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CA2


UNIT 4


PROCESS COSTING


 

After studying this chapter you should able to understand

  • The meaning of Process Costing and its importance
  • The distinction between job costing and process costing
  • The accounting procedure of process costing including normal loss abnormal loss

(or) gain

  • The valuation of work-in-progress, using FIFO, LIFO average and weighted average

Methods

  • The steps involved in inter process transfer

 


Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. It is assumed in process costing that the average cost presents the cost per unit. Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit.

 


Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.

 

Definition:

CIMA London defines process costing as “that form of operation costing which applies where standardized goods are produced”

 

Features of Process Costing:

(a)   The production is continuous

(b)  The product is homogeneous

(c)   The process is standardized

(d)  Output of one process become raw material of another process

(e)  The output of the last process is transferred to finished stock

(f)    Costs are collected process-wise

(g)  Both direct and indirect costs are accumulated in each process

(h)  If the revise stock of semi-finished goods, it is expressed in terms of equal units

(i)    The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.

 

Advantages of process costing:

  1. Costs are be computed periodically at the end of a particular period
  2. It is simple and involves less clerical work that job costing
  3. It is easy to allocate the expenses to processes in order to have accurate costs.
  4. Use of standard costing systems in very effective in process costing situations.
  5. Process costing helps in preparation of tender, quotations etc.
  6. Since cost data is available for each process, operation and department, good

Managerial control is possible.

 

Limitations:

  1. Cost obtained at each process is only historical cost and are not very useful for effective

Control.

2.      Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.

3.      Work-in-progress is generally done on estimated basis which leads to inaccuracy in total

Cost calculations.

4.      The computation of average cost is more difficult in those cases where more than one

Type of products is manufactured and a division of the cost element is necessary.

5.      Where different products arise in the same process and common costs are prorated to

Various costs units. Such individual products costs may be taken as only approximation and hence not reliable.

 


Job order costing and process costing are two different systems. Both the systems are used for cost calculation and attachment of cost to each unit completed, but both the systems are suitable in different situations. The basic difference between job costing and process costing are:

 

 

Basis of Distinction

Job order costing

Process costing

1.

Specific order

Performed against

Specific orders

Production is contentious

2.

Nature

Each job many be different.

Product is homogeneous and standardized.

3.

Cost determination

Cost is determined for each job separately.

Costs are compiled for each process for department on time basis i.e. for a given accounting period.

4.

Cost calculations

Cost is compiled when a job is completed.

Cost is calculated at the end of the cost period.

5.

Control

Proper control is comparatively difficult as each product unit is different and the production is not continuous.

Proper control is comparatively easier as the production is standardized and is more suitable.

6.

Transfer

There is usually not transfer from one job to another unless there is some surplus work.

The output of one process is transferred to another process as input.

7.

Work-in-Progress

There may or may not be work-in-progress.

There is always some work-in-progress because of continuous production.

8.

Suitability

Suitable to industries where production is intermittent and customer orders can be identified in the value of production.

Suitable, where goods are made for stock and productions is continuous.

 


For each process an individual process account is prepared.

Each process of production is treated as a distinct cost center.

 

Items on the Debit side of Process A/c:

Each process account is debited with –

a)      Cost of materials used in that process.

b)     Cost of labor incurred in that process.

c)      Direct expenses incurred in that process.

d)     Overheads charged to that process on some pre-determined.

e)     Cost of ratification of normal defectives.

f)       Cost of abnormal gain (if any arises in that process)

 

Items on the Credit side of Process A/c.:

Each process account is credited with

a)      Scrap value of Normal Loss (if any) occurs in that process.

b)     Cost of Abnormal Loss (if any occurs in that process)

 

Cost of Process:

The cost of the output of the process (Total Cost less Sales value of scrap) is transferred to the next process. The cost of each process is thus made up to cost brought forward from the previous process and net cost of material, labor and overhead added in that process after reducing the sales value of scrap. The net cost of the finished process is transferred to the finished goods account. The net cost is divided by the number of units produced to determine the average cost per unit in that process. Specimen of Process Account when there is normal loss and abnormal loss.

 

Dr. Process I A/c.           Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Basic Material

Xxx

Xx

By Normal Loss

Xx

Xx

To Direct Material

 

Xx

By Abnormal Loss

Xx

Xx

To Direct Wages

 

Xx

By Process II A/c.

Xx

Xx

To Direct Expenses

 

Xx

(output transferred to Next process)

 

 

To Production Overheads

 

Xx

 

 

 

To Cost of Rectification of Normal Defects

 

Xx

By Process I Stock A/c.

Xx

Xx

 

 

 

 

 

 

To Abnormal Gains

 

Xx

 

 

 

 

Xx

Xxx

 

Xx

Xx

 

Process Losses:

In many process, some loss is inevitable. Certain production techniques are of such a nature that some loss is inherent to the production. Wastages of material, evaporation of material is unavoidable in some process. But sometimes the Losses are also occurring due to negligence of Laborer, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Basically process losses are classified into two categories

(a) Normal Loss (b) Abnormal Loss

 

  1. Normal Loss:

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. It may occur at any time of the process.

No of units of normal loss: Input x Expected percentage of Normal Loss.

 

The cost of normal loss is a process. If the normal loss units can be sold as a crap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then debit that cost in the process account. After adjusting the normal loss the cost per unit is calculated with the help of the following formula:

 

Cost of Good units = Total Cost – Scrap value of Normal goods / Input – Normal Loss

2.      Abnormal Loss:

Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. The units of abnormal losses in calculated asunder:

 

Abnormal Losses = Actual Loss – Normal Loss

 

The value of abnormal loss is done with the help of following formula:

 

Value of Abnormal Loss:

Total Cost increase – Scrap Value of normal Loss x Units of abnormal loss

Input units – Normal Loss Units

Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal or unexpected conditions. Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.

 

Dr. Abnormal Loss A/c.         Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process A/c.

Xx

Xx

By Bank

Xx

Xx

 

 

 

By Costing P & L A/c.

Xx

Xx

 

Xx

Xxx

 

Xx

Xx

 

3.      Abnormal Gains:

The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain calculated in the similar manner of abnormal loss. The formula used for abnormal gains:

 

Abnormal Gain

 

Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain Unites

Input units – Normal Loss Units

 

The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. As a Real Gain.

 

Dr. Abnormal Gain A/c.      Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Normal Loss A/c.

Xx

Xx

By Process A/c.

Xx

Xx

To Costing P & L A/c.

Xx

Xx

 

 

 

 

Xx

Xx

 

Xx

Xx

 


Normally the output of one process is transferred to another process at cost but sometimes at a price showing a profit to the transfer process. The transfer price may be made at a price corresponding to current wholesale market price or at cost plus an agreed percentage. The advantage of the method is to find out whether the particular Process is making profit (or) loss. This will help the management whether to process the product or to buy the product from the market. If the transfer price is higher than the cost price then the process account will show a profit. The complexity brought into the accounting arises from the fact that the inter process profits introduced remain a part of the prices of process stocks, finished stocks and work-in-progress. The balance cannot show the stock with profit. To avoid the complication a provision must be created to reduce the stock at actual cost prices. This problem arises only in respect of stock on hand at the end of the period because goods sold must have realized the internal profits. The unrealized profit in the closing stock is eliminated by creating a stock reserve. The amount of stock reserve is calculated by the following formula.

 

Stock Reserve = Transfer Value of stock x Profit included in transfer price

Transfer Price

 


 

Meaning of Work-in-Progress:

Since production is a continuous activity, there may be some incomplete production at the end of an accounting period. Incomplete units mean those units on which percentage of completion with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-Progress is valued in terms of equivalent or effective production units.

 

Meaning of equivalent production units:

This represents the production of a process in terms of complete units. In other words, it means converting the incomplete production into its equivalent of complete units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity. The principle applies when operation costs are apportioned between work in progress and completed units.

Equivalent units of work in progress = Actual no. Of units in progress x Percentage of work completed

 

Equivalent unit should be calculated separately for each element of cost (viz. Material, labour and overheads) because the percentage of completion of the different cost component may be different.

 

Accounting Procedure:

The following procedure is followed when there is Work-in-Progress

  1. Find out equivalent production after taking into account of the process losses, degree of completion of opening and / or closing stock.
  2. Find out net process cost according to elements of costs i.e. material, labour and overheads.
  3. Ascertain cost per unit of equivalent production of each element of cost separately by dividing each element of costs by respective equivalent production units.
  4. Evaluate the cost of output finished and transferred work in progress

 

The total cost per unit of equivalent units will be equal to the total cost divided by effective units and cost of work-in- progress will be equal to the equivalent units of work-in- progress multiply by the cost per unit of effective production. In short the following from steps an involved.

 

Step1 – Prepare statement of Equivalent production

Step2 – Prepare statement of cost per Equivalent unit

Step3 – Prepare of Evaluation

Step4 – Prepare process account.

 

The problem on equivalent production may be divided into four groups.

  1. When there is only closing work-in-progress but without process losses
  2. When there is only closing work-in-progress but with process losses
  3. When there is only opening as well as closing work-in- progress without process losses
  4. When there is opening as well as closing work-in- progress with process losses.

 

Situation I: Only closing work-in-progress without process losses:

 

In this case, the existence of process loss is ignored. Closing work-in-progress is converted into equivalent units on the basis of estimates on degree of completion of materials, labour and production overhead. Afterwards, the cost per equivalent unit is calculated and the same is used to value the finished output transferred and the closing work-in-progress.

 

Situation II: When there is closing work-in-progress with process loss or gain.

 

If there are process losses the treatment is same as already discussed in this chapter. In case of normal loss nothing should be added to equivalent production. If abnormal loss is there, it should be considered as good units completed during the period. If units scrapped (normal loss) have any reliable value, the amount should be deducted from the cost of materials in the cost statement before dividing by equivalent production units. Abnormal gain will be deducted to obtain equivalent production.

 

Situation III: Opening and closing work-in-progress without process losses.

 

Since the production is a continuous activity there is possibility of opening as well as closing work-in-progress. The procedure of conversion of opening work-in-progress will vary depending on the method of apportionment of cost followed via, FIFO, Average cost Method and LIFO.

 

Let us discuss the methods of valuation of work-in-progress one by one.

 

(a)               FIFO Method: The FIFO method of costing is based on the assumption of that the opening work-in-progress units are the first to be completed. Equivalent production of opening work-in-progress can be calculated as follows:

 

Equivalent Production = Units of Opening WIP x Percentage of work needed to finish the units

 

(b)               Average Cost Method: This method is useful when price fluctuate from period to period. The closing valuation of work-in-progress in the old period is added to the cost of new period and an average rate obtained. In calculating the equivalent production opening units will not be shown separately as units of work-in-progress but included in the units completed and transferred.

 

(c)               Weighted Average Cost Method: In this method no distinction is made between completed units from opening inventory and completed units from new production. All units finished during the current accounting period are treated as if they were started and finished during that period. The weighted average cost per unit is determined by dividing the total cost (opening work-in-progress cost + current cost) by equivalent production.

 

(d)               LIFO Method: In LIFO method the assumption is that the units entering into the process is the last one first to be completed. The cost of opening work-in-progress is charged to the closing work-in-progress and thus the closing work-in- progress appears cost of opening work-in-progress. The completed units are at their current cost.

 

(1)   Format of statement of Equivalent Production:

 

Input

Output

Equivalent Production

Particulars

Units

Particulars

Units

Material

Labour

Overheads

%

Units

%

Units

%

Units

Opening Stock

Xx

Units completed

Xx

Xx

Xx

Xx

Xx

 

 

Units Introduced

Xx

Normal Loss

Xx

--

--

--

--

 

 

 

 

Abnormal

Loss

Xx

Xx

Xx

Xx

Xx

 

 

 

Xx

EquivalentUnits

Xx

Xx

Xx

Xx

Xx

Xx

Xx

 

(2)   Statement of cost per Equivalent Units:

 

Element of costing

Cost Rs.

Equivalent Units

Cost per Equivalent Units Rs

Material Cost (Net)

Xx

Xx

Xx

Labour Cost

Xx

Xx

Xx

Overheads Cost

Xx

Xx

Xx

 

Xx

 

Xx

 

(3)   Statement of Evaluation

 

Particulars

Element of cost

Equivalent Units

Cost per equivalent units

Rs.

Cost Rs.

Total Cost Rs.

Units completed

Material

Xx

Xx

Xx

 

 

Labour

Xx

Xx

Xx

 

 

Overheads

Xx

Xx

Xx

Xx

Closing WIP

Material

Xx

Xx

Xx

 

 

Labour

Xx

Xx

Xx

 

 

Overheads

Xx

Xx

Xx

Xx

Abnormal Loss

Material

Xx

Xx

Xx

 

 

Labour

Xx

Xx

Xx

 

 

Overheads

Xx

Xx

Xx

Xx

 


 

Q.1. (Normal / Abnormal Loss)

 

Prepare a Process Account, Abnormal Loss Account and Normal Loss Account from the following information.


Solution:

Dr. Process – I A/c.                 Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Raw material @ 20

1,000

20,000

By Normal Loss

(5% on 1000)

50

400

To Direct Material

 

4,200

 

 

 

To Direct Wages

 

6,000

By Abnormal Loss A/c.

50

1,884

To Production Overheads

 

6,000

By Process – II A/c. (output transferred)

900

33,915

 

 

 

 

 

 

 

1,000

36,200

1,000

36,200

Dr. Abnormal Loss A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process – I A/c.

50

1,884

By Bank A/c.

50

400

 

 

 

By Costing P & L A/c.

 

1,484

 

50

1,884

 

50

1,884

Dr. Normal Loss A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process – I A/c.

50

400

By Bank

50

400

 

 

 

 

 

 

 

50

400

 

50

400

 

Working Notes:

 

Cost Per Unit of Process 1:

= Total Cost increased – Sales value of Scrap

Input units – Normal Loss Units

 

= 36200–400 = Rs 37.68 per unit

1000 – 50

 

Note: It has been assumed that units of abnormal loss have also been sold at the same rate i.e. of Normal Scrap.

 

Q.2. (Normal / Abnormal Loss and Abnormal Gain)

 

The product of a company passes through 3 distinct process. The following information is obtained from the accounts for the month ending January 31, 2008.

 

Particulars

Process – A

Process – B

Process – C

Direct Material

7800

5940

8886

Direct Wages

6000

9000

12000

Production Overheads

6000

9000

12000

 

3000 units @ Rs. 3 each were introduced to process – I. There was no stock of materials or work in progress. The output of each process passes directly to the next process and finally to finished stock A/c.

The following additional data is obtained:

 

Process

Output

Percentage of Normal Loss to Input

Value of Scrap per unit

(Rs.)

Process – I

2,850

5 %

2

Process – II

2,520

10 %

4

Process – III

2,250

15 %

5

 

Prepare Process Cost Account, Normal Cost Account and Abnormal Gain or Loss Account.

 

Solution:

Dr. Process – A A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Units introduced

3,000

9,000

By Normal Loss A/c.

150

300

To Direct Material

 

7,800

By Process – B A/c.

2,850

28,500

To Direct Wages

 

6,000

(Units transferred

 

 

To Production

 

 

@ Rs. 10/-)

 

 

Overheads

 

6,000

 

 

 

 

3,000

28,800

 

3,000

28,800

Cost Per Unit of Process A:

= Total Cost – Sales value of Scrap

Input units – Normal Loss Units

 

= 28800–300 = Rs 10 per unit

3000– 150

Dr. Process –B A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process – I A/c.

2,850

28,500

By Normal Loss A/c.

285

1,140

To Direct Material

 

5,940

By Abnormal Loss A/c.

45

9,000

To Direct Wages

 

9,000

By Process – C A/c.

2,520

50,400

To Production

 

 

 

 

 

Overheads

 

9,000

 

 

 

 

2,850

52,440

 

2,850

52,440

Cost Per Unit of Process B:

= Total Cost – Sales value of Scrap

Input units – Normal Loss Units

 

= 52400–1140 = Rs 20 per unit

3000– 285

Dr. Process – C A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process – II A/c.

2,520

50,400

By Normal Loss A/c.

378

1,890

To Direct

Material A/c

 

8,886

By Finished

Stock A/c.

2,250

85,500

To Direct Wages

 

12,000

 

 

 

To Production

 

 

 

 

 

Overheads

 

12,000

 

 

 

To Abnormal Gain A/c.

108

4,104

 

 

 

 

2,628

87,390

 

2,628

87,390

Cost Per Unit of Process C:

= Total Cost – Sales value of Scrap

Input units – Normal Loss Units

 

= 87390–1890 = Rs 38 per unit

2520– 378

Dr. Abnormal Gain A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Normal Loss A/c.

108

540

By Process – C A/c.

108

4104

To Costing P&L A/c.

 

3,564

 

 

 

 

108

4,104

 

108

4,104

 

Dr.     Normal Loss A/c.       Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process – A A/c.

150

300

By Bank A/c. (Sales)

 

 

To Process – B A/c.

285

1,140

 Process – A A/c.

150

300

To Process – C A/c.

378

1,890

Process – B A/c.

285

1,140

 

 

 

 Process – C A/c.

270

1,350

 

 

 

By Abnormal Gain A/c.

108

540

 

813

3,330

 

813

3,330

 

Q.3. A product passes through three processes before its completion. The output of each process s charged to the next process at a price calculated to give a profit of 20% on transfer price. The output of Process III is transferred to finished stock account on a similar basis. There was no work-in-progress at the beginning of the years. Stock in each process has been valued at prime cost of the process. The following data is available at the end of 31st March, 2009.

 

 

Process I

 

Process II

 

Process III

 

Finished Stock Rs.

Direct Material

20,000

30,000

10,000

--

Direct Wages

30,000

20,000

40,000

--

Stock on 31st March 2009

10,000

20,000

30,000

15,000

Sale during the year

--

--

--

1,80,000

 

From above information prepare:

  1. Process Cost Account showing the profit at each stage
  2. Actual realized profit and
  3. Stock Valuation as would appear in the balance sheet

 

Solution:

Dr. Process –I A/c.                          Cr.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

Particulars

Total      Rs.

Cost Rs.

Profit Rs.

To Materials

20,000

20,000

--

By Process

II A/c. (Transfer)

50,000

40,000

10,000

To Wages

30,000

30,000

--

 

 

 

 

Total

50,000

50,000

--

 

 

 

 

Less Closing

Stock c/d

10,000

10,000

--

 

 

 

 

 

 

 

 

Prime Cost

40,000

40,000

--

 

 

 

 

To Gross

 

 

 

 

 

 

 

Profit (20% on

Transfer Price)

10,000

--

10,000

 

 

 

 

 

 

 

 

 

50,000

40,000

10,000

 

50,000

40,000

10,000

 

 

 

 

 

 

 

 

To Stock B/d.

10,000

10,000

--

 

 

 

 

 

Dr. Process –II A/c.      Cr.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

To Process

– I A/c.

50,000

40,000

10,000

By

Process-III

 

 

 

 

 

 

 

A/c.

1,00,000

72,000

28,000

To Material

30,000

30,000

--

(Transfer)

 

 

 

To Wages

20,000

20,000

--

 

 

 

 

Total

1,00,000

90,000

10,000

 

 

 

 

Less: Closing Stock C/d.

20,000

18,000

2,000

 

 

 

 

Prime Cost

80,000

72,000

8,000

 

 

 

 

To Gross Profit (20% on Transfer Price)

20,000

--

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

1,00,000

72,000

28,000

 

1,00,000

72,000

28,000

To Stock B/d.

20,000

18,000

2,000

 

 

 

 

 

Dr.     Process III A/c        Cr.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

To process II

1,00,000

72,000

28,000

By Finished

1,50,000

97,600

52,400

A/c

 

 

 

Stock A/c

 

 

 

To Material

10,000

10,000

 

 

 

 

 

To Wages

Total

Less: Closing

40,000

40,000

 

 

 

 

 

1,50,000

1,22,000

28,000

Stock

 

To Gross

30,000

24,400

5,600

 

 

 

 

1,20,000

 

30,000

97,600

 

--------

22,400

 

30,000

Profit

 

 

 

 

(20%of

 

 

 

 

Transfer

 

 

 

 

Price)

 

 

 

 

 

1,50,000

97,600

52,400

 

1,50,000

97,600

52,400

To Stock b/d

30,000

24,000

5,600

 

 

 

 

 

Dr.     Finished Stock A/c        Cr.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

Particulars

Total Rs.

Cost Rs.

Profit Rs.

To process

1,15,000

97,600

52,400

By Sales

1,80,000

87,840

92,160

III A/c

 

 

 

 

 

 

 

(-)Stock

15,000

9,760

5,240

 

 

 

 

 

 

 

 

 

1,35,000

87,840

92,160

To gross profit

45,000

---

45,000

 

 

 

 

 

1,80,000

87,840

92,160

 

1,80,000

87,840

92,160

To Stock A/c

15,000

9,760

5,240

 

 

 

 

Calculation of profit on closing stock

 

Profit included in stock = Profit included in transfer price x Value of stock

Transfer price

Process I = No profit

Process II = 10000 x 20000 = 2000

100000

 

Process III   = 28000 x 30000= 5600

150000

 

Finished stock = 52400x15000 = 5240

150000

Q.4. A product process through three process A, B and C. The details of expenses incurred on the three processes during the year 2008 were as under:

 

 

Process A

Process B

Process C

Units introduced

10000

 

 

Cost per unit is Rs. 50/-

 

 

 

 

Rs.

Rs.

Rs.

Sundry Material

6000

9000

3233

Labour

18000

48000

39000

Direct Expenses

3000

11000

18000

Selling price per unit of output

70

100

200

 

Management expenses during the year were Rs. 80000 and selling were Rs. 5000. There are not allocable to the processes. Actual output of the three process were A – 9300 units, B – 5400 units and C 2100 units. Two-thirds of the output of process A and one half of the output of process B was passed on to the next process A and one-half of the output of process B was passed on to the next process and the balance was sold. The entire output of process C was sold.

 

The normal losses of the three process, calculated on the input of every process was: Process A – 5%, B – 15% and C – 20%. The loss of process A was sold @ Rs. 3 per unit, that of B @ Rs. 5 per unit and of process C @ Rs. 10 per unit.

Prepare process A, B and C account and the Profit and Loss Account.

 

Solution:

 

Dr. Process A A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Units Introduced

@ Rs. 50

10,000

5,00,000

By Normal Loss

500

1,500

By Abnormal Loss A/c.

200

11,063

To Sundry Materials

 

6,000

By Process A/c. (@ 55.32)

6,200

3,42,958

To Labour

 

18,000

By P & L A/c.

3,100

1,71,479

To Direct Expenses

 

3,000

 

 

 

 

 

 

 

 

 

 

10,000

5,27,000

 

10,000

5,27,000

Dr.  Process B A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process A/c.

6,200

3,42,958

By Normal Loss

930

4650

To Sundry Materials

 

9,000

By Process C A/c. (@ 77.19)

2,700

2,08,165

To Labour

 

48,000

By P & L A/c.

2,700

2,08,165

To Direct Expenses

 

11,000

 

 

 

To Abnormal Gains

130

10,022

 

 

 

A/c. (@ 77.19)

 

 

 

 

 

 

6,330

4,20,980

 

6,330

4,20,980

 

Dr. Process C A/c.  Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process B A/c.

 

2,08,165

By Normal Loss

540

5,400

To Sundry  Materials

 

3,233

By Abnormal Loss

60

7,305

To Labour

 

39,000

By P & L A/c.

2,100

2,55,693

To Direct Expenses

 

18,000

( @ 12.76)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,700

2,68,398

 

2,700

2,68,398

 

Dr. Profit &Loss A/c. Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process A A/c.

3,100

1,71,479

By Sales( @ Rs. 70)

3,100

2,17,000

To Process B A/c.

2,700

2,08,165

By Sales(@Rs. 100)

2,700

2,70,000

To Process C A/c.

2,700

2,65,693

By Sales(@Rs.2000)

2,700

4,20,000

To Management

Expenses A/c.

 

80,000

By Abnormal Gain A/c.

 

9,372

 

 

 

 

 

 

To Selling Expenses

 

50,000

 

 

 

To Abnormal Loss A/c.

 

17,168

 

 

 

To Net Profit

 

1,33,867

 

 

 

 

 

9,16,372

 

 

9,16,372

 

Dr.                                          Abnormal Loss A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process A A/c.

200

11,063

By Bank Sales

 

 

To Process B A/c.

60

7,305

(@ Rs. 30)

200

600

 

 

 

By Bank

 

 

 

 

 

(@ Rs. 10)

60

600

 

 

 

By P & L A/c.

 

17,168

 

260

18,368

 

260

18,368

 

Dr.                                       Abnormal Gain A/c   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To  Normal Loss A/c.

130

650

By Process B /c.

130

10,022

To Costing P & L A/c.

 

9,372

 

 

 

 

130

10022

 

130

10022

 

Q.5. Mahesh Ltd process a material which passes through three processes. Figures relating to production for the first 6 months of 2009 are as follows.

 

 

Process 1

Process 2

Process 3

Raw material used

1000 tones @

Rs. 200

 

 

Manufacturing Wages

Rs. 40,000

Rs. 30,000

Rs. 7,000

Expenses

Rs. 32,500

Rs. 10,800

Rs. 3,710

Scrap sold @ Rs. 50 per tone

50 tones

30 tones

51 tones

Selling price per tone

Rs. 320

Rs. 450

Rs. 800

Weight Loss

5%

10%

20%

 

Management expenses were Rs. 10,500 selling expenses Rs. 8,000 and interest on borrowed capital Rs. 2,000. Two third of process I and one half of process 2 are passed on to the next process and the balance are sold.

 

Prepare Process Account, Process Stock Account and Costing Profit & Loss A/c.

Solution

Dr.   Process No.1 A/c.    Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Material Rs.200

1,000

2,00,000

By Normal Loss (sale of Scrap)

50

2,500

To Wages

 

40,000

By Weight Loss

50

--

To Expenses

 

32,500

By Process I Stock A/c.(@300per tone)

900

2,70,000

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000

2,72,500

 

1,000

2,72,500

 

Dr. Process No. 1 Stock A/c. Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process I A/c.

900

2,70,000

By Bank (@ 320)

300

96,000

To Costing Profit & Loss A/c.

 

6,000

By Process No.2 A/c.

600

1,80,000

 

 

 

 

 

 

 

900

2,76,000

 

900

2,76,000

 

Dr. Process No.2 A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process 1 Stock A/c.

600

1,80,000

By Normal Loss (@ Rs. 50)

30

1,500

To Wages

 

30,000

 

 

 

To Expenses

 

10,800

By Weight Loss

60

--

 

 

 

By Process Stock

A/c(@ Rs. 430)

510

2,19,300

 

600

2,20,800

 

600

2,20,800

 

Dr. Process No. 2 Stock A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process 2 A/c.

510

2,19,300

By Bank (sale @ 450)

255

1,14,750

To Costing P&L A/c.

 

5,100

 

 

 

By Process 3 A/c.

255

1,09,650

 

 

 

 

 

 

 

 

 

 

 

 

 

510

2,44,400

 

510

2,44,400

 

Dr. Process No.3 A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process 2 Stock A/c.

255

1,09,650

By Scrap

51

2,550

To Wages

 

7,000

By Weight Loss

51

--

To Expenses

 

3,710

By Process 3  Stock A/c

153

1,17,810

 

255

1,20,360

 

255

1,20,360

 

Dr. Process No. 3 Stock A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Process 3 A/c.

153

1,17,810

By Bank

 

 

To Costing P & L A/c.

 

4,590

(sale @ 800)

153

1,22,400

 

153

1,22,400

 

153

1,22,400

 

Dr. Costing Profit &Loss A/c.   Cr.

Particulars

Rs.

Particulars

Rs.

To Management Expenses

10,500

By Process 1 Stock A/c.

6,000

To Selling Expenses

8,000

By Process 2 Stock A/c.

5,100

To Interest on Capital

2,000

By Process 3 Stock A/c.

4,590

 

 

By Net Loss

4,810

 

20,500

 

20,500

 

Q.6

Prepare a statement of equivalent production, statement of cost, process account from the following information using average costing method.

Opening Stock

50,000 Units

Material

Rs. 25,000

Labour

Rs. 10,000

Overheads

Rs. 25,000

Units Introduced

20,00,000 Units

Material

Rs. 1,00,000

Wages

Rs. 75,000

Overheads

Rs. 70,000

 

During the period 1,50,000 units were completed and transferred to Process II.

Closing stock 1,00,000 units. Degree of completion.

 

Material

100 %

Labour

50 %

Overheads

40 %

Solution:

Statement of Equivalent Production

Input

Output

Equivalent Production

Particulars

Units

Particulars

Units

Material

Labour

Overheads

%

Units

%

Units

%

Units

Opening

 

Units

 

 

 

 

 

 

 

 Stock

50,000

Produced

1,50,000

100

1,50,000

100

1,50,000

100

1,50,000

Introduced

2,00,000

Closing

 

 

 

 

 

 

 

 

 

Stock

1,00,000

100

1,00,000

50

50,000

40

40,000

 

 

 

 

 

 

 

 

 

 

 

2,50,000

 

2,50,000

 

2,50,000

 

2,00,000

 

1,90,000

 

Statement of Cost:

Element

Opening cost Rs.

Current cost Rs.

Total Cost Rs.

Equivalent units

Cost per unit

Material

25,000

1,00,000

1,25,000

2,50,000

0.500

Labour

10,000

75,000

85,000

2,00,000

0.425

Overheads

25,000

70,000

95,000

1,90,000

0.500

 

60,000

2,45,000

3,05,000

 

1.425

 

Statement of Apportionment of Cost

Particulars

Units

Cost per unit

Cost

Total cost

Units introduced & transferred

1,50,000

1.425

 

213750

Closing work-in progress

 

 

 

 

Material

1,00,000

0.500

50,000

 

Labour

50,000

0.425

21,250

 

Overheads

40,000

0.500

20,000

91,250

 

 

 

 

3,05,000

 

Dr. ProcessIA/c. Cr.

 

Particulars

Units

Rs.

Particulars

Units

Rs.

To Opening Stock

50,000

60,000

By Units completed

& transferred

50,000

2,13,750

To Materials

2,00,000

1,00,000

To Labour

 

75,000

By Closing Stock

50,000

91,250

To Overheads

 

70,000

 

 

 

 

2,50,000

3,05,000

 

2,50,000

3,05,000

 

Q.7. From the following information relating to KKN Company Ltd, prepare Process Cost Account for Process III for the year 2008.

 

Opening Stock in Process III 5000 units of Rs.36,000

Transfer from Process II 2,13,000 units of Rs.8,27,000

Direct Material added in Process III Rs. 4,01,800

Direct Wages Rs.1,98,100

Production Overhead Rs.99,050

Units Scrap 11,000 units

Transferred to Process IV 1,89,000 units

Closing Stock 18,000 units

 

Degree of Completion: Opening

 

Closing

 

Scrap

Stock

Stock

 

Material 70%

80 %

100 %

Labour 50%

60 %

80 %

Overhead 50%

60 %

80 %

There was a normal loss of 5% production and unit scraped were sold at Rs. 1.50

 

Solution:

 

Input

Output

Equivalent Production

Particulars

Units

Particulars

Units

Material

Labour

Overheads

%

Units

%

Units

%

Units

Opening

 

Normal

 

 

 

 

 

 

 

Stock

5,000

Loss

10,000

 

 

 

 

 

 

Process II

 

Op. Stock

 

 

 

 

 

 

 

Transfer

213,000

Processed

5,000

-

-

30

1500

50

2500

 

 

Introduces &

 

 

 

 

 

 

 

 

 

Completed

1,84,000

100

184000

100

184000

100

184000

 

 

Abnormal

 

 

 

 

 

 

 

 

 

Loss

1000

100

1000

100

1000

80

800

 

 

Closing

 

 

 

 

 

 

 

 

 

Stock

18000

100

18000

80

14400

60

10800

 

218000

 

218000

 

203000

 

200900

 

198100

 

Note  : Units Produced: Opening stock + units introduced – closing stock

: 5000 +213000 – 18000 = 200000

Normal Loss : 5 % of 200000 = 10000 units

 

Statement of Cost

Particulars

 

Cost Rs.

Equivalent cost

Cost per unit

Material – I

 

 

 

 

Transfer from Previous process

8,27,000

 

 

 

Less – value of Scrap (Normal)

15,000

8,12,000

2,03,000

4.00

Material - II

 

 

 

 

Added + in the process

 

4,01,800

2,00,900

2.00

Direct wages

 

1,98,100

1,98,100

1.00

Overheads

 

99,050

1,98,100

0.50

Statement of Apportionment of Cost

Particulars

Elements

Equivalent Units

Cost Per Unit

Rs.

Cost Rs.

Total cost Rs.

Op. Stock Processed

Material I

--

 

--

 

 

Material II

1,500

2.00

3,000

 

 

Wages

2,500

1.00

2,500

 

 

Overheads

2,500

0.50

1,250

6,750

Units introduced and

Material I

1,84,000

4.00

7,36,000

 

Completed

Material II

1,84,000

2.00

3,68,000

 

 

Wages

1,84,000

1.00

1,84,000

 

 

Overheads

1,84,000

0.50

92,000

13,80,000

Closing stock

Material I

18,000

4.00

72,000

13,86,750

 

Material II

14,400

2.00

28,800

 

 

Wages

10,800

1.00

10,800

 

 

Overheads

10,800

0.50

5,400

1,17,000

Abnormal loss

Material I

1,000

4.00

4,000

 

 

Material II

1,000

2.00

2,000

 

 

Wages

800

1.00

800

 

 

Overheads

800

0.50

400

7,200

TOTAL

 

 

 

 

15,10,950

 

Dr.                                             Process III A/c.     Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Balance b/d.

5,000

36,000

By Normal Loss

10,000

15,000

To Process II A/c.

2,13,000

8,27,000

By Process IV A/c.

1,89,000

14,22,750

To Materials

 

4,01,800

By Abnormal

Loss

1,000

7,200

To Wages

 

1,98,100

By Closing Stock

18,000

1,17,000

To Overheads

 

99,050

 

 

 

 

2,18,000

15,61,950

 

2,18,000

15,61,950

 

Note :

 

Cost of goods transferred to Process IV :

Value of Opening Stock

36,000

Cost incurred in this process for Opening Stock

6,750

Cost incurred for the units introduced & Processed

13,80,000

Total

14,22,750

 

Q.8. GH & Co. Manufactures a product. The process costing is followed and work-in-progress stocks at the end of each month are valued at FIFO basis.

 

At the beginning of the month of June, the inventory of work- in-progress showed 400 units, 40% complete, valued as follows:

 

Rs.

Material

3,600

Labour

3,400

Overheads

1,000

Total

8,000

In the month of June, materials were purchased for Rs. 75,000. Wages and overheads in the month amounted to Rs. 79,800 and Rs. 21,280 respectively. Actual issue of material to production was Rs. 68,500. Finished stock in the month was 2500 units. There was no loss in process.

 

All the end of the month, the work-in-process inventory was 500 units, 60 percent complete as to labour and overheads and 80% complete as to materials.

 

Prepare a Process Account for recording the month’s transactions and prepare a Process Cost Sheet showing total and units costs

 

Solution:

 

Dr. Process A/c.   Cr.

Particulars

Units

Rs.

Particulars

Units

Rs.

To Opening Stock

400

8,000

By Transfer to

 

 

To Material

2,600

68,500

Finished stock

2,500

1,56,094

To Labour

 

79,800

By Work-in-

 

 

To Overheads

 

21,280

Progress

500

21,486

 

3000

1,77,580

 

3000

1,77,580

 

Working Note:

 

Statement of Equivalent Production (Units)

Input

Particulars

Output

Material

Labour

Overhead

Qty.

%

Qty.

%

Qty.

%

400

 

2600

Opening Stock

 

Completely Processed

Work-in- Progress

400

 

2,100

500

240

 

2,100

400

60

 

100

80

240

 

2,100

300

60

 

100

60

240

 

2,100

300

60

 

100

60

3000

3,000

2,740

 

2,640

 

2,640

 

Working Note:

  1. For opening stock also equivalent production has been calculated as it was partly complete and it has to be converted into finished product in this period. They were completed 60 % in this period.
  2. Total units produced in a month are 2,50 units. Out of this 400 units of opening stock has been deducted because they have been partly processed in this particular month and we have already calculated equivalent units of opening stock. Only, 2,100 units have been introduced and completed in the particular period.
  3. For closing stock also equivalent production in terms of total units completed has been calculated.

Statement of Element of cost on the basis of Equivalent Units

 

Cost Rs.

Equivalent Units

Cost per unit Rs.

Material

68,500

2.740

25.000

Labour

79,800

2.640

30.2273

Overheads

21,280

2.640

8.0606

 

Statement of Apportionment of Cost

Particulars

 

Equivalent Units

Cost

Per Unit Rs.

Details Rs.

Total Rs.

Op. Stock

Material

240

25.0000

6,000

 

Processed

 

 

 

 

 

 

Labour

240

30.2273

7,255

 

 

Overheads

240

8.0606

1,935

15,190

Completely

Material

2,100

25.0000

52,500

 

Processed

 

 

 

 

 

 

Labour

2,100

30.2273

63,477

 

 

Overheads

2,100

8.0606

16,927

1,32,904

Work-in-

Material

400

25.0000

10,000

 

Process

 

 

 

 

 

 

Labour

300

30.2273

9,068

 

 

Overheads

300

8.0606

2,418

21,486

 

 

 

 

TOTAL

1,69,580

 

Total Cost of 2500 units

 

Rs.

Cost of opening stock

8,000

Additional cost of opening stock processed

15,190

Cost of completely processed

1,32,904

 

1,56,094

 


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