Question

Discuss any aspect of "Process Costing.

Answer 1

The aspects of process costing includes:

1. Process Losses: Since there is movement of goods between processes, losses may occur naturally. Some of them are unavoidable hence termed as normal losses. Some companies apportion separately a percentage of units processed as normal losses. These losses are considered as a part of costs. Those losses which are avoidable are termed as Abnormal losses. They can be eliminated by implementing proper measures. Such losses are charged to Profit or Loss a/c
2. Equivalent Units of production: In Process costing not all units will be 100% complete at end of any accounting period. Hence we have a system where is we report the proportionate units if completed units as Inventory in terms of material and in terms of conversion. These units are refered to as Equivalent units of production.
3. Process profits: Not always does each process transfer its output to other at costs. Sometimes they do it at a certain transfer price. They may do this by adding a percentage of profit margin on cost or sales or sell the output in its current stage at market value. Though this does not impact the overall financial position of the company, it affects the performance of the departments processing the products. Sometimes process managers may disagree with transfer prices and hence negotiations may be necessary.
4. Joint and By-products: Industries like Crude oil, Ores and metals may release more than one product during the process of production. these products may either have similar weights of values ie Joint Products or may be the one has higher value and other having inferior value ie by-products. Thus process costing paves way for computation of costs up to the 'Point of separation' and costs 'after points of separation' of products processed.