Question

Explain the Process Costing process and give a specific example.

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Answer 1

Process Costing is a technique of cost accounting which is used in manufacturing sector where the product passes through two or more stages before it is converted to a final product. In this method the costs are charged separately to each processes and averaged over units produced. A separate ledger account is opened for each process and all the expenses and revenues pertaning to the particular process are charged to the process account.

Costing Procedure :

(i) Materials: Materials that are required and used in the process are debited to the particular process account. The materials are converted to raw materials of second process and the converted materials to be transferred to the second process are credited in the materials account.

(ii) Labour: Direct labour costs identifiable with the process are debited to the process account.

(iii) Direct Expenses : Direct expenses such as insurance, repairs, depreciation identifiable with the process are debited to the process account.

Example of a process costing :

XYZ LTD, a company engaged in the manufacturing of dark chocolates for sale which involves two processes viz., melting raw materials and second is moulding the mixture into different shapes and sizes. It The first process involves melting raw materials and obtaining the chocolate liquid. For this the company spends $100,000 on raw materials ,$200,000 on direct labour and $ 250,000 on other direct expenses . The materials , labour and direct expenses are all transferred to process 1 account. The finished product of $550,000 is transferred to Process 2 . In the Process 2 account, the transfer from process 1 of $550,000 is debited. Any other expenses incurred in Process 2 are debited to the Process 2 account and the final product is transferred to Statement of Profit and Loss.