PROCESS COSTING

MEANING:
   Process costing is a method of costing applied to industries where the material has to pass through two or more processes for being converted into a finished product. Each process is treated as a cost centre.
    Cost per unit of each process = Cost of output in the
                                                process/Normal number of units in 
                                                       the process 
CHARACTERISTICS OF PROCESS COSTING:
following are:
Process costing is an accounting method used to determine costs in industries where the production process is fixed and large-scale. This means that process costing generally appears in the manufacturing industry, where factories are trying to make large amounts of an item as quickly as possible for as low a cost as possible.
1.Controlled:
One major characteristic of process costing is the fact that the process is controlled. This is why process costing is used--it is an industry where the process is clear-cut, which makes it possible to assign a price to it. This means that there are a wide range of industries where process costing will not work. For example, a law firm cannot use process costing to determine prices because the process to produce their product (legal expertise and advice) is not the same for every client. Indeed, its selling point is that it is different for every client. Therefore, the process cannot be streamlined and the costs cannot be kept the same for all lawyers.
2.Cumulative:
Process costing uses cumulative costs from every stage of production. So, if a factory makes ketchup bottles, the people in charge of process costing would find the cost of the glass, plus the cost of the labels, plus the cost of the workers in each department and maintenance of the necessary machines. By adding up the total cost of producing a set number of ketchup bottles, the accounting team can determine how much it costs to produce each ketchup bottle--and therefore determine what price each bottle should sell for.
3.Continuity:
The final characteristic of process costing is that the process has to be continuous. If a factory makes custom equipment for large clients, it is not possible to assign a fixed process cost because the process is not continuous. The factory may be making one kind of equipment for six months and a completely different kind for the next six months; the changing of inputs and outputs will change the process and therefore change its cost. However it is possible to process cost within each of these six-month periods. If a shop is making different things every day, though, then there are too many variables and process costing is not possible.

CONTRACT COSTING

CONTRACT COSTING:

Contract costing is the tracking of costs associated with a specific contract with a customer. For example, a company bids for a large construction project with a prospective customer, and the two parties agree in a contract for a certain type of reimbursement to the company. This reimbursement is based, at least in part, on the costs incurred by the company in order to fulfill the terms of the contract. The company must then track the costs associated with that contract so that it can justify its billings to the customer.

The most typical types of cost reimbursement are:

• Fixed fee. The company is paid a fixed total amount for completing the project, possibly including progress payments. Under this arrangement, the company will want to engage in contract costing to compile all of the costs relevant to the construction project, just to see if the company earned a profit on the deal.
• Cost plus. The company is reimbursed for the costs it incurred, plus a percentage profit or fixed profit. Under this arrangement, the company will be forced under the terms of the contract to track the costs related to the project, so that it can apply to the customer for reimbursement. Depending on the size of the project, the customer may send an auditor to examine the company's contract costs, and may disallow some of them.
• Time and materials. This approach is similar to the cost plus arrangement, except that the company builds a profit into its billings, rather than being awarded a specific profit. Again, the company must track all contract costs carefully, since the customer may review them in some detail.

FEATURES OF CONTACT COSTING:

The following are the features of contract costing.

1. A contract is undertaken according to the specific requirements of customers.

2. Generally, the duration of a contract is long period.

3. The contract is undertaken only at the site of the customer.

4. Contract work mainly consists of construction activities.

5. The specific order costing principles are applied in contract costing.

6. The size of a contract is usually large or bigger than jobs.

7. It requires a long time to complete a contract.

8. Each contract is an independent one, quite distinct from another.

9. A distinctive number is assigned to each contract to differentiate the contract from one another.

10. A separate account is maintained and prepared for each contract to find out the profit earned from each contract separately.

11. If a contract is not completed at the end of the accounting period, only a portion of profit is transferred to profit and loss account on the basis of stage of completion of a contract.

12. There is no problem of under absorption and over absorption of overheads.

13. Every conceivable expenditure is charged to the concerned contract.

14. If the materials, plants and other inputs are transferred from one contract to another, the transfer may be affected by giving debit and credit to the respective contracts.

15. The proportion of indecent costs to total cost of a contract is very small.

16. A contractor may appoint a sub — contractor(s) for the execution of the work of the main contract.

Procedure of Contract Costing

In contract costing, most of the expenses are direct in nature as in the form of materials, labour, expenses, plant, sub-contract charges and the like. Only a small portion of amount is charged as overheads which are apportioned on suitable basis. Accounting treatment of costs of contract costing is briefly explained below.

1. Materials

The value of materials used is debited in the concerned contract account. Materials may be specifically purchased from the open market, issued from the stores, transfer from other contracts or supplied by the contractee himself. If materials are returned to stores, the value of materials is credited in the concerned contract account.

Sometimes, materials may be transferred from one contract to another. If so, the value of materials is debited in the receiving contract account and credited in the transferring contract account. Whenever the materials are purchased from the open market, the values of materials are debited in the concerned contract account.

Similarly, if materials are issued from stores, the concerned contract account is debited and the stores control account is credited. Sometimes, some materials may be stolen or destroyed by fire, the value of materials is credited in the concerned contract as stores account and the same is transferred to profit and loss Account.

2. Labour

Generally, the contract is carried on only at the site of the contractee i.e., customer not within the company premises. Hence, labour is engaged at site to work on the contract. The amount paid to workers is wages which is directly debited in the concerned contract account. The details of information regarding wages are obtained from the records of time sheet and wages sheet. Equitable base method is usually adopted to apportion the wages of supervisors working on two or more contracts.

Likewise, the overheads are also apportioned on suitable basis. The accrued wages and outstanding expenses are calculated at the end of the accounting period and debited in the concerned contract account.

3. Direct Expenses

The direct expenses are debited in the concerned contract account as and when they are incurred. Examples of direct expenses are hire charges paid for the plant procured from outside, sub-contractor’s charges, architect’s fees, electricity, insurance and the like.

4. Plant and Machinery

The plant and machinery is treated in two ways. Under first method, the full value of plant and machinery is debited in the concerned contract account if the plant and machinery is specifically purchased for the contract. At the end of contract, the plant and machinery may be sold out in the market if it is not required further. If so, the sale proceeds are credited in the concerned contract account.

Sometimes, the plant and machinery may be required further, if so, the depreciated value or revalued amount of plant and machinery is credited in the concerned contract account. The net effect is that the contract account is debited with the amount of depreciation.

Under second method, the contract account is debited with the amount of depreciation of plant and machinery. The plant and machinery may be purchased specifically from the open market or issued from the stores. The amount of depreciation is calculated on the basis of daily use or hourly basis. Sometimes, a plant is procured on hire basis, if so, only hourly charges are debited in the contract account.

5.Overheads:

  The indirect expenses incurred commonly on two or more contracts are called overheads. These overheads are allocated  or apportioned to the contracts on an appropriate basis.

COST ACCOUNTING

MEANING:
  Cost Accounting is specialised branch of general accounting in which detailed and systematic information related to cost of goods or services are maintained in such a way as to obtain detailed information about total and per unit cost and guidance for the analysis and control of cost.
  ''Cost Accounting is the technique and process of ascertainment of cost''.
Cost:  
  ''Cost is a measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services".
Costing:
  The techniques and process of ascertaining costs is known as Costing.
Cost Accounting:
  It is the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centre and cost units.  
Cost Accountancy:
 Cost Accountancy includes

• Costing
• Cost Accounting 

FEATURES OF COST ACCOUNTING:
following are:

• Speacialised branch of accounting. 
• It is both art and science.
• It is a specialised branch of knowledge.
• It ascertains cost of product and services through the process of accumulation, classification, analysis and recording.
• Helpful to Management.