Process costing refers to a method of ascertaining the cost of product at each stage or process of manufacture where a product passes through different consecutive processes of production, each distinct and well defined. As a matter of fact, almost every product passes through a series of manufacturing operations before it takes the shape of a final product. But, in most cases, the operations involved are small and the costs incurred on each operation form an insignificant portion of the total cost. Hence, it is not considered worthwhile to compute the cost of each operation separately and so the process costing is not considered useful. Process costing is suitable only where the final product is the result of a series of such process that the output of one process passes on as a raw material to the next process and may otherwise be saleable as a finished product in the market. Take the case of a cotton textile mill, for example where production of cloth involves three distinct sequential processes viz., the spinning process, the weaving process and the finishing process. The output of spinning process (yarn) is passed on as a raw material to the weaving process. It can also be sold in the market, if the mill has some surplus. Similarly, the output of weaving process (coarse cloth) is passed on to the finishing process as a raw material and, if there is surplus, it can be sold to other textile mills. For a textile mill, therefore, it will be useful to compute the costs of spinning, weaving and finishing processes separately and ascertain the cost of yarn, coarse cloth and finished cloth. This will also enable them to compare their costs with the market prices thereof. Thus, the industries to which process costing can be usefully applied, may normally have the following features:
1) The production is continuous and passes through a number of consecutive operations or processes.
2) The output of one process becomes the input for the next process till final product is obtained.
3) The products are standardised and homogenous.
4) The output of each process may be saleable in the market.
5) The processing of raw material may give rise to the production of joint and/or by-products.
Hence, process costing is usually employed by the following industries:
Chemical works
Distillaries
Textile mills
Sugar works
Soap-making
Paper mills
Food processing
Paint manufacturing
Breweries
Oil refineries
Canning factories
Milk dairy
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