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Process costing
Process costing is a method of costing under which all

costs are accumulated for each stage of production or process and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.
CIMA London defines process costing as that form of

operation costing which applies where standardize goods are produced


The production is continuous. The product is homogeneous. The process is standardized. Output of one process become raw material of another

process. The output of the last process is transferred to finished stock Costs are collected process-wise. Both direct & indirect cost are accumulated in each process. If there is a stock of semi-finished goods, it is expressed in terms of equivalent units. The total cost of each process is divided by the normal output of the process to find out cost per unit of that process.

Costs are to be computed periodically at the end of a

particular period. It is simple & involves less clerical work that job costing It is easy to allocated the expenses to processes in order to have accurate costs. Use of standard costing system in very effective in process costing situations.
Process costing helps in preparation of tender, quotations.
Since cost data is available for each process, operation

department, good managerial cost is possible.

Cost obtained at each process is only historical cost and are

not very useful for effective control. Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation & managerial control. Work in progress is generally done on estimated basis which leads to inaccuracy in total cost calculation. The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.


Identifying, measuring and reporting:
There is wastage of material as it passes from process to

process. Wastage is an innate part of textile industry. It is therefore imperative to account properly, for process waste while working out product costs in a process. Organization should initiate the loss and waste analysis as the first step in assessing and improving business performance. A key component of our Loss and Waste analysis is working alongside people so that while the exercise is taking place up skilling occurs at the same time; this is important for ownership of the results and opportunities and employee buy in to improvement recommendations.

Identifying, measuring and reporting Contd

All business improvement activities should have a

strategic focus on eliminating waste but determining areas of waste can be hard task for many businesses. Waste is a process or activity which absorbs resources without adding value. Loss and waste analysis involves spending time within your workplace environment or a specific part of your business to identify areas of waste that are costing company time, money and resources. Following the analysis, organisation should provide with a report which will identify areas which would benefit from a waste reduction programme and provide opportunities for financial gain.

Cost of Process
The cost of the output of the process (Total Cost less Sales

value of scrap) is transferred to the next process. The cost of each process is thus made up to cost brought forward from the previous process and net cost of material, labour and overhead added in that process after reducing the sales value of scrap. The net cost of the finished process is transferred to the finished goods account. The net cost is divided by the number of units produced to determine the average cost per unit in that process. Specimen of Process Account when there are normal loss and abnormal losses.


Process I A/c.


Particulars To Basic Material To Direct Material To Direct Wages

Units xx

Rs xx xx xx

Particulars By Normal loss By Abnormal Loss By process II A/c.

Units xx xx xx

Rs xx xx xx

To Direct Expenses
To production overheads


(output transferred to
Next process)



To cost of rectification of normal Defects


By process I stock A/c



To Abnormal Gains xx

xx xx xx xx

Process Losses
In many process, some loss is inevitable. Certain production techniques are of such a nature that

some loss is inherent to the production. Wastages of material, evaporation of material is unavoidable in some process. But sometimes the Losses are also occurring due to negligence of Labourer, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Basically process losses are classified into two categories (a) Normal Loss (b) (b) Abnormal Loss

Ascertainment of Clean Cotton Cost

CLEAN COTTON COST It refers to raw cotton cost duly adjusted to waste in the course of processing material. Purpose of clean cotton cost is to find the actual value /cost of cotton that is attributed to / used in spinning, after making adjustments/allowances for the Waste and crediting the value of (Saleable value) of waste to the cost of cotton. The waste / impurities has certain sale value. This Sale Value is deducted from Raw Materials Mixing Cost and multiplied by Waste Multiplier to ascertain the value of clean cotton cost .

Ascertainment of Clean Cotton Cost Contd..

Clean Cotton Cost = (Raw Material Mixing Cost Sale Value of Waste)

x Waste multipliers
Waste multiplier is a means determining the

amount of raw material required to produce a stated quantity of product.

Waste Multiplier = (Raw Material Consumed )

(Weight of Product Produced)

For the purpose of computing , value of waste to be

credited to the cost of cotton, average market rate over a fairly long period should be considered. The amount to be credited should be net of all the costs incurred in handling and storing wastage. Accounting for the sale value of waste realized in the cost of cotton will reflect the actual cost of cotton used in spinning process. The waste should include all kinds of waste, that is usable, saleable and invisible waste.

Waste Multiplier

Production at a Cost Centre Production at finished stage

= (100 - Total waste % upto the cost centre) (100 total waste % for all cost centres)

Mixing 30s/36s count , if the assumed waste percentages

1. Mixing/Blow room
2. Carding 3. Pre-Comb drawing 4. Combing 5. Post Comb drawing 6. Canfed Inter 7. Ring Spinning


7.50 0.30 11.57 0.30 0.80 2.80

The total waste percentage works to 29.77 percentage .

waste multiplier for various cost centers

1. Mixing & Blow room 2. Carding 3. Pre-Comb Drawing 4. Combing 5. Post - Comb Drawing 6.Canfed Inter 7. Ring Spinning

= (100 - 6.5)/ (100-29.77) = 1.331 = (100 - 14)/ (100-29.77) = 1.225 = (100 -14.30)/(100-29.77) = 1.220 = (100 -25.87)/(100-29.77) = 1.056 = (100 -26.17)/(100-29.77) = 1.051 = (100 -26.97)/(100-29.77) = 1.039 = (100 -29.77 )/(100-29.77)= 1.00

Assume that for spinning 18s warp carded yarn, three qualities of

cotton are used ; the proportion and rates per kg are as shown below; Quality of cotton Proportion (Rs ) (1) CJ 73 8 % (2) V 7973 88 % (3) Comber waste 4 %

Rate per kg

40 30 8

Assume Yarn Realization in 86% and that out of 14 kgs lost per 100kgs of input , 8kgs are saleable at Rs 2 per kg. Find out Clean Cotton Cost per kg .

1.Raw material cost / kg = (8% of 40) + (88% of 30) + (4% of 8) =Rs.(3.20+26.40+0.32) = Rs. 29.92 2. Sale value of waste per kg = 0.08 x 2 = Rs. 0.16 3. New cotton price = Rs.( 29.92 -0.16) = Rs. 29.76 4. Waste Multiplier = 100/86 = 1.163 5. Clean Cotton Cost = Rs. 29.76 x 1.163 = Rs. 34.61