Process Costing
It is a costing method, which is applied wherever there are standard operations along with continuous production of homogeneous as identical units. Consequently the output is the final product of a sequence of operations. In such type of costing, costs are accumulated on the basis of process, and the cost per unit is arrived at via dividing the total process costs via the number of input of the next process and further materials can be added at every stage production. Thus cost per unit for the second and subsequent processes is a cumulative cost as an example of, the cost per unit for the output transferred from process 2 is the cost of production for both process 1 and 2 and not for process 2 above. The fact such the output for the first process becomes the input for the next process means such the process costing procedure strives to maintain the cost of each process product and charge that along with the first process. The intention is to transfer the cost accumulated in the first process to the next process.
This is demonstrating below as:
Process 1
|
|
Shs
|
|
Shs
|
|
Direct Material:
|
1,000
|
Transferred to
|
|
|
Direct Labour
|
500
|
Process 2:
|
3,000
|
|
Overheads
|
1,500
|
|
3,000
|
|
|
3,000
|
|
3,000
|
Person 2
|
|
Shs
|
|
Shs
|
|
Transfer from
|
|
Transfer to
|
|
|
Process 1:
|
3,000
|
Finished Goods:
|
6,000
|
|
Direct material
|
1,500
|
|
|
|
Direct labour
|
1,000
|
|
|
|
Overheads
|
500
|
|
____
|
|
|
6,000
|
|
6,000
|