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  Preparing Process Cost Accounts

Preparing Process Cost Accounts

1) As described above, the aim of process costing is to work out the cost of every process, transfer similar to the consequent process and at last ascertain the total cost of production. So it is essential to charge several costs to each process. For this, the factory is spilt into different processes or operations and an account is kept of each process to that all the costs are debited. The following are the several elements of cost that are displayed in the process accounts.

  • Materials:

Raw materials needed for each process is taken out from stores against material requisitions. Appropriate procedure such as preparing and authorizing the requisition, pricing of the issues, transfer of material from one process to another, return of materials to the stores should be followed when issuing the materials. Cost of materials that are consumed should be calculated according to the method used for pricing of the issues and the cost should be debited to the process account.

  • Labor:

Wages paid to workers and supervisory staffs have to be charged to the specific process if they can be recognized with it. If workers work on two or more processes, appropriate allocation should be made as per to some basis such as time spent on each process.

  • Direct Expenses:

If expenses are identifiable with a specific process, they should be charged to that process. For instance, cost of electricity, depreciation might be charged directly to a process if they are identifiable with it.

  • Overheads:

Naturally, overheads are indirect expenses and though cannot be recognized with a specific process. These expenses can be apportioned on some appropriate basis and charged to the process.

2) Important aspects an Process Accounts:

 When preparing process cost accounts, some significant aspects are to be taken into consideration. These aspects are as follow:

  • Normal Loss:

Normal loss is a loss that is inevitable in any process. So if the input is 100, the output might be 95 if the normal loss is anticipated like 5%. Accounting treatment of normal loss is described and demonstrated in the following paragraphs.

  • Abnormal Loss/Abnormal Gain:

The difference among the two is the abnormal loss, if the actual output is less than the normal output [Normal output = Input - Normal Loss]. Alternatively if the actual output is more than the normal output, the variation among the two is abnormal gain. So in the instance given above, the normal output is 95 that is 100 - 5% of 100 as the normal loss. If the actual output is 93 units, 2 units will be abnormal loss and if the actual output is 97 units, 2 units will be abnormal gain. Abnormal loss/gain is to be treated in a different way and is demonstrated subsequently.

  • Inter Process Profits:

Occasionally, when transferring the cost of one process to the consequent one, some % of profit is added in it. This is known as as inter process profits. This is completed when a process is treated as profit center. In such type of cases, unrealized profit is to be calculated and displayed separately. This is also demonstrated separately.

3) Pro Forma of Process Account

[Without normal/abnormal loss/gain]: A simple process account is

prepared in the following manner.

Process I Account

Note: Process II and consequent Process Accounts will be ready in the same way. In the final process, the cost and output will be transferred to the finished goods stock account.

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