To Direct Labour | 6,000 | By Transfer to Finished Goods | 30,000 |
| To Fuel, Power, Maintenance | 2,500 | By Abnormal Gain (50 units) | 1,500 |
| To Overhead Allocated | 1,500 | ||
| Total | 30,000 | Total | 31,500 |
Note: Abnormal Gain is the excess output received over expected. It is debited to Process Account and credited to Abnormal Gain Account.
Abnormal Loss Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Process 1 Account | 1,000 | By Scrap Value (50x₹2) | 100 |
| By Costing P&L Account | 900 | ||
| Total | 1,000 | Total | 1,000 |
Abnormal Gain Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Costing P&L Account | 1,500 | By Process 2 Account | 1,500 |
| Total | 1,500 | Total | 1,500 |
Closing Transfers:
After preparation of the process accounts:
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The output from the last process is transferred to the Finished Goods Account.
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Any abnormal loss/gain is transferred to the Costing Profit and Loss Account.
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Scrap value, if any, is deducted from the loss.
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