Preparation of Process Accounts

In industries where production involves several stages or processes, like chemical manufacturing, textiles, and food processing, it is essential to determine the cost at each stage. This is done through process costing. Process accounts are maintained to accumulate the costs of each process and compute the cost of output at each stage.

Key Features of Process Accounts:

1. Process Accounts:

Separate accounts are maintained for each process, which helps track the costs incurred at each stage of production.

2. Accumulation of Costs:

Costs are accumulated for each process, including direct materials, direct labor, and overheads.

3. Transfer of Costs:

The cost of output from one process is transferred to the next process until the final product is obtained. The final process account shows the cost of the finished goods.

4. Normal and Abnormal Losses:

Process accounts also account for any losses, both normal (expected) and abnormal (unexpected).

5. Joint and By-products:

In cases where multiple products are produced simultaneously, process costing is used to apportion costs between joint and by-products.

Components of Process Accounts:

1. Direct Materials:

The raw materials added at each process stage.

2. Direct Labor:

The wages paid to workers directly involved in the process.

3. Overheads:

Indirect costs associated with each process, such as utilities, maintenance, and factory rent.

4. Normal Loss:

The loss expected due to the nature of the process, which is typically accounted for as a percentage of input.

5. Abnormal Loss/Gain:

Any unexpected loss or gain that differs from the normal loss rate. Abnormal loss is treated as a separate item and transferred to a separate account.

Preparation of Process Accounts:

Each process account includes details of inputs, outputs, costs, and losses. The process cost is calculated by adding all the costs incurred and adjusting for losses.

Format of a Process Account

Example of a Process Account:

Assume a company has three processes (Process A, B, and C). The following details are available for Process A:

• Input (Raw Materials): 1,000 units at ₹10 per unit = ₹10,000
• Direct Labor: ₹5,000
• Overheads: ₹3,000
• Normal Loss: 10% (100 units with scrap value ₹2 per unit)
• Abnormal Loss: 50 units with a cost of ₹1,200

Process Account for Process A:

• Explanation:
  • The normal loss is 100 units, which are sold as scrap for ₹200 (₹2 per unit).
  • The abnormal loss of 50 units is valued at ₹1,200.
  • The remaining 850 units are transferred to the next process at a total cost of ₹16,600.

Accounting for Normal and Abnormal Losses:

1. Normal Loss:

It is expected and considered as part of the process. The cost is absorbed by the remaining good units.

2. Abnormal Loss:

It is unexpected and treated as a separate expense. The cost is debited to an Abnormal Loss Account and credited to the Process Account. Any scrap value is deducted from the abnormal loss.