The process costing is applied to the continuous mass manufacturing system where uniform standard units are produced on large scale. Like job costing, there is no necessity of maintaining the detailed records for each job because the total production consists of identical units. Here the unit cost is ascertained on the basis of average calculations. Under this system, all the costs for a period are accumulated by departments or other cost centers. The unit cost is ascertained dividing the number of units produced during the period by the total accumulated costs for that period. It should be noted that in the denominator, the units which are completed during the year are considered. But in reality there can arise following three types of situations:
1. Uncompleted units of the prior period completed during the current period. Such units are shown as the work-in-progress or WIP at the beginning of the period.
2. Units started and completed during the current period.
3. Units started during the current period but remain un- completed at the end of the current period. Such units are shown as the work-in-progress or WIP at the end of the year or period.
We have noted above that for the purpose of ascertaining the cost per unit, only the completed units are considered. So the beginning work-in-progress (i.e. above 1) and the ending work-in-progress (i.e. above 3) are converted into the equivalent completed units on the basis of their stages of completion. For such calculation, the information about the stage of completion is very important ; e.g. the end of the period say 1,000units are in process and the processing on them have been completed only up to 40%. In this case, 1000 uncompleted units will be treated as 400 completed units for the purpose of ascertaining the cost per unit.
It should be noted that if the units are lost or spoiled during the processing in any department, such loss in borne by the units complete and remained uncompleted in that department. Thus the cost of lost units is spread over the remaining units on some equitable basis.
In case where the products are processed in more than one department, the costs of one department are transferred to the next department and the total cost and the total units are accumulated till the stage of completion.
The ascertainment of various elements of cost is made as under:
Direct material cost
The cost of materials used for the period is determined by totaling the material requisitions of that period. The total represents the cost of materials consumed which are charged to the producing department as a whole rather than the individual job as in the case of job costing.
Direct Labor cost
Direct labor cost is determined by the total pay bill of the respective departments. Sufficient care should be taken to see that wages considered for these calculations are for those employees whose work can be specifically identified with the actual production the respective departments.
The overheads are apportioned to the various production departments on some scientific basis. Generally, it is the practice to apply the predetermined overhead rates in proportion to the direct material, direct labor, labor hour rate, machine hour rate, or some other reasonable basis. It may be desirable to use different overhead rates for each producing department since the various departments may not incur overheads in the same proportion.
To sum up in process costing there is no necessity of maintaining the detailed records for each job (like job costing) because the total production consists of identical units. Process cost system entails that all the costs for a given period are accumulated by departments or other cost centers. The unit cost is ascertained dividing the number of units produced during the period by the total accumulated costs for that period.