Page 251 - DCOM202_COST_ACCOUNTING_I

Unit 12: Process Costing and its Applications

Normally in each process, there is a residue left after transfer of the partially completed product Notes
to the next process. For example, in case of crushing of oil seeds, oil produced will be passed on
to the refining process and oil cakes will be left. This is not wastage as it can be sold in the market.
But the quantity of oil produced plus the quantity of cake left will not equal the quantity of oil
seeds. It will be slightly less. The quantity not accounted for is a loss and effort should be to keep
it as low as possible. The residue, if it can be sold in the market and if it can be used as a material
for another finished product, is known as a by-product. In the process of converting coal into
coke, useful by-products such as coal tar, sulphate of ammonia are obtained.

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Caution Normal wastage is absorbed in the cost of net output while abnormal wastage is
written-off to costing profit and loss account. When, however, wastage has any reusable
value, the process account should be credited with the quantity and value of normal
wastage.
Scrap as discarded material which has same recovery value and which is usually either disposed
of without further treatment, or reintroduced into the production process in place of raw material.
Where value of scrap is negligible, it may be excluded from costs. In other words, the cost of
scrap is borne by good units and the income from scrap, if any, is treated as other income.

Did u know? The sate value of scrap, net of selling and distribution cost, if any, is deducted
from overheads to reduce the overhead rate.
Defectives products are not up to the standard or they do not meet dimensional specifications,
they are known as defectives. Defective work may be the result of various causes, such as
sub-standard materials, bad workmanship, incompetent supervision, carelessness in planning, etc.
Accounting for defectives in concerned with accounting for rework costs or costs of rectification.
When defectives are usual for the products and it is not paying to try to identify them job-wise,
the related methods are generally in use. Where defectives are easily identifiable with specific
jobs, the rework costs are debited to the job.

Spoilage results when materials are damaged in manufacturing operations in such a way that
they cannot be rectified economically and hence taken out of the process to be disposed of in same
manner without further processing. The main difference between defectives and spoiled work is
that spoiled material cannot be repaired or reconditioned as is done in the case of defectives.
Normal spoilage costs are included in costs either by charging the loss due to spoilage to the
production order or charging it is production overheads, so that it is spread over all products.
Any value realized from spoilage is credited to the production order or production overheads
account, as the case may be. The cost of abnormal spoilage is charged to costing profit and loss
account.

Reason for Calculation of Inter Process Profit

The output of one process is transferred to the subsequent process at cost price. However
sometimes, the transfer is made at cost + certain percentage of profit. This is done when each
process is treated as a profit center. In such cases, the difference between the debit and credit side
of the process account represents profit or loss and is transferred to the Profit and Loss Account.
The stocks at the end and at the beginning contain an element of unrealized profits, which have
to be written back in this method. If the profit element contained in the closing inventory is more
than the profit element in the opening inventory, profit will be overstated and vice versa. Profit
is realized only on the goods sold, thus to obtain the actual profit the main task would be to
calculate the profit element contained in the inventories. In order to compute the profit element,

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