What is Process costing?Advantages & Disadvantages of physical care for costing
Process costing
Concept as well as physical care for costing
Concept as well as important of physical care for costing
Process is a laid of sequential steps followed to consummate a for certain activity. The way of maintaining the costing records of each physical care for is called costing. It refers to the method of cost accounting nether which cost are accumulated for every physical care for which are interrelated to each other. Process costing is used inwards manufacturing concerns where the raw materials are converted to finished goods later on passing through a number of processes. For example; inwards illustration of cotton fiber textiles, the commencement physical care for may live spinning, 2nd physical care for may live weaving as well as the lastly physical care for may live finished.
Characters flora of management accountants (CIMA), London defines "process costing is that shape of operating costing where standardized goods are produced."
Likewise, according to Charles T. Hangmen, "process costing deals alongside the volume production of similar units that ordinarily transcend inwards continuous fashion through a serial of production steps called performance of process."
Process costing is mostly used inwards manufacturing concerns. T determines the cost of a production at each phase of manufacturing or process. This method of costing is adopted past times industries involved inwards the manufacturing of textiles, biscuits, cement, paper, stone oil refining, etc. the output of commencement physical care for becomes the input of the 2nd physical care for as well as thus on equally shown inwards next figure.
Features of physical care for costing
The major features of physical care for costing are equally follows:
a. Each physical care for is treated equally a cost oculus as well as the costs similar material, labour as well as overhead are incurred inwards each physical care for separately.
b. Production is inwards continuous stream as well as the output of 1 physical care for becomes the input of sub sequences physical care for as well as thus until the finished production is obtained.
c. The costs also stream alongside the production physical care for i.e. costs incurred inwards 1 physical care for is transferred to the side past times side physical care for along alongside output.
d. Costs are ascertained for each physical care for at the cease of costing period.
e. Units of production are uniform as well as homogenous. As a result, unit of measurement cost of each physical care for is obtained past times averaging the full cost inwards each process.
f. Total cost of the physical care for Is adjusted alongside normal loss, abnormal loss, abnormal gain as well as fight of the process.
g. The output from each physical care for may live categorized equally primary production as well as past times products. The primary production by as well as large involves high cost whereas the byproducts involved depression cost.
Advantages of physical care for costing
The next are the advantages of physical care for costing:
a. It is uncomplicated as well as less expensive to discovery out the cost of each process.
b. It is tardily to allocate the expense to physical care for inwards gild to conduct hold accurate costs.
c. Production action inwards physical care for costing is standardized. Hence, managerial command as well as supervision perish easier.
d. In physical care for costing, the products are homogeneous. As a result, costs per unit of measurement tin live easily computed past times averaging the full cost as well as toll quotations perish easier.
e. It is possible to determine physical care for costs periodically at brusk integrals.
Disadvantages of physical care for costing
The next are the disadvantages of physical care for costing:
a. The cost obtained at the cease of the accounting catamenia is historical inwards nature as well as is of niggling usage for effective's managerial control.
b. Since physical care for cost is average cost, it may non live accurate for analysis, evaluation as well as command the performance of diverse departments.
c. Once an mistake is committed inwards 1 process, it is carried to the subsequent processes.
d. Process costing does non evaluate the efficiency of private workers or supervisor.
e. The computation of average cost is hard inwards those cases where to a greater extent than than 1 type of production is manufactured.
Differences betwixt project costing as well as physical care for costing
The differences betwixt project costing as well as physical care for costing are equally follow:
Elements of production cost
The next are the primary elements of productions cost inwards physical care for costing:
a. Direct materials: materials are used for manufacturing products. The materials required for production are issued to the commencement process. The output of commencement physical care for is passed to the side past times side physical care for as well as thus on. Hence, the output of commencement physical care for becomes the input of 2nd physical care for as well as thus on, sometimes; novel materials may live introduced inwards the 2nd as well as subsequent processes.
b. Direct labour: payment madden to the manpower involved inwards physical care for operate against their operate is called labour cost. Generally, employees are engaged inwards 1 physical care for as well as reward paid to them is debited inwards the concerned physical care for account. But if the employs are engaged inwards to a greater extent than than 1 process, the full reward paid to them are apportioned amid the physical care for on equitable basis.
c. Direct expenses: cost of electricity, hire charges of machine, depreciation of machine are the cost that are direct attributable to a detail process. The physical care for describe of piece of work concern human relationship is debited past times such direct costs.
d. Production overhead: the overhead covers a important portion of the full physical care for cost. Great attending should live paid to ensure that each physical care for is charged alongside a reasonable portion of production overhead similar shop service, cafeteria services, services etc. are allocated on the the world of absorption rate. The overheads are debited to the physical care for account.
Under physical care for costing, a split describe of piece of work concern human relationship is maintained for each process. The describe of piece of work concern human relationship is debited alongside the value of materials, labour, direct expenses as well as overhead relating to the process. The value of by-products as well as scrap, if any, is credited to this account. The residuum of this account, representing the cost of partially worked out product, is passed on to the side past times side physical care for as well as thus on until the production is completed. Thus the finished production of 1 physical care for becomes the raw textile of the side past times side process.
The next situations arise spell preparing physical care for accounts.
a. Process costing having no physical care for loss as well as stock
All the costs similar materials, direct, labour expenses as well as production overhead relating to the detail physical care for are debited to the physical care for accounts. Since at that spot is no physical care for loss, the output of a physical care for is equal to the unit of measurement of input introduced inwards the process. The full cost of the physical care for is transferred to the side past times side process. The format of the physical care for describe of piece of work concern human relationship having no physical care for loss as well as stock is given below:
b. Process costing having physical care for loss
It is rare that the output of a physical care for is equal to its input. In most of the cases, the output of a physical care for is less than the input. The divergence betwixt the input as well as output as well as output is called physical care for loss. The physical care for loss may live inwards the shape of loss inwards weight, scrapes or wastes. These physical care for losses may live classified into.
Normal loss
Normal loss or uncontrollable loss agency the less of materials, which is inherent inwards the processing operations or inwards the nature of material. Normal loss includes loss of leakage as well as normal scrap. Normal loss is considered to live an integral usage of physical care for cost. It is unavoidable but efficient workers tin cut back it to around extent. The accounting handling of normal loss is equally follows:
Abnormal loss
Any loss caused past times unexpected or abnormal status such equally accident, carelessness, etc. is called abnormal loss. It is the excess of over the normal loss. For example, if 1,000 units of raw textile are introduced inwards a physical care for bailiwick to wastage of 10 percent, i.e. the output of the physical care for should live 900 units. But the actual output is 830 units; the extra losses of seventy units are abnormal loss. In other words, the excess loss of seventy units over the normal loss of 100 units is the abnormal loss.
Calculation of the unit of measurement as well as of abnormal loss:
Normal output/yield= inputs – normal loss/ fight unit
Total normal cost = full cost of input – fight value of normal loss
Abnormal loss unit of measurement = normal output unit of measurement – actual output unit
Normal cost per unit of measurement = full normal cost/ normal yield
Accounting for physical care for costing
Process accountsUnder physical care for costing, a split describe of piece of work concern human relationship is maintained for each process. The describe of piece of work concern human relationship is debited alongside the value of materials, labour, direct expenses as well as overhead relating to the process. The value of by-products as well as scrap, if any, is credited to this account. The residuum of this account, representing the cost of partially worked out product, is passed on to the side past times side physical care for as well as thus on until the production is completed. Thus the finished production of 1 physical care for becomes the raw textile of the side past times side process.
The next situations arise spell preparing physical care for accounts.
a. Process costing having no physical care for loss as well as stock
All the costs similar materials, direct, labour expenses as well as production overhead relating to the detail physical care for are debited to the physical care for accounts. Since at that spot is no physical care for loss, the output of a physical care for is equal to the unit of measurement of input introduced inwards the process. The full cost of the physical care for is transferred to the side past times side process. The format of the physical care for describe of piece of work concern human relationship having no physical care for loss as well as stock is given below:
b. Process costing having physical care for loss
It is rare that the output of a physical care for is equal to its input. In most of the cases, the output of a physical care for is less than the input. The divergence betwixt the input as well as output as well as output is called physical care for loss. The physical care for loss may live inwards the shape of loss inwards weight, scrapes or wastes. These physical care for losses may live classified into.
Normal loss
Normal loss or uncontrollable loss agency the less of materials, which is inherent inwards the processing operations or inwards the nature of material. Normal loss includes loss of leakage as well as normal scrap. Normal loss is considered to live an integral usage of physical care for cost. It is unavoidable but efficient workers tin cut back it to around extent. The accounting handling of normal loss is equally follows:
Abnormal loss
Any loss caused past times unexpected or abnormal status such equally accident, carelessness, etc. is called abnormal loss. It is the excess of over the normal loss. For example, if 1,000 units of raw textile are introduced inwards a physical care for bailiwick to wastage of 10 percent, i.e. the output of the physical care for should live 900 units. But the actual output is 830 units; the extra losses of seventy units are abnormal loss. In other words, the excess loss of seventy units over the normal loss of 100 units is the abnormal loss.
Calculation of the unit of measurement as well as of abnormal loss:
Normal output/yield= inputs – normal loss/ fight unit
Total normal cost = full cost of input – fight value of normal loss
Abnormal loss unit of measurement = normal output unit of measurement – actual output unit
Normal cost per unit of measurement = full normal cost/ normal yield
Difference betwixt normal loss as well as abnormal loss
The differences betwixt the normal loss as well as abnormal loss are given below:
c. Process costing having abnormal gain
We know that margin allowed for normal loss is only an gauge as well as slight differences are outflow to occur betwixt the actual as well as anticipated output of a process. These differences practise non ever stand upward for increased loss may live less than the expected. Thus, when actual loss inwards a increased loss, on occasions the actual loss may live less than the expected. Thus, when actual loss inwards a increased loss, inwards a physical care for is lower than the expected, an abnormal gain results. The value of the gain is calculated inwards a similar mode to an abnormal loss.
Abnormal gain beingness the outcome of actual loss beingness less than the normal, the fight realization shown against normal loss gets reduced past times the fight value of abnormal gain. Consequently, at that spot is an storey loss past times way of reduction inwards the fight realization attributable to abnormal gain. The loss is laid off against abnormal gain past times debiting this account. The residuum of this describe of piece of work concern human relationship becomes abnormal gain as well as is transferred to costing profits as well as loss account. The residuum of this describe of piece of work concern human relationship becomes abnormal gain normal yield or actual loss is less than normal loss.
Calculation of abnormal gain unit of measurement as well as value
Total normal cost= full cost of input – fight value of normal loss
Normal output/ yield= input – normal loss/ fight unit
Normal cost per unit of measurement = full normal cost/ normal yield
Sales describe of piece of work concern human relationship as well as income statement
Income contestation is prepared to discovery out profits as well as loss. Income contestation is based on sales account, if sales is recorded inwards related physical care for account. Incomes contestation is also prepared on the the world of profits as well as loss of every process. If sales are non recorded inwards related procuress account, incomes contestation is prepared on the the world of full sales. Incomes contestation tin live prepared equally follows:
a. When sales is included inwards the physical care for account
Interest physical care for profit
The profits associated alongside the transfer of goods shape 1 physical care for to around other is called inter physical care for profit. Normally finished goods of 1 physical care for are transferred to the immediate side past times side physical care for at cost of production basis. In around physical care for industries, transfer of finished goods is made to the immediate side past times side physical care for past times including around describe of piece of work concern human relationship of profit. The physical care for is followed to demonstrate the subdivision efficiency of concerned processes. It helps inwards recognizing the profits on each physical care for of production. The profits thus incorporated is called inter-process profit. The toll fixed past times adding nominal residuum sail for the transfer of the finished goods to the side past times side physical care for is called equally transfer price. For residuum sail purpose, intern physical care for profits cannot live included inwards stock, equally a theater cannot brand profits past times trading itself. To avoid these complications a provision must live created to cut back the stock to actual cost price. This work arises solely inwards observe of stock on mitt at the cease of the period.
The next are the objectives of inter physical care for profit.
• To assess the performance of physical care for operation
• To assess whether the output tin compete alongside the market.
• To create upward one's take away heed whether the output tin live sold without farther processing.
Advantages of inters-process profit
• It shows whether the cost of production computers alongside the marketplace price.
• By comparison the transfer prices alongside the corresponding marketplace prices, the 'week' or strong' sports inwards the manufacturing action tin live located. As a result, measures tin live adopted to amend the weather condition wherever necessary.
• It makes each physical care for stand upward on its ain efficiency as well as economics.
Disadvantages of inter-process profit
• This organisation involves an unnecessary complication of the accounts.
• This systems shown unrealized profits inwards observe of unsold stocks on the closing appointment of the accounting period.
• In the residuum sheet, stock is conventionally shown at 'cost or marketplace toll whichever is lower' to larn inwards acceptable to auditors as well as taxation authorities. Thus, the profits included inwards stocks has to live eliminated from the stock value earlier they are shown inwards lastly accounts as well as residuum sheet.
Wastage, scrap, spoilage as well as diffractive unit
1. What is the important as well as features of physical care for costing?
The activities related to each other are known equally process. In gild to arrive at sugar, oil, shoes as well as lather as well as chemic substances as well as drinks dissimilar stages should live passed. Recording cost inwards dissimilar stages is known equally physical care for costing. Recording cost inwards dissimilar stages is known equally physical care for costing. The primary features of physical care for costing are equally follows:
a. The production as well as physical care for are standardized.
b. Unit of production is uniform as well as homogeneous. As a result, at that spot is confirmation inwards the production.
c. Products are produced for stocks. They are non produced according to the need of customers.
d. The output of 1 physical care for becomes the input of side past times side process. Cost of production is determined inwards average value.
2. What is scrap? How is it treated?
Scrap is defined equally the incidental textile residue. For a for certain types of manufacturing, it has got around disposal values which are ordinarily small. This type of loss is visible. Scrap may occur because of faulty operation, bad supervision, incorrect tool setting as well as defective process. Scrap is recorded inwards the credit side of physical care for describe of piece of work concern human relationship as well as debit side of profits as well as loss account.
3. What is wastage as well as how is it treated?
Wastage is defined equally the portion of textile which is lost during the production which has no reuse value. It is a consummate loss. It may live visible or non-visible. Raw dust if slice of furniture industry, equally inwards a coke industry, post inwards construction, as well as evaporation inwards stone oil refinery etc. are the illustration of wastages. Normal wastage is non recorded inwards a split describe of piece of work concern human relationship rather per unit of measurement cost of production increment due to this. But abnormal wastage is recorded inwards the credit side of physical care for describe of piece of work concern human relationship as well as wastage is recorded inwards the credit side of physical care for describe of piece of work concern human relationship as well as debit side of profits as well as loss account.
4. What is spoilage? How is it treated?
Spoilage is defined equally the need goods inwards the course of pedagogy of manufacturing physical care for which are taken out of physical care for as well as disposed off inwards around mode without farther processing. This occurs due to around defects inwards material, fault inwards operation, defective machines as well as faulty tool setting. Normal spoilage is recorded inwards cost of production but abnormal spoilage is recorded inwards the debit side of profits as well as loss account.
5. What is defective production? How is it treated?
Defective products are defined equally the imperfect products which are non upward to the criterion character or practise non run across prescribed specification. It tin live rectified as well as turned into normal units past times the application of extra material, labour as well as overhead. It is recorded inwards related subdivision which is raised due to normal cases or detrimental activities. When it can't live separate, it is recorded inwards full overhead costs.
6. Write close the efferent type of physical care for losses as well as explicate their accounting treatments.
Normal loss: normal loss or uncontrollable loss agency the loss of materials, which is inherent inwards the processing performance or inwards the loss nature of material. Normal loss including loss of weight leakage as well as normal scrap. Normal loss is considered to live an internal usage of a physical care for cost. It is unavoidable but efficient workers tin cut back it to around extent.
Abnormal loss: whatever loss caused past times unexpected or normal status such equally accidents carelessness, etc. is called abnormal loss. It is the excess of loss over the normal loss.
Abnormal gain: nosotros know that margin allowed for normal loss is only an gauge as well as slight differences are outflow to occur betwixt the actual as well as anticipated output of a process. These dissimilar practise non ever stand upward for incurred loss, on occasions practise non ever stand upward for incurred loss, on when actual loss may live less than the expected. Thus, abnormal gain results.
List of formula
Normal output/yield = inputs – normal loss/ fight unit
Total normal cost = full cost of input –scrap value of normal loss
Normal cost per unit of measurement = full normal cost/ normal yield
Abnormal loss (unit) = normal output unit of measurement –actual output unit/ normal output unit of measurement – actual output unit
Abnormal loss (Rs.) = abnormal loss unit of measurement x normal cost per unit
Abnormal gain (units) = actual loss unit of measurement – actual loss unit
Abnormal gain (RS.) =abnormal gain unit of measurement x normal cost per unit
Inter process:
Cost of losing stock = given closing stock x full amount of cost column/ full amount of full column
Unrealized profits on closing stock = given closing stock – cost of closing stock
Calculation of inter physical care for profit:
a. It per centum of item physical care for is given on processing cost, then
Inter physical care for profits = full cost x %profit
a. If per centum of inter physical care for profits is given on transfer toll , then
Inter physical care for profits =total cost x %profit / 100- %profit
Actual released profits = gross profits + unrealized profits on opening stock – unrealized profits on closing stock
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