Process Costing :: Cost Components, Recording/Accounting Methodology

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Elements/Components of Cost  
For the purpose of cost accounting, the process industry is divided into separate departments with each department representing a specific process. The Direct Material and Direct Labour/Labor Costs are collected for each department separately and the overheads which are collected over all the departments/processes are apportioned over the various departments/processes on some rational basis.

The following are the main elements/components of costs involved in the manufacturing process where process costing method is adopted.

  1. Direct Materials

    There are two types of materials that we come across in process costing.
    • Primary Material

      Materials which are introduced in the initial process and passed on to the next process as a part of output after completion of processing.

    • Secondary Material

      Materials which are introduced in the first or subsequent processes in addition to the main material introduced in the initial process. This gets mixed up with the main material and is passed on to the subsequent processes as a part of the output.

  2. Direct Labour/Labor

    The direct labour/labor cost is generally incurred in every process. Identification of direct labour cost is also relatively easy in process costing industry

  3. Direct Expenses

    Expenses in addition to Direct Material and Labor which can be directly attributable to a particular process. These are costs relevant to specific processes.

  4. Production Overheads

    The overhead expenses are generally expended over all the processes involved in production. These are to be apportioned over the various processes in an amicable manner.

Methodology of Recording/Accounting Costs  

Financial Accounting Methodology is adopted for recording costs involved.

  • Process Accounts

    A nominal account for each process is used to record all the costs relevant to a process.

    Each process account is

    • Debited with

      • The Primary Direct Material Cost
      • Secondary Direct Material Cost
      • Direct Labor Cost
      • Direct Expenses and
      • Production Overheads allocated and/or apportioned to the process.
    • Credited with

      The value of output transferred to the subsequent process or finished stocks.

    Numbers, Alphabets or any word or phrase representing the process are used as suffixes/prefixes in the names ("Process I a/c", "Process A a/c", "Refining Process A a/c",... etc.,.) to distinctly identify the processes accounts.

  • Process Stock Accounts

    Stocks relevant to a process are maintained in a separate stock account.

    Stock accounts for input may be maintained where all the input acquired/received for a process during a period is not used up.

    Stock accounts for output may be maintained where all the output produced/completed in a process during a period is not disposed off either by transfer to the next process or by sale.

  • Where the output relevant to a process is sold apart from being transferred to the next process, it generates revenue. These revenues relevant to a process, are generally recorded using the process account or the stock account.

Process Account » Format  
DrProcess I a/c Cr
Particulars Quantity
(in Units)
(in Rs)
Particulars Quantity
(in Units)
(in Rs)
To Direct Material
To Other Material
To Direct Labour/Labor
To Production Overheads
By Process II a/c 10,000 6,24,000
    6,24,000     6,24,000

This is the simplest form of the process account that we see.

There is more to process costing than preparing this simple ledger account.

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