Preparation of Process Account

26/07/2021 1 By indiafreenotes

Process account is the account which is made for calculating the cost of specific process. We show the material cost, labour cost and overhead cost in the debit side of process account. Its total will be transfer to next process. If there is the last process, then last process account’s total debit side total will be transferred to finished stock account.

Procedure of Process Cost Accounting

  1. Separate account is opened for each process or department. All costs (both direct and indirect) are charged to each such process or department.
  2. The physical units (quantity) of output in each process are recorded in the respective process accounts.
  3. The cost per unit of output is determined by dividing the total cost of each process by total production at the end of each period.
  4. The total cost of one process is transferred to the next process as an initial cost till the production is completed. The cumulative costs of different processes determine the total cost and per unit cost at the final stage.
  5. When there is work in progress at the end of the period, the stage of completion of the incomplete work is determined, and the computation of inventory is in terms of equivalent production units. For example, if 100 units are 40% complete, they are taken as equivalent to 40 completed units. The total number of completed units divides the total cost and the unit cost is obtained for the process.
  6. In case of any normal loss in the process, the units produced in that process bear that loss. Accordingly, the average cost of that process is increased. In case of any abnormal loss, it is treated as general business loss and transferred to costing profit and loss account.

Process Losses:

Process loss refers to the loss in quantity of output during the normal course of manufacture due to various reasons. The process may take the form of wastage, spoilage, defectives, or scrap. It may be due to the nature of operations involved and to that extent inevitable. If the loss of quantity occurs in the normal course of work and inherent in the nature of work, it is known as ‘normal loss’.

Normal loss is an expected loss and uncontrollable. Management can provide for such loss based on past experience or technical data. Besides this, the loss of quantity may arise due to certain unexpected or abnormal factors or inefficiency of operations. Such loss is known as ‘abnormal loss’. It cannot be accurately estimated in advance.

However, to a larger extent, it is controllable. Abnormal loss is estimated by fixing due allowance for normal loss. For example, if the management decides to allow 10% of input as normal loss, and the actual loss is more than 10%, then the excess loss will be treated as abnormal loss.

Sometimes, it may happen that the actual loss in a process is less than the estimated normal loss or actual output is more than the expected normal output. The difference is regarded as abnormal gain. As the normal loss is the expected loss of the concerned process, it should form part of the cost of the process.

But abnormal loss or abnormal gain does not affect the cost of production of the concerned process. Hence, it should be transferred to costing profit and loss account. Abnormal loss is credited to process account and debited to abnormal loss account. Abnormal gain is debited to process account and credited to abnormal gain account.