The General Principle for Preparing Process Cost Accounts

A separate process account is prepared for each process so that cost treated as a separate cost center for which profit can also be ascertained if the output of one procedure is transferred to another procedure at a profit. In each process three columns are prepared in debit and credit sides of each process, viz, for quantity or units, cost per unit and total cost. The general rule to prepare process cost account is as follows:

1. Apportionment of overhead or indirect cost

All the direct cost such as direct material, direct wages, and direct expenses are shown on the debit side of process account management as it is allocated to different process so it is apportioned on some suitable basis. If no basis is given for apportionment of overhead, it is apportioned on the basis of direct wages.

2. Reconciliation of production quantity

If information regarding units or quantity or abnormal loss/gain is not given it is computed as a balancing figure. For this purpose one additional column of quantity is also prepared on each side of the process account.

3. Transfer of goods from one process to another

One procedure output is transferred to the next procedure as the input of the next procedure and output of the last procedure is transferred to the finished stock account.

4. Finding the cost of joint products and by-products

Sometimes, the nature of the process is such that some joint products or by-products are also produced with the main product. Cost of the main product can be ascertained only if the cost of such joint products is ascertained correctly and revenue from the sale of the by-product is credited properly.

5. Adjustment of stock of finished goods at the ending  year in each process to avoid imbalance or bottleneck situation

Closing stock of completed units in each process is valued at average cost of goods produced for the duration of the period on a FIFO basis. Sometimes there may be a bottleneck situation where the production capacity of the next process is less than the capacity of earlier process. In such a situation, whole of the output of one process cannot proceed in the next process and a part of it is sold in the open market process, so out of well-produced during the year some, some goods are transferred to the next process, some goods is transferred to the next stock and some goods may be remain as closing stock of the process.

6. Computation of total cost and cost per unit

Total cost and total units of good transferred to the next process are computed as a balancing figure. After computing it, the total cost is divided by the total unit to compute the cost per unit of goods transferred to the next process.

7. Preparation of normal loss and abnormal loss account

After preparing the process account, normal loss and abnormal loss accounts are prepared. Normal loss is credited in the procedure by the realizable value of scrap. So there is no balance in normal loss account is scrap is sold during the period. If it is not sold, either it is transferred to store ledger control accounts or this account is showing a balance equal to the realizable value of scrap. The abnormal loss is credited in process at the same cost per unit used for transferring goods to next process. The sale value of such abnormal scrap is credited in abnormal loss account and balance of abnormal loss account is showing net loss which is transfer to costing P&L account.