PROCESS COSTING

INTRODUCTION
Process costing is a method used in a situation where
production follows a series of sequential processes.
An inherent feature of process costing is that the
output of one process becomes the input of the other
process. In case of process costing all the cost
direct and indirect are charged to the specific
process. Process costing is normally used by
industries which manufacture identical products
such as chemicals, soaps, spirits paper, paint or oil
products, biscuits textiles etc.

Characteristics of Process Costing

The following are the distinct features in most process costing
systems:

1. Clearly defined process cost centres will normally be set

up for each operational stage, which can be identified.
Expenditure for each cost centre is collected and, at
the end of the accounting period, the cost of the
completed units are then transferred into a stock
account or to a further process cost centre. Accurate
records are, therefore, required of units produced and
part- produced units and the total cost incurred by the
cost centres.
2. The cost unit chosen should be relevant to the
organisation.
3. The cost of the output of one process is the raw
material input cost of the following process.
The cost incurred in a process cost centre could
include, therefore, costs transferred from a
previous process plus the raw materials, labour
and overhead costs relevant to the cost centre.
4. Wastage due to scrap, chemical reaction or
evaporation is unavoidable. The operation or
manufacturing should, however, be in such a
way that wastage can be reduced to the nearest
minimum.
5. Either the main product or by-product of the
production process may require further
processing before reaching a marketable state.
Elements of process costing
1. Raw materials Materials are divided into:
• Input materials

• Materials added

Input materials are those materials introduced into

the first process and materials added are those
added into subsequent processes. The cost of all
materials, input and added is debited in the process
account.

2.Labour cost
Labour cost of each process in debited in the process
account. Labour cost is usually low in process
costing due to automation.

Direct cost
3.

These are expenses incurred in respect of any

particular process and they are debited into the
process account. For example the direct expense of
packaging.

4.Production overheads
In case of production overheads each and every
process is debited with a fair share of the production
overheads.
Example. Manufacture of product Ghee goes
through three distinct processes, that is, 1-3. After
process 3, the completed is passed to finished
goods stock. The following information was
provided by the cost accountant in respect of
product Ghee for the month of July 2023. 6,000
units of raw material at Ksh 50 were passed to
process 1 and the costs incurred are as shown
below:

Element of Process 1 Process 2 Proce T

cost ss 3 ot
al
Ksh Ksh Ksh Ksh
Direct 10000 24000 36000 70000
material
Dire 600 400 2000 120000
ct 00 00 0
Labo
ur
 Direct 5600 10400 4000 20000
Expenses
Production 180000
overheads

Production overheads are absorbed by each process at 150% of

direct labour. There was no stock of raw materials or work in
progress either at the beginning or at the end of the production
period.

REQIURED
Prepare Process account.

Process loss, scrap and waste

In process costing the weight or quantity of output of a
process is less than input of that process. This loss of
weight arises in the course of manufacturing. The main
cause of loss is due to distillation or disintegration by heat or
chemical action which leads to evaporation, residuals, ash
and spoilage.

Process loss
This is the loss of weight or volume of material during a process. It
is divided into
two:

i. Normal process loss

This represents loss which is expected under normal
conditions. It is loss which is unavoidable in view of
nature of the production processes such as loss due to
evaporation and it is calculated in advance on the basis of
past experience. The cost of normal loss is absorbed in the
cost of production for goods production. Proceeds of
defective units that are sold in respect to normal loss at a
reduced value are normally subtracted from total cost of
good products.
A fundamental feature of process costing is the
determination of cost per unit of transfer from one process
to the next. This cost per unit is influenced by the value of
normal loss, that is, whether normal loss has value or not.
Obtaining cost per unit of transfer:

1. Where normal loss has no scrap value

Cost per unit = Total process cost
Expected units after normal loss
*. Where nonnal loss has a scrap value
Cost per unit = Total process cost — scrap v alue of
normal loss
Expected units after normal loss
Note: If normal loss has no sales proceeds or the
sales proceeds are less than the cost the amount of
cost not recovered becomes part of the cost of the
goods units.

Abnormal process loss

It represents a loss which occurs under abnormal
conditions. It is loss which cannot be foreseen such
as loss due plant break down, power failure,
industrial accident, and inefficiency of workers or
use of defective low materials.
Abnormal process loss is therefore defined as a
loss that occurs when actual loss is more than the
normal process loss. The following are the
accounting entries for abnormal process loss:

Dr Cr
1 When Abn Process account
. abnormal orma
process loss l loss
arise acco
unt
2 Sale of Bank/cash Abnormal loss
. abnormal account
loss item
3 Loss- Profit and Abnormal loss
. difernce loss account account
between
abnormal
loss and
sales value

Abnormal gain
The difference between actual loss and normal loss is
known as abnormal gain and it normally arises when
the process loss is less than expected. The value of
abnormal
is calculated on the basis of goods produced. The
following are the accounting entries for its
treatment:
The value of
abnormal gain Dr.
Process account
Cr. Abnormal gain account
Normal loss is reduced due to abnormal gain such that:
Dr. Abnormal gain account Cr. Scrap debtors account

Waste
This refers to material arising in production process
but has no value attached to it. If waste is part of the
normal loss, then its cost is absorbed by the goods
produced and in case of abnormal loss, then it is
transferred to abnormal loss account.

Scrap
This refers to material which can no longer be used
for its original purpose. It can be sold at a much
lower price than the cost price. Income as a result
of scrap is considered and process loss is reduced
by that amount.
Example. Moyongo Company Ltd manufactures a
chemical that passes through three production
processes 1-3. During the month of December 2023;
6,000 litres of raw material at a price of Ksh 240,000
was introduced into process 1. The following are the
additional costs that were incurred during the
production process:
Elements Total Process
of cost cost
1 2 3Ksh
Ksh Ks
h
Direct 87500 300 40000 17500
Material 00
added
Direct 1100 40000 50000 20000
Labour 00
Direct 16900 6000 1600 9300
Expenses

Normal loss per process is estimated to be 10%, 5%

and 8% for processes 1, 2 and 3 respectively. The
outputs for each process were 5,300, 5,000 and
4,700 for processes 1, 2 and 3 respectively. The loss
in each process represented scrap which could be
sold at for the following values:
Process 1 Ksh 20 per unit
Process 2 Ksh 44 per unit
Process 3 Ksh 55 per unit

There were no stocks of materials or work-in-

progress at the beginning or end of the month. The
output of each process passes directly to the next
process and finally to finished stock. Production
overhead is absorbed by each process on a basis of
50% of the cost of direct labour.
Required:
a.Prepare separate process accounts for each of the
three processes
b. Prepare the abnormal loss and abnormal gain
accounts
 Review Questions
EXERCISE 41. Kampala bottlers produce
schweppes after three distinct pro- cesses. The
following information is obtained from the
account for a period.
Processes
Item5 Total I (fish) II(Ksfi) III fKsh )
Direct material 2,200 1,500 300 100
Direct races 400 100 200 100
Direct expenses :00 300 200

Production overhead incurred is Shs. 800 and

recovered on 200% of direct wages. Production
during the period was l00kg. There were no
opening stocks or closing stocks. REQUIRED:
a) Prepare process cost accounts.

b) Define process costing and explain the

main elements of process costs. What is meant

by abnormal gain? How is treated in product
cost?
EXERCISE 42. Differentiate the following terms as used in
process costing:
i. Abnormal loss and abnormal gain;
ii. Joint product and by-product. (8
marks)
EXERCISE 43. Explain the meaning of
 each of the following terms used in process
costing:
i. Normal loss;
ii. Abnormal loss;
iii. Waste;
iv. Scrap. (8 marks)
EXERCISE 44. Chemo ltd manufactures a product
which passes through two processes, I and II to
completion. The following information relates to the
year ended 3 l" December 2015.
Process I II
Ksh Ksh
Raw materials (5,000 280,0 -
kg) 00
Direct wages 150,000 250,0
00
Direct expenses 45,000 18,0
00
Production overheads 312,000 416,0
00
Outputs (units) 4,200 3,9
Normal loss (% of 00
12 5
input)
Scrap value of losses 65 2
(ksh/kg) 0
0
Process I
account.
Process II
account. (12 marks)
Normal loss
account.
Abnormal
loss account.
EXERCISE 45. Kaka ltd manufactures a product which goes
through a single process. The following information relates to
the process for the month of January 2016.
Process costs: Ksh
Materials (3,200 128,000
units)
Labour 72,960
Overheads 59,200
During the year, 2,800 units were transferred to finished
goods, while 400 units remained as work-in- progress
with the following percentages of completion.
Materials 10%
Labour 60%
Overhead 40%
s
Prepare a production cost statement showing:
i. Equivalent production
ii. Cost per equivalent
iii. Cost of finished goods
iv. Value of work-in-progress (12 marks)

EXERCISE 46. Mrefu limited manufactures a product

that passes through two processes; Refining and
finishing. During the month of May 2014,100,000 litres
of
raw materials were introduced into the refining process
at ksh 50 per litre. The following information relates to
the two processes for the month of May 2014:
Refining Finishing
 process process
Materials (ksh) 2,600,000 108,000
Direct labour (ksh) 4,000,000 600,000
Normal loss tpercentage 10% 5%
of input)
Output (litres) 88,000 85,000
Scrap value per litre (ksh) 40 50
The production overheads are absorbed at 80% of
direct labour in each process. Prepare:
i. Refining process account;
Finishing proess account