Process Costing Flashcards
what is process costing?
Process Costing is a method of costing used to calculate the cost of a product at each process, operation or stage of manufacture.
DEFINITION
Process costing is used to find the unit cost of making a product which passes through several processes. It is used by firms which mass produce identical or standardized products e.g canning/bottling. It is commonly used in the chemical industry. The total input cost of each process is divided by the total number of good units produced to give a common cost per unit/kg/litre.
What are the features of process costing?
- Units pass through a series of stages of production/ processes where the output of one stage is the input of the next stage.
- the product is produced in one single process.
- there is simultaneous production at one or more processes, of different products
- simultaneous production of identical products, products are not distinguishable from each other
- completed output is transferred to stock as a single commodity.
what is process production?
process production involves a continuous sequence of operations. Each operation is a distinct stage in the manufacturing process in which the output of one stage becomes the input of the next stage. Completed output is transferred to stock as a single commodity. By using process costing you can establish the unit cost of making a product.
Where is process costing used?
in firms which have a continuous flow of identical products where it is not possible to distinguish one product from another.
examples of industries which use process costing
Chemical works, oil refining, soap making and distillation processes such as whisky
Food processing, canning factories, biscuit works, meat products, milk and dairy
Textiles, weaving and spinning
Paper mills, paint, ink and varnishing
what is normal loss?
This is an expected loss which will be incurred during the production process. Some losses will be scrap whilst other losses will be waste. This normal loss can be calculated in advance either by using a formula or based on previous processing experience e.g normal loss is 5% of total materials input.
Normal loss is loss that is expected to occur under normal operating procedures. It may be caused by evaporation or off - cuts of material.
scrap
This refers to discarded materials which have some recovery value however they can no longer be used for their original purpose. Products which are found to be defective , or raw material which proves not to be up to standard may be used in other departments or sold at a much lower price than they cost. It is important to keep the quantity of scrap to a minimum and where it occurs, to make it more profitable by further processing. This will reduce the number of good units produced and hence increase the cost of output.
spoilage
This is a form of scrap, It is spoiled work which is partly complete and doesn’t reach the standard required, It may be sold as substandard material. This, just like scrap will reduce the number of good units produced and hence will increase the cost per unit of output.
Waste
This is discarded substances which have no value. Eg if broken glass fell into a tank of soup then the soup would be considered unfit for human consumption and would be destroyed.
Abnormal loss
An Abnormal Loss is caused by unexpected or abnormal conditions, such as inferior materials, or carelessness by workers. All losses under this category must be thoroughly investigated and steps taken to prevent any recurrence.
With a normal loss the cost is absorbed into the cost of production, but when an abnormal loss occurs a separate Abnormal Loss Account must be opened and the total cost of the abnormal loss charged to it.
it is valued at the same unit amount as the good output using your Cost per unit/kg/litre formula answer.
Abnormal Losses do not affect the overall cost of good output.
Work in progress
This refers to partly finished materials/products. These partly completed products need to be valued and the quantity accounted for. There may be opening stock of work in progress and closing stock of work in progress. The closing stock of work in progress will affect your cost per unit/kg/litre calculation and should be part of your formula
