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  Features of Process Costing

Introduction to Features of Process Costing

In the earlier paragraph we have discussed that process costing is used in continuous production industries in which the flow of production is in a sequence and the production of one process turns the input of the subsequent one. The aim of process costing is to observe the cost of each process through identifying the direct costs along with the specific process and apportioning the indirect costs that is overheads to each process on some appropriate basis. The units coming out the process as the completed output are identical in all the respects and though the cost per unit is calculated through dividing the total cost from the total production units. In case, a number of units are incomplete at the end of a specific period, equal units are worked out of such type of incomplete units and then the cost per unit is calculated.

1) The production is in uninterrupted flow and is uniform. All units coming out like finished products are in all respects consistent with each other.

2) The product is manufactured in a constant flow and hence individual units lose their identity.

3) The unit cost is obtained through dividing the total cost for a specific period through the total output. This is the average cost of the product units.

4) Cost per process is ascertained and cost of every process is transferred to the consequent process until the finished product emerges.

5) In a specific process normal and abnormal losses emerge. Normal loss is a loss that is inevitable in any process and so cannot be avoided or controlled. Any loss that is above and over, the normal loss is termed as abnormal loss and is to be accounted for independently. For instance, if 1000 units are put in Process 1 and it is anticipated that there will be a normal loss of 1% in the process, the output supposed is 1,000 - 1% of 1,000 i.e. 990. There is an abnormal loss of 10 units, if actual production is 980. Alternatively if the production is 995, here an abnormal gain of 5 units. Abnormal loss and abnormal gain are to be calculated for in the process cost accounts.

6) Occasionally each process might be treated as profit center and so when transferring the cost from one process to other, a % of profit is added in the cost of that process. This is termed like inter process profit and requires to be accounted for in the process cost accounts.

7) Even though the cost per unit is calculated through dividing the total cost from the number of units, there can be a difficulty on incomplete units at the end of a specific accounting period. In such cases equal units have to be worked out for calculating the cost per unit.

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