Process costing is a cost accumulation method where continuous promotion of uniform items occurs in large quantities or mass production occurs passing through many stages/ processes which produce a large amount of units of production. This differs from job costing system mainly because cost is accumulated for a unique item in job costing whereas in process costing cost is accumulated for a process which produces a large quantity of uniform/ homogeneous products. For example: Manufacturing of garments, manufacturing of electrical appliances, Oil refining both petroleum and edible oils.
In process costing, a unit of product is a result of a bulky production which passes through a number of production processes. Therefore, output of one process becomes the input of the next process until the production is complete in the final process, when it is transferred to finished goods.
Process costing identifies two types of losses
Normal loss/ uncontrollable loss/ expected loss
This is the type of cost that a process incurs due to inherent factors. So it is an expected loss due to known unavoidable reasons. This loss expected to occur at normal operational conditions which is assumed to be the most efficient production environment. For example, when shirts are cut from a real of cloth, part of the cloth may be lost. This requires that cloth input to cutting processes should take into account this loss which has to be incurred however efficient the production process is.
Abnormal Loss/ Avoidable loss
This is the type of loss resulting from inefficiencies in the production process. So, this is a loss which can be avoided under an efficient production environment. Mathematically it is the difference between actual loss and normal loss when the actual loss is higher than the expected loss/ normal loss.
Abnormal gain is the unexpected gin in the production process under normal operational efficiency. Mathematically, this is the difference between the actual output and expected output when the actual output is higher than the expected output. Alternatively, this is the gain resulting when actual loss is less than the normal/ expected loss.
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