## Process Costing — Concept and Applicability

Process Costing is a method of costing applicable to industries or companies where raw material gets converted into finished goods by passing through different processes (multiple sequential stages).

### Examples of Industries

Sugar industry — sugarcane passes through various stages (jaggery, refined sugar, etc.)
Chemicals, paints, oil refining, textiles, steel, paper, cement.

### Distinguishing Feature

Unlike Job Costing (where cost is tracked per job), Process Costing tracks cost per process and averages it over the units produced in that process.

### How to Prepare a Process Account — 4 Steps

Step 1: A separate account is prepared for each process.

Step 2: Calculate the total cost of units manufactured in each process at the Normal Cost per Unit.

Step 3: Calculate the Normal Cost per Unit using the formula:

```

Normal Cost = Total Cost − (Normal Loss Units × SP of Normal Loss Units)

per unit ─────────────────────────────────────────────────────────────

Total Units − Normal Loss Units

```

Step 4: Calculate Normal Loss, Abnormal Loss, Abnormal Gain, and Profit/Loss.

### Why this Formula?

The numerator removes the realisable value of normal loss units from total cost (because that value is recovered), and the denominator removes normal loss units from total input (because we want average cost over the good units expected to be produced).

Worked example

### Example 1

Example: A process receives 1,000 units at ₹26,000 material + ₹7,000 labour + ₹5,000 overheads = ₹38,000 total cost. Normal loss is 10% of input (100 units) realisable at ₹20/unit.

Numerator = ₹38,000 − (100 × ₹20) = ₹38,000 − ₹2,000 = ₹36,000
Denominator = 1,000 − 100 = 900 units
Normal Cost per Unit = ₹36,000 / 900 = ₹40/unit

⚠️ Common exam mistakes

Including normal loss units in the denominator (must be excluded).
Forgetting to deduct realisable value of normal loss from total cost in the numerator.
Using actual output instead of expected good output in the denominator.
Preparing one combined account instead of separate accounts for each process.

Reference:

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Introduction and Applicability of Process Costing

Worked example

⚠️ Common exam mistakes