INTRODUCTION

1) Process: A Process means a distinct manufacturing operation or stages. In Process

Industries, the raw material goes through a number of processes in a sequence before the
finished product is finally produced. For example, production of coconut oil involves the
following distinct processes:
(1) COPRA CRUSHING (2) REFINING AND (3) FINISHING.

2) Process Costing: Process costing is method of costing used to find out the cost of the
product in each process. Wheldon has defined process costing as “a method of costing used
to ascertain the cost of the product at each stage or operation of manufacture …..”According
to CIMA, London-“it is that form of operation costing where standardized goods are
produced”

3) Process Cost: According to CAS – 1 when the production process is such that goods are
produced from a sequence of continues or repetitive operation or processes, the cost
incurred during a period is considered as process cost.
Features of Process Costing:
(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.

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WHEN PROCESS COSTING IS APPLIED?

Process costing is appropriate for companies that produce a continuous mass of like units
through series of operations or process. Also, when one order does not affect the production
process and a standardization of the process and product exists. However, if there are
significant differences among the costs of various products, a process costing system would
not provide adequate product-cost information. Costing is generally used in such industries
such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, and food.
REASONS FOR USE OF PROCESS COSTING:
Companies need to allocate total product costs to units of product for the following reasons:
a) A company may manufacture thousands or millions of units of product in a given
period of time.

b) Products are manufactured in large quantities, but products may be sold in small
quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at
a time (eggs, cookies), etc.

c) Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales
are made. This requires a correct and accurate accounting of product costs per unit,
to have a proper matching of product costs against related sales revenue.

d) Managers need to maintain cost control over the manufacturing process. Process
costing provides managers with feedback that can be used to compare similar product
costs from one month to the next, keeping costs in line with projected manufacturing
budgets.

e) A fraction-of-a-cent cost change can represent a large dollar change in overall

profitability, when selling millions of units of product, a month. Managers must
carefully watch per unit costs on a daily basis through the production process, while
at the same time dealing with materials and output in huge quantities.

f) Materials part way through a process (e.g. chemicals) might need to be given a value,
process costing allows for this. By determining what cost the part processed material
has incurred such as labor or overhead an "equivalent unit" relative to the value of a
finished process can be calculated.

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 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 OF PROCESS COSTING

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.

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 PROCEDURE OF PROCESS COSTING
The accounting prouder in process costing is as follows:
1. Separate Process A/c: the entire manufacturing operation is divided in to separate stages
or process. each process of production is treated as a distinct cost centre a separate process
account is opened to record the cost incurred in such process.
2. Debit side of Process A/c: each process account is charged with the expenses directly
incurred for that process and plus its share of the overheads. the process account is debited
with the direct and indirect expenses (material, wages and overheads) pertain to that process.
a) Material: the raw material, sundry material and stores required for a process are issued
directly from the stores against a material requisition slip. in addition, the cost of units
transferred from the earlier process, if any, also appears on the debit side of the process
account.
b) Labour: wages paid to workers directly employed in a process are debited to the process
account. like material, the distinction between direct and indirect labour is not important in
process costing. Indirect labour expenses (e.g. manager`s salary) may, if necessary, be debited
on the basis of ratio of direct wages.
c) Expenses: the expenses directly related to the process such as repairs of machinery, power
etc. are debited to the respective process account. Indirect expenses are apportioned over
and absorbed by various processes on a suitable basis such as ratio of material costs, labour
costs or prime costs.
3.Credit side of Process A/c: The Process account is credited with the sale value of residue
etc.
4. Net cost of Process: The net cost of the output of the process (total cost less sale value of
residue) is transferred to the next process. the cost of each process is thus made up of
(i) cost brought forward from previous process and
(ii) net cost of material, labour and overheads added in the process less sale value of residue.
the net cost of the last process is transferred to finished goods account.
5. Average Unit Cost: The net cost is divided by the number of units produced to determine
the average cost per unit in that Process.

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Dr. Process I A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Basic Material xxx Xx By Normal Loss xx Xx

To Direct Material Xx By Abnormal Loss xx Xx

To Direct Wages Xx By Process II A/c. xx Xx

To Direct Expenses Xx (output

transferred to

To Production Xx Next process)

Overheads

To Cost of Xx By Process I xx Xx

Rectification of Stock A/c.

Normal Defects

To Abnormal Gains Xx

xx xxx xx Xxx

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 WASTE AND LOSSES
A manufacturing process is likely to give rise to some waste and losses. Let us first be clear
about the exact meaning of these terms – viz waste and losses.

Waste: It represents the portion of basis raw materials lost in processing having no
recoverable value. Waste may be visible - remnants of basis raw materials – invisible; e.g.
disappearance of basic raw materials through evaporations, smoke etc. normal waste is
absorbed in the cost of net output , whereas abnormal waste is transferred to the costing
profit and loss account.

Spoilage: It is the term used for materials which are badly damaged in manufacturing
operations, and they cannot be rectified economically and hence taken out of process to be
disposed of in some manner without further processing. Spoilage may be either normal or
abnormal. Normal spoilage costs are included in costs either charging the loss due to spoilage
to the production order or by charging it to production overhead so that it is spread over all
products.

Salvage: It signifies those units or portions of production which can be rectified and turned
out as good units by the application of additional material, labour or other service. For
example, some mudguards produced in a bicycle factory may have dents; or there may be
duplication of page or omission some pages in a book. Defectives arise due to sub-standards
materials, bad – supervision, bad – planning, poor workmanship, inadequate – equipment
and careless inspection.

Rectification: In the case of articles that have been spoiled, it is necessary to take steps to
salvage/reclaim as much of the loss as possible. For this purpose:
(i) all defective units should be sent to a place fixed for the purpose
(ii) these should be dismantled
(iii) goods and serviceable parts should be separated and taken into stock;
(iv) parts which can be made serviceable by further work should be separated and sent to the
workshop for the purpose and taken in to stock after the defects have been removed; and
(v) parts which cannot be made serviceable should be collected in one place for being melted
or sold.

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Scrap: It has been defined as the incidental residue from certain types of manufactures,
usually of small amount and low value, recoverable without further processing. Scarp may be
treated in cost accounts in the following ways: -
I. Where the value of scrap is negligible, it may be excluded from costs. In other words, the
cost of scrap is borne by good units and income scrap is treated as other income.
II. The sale value of scrap net of selling and distribution cost is deducted from overhead to
reduce the overhead rate. A variation of this method is to deducted the net realizable value
from material cost. This method is followed when scraps cannot be aggregated job or process-
wise.
III. When scrap is identifiable with a particular job or process and its value is significant, the
scrap account should be charged with full cost. The credit is given to the job or process
concerned. The profit or loss in the scrap account, on realization, will be transferred to the
costing profit and loss account.

PROCESS LOSS:
In many process, some loss is inevitable. Certain production techniques are of such a nature
that some loss is inherent to the production. Wastages of material, evaporation of material is
unavoidable in some process. But sometimes the Losses are also occurring due to negligence
of Labourer, poor quality raw material, poor technology etc. These are normally called as
avoidable losses. Basically process losses are classified into two categories

(a) Normal Loss

(b) Abnormal Loss

a. NORMAL LOSS:
Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials
and production process under normal conditions. It is normally estimated on the basis of past
experience of the industry. It may be in the form of normal wastage, normal scrap, normal
spoilage, and normal defectiveness. It may occur at any time of the process.

No of units of normal loss: Input x Expected percentage of Normal Loss.

The cost of normal loss is a process. If the normal loss units can be sold as a crap then the sale
value is credited with process account. If some rectification is required before the sale of the
Normal loss, then debit that cost in the process account. After adjusting the normal loss the
cost per unit is calculates with the help of the following formula:
Cost of good unit: Total cost increased – Sale Value of Scrap
Input – Normal Loss units

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b. ABNORMAL LOSS:
Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard
material, carelessness, accident etc. such losses are in excess of pre-determined normal
losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are
more than expected losses. The units of abnormal losses in calculated as under:

Abnormal Losses = Actual Loss – Normal Loss

The value of abnormal loss is done with the help of following formula:
Value of Abnormal Loss:
Total Cost increase – Scrap Value of normal Loss x Units of abnormal loss

Input units – Normal Loss Units

Abnormal Process loss should not be allowed to affect the cost of production as it is caused
by abnormal (or) unexpected conditions. Such loss representing the cost of materials, labour
and overhead charges called abnormal loss account. The sales value of the abnormal loss is
credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.

Dr. Abnormal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process A/c. xx Xx By Bank A/c. Xx Xx

By Costing P & L xx Xx

A/c.

xx Xxx xx Xxx

ABNORMAL GAIN:

The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process
industries in normal conditions) and slight differences are bound to occur between the actual
output of a process and that anticipates. This difference may be positive or negative. If it is
negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual
loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal
gain calculated in the similar manner of abnormal loss.
The formula used for abnormal gain is:

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 Abnormal Gain =

Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain Unites

Input units – Normal Loss Units

The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive
out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real
Gain.
Dr. Abnormal Gain A/c. Cr.

Units Rs. Particulars Units Rs.

Particulars

To Normal Loss xx xx By Process A/c. Xx Xx

A/c.

To Costing P & L xx xx

A/c.

xx xx Xx xx

INTER PROCESS PROFITS:

Normally the output of one process is transferred to another process at cost but sometimes
at a price showing a profit to the transfer process. The transfer price may be made at a price
corresponding to current wholesale market price or at cost plus an agreed percentage. The
advantage of the method is to find out whether the particular process is making profit (or)
loss. This will help the management whether to process the product or to buy the product
from the market. If the transfer price is higher than the cost price then the process account
will show a profit. This problem arises only in respect of stock on hand at the end of the period
because goods sold must have realized the internal profits. The unrealized profit in the closing
stock is eliminated by creating a stock reserve. The amount of stock reserve is calculated by
the following formula.
Stock Reserve = Transfer Value of stock x Profit included in transfer price
Transfer Price

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DISTINCTION BETWEEN JOB COSTING AND PROCESS COSTING

Job order costing and process costing are two different systems. Both the systems are used
for cost calculation and attachment of cost to each unit completed, but both the systems are
suitable in different situations. The basic difference between job costing and process costing
are

Basis of Job order costing Process costing

Distinction
1. Specific order Performed against specific Production is contentious
orders
2. Nature Each job many be different. Product is homogeneous and
Standardized.
3. Cost determination Cost is determined for each Costs are compiled for each
job separately. process for department on
time basis i.e. for a given
Accounting period.
4. Cost calculations Cost is compiled when a job Cost is calculated at the end
is completed. of the cost period.
5. Control Proper control is Proper control is
comparatively difficult as comparatively easier as the
each product unit is different production is standardized
and the production is not and is more suitable.
Continuous.
6. Transfer There is usually not transfer The output of one process is
from one job to another transferred to another
unless there is some surplus process as input.
work.
7. Work-in-Progress There may or may not be There is always some
work-in-progress. Work-in-progress because of
continuous production.
8. Suitability Suitable to industries where Suitable, where goods are
production is intermittent made for stock and
and productions is continuous.
Customer orders can be
identified in the value of
production.

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 VALUATION OF WORK-IN-PROGRESS
MEANING OF WORK IN PROGRESS:
Since production is a continuous activity, there may be some incomplete production at the
end of an accounting period. Incomplete units mean those units on which percentage of
completion with regular to all elements of cost (i.e. material, labour and overhead) is not
100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-
Progress is valued in terms of equivalent or effective production units.

MEANING OF EQUIVALENT PRODUCTION UNIT:

This represents the production of a process in terms of complete units. In other words, it
means converting the incomplete production into its equivalent of complete units. The term
equivalent unit means a notional quantity of completed units substituted for an actual
quantity of incomplete physical units in progress, when the aggregate work content of the
incomplete units is deemed to be equivalent to that of the substituted quantity. The principle
applies when operation costs are apportioned between work in progress and completed
units.
Equivalent units of work in progress = Actual no. of units in progress x Percentage of
work completed.
Equivalent unit should be calculated separately for each element of cost (viz. material, labour
and overheads) because the percentage of completion of the different cost component may
be different.
ACCOUNTING PROCEDURE:
The following procedure is followed when there is Work-in Progress
i. Find out equivalent production after taking into account of the process losses,
degree of completion of opening and / or closing stock.
ii. Find out net process cost according to elements of costs i.e. material, labor and
overheads.
iii. Ascertain cost per unit of equivalent production of each element of cost
separately by dividing each element of costs by respective equivalent production
units.
iv. Evaluate the cost of output finished and transferred work in progress.

PROBLEMS ON EQUIVALENT PRODUCTION:

The problems are dividend in to four groups. They are:
I. When there is only closing work-in-progress but without process losses
II. When there is only closing work-in-progress but with process losses
III. When there is only opening as well as closing work-in- progress without
process losses
IV. When there is opening as well as closing work-in- progress with process losses

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Situation I:
When there is only closing work-in-progress but without process losses:

In this case, the existence of process loss is ignored. Closing work-in-progress is

converted into equivalent units on the basis of estimates on degree of completion of
materials, labour and production overhead. Afterwards, the cost per equivalent unit is
calculated and the same is used to value the finished output transferred and the
closing work-in-progress.

Situation II:
When there is closing work-in-progress with process loss or gain:

If there are process losses the treatment is same as already discussed in this chapter. In
case of normal loss nothing should be added to equivalent production. If abnormal loss is
there, it should be considered as good units completed during the period. If unit’s
scrapped (normal loss) have any reliable value, the amount should be deducted from the
cost of materials in the cost statement before dividing by equivalent production units.
Abnormal gain will be deducted to obtain equivalent production.

Situation III:
Opening and closing work-in-progress without process losses.
Since the production is a continuous activity there is possibility of opening as well
as closing work-in-progress. The procedure of conversion of opening work-in-progress
will vary depending on the method of apportionment of cost followed viz, FIFO, Average
cost Method and LIFO.
(1) Format of statement of Equivalent Production:

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(2) Statement of cost per Equivalent Units:

(3) Statement of Evaluation:

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 METHODS OF VALUATION OF WORK IN PROGRESS

(a) FIFO METHOD:

The FIFO method of costing is based on the assumption of that the

opening work-in-progress units are the first to be completed. Equivalent
production of opening work-in-progress can be calculated as follows:
Equivalent Production = Units of Opening WIP x Percentage of
Work needed to finish the units

(b) AVERAGE COST METHOD:

This method is useful when price Fluctuate from period to period. The
closing valuation of work-in-progress in the old period is added to the cost
of new period and an average rate obtained. In calculating the equivalent
production opening units will not be shown separately as units of work-in-
progress but included in the units completed and transferred.

(c) WEIGHTED AVERAGE COST METHOD:

In this method no distinction is made between completed units from

opening inventory and completed units from new production. All units
finished during the current accounting period are treated as if they were
started and finished during that period. The weighted average cost per unit
is determined by dividing the total cost (opening work-in-progress cost +
current cost) by equivalent production.

(d) LIFO METHOD:

In LIFO method the assumption is that the units entering into the process is the
last one first to be completed. The cost of opening work-in-progress is charged to
the closing work-in-progress and thus the closing work-in- progress appears cost of
opening work-in-progress.

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 Case Study on Volant Textile Mills Ltd.
Textiles: The word 'textile' is from Latin, from the adjective textilis, meaning 'woven', from
textus, the past participle of the verb texere, 'to weave'.
Textile industry in India: The Textile industry in India traditionally, after agriculture, is the
only industry that has generated huge employment for both skilled and unskilled labour in
textiles. The textile industry continues to be the second largest employment generating
sector in India. It offers direct employment to over 35 million in the country. In 2010, there
were 2,500 textile weaving factories and 4,135 textile finishing factories in all of India.
About the unit: Volant Group is promoted by the Somani family, which has a textile
manufacturing background since the year 1932 in Mumbai, India. Volant is a multi-divisional
textile manufacturing company having its facilities located at Solapur. The scope of its
business includes yarn dyeing, weaving, woven fabric processing, knit processing, finishing
and designing with state-of-the-art infrastructure.
Volant has also taken a 3 years management contract an open end (OE) spinning plant for
cotton yarn there by having better control on the quality of yarn.
Date of Establishment: 1993
Market Capital: 49.4703 (Rs. in Millions)
Management Details: Chairperson - Rajesh Somani
MD - Anantvikram Somani
Business Operation: Textile - Spinning
Registered Office address: Ansa Industrial Estate,Saki Vihar Road,Saki Naka,
Andheri (E),Mumbai 400072.

Company History
Volant Textile Mills Ltd. incorporated in 1994, is a 100% Export Oriented Unit manufacturing
cotton and bleached grey fabrics. The weaving unit comprises of- 36 nos. Sulzer machines -
Model PU 130 ES 120 E10 D1 having 130' reed space. 5 no’s of these Sulzer machines are
with batching motion, 6 nos. Sulzer machines – Model PU 130 having 130” reed space with
Dobby, 10 nos. Somet Rapier SM93 Model Looms having 90” reed space with Jacquard 1344
hooks, High Speed wrapping machine from Benninger India Ltd. Twin sow-box sizing
machine with synchro-four system from Amba Machine Works Pvt. Ltd. Weave - direct
humidification plant from LTG, Germany Inspections, checking, roll & bale packaging
equipments Generator plant for full capacity requirement It has exported to all major
markets of the world like Australia, Bangladesh, EEC, Hong Kong, Israel, Nigeria, Russia,
Taiwan, USA. The company follows the American 10 point grey inspection In 2008, the
promoters have made payment to SASF for buy back of 7,50,000 Equity shares at par, as per

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terms of the negotiated settlement the Company had entered into with SASF on September
27, 2006. The Company added 6 Sulzer weaving machines with Dobby and 10 Jaquard
weaving machines, commercial production of which started on October 09, 2008. The
addition of machines was with reference to proposed Draft Rehabilitation scheme which has
been submitted to the Operating Agency for bringing about Viability for the Company.

Products:
1. Fancy Shirting
2. Fibres & Acrylic Waste
3. Fabrics
4. Fabrics Lumps
5. Scrap
Processes involved in Manufacturing

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1. Spinning - Spinning is a process of making or converting fibre materials into yarns.
Since few centuries ago, spinning have been known as a process of converting raw
materials (fibre) such as cotton and wool into yarns for making textile fabric or
products. Fibres cannot be used to make clothes in their raw form. For this purpose,
they must be converted into yarns. The process used for yarn formation is
spinning.Drawing pulls the staple lengthwise over each other. As a result longer and
thinner slivers are produced. After several stages of drawing out, the sliver is passed
to the spindles where it is given its first twist and is then wound on bobbins. 'Roving'
is the final product of the several drawing-out operations. It is the preparatory stage
for the final insertion of twist. Till now, enough twist is given for holding the fibres
together but it has no tensile strength. It can break apart easily with a slight pull.

2. Weaving - Weaving is a method of fabric production in which two distinct sets of yarns
or threads are interlaced at right angles to form a fabric or cloth. Cloth is usually woven
on a loom, a device that holds the warp threads in place while filling threads are woven
through them. A fabric band which meets this definition of cloth (warp threads with a
weft thread winding between) can also be made using other methods, including tablet
weaving, back-strap, or other techniques without looms. The way the warp and filling
threads interlace with each other is called the weave. The majority of woven products
are created with one of three basic weaves: plain weave, satin weave, or twill. Woven
cloth can be plain (in one colour or a simple pattern), or can be woven in decorative
or artistic designs. In order to interlace the warp and weft yarn, there are three
operations which often called primary motions are necessary:

• Shedding- The process of separating the warp yarn into two layers by raising the
harness to form an open area between two sets of warps and known as shed.

• Picking- The process of inserting the filling yarn through the shed by the means of
the shuttle less while the shed is opening.

• Beating- The process of pushing the filling yarn into the already woven fabric at a
point known as the fell and done by the reed.

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3. Dyeing & Printing - Dyeing is the process of adding color to textile products like
fibers, yarns, and fabrics. Dyeing is normally done in a special solution containing dyes
and particular chemical material. After dyeing, dye molecules have uncut chemical
bond with fiber molecules. The temperature and time controlling are two key factors
in dyeing. The common dyeing process of cotton yarn with reactive dyes at package
form is as follows:

a. The raw yarn is wound on a spring tube to achieve a package suitable for dye
penetration.

b. These softened packages are loaded on a dyeing carrier's spindle one on another.

c. The packages are pressed up to a desired height to achieve suitable density of

packing.

d. After dyeing, the packages are unloaded from the carrier into a trolley.

e. The packages are then dried to achieve the final dyed package.

4. Finishing -In textile manufacturing, Finishing refers to the processes that convert
the woven or knitted cloth into a usable material and more specifically to any process
performed after dyeing the yarn or fabric to improve the look, performance, or "hand"
(feel) of the finished textile or clothing. Some finishing techniques such as bleaching
and dyeing are applied to yarn before it is woven while others are applied to the grey
cloth directly after it is woven or knitted. Some finishing techniques, such as fulling,
have been in use with hand-weaving for centuries; others, such as mercerization, are
by-products of the Industrial Revolution.

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In the Books of Textile Mills Ltd.
Process Accounts

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 Conclusion
The researcher has observed the following points:

• Process costing is used in situations where homogeneous products or services are

produced on a continuous basis.

• To compute unit costs in a department, the department's output in terms of

equivalent units must be determined.

• Volant Group is promoted by the Somani family, which has a textile manufacturing
background since the year 1932 in Mumbai, India.

• It has a multi divisional textile manufacturing company having its facilities located at
Solapur.

• The scope of its business includes yarn dyeing, weaving, woven fabric processing, knit
processing, finishing and designing with state-of-the-art infrastructure.

• This company is operational from the year 1993.

• Raw materials used include cotton, silk, wool, flax, polyester, dyes, chemicals and
auxiliaries.

• The processes involve spinning, weaving, dyeing, printing and finishing.

• Volant has also taken a 3 years management contract on an open-end spinning plant
for cotton yarn there by having better control on the quality of yarn.

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