Features of Process Costing

In this article we will learn 12+ Key Features of Process Costing.

Key, Distinctive and Special Feature of Process Costing (with Examples and as employed in Industries)

Top 6 Features of Process Costing

The features of process costing are:

(1) Each process represents a distinct stage of production for which a separate process account is prepared.

(2) Output of the first processes becomes the input for the next process. The process will continue until it reaches the final process account where it is transferred to finished stock A/c.

(3) All direct and indirect costs are classified according to the process and charged to respective process accounts.

(4) Per unit cost can be obtained by dividing the total cost of the process by the number of units processed or produced in that process.

(5) Some losses of material are unavoidable in each process.

(6) The products are standardized and homogenous.

13 Features of Process Costing

Process costing reveals the following features:

(a) Each plant is divided into a number of process cost centers or departments. Each such division is a distinct stage of production or process.

(b) Costs are accumulated by these process cost centers.

(c) Physical flow of units follows different patterns such as sequential, or parallel.

(d) Output of one process becomes the input of the next process.

(e) Each completed unit is homogenous and indistinguishable from the other.

(f) The identity of any particular lot of material input cannot be traced to any particular lot of output.

(g) Costs follow the flow of production. Costs incurred in the earlier process are transferred to the subsequent process along with the output.

(h) Total cost of the finished product in the last process is cumulative. It comprises costs of all the processes put together.

(i) Cost per unit is arrived at by averaging the costs of manufacture over a period.

(j) Production of an article may give rise to joint and/or by-products.

(k) Avoidable and unavoidable process losses arise at different stages of production.

(I) Gives rise to work-in-progress and equivalent units.

(m) Output of earlier processes may be transferred to subsequent processes not at cost but at transfer prices so as to include profit.

Key Features of Process Costing

The features of process costing are:

1. The production is continuous (except shut down for repairs etc.).

2. The product is homogeneous/Identical.

3. The production processes are standardized.

4. The output or finished product of one process becomes the raw material or Input for the next process until the final product is produced.

5. The output of last process is transferred to finished stock A/c.

6. In each process avoidable and unavoidable losses arise. Unavoidable losses are called as normal losses and avoidable losses are called as abnormal losses.

7. For each process, a separate account is maintained.

8. The cost is transferred from one process to another process along with its output.

9. Process costing is suitable for those industries where sequence of operations for processing the product is predetermined and specific.

10. Both direct and indirect cost is recorded separately for each process.

11. Scrap, normal loss, abnormal loss, abnormal going are adjusted in each process account.

At the end, cost per unit is calculated by dividing the total process cost by the normal output produced.

Features of Process Costing – Given in Points

The features of process costing are:

1. Output of one process becomes the input of another process or operation.

2. Cost per unit is ascertained by dividing total departmental cost by total departmental production inclusive of WIP.

3. Cost is accumulated at the end of each process or after a certain interval.

4. Costs are charged to departmental WIP account.

5. The production is continuous and the final output is the result of a series of operations.

6. Since the production process is continuous, WIP will be in the partly finished stage at the end of each accounting period. Process cost for a particular period is apportioned between finished and unfinished units considering the stage of completion of units in WIP.

7. Production is reported by process or department.

8. Some loss in processes is inherent, e.g., scrap, spoilage, evaporation, chemical reactions, etc. This cost is added to the good production.

9. Costs of finished units of a department are transferred to the subsequent processing department at total cost or at predetermined transfer price.

10. The products are identical and homogeneous.

11. Several products may emerge after processing a raw material. Such products may be termed as joint products or by-products depending on the realisable value.

12. Standard costing system can be applied for effective cost control.

13. Production is carried out for stock and not for any specific order.

12 Main Features of Process Costing

The main features of process costing may be given as follows:

(i) The production is divided into various stages (known as processes) and each process is carried out by a separate cost centre or department.

(ii) The production is continuous and the final product or end product is the result of a sequence of processes or operations.

(iii) The finished product of each process is treated as the raw material of the subsequent process.

(iv) The units of the commodity produced are homogeneous and identical in nature.

(v) The cost of production per unit is the average cost which is obtained by dividing the total process cost by the total number of units manufactured.

(vi) The sequence of processes and operations employed is predetermined.

(vii) There is indispensable loss in the process of production. It is known as normal loss. It may be due to inherent nature of the material used for production i.e., loss may occur due to chemical action, loss in weight and evaporation etc. The normal loss is absorbed by the cost of good units.

(viii) The processing of raw material may lead to joint products and by-products.

(ix) There may occur abnormal loss and abnormal gain. These are treated separately under process costing.

(x) Inter-process profits are also kept in mind while transferring the output at market price to another process. It will depict the market price and will be helpful in checking the inefficiency and losses taking place in a process.

(xi) The concept of equivalent production is also considered under process costing. It means that when some units are in semi-finished stage, these are to be expressed in terms of equivalent completed units or effective units.

(xii) Costing profit and loss is calculated after taking into account the opening balance of finished stock and the closing balance of the finished stock. The process accounts are helpful in the proper valuation of the raw material, work-in-progress (semi-finished goods) and finished goods. These stocks are shown in the Balance Sheet.

To sum up these principles, W.W. Big. has nicely remarked, “The fundamental principle involved in process cost accounts is simple. A separate account is opened for each process or distinct operation to which all expenditure incurred thereon is charged.

When the process or operation has been completed, the partially worked out product is passed into a process stock account from which it will be requisitioned as and when required by the next process or it may become automatically the raw material of the next process and be charged to the Process Account immediately.”

6 Important Features of Process Costing

The following are the important features of process costing:

(i) Production is on a continuous basis, except during shutdown for repairs, etc.

(ii) The finished product of one process becomes the raw material for the next process.

(iii) Products and processes are completely standardized.

(iv) Output is uniform and is usually manufactured for stock and not for the specific order.

(v) In certain industries, the by-products may require further processing before they can be sold.

(vi) A main product of one firm may be a by-product of another firm, which may be available in the market at prices which are lower than the cost of the first mentioned firm.

It is therefore, essential, that the comparative costs are known so that advantage can be taken of market conditions.

Necessary Features of Process Costing

Necessary features of process costing are as follows:

(i) Production is continuous in a series of stages called processes.

(ii) Each Process is termed as a cost centre.

(iii) Costs are accumulated for each process separately as well as finished output and work in progress.

(iv) Standardization is ensured in products and processes.

(v) Output of one process becomes the raw material to the next process, usually till the final product is completed.

(vi) Cost of the previous process is transferred to the next process along with the output. In some cases the transfer may be made at a transfer price inclusive of profit.

(vii) There may be process losses of the input. They may be normal or abnormal or both.

(viii) Completed and semi-finished goods both are used for the cost determination.

(ix) Production is made in identical units, and total cost of a process is to be divided with the unit of output to obtain the average cost per unit.

Features of Process Costing Employed in Industries

The features of process costing employed in industries are:

(1) Production is continuous, in a series of stages called processes.

(2) Each process is deemed as a cost centre and costs are accumulated for each process separately along with output, finished and in progress.

(3) Products and processes are standardised.

(4) The output of one process becomes the raw material to the next process, usually till the final product is completed.

(5) The cost of previous process is transferred to the next process along with the output. Sometimes, the transfer may be at a transfer price inclusive of profit.

(6) There may be process losses of the input. They may be normal or abnormal or both.

(7) Completed and semi-finished outputs have to be expressed in common terms for cost determination.

(8) Since production is of identical units, the total cost of process is divided with the units of output to obtain average cost per unit.

(9) Two or more products may be produced unavoidably in the same process. They may be of equal importance or of disproportionate values.

(10) It is not possible or necessary to trace or identify specific lots of material inputs with product or output.

Features of Process Costing (With Examples)

The features of process costing are:

1. There is continuous flow of production and the products are homogeneous.

2. Processes are related to each other. Products lose their individual entity.

3. The unit of cost is process, which is computed by dividing the total cost for the period into output of the process during that period.

4. Costs are calculated at the end of period under each process.

5. There will be normally opening and closing work in progress and the production is continuous.

6. Transfer from one process to another is a usual feature.

7. The control is easier as the production is standardized and stable.

Another important feature of the process costing is that the production goes on without interruption and there is no need for arranging specifications for meeting any special order. In a steel mill for example, when a customer orders a certain quantity, no special arrangements will be made for him since the order will be executed out of quantity produced in general.

Again often by-products are produced automatically at the end of each process, which are of same importance to the main product. For example kerosene oil, diesel, petrol, and other similar products are produced from the same crude oil. In such industries the method of cost accounting used is known as process costing.

It is possible to find out the total cost without distinguishing the cost of each process but it is not desirable to do so. This is so because, wastage and by-products of different nature may arise out of each operation or process.

Each process is likely to entail different types of expenses. It would thus be advisable to find out the cost of each process separately. Sometimes, it is possible to either process the materials or buy them ready for use in the next process.

For example, castor seed can be bought and processed – crushing, refining and finishing or one can buy refined castor oil and add the necessary perfume and color and bottle it to market it. The decision will depend upon the cost and the price prevailing in the market. This is another reason why cost of each process should be ascertained.

General Features of Process Costing

The features of process costing are:

1. Both direct and indirect costs are accumulated for departments or processes.

2. Emphasis is placed on production for a given period, which may be a day or a week of a month.

3. Production for a period relating to a process is expressed in terms of quantities such as units, tonnes and pounds. Process costing lays stress on the period of time and the number of units (or quantity) completed and in process.

4. The total cost of each process is divided by the total production for the process to obtain average cost per unit of the period.

5. If there remains in stock partly finished production, it is expressed in terms of “equivalent finished goods”.

6. If some units are spoiled in a process, the cost of spoiled units is borne by units completed and closing stock of unfinished units at the end of the period.

7. If products are the result of more than one process, the cost of one process is transferred to the next process.

8. Different products, with or without by-products, are simultaneously produced at one or more processes.

9. Unavoidable ‘normal’ wastage usually arises at different stages of manufacture, for reasons like evaporation and chemical reaction, etc.

10. In order to obtain accurate average cost, it is necessary to measure the production at various stages of manufacture. For this, the work-in-progress in each process, if any, is converted into equivalent units of finished products.

Special Features of Process Costing – Process Department, Wastages, Transfer, Production Schedule and Joint Product

The special features of process costing are as under:

1. Process Department  

The whole factory is divided into various processes and in order to obtain the finished product. The inputs are passed from one departments to other departments.

2. Wastages

The wastage of material is a natural feature in process costing. The accounting of normal and abnormal wastage is recorded separately and it has a special importance in process costing.

3. Transfer

The output of a process may be transferred to the next process at market price to ascertain whether the product is profitable or not. A reserve for profit has to be created to find out the correct profit and to make valuation correctly of the closing stock.

4. Production Schedule

Under process costing the operations are uniform and standard and they do not require any instruction in the production process. The production schedule contained the quantity required during a certain period and for that purpose requirements of materials, labour, on cost etc., are also recorded.

5. Joint Product

In manufacturing main products, sometimes joint products of equal importance is obtained. The cost and accounting records of such joint product is kept under process costing, because these joint products are also sold at a profitable margin in the market.

17 Important Features of Process Costing

Following are the important features of process costing:

i) Each plant is divided into a number of process cost centres or departments and each such division is a stage of production or a process.

ii) The finished products are uniform in all respects such as – shape, size, weight, quality, colour, chemical content etc., so unit cost is calculated by dividing the total cost by the number of units produced.

iii) Output of one process is the input of the next process.

iv) It is not possible to distinguish finished products while they are in the stage of processing.

v) Costs follow the flow of production i.e., costs incurred in the earlier process are transferred to the later process along with the output.

vi) Total cost of the finished product in the last process is cumulative i.e., it comprises of costs of all processes.

vii) The cost of any particular unit is the average cost of manufacture over a period.

viii) Production of one article may give rise to two or more by-products.

ix) Occurrence of process losses e.g., evaporation, shrinkage, chemical reaction etc.

x) The semi-finished products are expressed in terms of complete products. This is technically termed as equivalent production.

xi) Production is accumulated and reported by process.

xii) Production process is predetermined and a definite sequence of production is followed.

xiii) The unit of cost is the “Process” under this method of costing.

xiv) The production is continuous and on a large scale basis in anticipation of demand.

xv) The entire production is divided in clearly defined processes.

xvi) The number of units produced in a particular process are identical.

xvii) Each process is treated as a separate cost centre.

Job Costing is considered as a labour-intensive process, whereas Process Costing is considered as a capital-intensive process.

5 Main Features of Process Costing

The main features of process costing are:

1. There is continuous flow of production.

2. The finished product of one process will become the raw material for the subsequent process. After the completion of all the processes, it will become the finished product saleable in the market.

3. Products are not distinguishable in the process stage.

4. Number of Processes may be conveniently divided depending on the process of manufacture. In addition to the raw materials, additional materials or chemicals may be added in each process.

5. Industries in which process costing is used are chemical works textile, food and canning factories, etc.

Features of Process Costing

The features of process costing are:

1. Continuous production of identical units of a product on large scale for sale is made.

2. The output which is in semi-finished condition becomes raw materials for the subsequent process.

3. The amount of materials, labour and overheads incurred on all units are same.

4. Each process is a unit of costing. The expenses incurred during a particular period in each process are accumulated separately.

5. The units produced in a process during a period is ascertained. Total cost of production during the period in a process is divided by the number of units produced in that period to arrive at the cost per unit. The total cost is averaged over the units produced.

6. The output of one process becomes the raw materials for the next process till it is finished.

10 Distinctive Features of Process Costing

The features of process costing are listed as follows:

1. The factory is divided into different processes which are the cost centres.

2. The production is continuous and the final product is the end result of a series of processes.

3. The output of one process becomes the input of the next process and so on until the finished product is obtained.

4. The sequence of operations for processing the product is specific and predetermined.

5. A separate account is maintained for each process.

6. All costs, direct and indirect, are recorded for each process separately.

7. Different products with or without by-products are simultaneously produced at one or more stages.

8. Controllable and avoidable wastage may usually arise at different stages of manufacture, e.g., evaporation, shrinkage, chemical reaction, etc.

9. The cost flows from one process to another. The cost of finished output of one process becomes the input cost of the next process.

10. The units which are incomplete at each stage of production are converted into equivalent production based on the degree of com­pleteness.

Top 8 Features of Process Costing

The features of process costing are:

1. The production is continuous and the final product is the result of a sequence of operations or processes.

2. Costs are accumulated by processes.

3. The products are standardised and homogeneous.

4. Cost per unit is the average cost. This is calculated by dividing the total cost of the process by the number of units produced.

5. The finished product of one process is used as a raw material for the next processes until completion. The product of the last process is transferred to the finished stock account.

6. The sequence of operations or processes is specific and pre-determined.

7. Some loss of materials in processes (due to chemical action, evaporation, etc.,) is unavoidable.

8. Processing of a raw material may give rise to the production of several products. These several products produced from the same raw material may be termed as joint products or by-products.