Process Costing :: Characteristics, Features, Application in Industry

Methods of Costing  
 
By "Method of Costing" we mean the procedure adopted to ascertain costs. The Method adopted would be dependent on the circumstances in which accounting is required to be made which is dependent on the product being manufactured and the nature of the industry making the product.

Depending on the nature of the business i.e. the type of the product made and the procedure adopted to make it, all the different costing methods are classified as

  1. Specific Order Costing

    This is a costing method applicable to those industries where the activity being accomplished consists of a task which is specifically identifiable at each stage of production.

    This includes 1. Job Costing
    2. Batch Costing
    3. Contract Costing

  2. Operation Costing

    This is a costing method applicable to those industries where the activity consists of continuous or repetitive operations or processes and the products are identical and cannot be segregated.

    This includes 1. Unit Costing
    2. Process Costing

  3. Operating Costing

    This is also called Service Costing and is applicable to organisations which produce services but not tangible goods.
  4. Composite or Multiple Costing

    This actually is not a method but a combination of two or more methods mentioned above.

Techniques of Costing  
 
Techniques of costing imply tools that are to be used to apply a method of costing.

In accounting for costs using a particular method of costing as mentioned above, any one or more of the techniques of costing are used by the organisation

The various techniques of costing are

  1. Absorption Costing
  2. Marginal Costing
  3. Standard Costing
  4. Differential Costing
  5. Uniform Costing

Process Costing » Method and Techniques  
 
Process Costing is a technique of costing and it may be adopted using any of the techniques of costing.

The technique adopted would decide the procedure adopted in relation to various accounting aspects. For example, for the purpose of valuation of stocks

  • Fixed costs will be considered along with Variable costs, if "Absorption Costing" is adopted as the technique.
  • Only variable costs will be considered, if "marginal costing" is adopted as the technique.

Example of an area where Process Costing is applied

A common example of an industry where process costing may be applied is "Sugar Manufacturing Industry".

The processes in this industry are

  • Cane Shredding

    The cane is broken/cut into small pieces to enable easier movement through the milling machine.
  • Milling

    The shredded cane is passed through rollers which crush them to extract cane juice. [Similar to the cane juice extracted by the vendors who sell you sugar cane juice.]
  • Heating and Adding lime

    The extracted juice is then heated to make it a concentrate and lime is added to the heated juice.
  • Clarification

    Muddy substance is removed from the concentrate through this process
  • Evaporation

    Water is removed from the juice by evaporation.
  • Crystallisation and Separation

    Sugar crystals are grown from the dry juice concentrate in this process.
  • Spinning

    Molasses are separated from sugar using Centrifugals in this process.
  • Drying

    Sugar is obtained by drying the wet raw sugar obtained in the spinning process.

Features/Characteristics of Process Costing  
 
Process Costing Method is applicable where the output results from a sequence of continuous or repetitive operations or processes and products are identical and cannot be segregated.

Process Costing enables the ascertainment of cost of the product at each process or stage of manufacture.

The following features may be identified with process costing:

  1. The output consists of products which are homogenous.

  2. Production is carried on in different stages (each of which is called a process) having a continuous flow.

  3. Production takes place continuously except in cases where the plant and machinery are shut down for maintenance etc. Output is uniform and all units are identical during each process. It would not be possible to trace the identity of any particular lot of output to any lot of input.

  4. The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.

  5. The output of a process (except the last) may also be saleable in which case the process may generate some profit.

  6. The input of a process (except the first) may be capable of being acquired from the outside sources.

  7. The output of a process is transferred to the next process generally at cost to the process. It may also be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.

  8. Normal and abnormal losses may arise in the processes

There are a number of industries in which process costing can be applied.

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