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Process Costing

1. Process Industries

  • Definition: Firms producing identical products or services through a continuous process.

  • Examples:

    • Manufacturing: Cement, fertilizer, steel, rice noodles, paints, chemicals
    • Service: Banking, insurance, postal, courier

  • Costing Method: Process costing to compute cost per unit.

2. Single‑Process, Single‑Product Case

Rice Noodles (e.g., Nestlé, ITC)

  1. Process steps:
    • Mixing raw materials
    • Threading
    • Steam‑boiling
    • Packing
  2. Cost collection:
    • Direct costs: materials, labor, machine expenses (actual)
    • Indirect costs: allocated by weight or process hours
  3. Cost per unit (no WIP):
    Total direct + indirect costs / Units produced

3. Process with Work‑in‑Process (WIP)

Industrial Coating Example

  • Opening WIP:

    • Qty = 6,000 L
    • Materials = ₹6 million
    • Conversion = ₹2 million
    • Total = ₹8 million
    • Completion = 80%

  • Period activity:

    • Materials added = 20,000 L → ₹20 million
    • Conversion expenses = ₹8 million
    • Completed = 22,000 L
    • Closing WIP = 4,000 L → 30% complete

3.1 Equivalent Units (EU)

  • Material EU = Completed + WIP × 100%
    = 22,000 + 4,000 = 26,000 EU
  • Conversion EU = Completed + WIP × %complete
    = 22,000 + (4,000 × 30%) = 23,200 EU

3.2 Cost per Equivalent Unit

  • Total material cost = ₹6 m + ₹20 m = ₹26 m
  • Total conversion cost = ₹2 m + ₹8 m = ₹10 m
  • Material cost/EU = ₹26 m ÷ 26,000 = ₹1,000
  • Conversion cost/EU = ₹10 m ÷ 23,200 ≈ ₹431

3.3 Cost per Completed Unit

₹1000 + ₹431 = ₹1431

3.4 Closing WIP Valuation

  • Material: 4,000 EU × ₹1,000 = ₹4,000,000
  • Conversion: 4,000 L × 30% = 1,200 EU × ₹431 ≈ ₹517,241
  • Total WIP ≈ ₹4.52 million

3.5 Reconciliation

Cost of completed units + WIP value = ₹(22000 × 1431) + 4.52 m = ₹36 million

Equals opening WIP (₹8 m) + material added (₹20 m) + expenses (₹8 m).

4. Weighted‑Average vs. FIFO

  • Weighted‑Average (used above):
    • Ignore opening WIP % complete
    • Pool costs and units
  • FIFO:
    • Separate opening WIP from current period
    • More complex, less common in practice

5. Multi‑Process Costing Example

Mars Textile (Knitting → Dyeing)

5.1 Quantity Flow

Department Opening WIP Input Completed → Next Closing WIP
Knitting 100 kg 2,000 kg yarn 1,800 kg cloth → Dyeing 300 kg (100% mat, 30% conv)
Dyeing 30 kg 1,800 kg cloth from Knitting 1,750 kg dyed → Finishing 80 kg (100% mat, 60% conv)

5.2 Knitting Department

  • Costs:
    • Opening mat: ₹24,000; conv: ₹5,000
    • Added mat: ₹480,000; conv: ₹144,000
    • Total mat = ₹504,000; conv = ₹149,000
  • Equivalent units:
    • Material: 1,800 + 300 = 2,100 EU
    • Conversion: 1,800 + (300 × 30%) = 1,890 EU
  • Cost/EU:
    • Mat: ₹504,000 ÷ 2,100 = ₹240
    • Conv: ₹149,000 ÷ 1,890 ≈ ₹78.84
  • Cost/kg knitted = ₹240 + ₹78.84 = ₹318.84
  • Closing WIP value = (300 × ₹240) + (90 × ₹78.84) ≈ ₹79,096

5.3 Dyeing Department

  • Costs:
    • Opening mat: ₹9,000; conv: ₹5,400
    • Received 1,800 kg @ ₹318.84 = ₹573,912
    • Dye chem.: ₹200,000
    • Total mat = ₹782,912; conv addl = ₹60,000 → conv total = ₹65,400
  • Equivalent units:
    • Material: 1,750 + 80 = 1,830 EU
    • Conversion: 1,750 + (80 × 60%) = 1,798 EU
  • Cost/EU:
    • Mat: ₹782,912 ÷ 1,830 ≈ ₹427.82
    • Conv: ₹65,400 ÷ 1,798 ≈ ₹36.37
  • Cost/kg dyed = ₹427.82 + ₹36.37 = ₹464.19
  • Closing WIP value = (80 × ₹427.82) + (48 × ₹36.37) ≈ ₹35,971

5.4 Summary & Reconciliation

  • Value of 1,750 kg dyed @ ₹464.19 = ₹812,333
  • Knitting WIP = ₹79,096
  • Dyeing WIP = ₹35,971
  • Total ≈ ₹927,400 (matches combined costs)
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