Skip to content

Cost Accounting · Process Costing

How to Prepare Process Cost Accounts and Cost Sheets

Updated 10 October 2026 · Fact-checked

A process account collects the costs of one process: material, labour and overheads, plus the cost transferred in from the previous process. You deduct the value of normal loss and scrap, divide the net cost by expected output to get cost per unit, then value finished output, abnormal loss or gain, and transfer it to the next process.

Understand Process Cost Accounts and Cost Sheet Preparation

In process costing, goods move through a series of continuous processes, such as mixing, cooking and packing. Each process has its own account. You cannot trace cost to one unit, so you total the cost of the process and spread it over the units produced.

Every process account has a debit side and a credit side. The debit side shows units and cost put in: materials, direct wages, direct expenses, production overheads and, for second and later processes, the output transferred from the earlier process. The credit side shows where the units went: normal loss, abnormal loss, and output transferred to the next process or to finished stock.

The output of one process becomes the input material of the next. The final process transfers to Finished Goods. So the cost per unit of the last process includes all the earlier costs. The quantity columns must always balance: units in = units out.

Losses are the tricky part. Normal loss is expected and unavoidable, so its cost is absorbed by good units. Any scrap value of normal loss is credited to the process account. Abnormal loss is loss above normal. It is valued at the same cost per unit as good output and written off to the Costing P&L. Abnormal gain is actual loss lower than normal. It is valued the same way, and it is a credit to Costing P&L.

This page assumes no opening or closing work-in-progress, so every unit is complete. WIP with equivalent units is a separate topic.

Key rules to remember

Cost per unit of a process
Cost per unit = (Total process cost − Scrap value of normal loss) ÷ (Units input − Normal loss units)
Total process cost includes the cost transferred in from the previous process. Use expected output, which is units input less normal loss.
Normal loss units
Normal loss units = Normal loss % × Units input
Read the question carefully. Normal loss is usually a percentage of input, unless it says otherwise.
Value of abnormal loss
Abnormal loss value = Abnormal loss units × Cost per unit
Credit the process account. Debit Abnormal Loss Account. If the lost units have scrap value, credit Abnormal Loss Account and debit Scrap or Cash for it.
Value of abnormal gain
Abnormal gain value = Abnormal gain units × Cost per unit
Debit the process account. Credit Abnormal Gain Account. Scrap value that normal loss would have given on those units is then adjusted in the gain account.
Abnormal loss or gain units
Abnormal loss or gain = Actual output − Expected output
If actual output is less than expected, it is abnormal loss. If more, it is abnormal gain.
Process account journal entries
Dr Process A/c, Cr Stores / Wages / Overhead control; Dr Process B/c, Cr Process A/c for transfer; Dr Finished Goods, Cr last Process A/c
Also: Dr Scrap/Cash, Cr Process A/c for normal loss scrap. Dr Abnormal Loss A/c, Cr Process A/c for abnormal loss.

How to solve Process Cost Accounts and Cost Sheet Preparation questions

Use this method for any process account question with no opening or closing WIP. Do each process fully before moving to the next.

  1. 1Read the question and list, for each process, the units input, inputs of material, labour and overhead, normal loss % and scrap value, and actual output.
  2. 2Open the account for the first process. Write the quantity column and amount column on both sides. Put materials, labour and overheads on the debit side.
  3. 3Work out normal loss units and expected output. Write normal loss on the credit side with units, scrap value per unit and the total scrap value.
  4. 4Compute cost per unit = (Total cost − scrap value of normal loss) ÷ expected output units.
  5. 5Find abnormal loss or gain units by comparing actual with expected output. Value them at cost per unit. Put an abnormal loss on the credit side or an abnormal gain on the debit side.
  6. 6Value the transfer to the next process as actual good output units × cost per unit. Check that both sides of the account total the same in units and rupees.
  7. 7In the next process, bring the transferred cost as the first debit item, add the new costs, and repeat steps 3 to 6.
  8. 8Prepare the other required accounts: Abnormal Loss or Gain, Scrap, and Costing P&L if asked. Show a short working for cost per unit.

Quickest way: Rate first, then balance the account

When to use it: Use when time is short and the question has several processes, each with simple normal loss and no WIP.

  1. Calculate cost per unit for each process on rough paper first, one line per process.
  2. Transfer value = good units × cost per unit. Carry that value forward as the opening debit for the next process.
  3. Fill the account only once, using your calculated figures. Do abnormal items straight from the unit difference.
  4. Check the total: debit total must equal credit total in both quantity and amount. If it does not, the error is usually in scrap or the loss units.

Common mistakes in Process Cost Accounts and Cost Sheet Preparation

  • Dividing total cost by input units instead of expected output units.

    Students forget that normal loss units give no output and divide by all units put in.

    Fix: Always write the denominator as input minus normal loss. Write it out in a working line.

  • Forgetting to deduct the scrap value of normal loss from total cost.

    Scrap value is given in a separate line and gets ignored in the cost per unit formula.

    Fix: Credit normal loss at its scrap value in the account, and deduct it in the numerator of the rate.

  • Valuing abnormal loss at scrap value or at input cost.

    Students mix up normal loss treatment with abnormal loss treatment.

    Fix: Value abnormal loss and gain at the process cost per unit of good output. Scrap sale proceeds of abnormal units are credited to the Abnormal Loss account.

  • Not carrying the previous process cost into the next process.

    Students treat each process as separate and start the next account with new material only.

    Fix: The first debit entry of every later process is Transfer from previous process, at units and total cost.

  • Quantity columns do not balance.

    Abnormal gain is added on the wrong side, or normal loss is left out of the units column.

    Fix: Abnormal gain goes on the debit side as extra units. Abnormal loss and normal loss are credit items. Total units must match on both sides.

Worked examples

Example 1

A product passes through Process I and then Process II. In Process I, 1,000 units of raw material were put in at ₹20 per unit. Direct wages were ₹6,000 and production overheads ₹4,000. Normal loss is 10% of input, and the lost units are sold at ₹5 per unit. Actual output was 850 units, transferred to Process II. Prepare the Process I account, and the Abnormal Loss account.

Show the solution
  1. Material = 1,000 × ₹20 = ₹20,000. Total cost = 20,000 + 6,000 + 4,000 = ₹30,000.
  2. Normal loss = 10% × 1,000 = 100 units. Scrap value = 100 × ₹5 = ₹500.
  3. Expected output = 1,000 − 100 = 900 units. Actual output = 850 units, so abnormal loss = 50 units.
  4. Cost per unit = (30,000 − 500) ÷ 900 = 29,500 ÷ 900 = ₹32.78 (approx.). For exact entries use ₹32.7778.
  5. Value of abnormal loss = 50 × 32.7778 = ₹1,639 (approx.). Transfer to Process II = 850 × 32.7778 = ₹27,861 (approx.).
  6. Check: 27,861 + 1,639 + 500 = ₹30,000. Debit side: Material 20,000, Wages 6,000, Overheads 4,000 = 30,000. Credit side: Normal loss 500, Abnormal loss 1,639, Transfer to Process II 27,861 = 30,000.
  7. Abnormal Loss account: debit Process I ₹1,639; credit Costing P&L for ₹1,639 less any scrap realised on the 50 units, if given.

Answer: Cost per unit is about ₹32.78. Transfer to Process II is about ₹27,861 for 850 units. Abnormal loss is 50 units valued at about ₹1,639, and normal loss scrap is ₹500. Both sides of the account total ₹30,000.

Example 2

Continue from the previous question. In Process II, additional material cost ₹5,000, direct wages ₹3,000 and overheads ₹2,000 were incurred. Normal loss is 4% of the units transferred in, with no scrap value. Actual output was 820 units, transferred to Finished Goods. Prepare the Process II account. Use the Process I transfer value of ₹27,861 for 850 units.

Show the solution
  1. Total cost = 27,861 + 5,000 + 3,000 + 2,000 = ₹37,861.
  2. Normal loss = 4% × 850 = 34 units. Expected output = 850 − 34 = 816 units.
  3. Actual output is 820 units, so abnormal gain = 820 − 816 = 4 units.
  4. Cost per unit = 37,861 ÷ 816 = ₹46.40 (approx.). Exact figure is ₹46.3983.
  5. Value of abnormal gain = 4 × 46.3983 = ₹186 (approx.).
  6. Transfer to Finished Goods = 820 × 46.3983 = ₹38,047 (approx.).
  7. Check: Debit side = 37,861 + abnormal gain 186 = ₹38,047. Credit side = Transfer to Finished Goods ₹38,047, with normal loss at nil value. Units: debit 850 + 4 = 854; credit 34 + 820 = 854.

Answer: Cost per unit in Process II is about ₹46.40. Abnormal gain is 4 units worth about ₹186. Transfer to Finished Goods is 820 units worth about ₹38,047. Both sides total ₹38,047.

Exam tips

  • Show a clear working note for normal loss units, expected output and cost per unit. Step marks are given for each of these even if a later figure is wrong.
  • Draw the account with separate quantity and amount columns. It makes the balance check easy and shows the examiner the units flow.
  • Read whether normal loss is a percentage of input, of transferred-in units, or of output. Mark the base in the question before you start.
  • If the question asks for the cost sheet, show units, total cost and cost per unit for each process, and the total at the end. Add the abnormal loss or gain account only if asked.
  • In MCQs on this topic, the most tested items are expected output, cost per unit and the value of abnormal loss. Do these on rough paper in three lines and do not draw the full account.

Practice questions from Process Costing

Process Cost Accounts and Cost Sheet Preparation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Process Cost Accounts and Cost Sheet Preparation: frequently asked questions

What is the format of a process account?

It is a T-account with units, rate and amount columns on both sides. The debit side lists transfer from previous process, materials, labour and overheads. The credit side lists normal loss, abnormal loss and transfer to the next process or finished goods.

How is cost per unit calculated in process costing?

Add all costs of the process, subtract the scrap value of normal loss, and divide by expected output units. Expected output is units input less normal loss units. This rate is used for good output, abnormal loss and abnormal gain.

What are the journal entries in process costing?

Debit the process account and credit Stores, Wages and Overhead control for the costs. Debit the next process and credit the earlier one for the transfer. Debit Scrap or Cash for normal loss sales, and debit Abnormal Loss account for abnormal loss, crediting the process account in both cases.

Is normal loss included in the cost of good units?

Yes. Normal loss is unavoidable, so its cost is borne by the good units. Only the scrap value of normal loss is deducted from total cost. This raises the cost per good unit.