After studying this chapter you should be able to:
Understand the meaning and definition of process costing.
Enumerate the salient features of process costing.
Distinguish between job costing and process costing.
Know the different types of processing.
Identify the elements of manufacturing cost in a process industry.
Understand and apply process losses and wastages.
Explain the concept of equivalent production.
Prepare all necessary accounts relating to process accounts.
Explain the terms: by-products, joint products and co-products.
Understand and apply the accounting treatment of by-products and joint products.
Realize the importance of inter-process profits.
Explain the meaning of key terms.
In certain manufacturing industries, a product has to pass through different stages and through continuous sequence of operations. For such industries the method of costing differs. For instance, in a textile industry the production process occurs continuously and through various stages—namely, carding, warping, spinning, drawing, sizing, winding, weaving, painting, folding, and so on. Hence, the necessity arises to devise a suitable method to compute the cost of a product in such organizations. Process costing is a method of costing in such organizations. This chapter aims at explaining all the features with respect to process costing.
Process costing is one of the methods of costing. The cost of operating each process and the cost of transfer from one process to another are determined under this method. Process costing is a different type of cost procedure for continuous or mass production industries. In those industries, the output consists of like units, where each unit would be processed in the same manner. It is generally suitable for firms manufacturing products in a continuous flow, without any reference to specific orders or jobs.
Process costing may be defined as, “the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are arranged over the units produced during the period”.
Process costing is used to ascertain the cost of a product at each operation, process or stage of manufacture. This method of costing is used in the following types of industries:
The following are the features of process costing.
As in any manufacturing organizations, costs relating to direct material, direct wages and factory overheads are incurred here also, which are charged to process accounts. As manufacturing is continuous, the cost of the finished output of one process becomes the cost of the raw material input of the next process.
An average cost per unit is calculated by dividing the total costs by the output in a period.
The products are not distinguishable in the processing stage.
The cost of normal spoilage or wastage is included in the cost of the total units produced.
The units which are incomplete at each stage of production are converted into equivalent production based on the degree of incompleteness.
At the end of the accounting period, there will be some stock of semi-finished goods or WIP. The reason is due to the continuous nature of manufacturing process. Hence, apportionment of process cost has to be made between the finished product and WIP at the end of each accounting period.
At the end of different processes, more than one product may be produced. They are “joint products” or “byproducts”.
The following are the differences between Job Costing and Process Costing:
Basis of Distinction | Job Costing | Process Costing |
---|---|---|
1. Nature of production |
Each job is manufactured against specific requirements | Production is of continuous flow, without any reference to specific order or job |
2. Cost unit |
Each job is taken as a cost unit |
Each unit is taken as a cost unit |
3. Cost accumulation |
Costs are collected and accumulated against each job |
Costs are allocated for each process |
4. Cost ascertainment |
Cost of a job is calculated when the job is completed |
Costs are calculated at the end of accounting period |
5. Cost control |
Increases paper work and more managerial attention is needed for cost accounting and cost control |
As the product is homogeneous cost accounting and cost control are comparatively easy |
6. WIP |
WIP may or may not exist |
At the end of accounting period, WIP will always exist |
Loss is inevitable in process industries. Loss arises due to chemical reactions, evaporation, shrinkage, scrapping, spoilage, and so on. Losses may be of two types-normal and abnormal. In some processes, abnormal gain may also occur.
Normal loss is unavoidable. It arises under efficient operating conditions. It is an inherent result of the given process. Normal loss consists of:
Accounting Treatment:
Any loss which is in excess of normal loss may be termed as abnormal loss. It is controllable. Abnormal loss arises due to unfavourable or unexpected conditions such as bad workmanship, sub-standard materials, machinery break down, accidents, and so on. Abnormal loss includes abnormal waste, scrap and so on.
Where the actual output from the process is more than the normal output expected, the difference is called abnormal gain. To put in other words, the quantum of loss is lesser than the estimated percentage of the normal loss and the difference is termed as “abnormal gain” or “effectives”.
Accounting treatment:
The following are the elements of production or manufacturing cost in a process industry.
Direct materials or raw materials are issued to each process against authorized requisitions. Once they are processed, the same is transferred to the next process where further materials are added which continues till the raw materials are converted into finished products. At the end of each process or of each costing period, the requisitions are sorted according to their processes and their values issued on a material summary sheet. On its basis, the journal entry has to be passed to debit the various process accounts and the material control account is credited. Consumption for low-value materials are determined based on the periodical stock taking.
In case of process industries, direct labour is comparatively insignificant. Where direct labour is fully occupied in a process, an analysis of their time is carried out and accordingly their wages are allocated to that process. In case a direct worker is engaged in more than one process, the time sheet is used for apportioning his time and wages to the process. The journal entry is then passed debiting various process accounts and crediting the wages control account.
Expenses incurred for a given process has to be directly charged to the respective process.
As processes are highly automated, there will be an increase in the manufacturing overhead followed by a fall in the direct labour cost. However, in practice, several items of expenses do not associate with any particular process. Hence, it is necessary to apportion them to various processes on a suitable basis, as shown under:
Items of Expenses | Basis of Distribution |
---|---|
1. Rents, rates and taxes |
Area occupied by each process |
2. Power |
Horse power of plant or meter readings |
3. Fire insurance |
Value of asset |
4. Water, gas, steam, etc. |
Meter readings or technical estimates |
5. Depreciation |
Value of asset |
Amounts of overheads are to be debited into “Manufacturing Overhead Control Account” (or) the total of overheads is to be apportioned to the process in a lumpsum.
Illustration 10.1
A manufacturer makes two types of articles “ L” and “M”. They undergo two processes-namely, factory and finishing. Raw materials used in the factory and general expenses are apportioned in the ratio of output of each class. The output for the year that ended on 31 December 2009 was 6,000 for “ L” and 4,000 for “M”. The actual cost of labour for each process is ascertained. Other charges for each process are apportioned in the ratio of finishing wages.
From the following particulars, prepare a statement of the cost per article of each item in each process in the cost of manufacture and the profit per article. The selling prices are Rs. 500 and Rs. 400, respectively.
“Factory” raw materials:
Rs. | |
---|---|
“Factory” raw materials: |
|
Opening stock |
4,00,000 |
Purchases |
20,00,000 |
Closing stock |
6,00,000 |
“Finishing” raw materials: |
|
Opening stock |
1,50,000 |
Purchases |
6,50,000 |
Closing stock |
2,00,000 |
Factory wages |
|
L |
2,00,000 |
M |
1,50,000 |
Finishing wages |
|
L |
1,50,000 |
M |
1,00,000 |
Factory charges |
6,00,000 |
Finishing charges |
2,00,000 |
General expenses |
2,40,000 |
Solution
Method I: Raw materials consumed are calculated as follows:
Factory Rs. | Finishing Rs. | |
---|---|---|
Opening stock |
4,00,000 |
1,50,000 |
Add: Purchases |
20,00,000 |
6,50,000 |
|
24,00,000 |
8,00,000 |
Less: Closing stock |
6,00,000 |
2,00,000 |
Raw materials consumed |
18,00,000 |
6,00,000 |
Another method: The same problem can be solved by another approach, as explained as follows:
Process accounts for “factory” and “finishing” are to be prepared separately and the final figures are then transferred to the preparing statement of cost and profit.
STAGE I:
STAGE II:
STAGE III:
Illustration 10.2
The following information is extracted from the cost records of a factory producing a commodity in the manufacture of which three processes are involved. Prepare the process cost accounts, showing the cost of the output and the cost per unit at each stage of the manufacture. The value at which the units are to be charged to processes two and three is the cost unit of the processes one and two, respectively. Make assumptions wherever necessary:
[I.C.W.A. – Modified]
Solution
Assumption 1: |
Wastages are normal. They have no realizable scrap value. |
Assumption 2: |
Opening and closing stocks are received from previous process, on which no further work is done in the process concerned. |
Assumption 3: |
Processing costs remain the same. |
(I) Process I Account is prepared as follows:
*Cost per unit of Process No 1:
(II) Process II Account is prepared as follows:
II
* Cost per unit = (Rs. 88,000 − Rs. 8,800)
III
* Cost per unit = (1,31,600 − 3,600) =
Illustration 10.3
Model: Normal loss with scrap value
500 tonnes of raw material are used for producing a commodity which passes through two processes. The costs are as follows:
Process I Rs. | Process II Rs. | |
---|---|---|
Materials |
10,000 |
– |
Labour |
5,000 |
2,500 |
Work expenses |
2,000 |
1,000 |
10% of the material is wasted in the process. The wastage is normal. The scrap realized is Rs. 300. You are required to show Process No. I. Account.
Solution
In this problem, the normal wastage with scrap value is given. They have to be credited to process account. After deducting this, the cost per unit of process is to be ascertained.
Cost per unit of Process No. I =
Illustration 10.4
Model: Normal wastage + Proportion of output reworked
500 tonnes of raw material are used for producing a commodity, which passes through two processes. The costs are as follows:
Process I Rs. | Process II Rs. | |
---|---|---|
Materials |
10,000 |
– |
Labour |
5,000 |
2,500 |
Work expenses |
2,000 |
1,000 |
10% of the material is wasted in the process. 10% of the material is wasted in the process. 10% of material originally put in Process No. I is to be reworked. The scrap is realized at Rs. 300. You are required to show the process account.
Solution
In this problem, in addition to the normal wastage, 10% (proportion) has to be reworked in the same Process No. I account. The value of crude material is to be credited with the process account. While doing so (unless and otherwise any specific direction is given in the problem), the cost of other items (in this problem, labour and work expenses) are to be treated as waste, that is, they are to be ignored.
Cost per tonne of Process I =
Illustration 10.5
Model: Normal wastage + Reworking in earlier process
500 tonnes of raw material are used for producing a commodity which passes through two processes. The costs are as follows:
Process I Rs. | Process II Rs. | |
---|---|---|
Materials |
10,000 |
– |
Labour |
5,000 |
2,500 |
Work expenses |
2,000 |
1,000 |
10% of the material is wasted in the process. 10% of the material originally put is to be reworked in Process No. 1. Show how the process account will appear at end of Process II.
Solution
* Note: Crude stock—this part of material will go to Process No. I, with other crude material whenever again put in Process I.
Illustration 10.6
Model: Loss in each process
The product AA′ is produced by passing the chemical CC′ through four processes, where the output of the earlier process becomes the input of the subsequent process.
The loss of materials expressed as a % of input is as follows:
Process I – 20%, Process II – 10%, Process III – and Process IV –
The material lost in each process does not have any resale value.
You are required to calculate
Solution
Let the input be taken as 100 (assumption)
Then output will be = 100 – 20 = 80.
As per the direction given in the problem, the output of the earlier process becomes the input of the subsequent process.
In this stage of process loss is 10% (given)
80 – 8 (10% of 80) = 72
∴ Output = 72.
In Process III, loss is
∴ Output
In process IV, loss is
∴ Output
100 Units of input in Process I
55 Units of output in Process IV:
To produce 55 units of output, the input required = 100 units
∴ To produce 1 kg of (output) product XX′
the input of required chemical CC′
(b) To produce 10 m. tonnes of product XX’, the capacities of different processes are determined as follows:
Space to be allowed for chemical reactions = 25%.
To start with, take process IV & go in the descending order to Process I.
Process IV: (space) = 13.64 tonnes.
Process III:
Process II:
Process I:
Illustration 10.7
Model: Normal loss with realized value + selling price determination
At the end of Process A, which was carried on in a factory during the week that ended on 30 June 2009, the number of units produced was 1,750 excluding 50 units damaged at the very end of the process. The damaged units realized Rs. 5 per unit as the scrap. Generally, a normal wastage of 10% occurs during the process and so the wastage realized was Rs. 3 per unit.
A unit of raw material costs Rs. 6. The other expenses of the week were:
Rs. | |
---|---|
Wages |
1,000 |
Power |
500 |
General expenses |
900 |
50% of the output is sold so as to show a profit of on the selling price. The rest of the output is transferred to Process “B”. Prepare Process “A” Account.
[B.Com (Hons) – Delhi – Modified]
Solution
Basic calculations:
1. |
Material introduced |
= Units produced + damaged units |
|
|
|
|
|
(normal wastage of 10% is adjusted) |
|
|
= 2,000 units. |
|
Cost of 2,000 units of Materials |
= 2,000 × Rs. 6 |
|
|
= Rs. 12,000. |
2. |
Normal loss |
= 10% of 2,000 units |
|
|
= 200 units. |
|
Cost |
= 200 × Rs. 3 = Rs. 600. |
3. |
Damaged units: |
= 50 units. |
|
Cost |
= 50 × Rs. 5 = Rs. 250. |
4. |
Total cost of 1750 units |
= Rs. 12,000 (materials) |
|
|
Rs. 1,000 (wages) |
|
|
Rs. 900 (general expenses) |
|
|
Rs. 500 (power) |
|
|
Rs. 14,400 |
|
|
Less: 600 (Normal loss realized) |
|
|
Less: 250 (Damaged units realized) |
|
|
Rs. 13,550 |
5. Cost of 50% of output sold
50% of 1,750 units after damage
Sale price of 875 units
6. Profit = Selling Price – Total Cost
[*Profit of on selling price: Rs. (8,130 – 6675) = 1,455
Selling price = of cost
∴ Selling price = of cost.]
Illustration 10.8
Model: Normal loss and Abnormal loss
In the manufacture of product “X”, 1000 kg of material at Rs. 2.00 per kg were supplied to the firm’s Process I. Labour costs amounted to Rs. 500 and production overheads of Rs. 250 were incurred. The normal process loss has been estimated at 10% of which half can be sold as scrap at Re 1. per kg. The actual production realized was 850 kg.
Draw up necessary process accounts.
Solution
STAGE I: Computation of normal loss and abnormal loss
Kg | ||
---|---|---|
Step 1: |
Input (given) |
1,000 |
Step 2: |
Less: Normal Loss @ 10% (10% of 1,000 kg) |
100 |
Step 3: |
Expected normal output (1–2) |
= 900 |
Step 4: |
Actual output (given) |
= 850 |
Step 5: |
Abnormal loss (Step 4–5) |
= 50 |
STAGE II: Calculation of unit cost of finished output and abnormal loss:
|
|
Rs. |
Step 1: |
Total costs incurred (Materials + Labour + Overhead) Rs. (2,000 + 500 + 250) |
= 2,750 |
Step 2: |
Less: Scrap value of normal loss (50 kg × Re 1) (given) Normal loss = 100 kg, half of which is 50 kg) |
= 50 |
Step 3: |
Effective cost of normal production: (Step 1 – Step 2) |
|
Step 4: |
Unit cost of finished output and abnormal loss |
|
Hence, the finished output and abnormal loss will be valued at Rs. 3 per kg.
STAGE III: Preparation of Process Account.
Illustration 10.9
Model: Computation wastage in proces
The following data are available pertaining to a product after passing through two processes A and B: Output transferred to Process C from B:
Units: 18,240, |
Rs. 98,526 |
Expenses incurred in Process C:
Sundry materials |
Rs. 2,960 |
Direct labour |
Rs. 13,000 |
Direct expenses |
Rs. 3,210 |
The wastage of Process C is sold @ Rs. 2.00 per unit. The overhead charges were 150% of direct labour. The final was sold at Rs. 20 per unit fetching a profit of 20% on sales.
You are required to compute the percentage of wastage in Process C and prepare the Process C account.
[B.Com. – Hons-Delhi – Modified]
Solution
Total finished output of Process C is not given in the problem.
= Rs. 2 × (18,240 – x).
20 x |
= |
1,37,196 – 2 × 18,240 – 2 x + 4 x |
20 x |
= |
1,37,196 – 36,480 + 6 x |
20 x |
= |
1,00,716 + 6 x |
20 x– 6 x |
= |
1,00,716 |
14 x |
= |
1,00,716 |
*1 Wastage = 18,240 – 7,194 = 11,046.
Units = 59.97 % or 60% (approx)
Illustration 10.10
Model: Abnormal Loss
2,000 units of raw material were introduced in a process at a cost of Rs. 8,000. 10% wastage is allowed and each unit of wastage realizes Rs. 2.50. The actual production was 1,700 units (with abnormal wastage of 100 units). The expenses being as follows:
Direct wages Rs. 13,000
Indirect expenses Rs. 6,500
You are required to prepare the process account to bring out the effect of wastage.
Solution
Step 1: Per unit cost of normal output is prepared as follows:
|
|
Rs. |
(i) |
Raw materials introduced: 2000 units: Total cost: Rs. 8,000 + Rs. 13,000 + Rs. 6,500 |
= 27,500. |
(ii) |
Less: Normal wastage: 10% of 2,000 units: 200 units 200 units × Rs. 2.50 |
= 500 |
|
(2000–200): 1800 units |
|
(iii) |
Per unit cost of normal output |
|
|
|
= Rs. 15 |
Step 2: |
Cost of abnormal wastage |
= |
No. of units of abnormal wastage × per unit cost of normal output |
|
|
= |
100 units × Rs. 15 = Rs. 1,500. |
Step 3: Preparation of abnormal wastage account:
Step 4: Preparation of Process Account:
Illustration 10.11
Model: Abnormal effectives (gain)
A product passes through three processes A, B and C. The normal wastage of each process is as follows:
Process A – 3%
Process B – 5%
Process C – 8%
Wastage of Process A was sold at Re 0.50 per unit, that of Process B at Re 1 per unit and that of Process C at Rs. 2 per unit. 10,000 units were issued to Process A in the beginning of November 2009 at a cost of Rs. 2 per unit. The other expenses were as follows:
Actual output was:
Process A – 9,500 units
Process B – 9,100 units
Process C – 8,100 units
You are required to prepare the process accounts assuming that there were no opening and closing stocks. Also give the abnormal wastage and abnormal effectives accounts.
[B.Com. (H) – Delhi – Modified]
Solution
*A Cost of abnormal wastage is calculated as follows:
*B Abnormal effectives: In this process, instead of abnormal loss, there is abnormal gain. (Credit side: 475, + 9,100 = 9,575 units; Debit side: 9,500 units. So, that 75 units are treated as abnormal gain). Its value is calculated as follows:
∴ Cost for 75 units = 75 × Rs. 6 = Rs. 450.
*C Cost of abnormal wastage is calculated as follows:
Cost of abnormal wastage per unit = Rs. 8.50 per unit
For 272 units = Rs. 8.50 × 272 = Rs. 2,312.
Illustration 10.12
Model: Process Accounts – P&L A/c
A product passes through three processes A, B and C. The details of expenses incurred on the three processes during the year 2009 were as follows:
Units introduced in process (Cost per unit Rs. 100) = 10,000 units
Management expenses during the year were Rs. 72,500 and selling expenses were Rs. 57,500. These are not allocable to the processes.
Actual output of the three processes was:
A: 9,300 units; B: 5,400 units; and C: 2,100 units.
About 2/3rd of the output of 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 also sold.
The normal loss of three processes, calculated on the input of every process was:
Process A: 5%, B: 15% and C: 20%.
The loss of Process A was sold at Rs. 2 per unit; that of B at Rs. 5 per unit and that of Process C at Rs. 10 per unit.
You are required to prepare the Three Processes Accounts and the P&L A/c.
[C.A.(Inter); C.S. (Inter); B.com (Hon) Delhi; I.C.W.A. (Inter) – Adapted and modified a little]
Solution
*1 Per unit of cost of normal production under Process A:
For Process “B”:
Basic calculations:
*1(1) Per unit cost of normal production under Process B is calculated as follows:
*2(2) Amount of abnormal effectives is calculated as follows:
(i) Abnormal effective units |
= |
Normal loss –Actual loss |
|
= |
930 – 800 = 130 units. |
(ii) Abnormal effective units × per unit cost of normal production |
||
|
= |
130 units × Rs. 150 = Rs. 19,500. |
Now Process “B” is prepared as follows:
For Process “C”:
Basic calculations:
Abnormal loss |
= |
Normal output – Actual output |
|
= |
2,160 units – 2,100 units given |
|
= |
60 units. |
Amount |
= |
60 units × Rs. 230 = Rs. 13,800. |
Now, Process “C” account is to be prepared as follows:
WORKING NOTES:
Meaning of Equivalent Production—Illustrated
In process costing, the unit product cost is ascertained for each process. If all the units started are completed within the period, this can be calculated easily. However, in process industries, there are opening and closing WIP (i.e., incompleted units) in each process. So, the unit product cost will not reflect the correct figure. As the costs incurred must cover all the work of the process-that is, both completed as well as incompleted units. Hence the necessity arises to convert such incomplete units into their equivalent of completed units. This procedure is referred to as “equivalent production”.
Equivalent production represents “the production of a process in terms of complete units”.
How are incomplete units converted into “equivalent of completed” units? Normally, an estimate as to the degree of completion is made, after inspecting WIP, and percentage basis is used for this. To illustrate,
So, for 5,000 units of input, the equivalent production is only 4,600 units.
Determination of Equivalent Production—Steps Discussed
Step 1: Consider
Step 2: |
Find out the net process costs and they are split into materials, labour and overheads. |
Step 3: |
Cost per unit of equivalent production for each elements of cost are to be determined. (This is done by dividing each element of costs by the respective equivalent production units.) |
Step 4: |
Evaluate the output finished, transferred and WIP. |
The above mentioned steps are to be presented in the following accounts (statements), which means three separate accounts have to be prepared.
Illustration 10.13
Method: (i) Only Closing WIP and ii) No Process loss
Input |
5,000 units |
Output |
4,000 units |
Closing WIP |
1,000 units |
Degree of Completion:
Materials |
100% |
Labour |
80% |
Overhead |
50% |
Process Costs
Materials: |
Rs. 50,000 |
Labour: |
Rs. 30,000 |
Overhead: |
Rs. 20,000 |
Yor are required to ascertain (i) Equivalent Production, (ii) Cost per unit of Equivalent Production and prepare (iii) Process Account assuming that there is no opening WIP and no process loss.
STAGE I:
STAGE II:
STAGE III: Statement of Evaluation
|
|
Rs. |
(i) Materials: 4,000 units @ Rs. 10 |
= |
40,000 |
(ii) Labour: 4,000 units @ 6.25 |
= |
25,000 |
(iii) Overhead: 4,000 units @ 4.44 |
= |
17,780 |
|
|
82,780 |
(i) Materials (Ref: Stage I): 1,000 units @ Rs. 10 |
= |
10,000 |
(ii) Labour (Ref: Stage I): 800 units @ Rs. 6.25 |
= |
5,000 |
(iii) Overhead (Ref: Stage I): 500 units @ Rs. 4.44 |
= |
2,220 |
|
|
17,220 |
STAGE IV: Preparation of Process Account
Illustration 10.14
Model: Only closing WIP and Process losses
During November 2009, 20,000 units were introduced into Process “A” at a cost of Rs. 1,00,000. The other process costs were:
Rs. | |
---|---|
Direct materials |
51,000 |
Direct wages |
1,03,500 |
Factory overhead |
50% of direct wages |
The normal loss was estimated at 10% on the input. At the end of the month, 16,000 units have been produced and transferred to Process “B”. About 2500 units had been scrapped and the scrapped units had been completely processed and realized at Rs. 5.00 per unit. About 1500 units were incomplete. The stage of completion in respect of these units was estimated to be:
Materials = 80%
Labour = 60%
Overheads = 50%
You are required to calculate
Solution
STAGE I: Preparation of Statement of Equivalent Production.
STAGE II:
STAGE III:
Value to be transferred to
Process “B” (Ref: Stage III (ii)) = Rs. 2,70,623
STAGE IV:
STAGE V:
Illustration 10.15
Model: Opening as well as Closing WIP: Average cost method (No process loss)
Opening WIP: 3,000 units
Completed as to
Materials 80%
Labour 75%
Overhead 60%
Units introduced: 7,000 units
Closing WIP: 4,000 units
Degrees of completion:
Materials: 80%;
Labour: 75%
Overhead: 60%
You are required to find out the equivalent production assuming that there is no process loss.
Solution
Important Note
The procedure for conversion of opening WIP will vary according to the method of apportionment of the process costs (Average Cost Method or First-in-First-out method). Under average cost method, opening units (WIP) are not shown separately while determining the equivalent production. Opening WIP units are to be included in the units completed and transferred. That is, opening WIP (brought forward from the previous period) should be added to the current process units. The units completed and transferred and closing WIP are valued at the average unit cost.
First, do this basic calculation to find the units completed and transferred:
Units | |
---|---|
Opening WIP |
3,000
|
Add: Additional input |
7,000 |
Total input |
10,000 |
Less: Closing WIP |
4,000 |
Units completed and transferred |
6,000 |
It is to be observed here that the opening WIP units 3,000 are included in these 6000 units that are completed and transferred units.
Now, the statement of equivalent production is to be drafted as follows:
Illustration 10.16
Model: Average cost method statement of cost preparation
Opening WIP: 5000 units
|
Rs. |
Materials:100% of degree of completion |
= 12,500 |
Labour: 60% ” |
= 7,500 |
Overhead: 60% ” |
= 3,750 |
|
|
Units introduced into this process: 20,000 units.
There are 5,000 units in this process, and the stage of completion is estimated to be:
|
Materials: |
100% |
|
Labour: |
50% |
|
Overhead: |
50% |
20,000 units are transferred to the next process.
The process costs for the period are:
Rs. | |
---|---|
Materials |
2,37,500 |
Labour |
1,50,000 |
Overhead |
75,000 |
You are required to find the value of:
(v) Output transferred and
(vi) Closing WIP.
Solution
As the units transferred are given in the question, the statement of equivalent production can be prepared straight away as follows:
Next, the statement of cost has to be prepared as follows
Total cost per unit = Rs. 10 + Rs. 7.00 + Rs. 3.50 = Rs. 20.50.
Value of output transferred |
= |
No. of units × cost/unit |
|
= |
20,000 units × Rs. 20.50 |
|
= |
Rs. 4,10,000. |
|
|
Rs. |
(a) Materials: 5000 units × Rs. 10 |
= |
50,000 |
(b) Labour: 2500 units × Rs. 7 |
= |
17,500 |
(c) Overhead: 2500 units × Rs. 3.50 |
= |
8,750 |
|
= |
76,250 |
Illustration 10.17
Model: FIFO Method
Data: Same as in Illustration No. 15:
Solution
Important Note
Under FIFO method, the Opening WIP units are to be converted to equivalent production after taking into account the percentage of work to be done and shown separately in the statement of equivalent production. That means, the opening WIP units to be shown separately.
Illustration 10.18
Model: FIFO Method—Statement of Cost
Data same as in Illustration No. 16:
Solution
Important Note
Under FIFO method, the closing WIP is valued at the current cost. Hence, in order to determine the average unit cost, the values of opening WIP are not added to the current process costs.
Rs. | ||
---|---|---|
Step 1: |
Last period’s cost |
23,750 |
|
(Add: Opening figures given in the question Rs. 12,500 + Rs. 7,500 + Rs. 3,750 = Rs. 23,750) |
|
Step 2: |
ADD: Total current period’s cost (Ref Stage III – A) |
3,73,125 |
|
|
3,96,875 |
Step 3: |
Less: Value of Closing WIP (Ref Stage III – 2) |
25,000 |
Step 4: |
Value of output transferred |
3,71,875 |
Illustration 10.19
Model: Equivalent production abnormal loss
During the month of September, 5000 units were introduced into Process I. The cost of 5000 units was Rs. 29,000. At the end of the month, 3,750 units had been produced and transferred to Process II. About 900 units were still in process and 350 units had been scrapped. A normal loss of 5% on input is allowed. It was estimated that the WIP units had reached a stage in the production as follows:
Material: 75% completed
Labour: 50% completed
Overhead: 50% completed
The total cost incurred, in addition to 5,000 units were:
Rs. | |
---|---|
Direct materials introduced during the process |
7,700 |
Direct wages |
17,200 |
Overheads |
8,600 |
Units scrapped realized (each) |
2.00 |
The units scrapped have passed through the process and so were 100% completed in respect of material, labour and overhead.
You are required to prepare all the necessary accounts.
Solution
STAGE I:
STAGE II:
STAGE III:
STAGE IV:
STAGE V:
Illustration 10.20
Model: Statement of cost–Normal loss–Average cost method
Product X passes through three processes. On 20 March, the following information is obtained in respect of Process 2: 1,400 units valued at Rs. 2,400 were made up of
Rs. 1400 for material
Rs. 300 for labour
Rs. 700 for overheads
Degree of completion: Material – 60%
Labour – 40%
Overheads – 40%
Transfer from Process 1: 7,000 units Re. 0.40 each.
Transfer to Process 3: 6,000 units.
Rs. | |
---|---|
Direct material added in Process 2 |
3,120 |
Direct labour |
4000 |
Production overhead incurred |
8,800 |
Units scrapped on completion of Process 2: 1,000 units
Closing stock = 1,400 units.
Degree of completion: Materials – 80%
Labour – 60%
Overheads – 60%
10% of loss during production was considered normal. Units scrapped realized Re. 0.80 each.
You are required to prepare a statement of cost of Process 2 and show the unit cost of units transferred to Process 3 by using Average Method.
[I.C.W.A. – Modified]
Solution
Unit Cost transferred to Process 3 is Rs. 2.71.
Illustration 10.21
Equivalent Production – FIFO Method – Abnormal Loss
Opening Work-in-Process: 3,000 units (60% complete) – Cost Rs. 3,300. Units introduced during the period 30,000 units: Cost – Rs. 57,900. Transferred to next process 27,000 units.
Closing Work-in-Process – 2,400 units (75% complete). Normal loss estimated at 10% of the total input including the units in the process at the beginning. Scrap realized at Re. 1 per unit. Scrapped units are 100% complete. You are required to compute equivalent production and cost per equivalent unit. Also evaluate the output.
Solution
Cost of the Process: |
Rs. 57,300 |
Less: Scrap value of Normal loss: |
|
3,300 units × Re 1. |
Rs. 3,300 |
Total cost |
Rs. 54,600 |
∴ Cost per equivalent unit
Illustration 10.22
Model: Equivalent production abnormal loss – Average cost method
Data same as in Illustration: 21
Solution
Costs | Rs. |
---|---|
Opening WIP | 3,300 |
Cost of units produced | 57,900 |
61,200 | |
Less: Scrap value realized on normal loss | 3,300 |
57,900 | |
∴ Cost per equivalent unit |
In some industrial concerns two or more products are produced simultaneously. Chemical companies, refineries, flour mills, coal mines, dairies, canners and meat packers produce in their manufacturing or conversion process more than one product having equal importance. In such concerns, apportionment of costs for all the products has to be carried out. Those products which are produced are classified as (i) Joint Products and (ii) By-Products.
Meaning and features of joint products.
Joint products may be defined as, “Two or more products separated in the course of processing, each having a sufficiently high saleable value to merit recognition as a main product”. When two or more products of equal importance are simultaneously produced, they are called “joint products”. Example: In petroleum-refining industry, petrol, naptha, kerosene and fuel oil are obtained simultaneously. The products are not identifiable as separate products until a certain stage of production known as “split-off point”.
Meaning and features of by-products
By-products may be defined as,
A product which is recovered incidentally from the materials used in the manufacture of recognised main products, such by-product having either a net realisable value or usable value which is relatively low in comparison with saleable value of main products. By-Products may be further processed to increase their realisable value.
The term “by-product” is generally used to denote one or more products of a relatively small value that are produced simultaneously with a product of higher value. Such a product which has a higher value is known as the main product.
Co-products represent the products that are produced in a number of varieties. The manufacture of each co-product requires different raw materials and a different processing operation altogether. Co-products differ from joint products. It is possible to produce co-products in the desired quantities, whereas it is not possible in case of joint products. The process of one co-product differs from that of another co-product. Whereas joint products are produced from common raw materials and common processes. Co-products can be identified at each and every stage of the manufacturing process. Whereas the joint products can be identified at split-off point only. In the manufacture of co-products, the manufacturer has control over the quality and quantity of the products whereas in the case of joint products it is not possible.
Basis of Distinction | Joint Products | By-Products |
---|---|---|
1. Nature of production |
Joint products are produced simultaneously |
By-products are produced incidentally |
2. Economic value |
Joint products have equal economic value (more or less) |
By-products have small economic value |
3. Sales value |
Sales value of joint products have a significant relationship with the total revenue |
Relative sales value of by-products is less significant |
4. Business objectives and policies |
In case of joint products a company’ objective to produce a particular product is expressed explicitly in clear terms |
By-products are produced simultaneously. Due to this, no objectives and policies can be expressed explicitly |
5. Certainty of markets |
Sales can be predicted |
Sales cannot be predicted |
6. Profit pattern |
Joint products will fulfil the profit pattern of the management |
By-products may not be able to fulfil the profit pattern |
7. Further processing |
Joint products are produced from the same raw materials and processes |
When processed or reprocessed further by-products are obtained |
Allocation of Joint Costs Methods
A portion of the total joint costs has to be apportioned to each joint product properly in order to ascertain the unit product cost and P&L A/c. For such allocation of joint costs the following methods may be used:
Joint costs are apportioned to various products based on the average cost unit. This is calculated by dividing the total manufacturing cost by total number of units produced. The logic behind the method is that since all products are turned out by the same process, it is impossible to say that one costs more to produce per unit than the other.
Illustration 10.23
From the following particulars find out the cost of joint products X, Y and Z using the average unit cost method:
Product | Units Produced | Raw Materials Used Units |
---|---|---|
X |
2,000 |
25,000 |
Y |
1,000 |
10,000 |
Z |
1,500 |
10,000 |
4500 |
45,000 |
Solution
Under this method, a physical base is used (volume or weight of raw materials, labour hours) in allocation of pre-separation-point (split-off point) costs to joint products. This method can be used when physical units are similar. That is, the output of all joint products is measured using the same unit of measurement, for example, kilograms or litres.
Illustration 10.24
Same data as in the previous Illustration 23.
Solution
First, the cost per unit of raw materials used is determined as follows:
This method is also known as “points value method”. Joint costs are allocated on the basis of assigning weight factors. Factors relating to production, selling and distribution are given due consideration. The weight factors may include the amount of material used, the manufacturing process, the time involved, the type of labour used, and so on. These factors and their relative weights are combined in a single value, called the factor of conversion. This method is suitable where products produced are not homogeneous.
Illustration 10.25
P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 4,00,000 and in the following quantities:
P – 40,000 units
Q – 30,000 units
R – 20,000 units
S – 30,000 units
The weight factors assigned to them are:
P – 10 points
Q – 8 points
R – 5 points
S – 2 points
You are required to allocate joint costs to the products using the weighted output method.
Solution
Allocation of Joint Costs
Method: Weighted Output
Joint Cost: Rs. 4,00,000
The average cost per unit is computed after filling the Column (4) and then adding for all the four products, that is, 8,00,000 units in this problem. Joint Cost = Rs. 4,00,000.
Under this method, joint costs are apportioned to products on the basis of predetermined standards. Sales values are estimated after adjusting profit margin, selling and distribution expenses, and conversion costs. The price of raw materials is determined which forms the basis for the apportionment of costs to the joint products.
Illustration 10.26
P, Q, R and S are four joint products produced in the following quantities:
P – 40,000 units
Q – 40,000 units
R – 20,000 units
S – 30,000 units
The following details apply:
The joint costs of manufacturing amount to Rs. 7,20,000. You are required to allocate the joint costs on the standard cost method.
Solution
NOTE:
These are shown in the tabular as follows:
On the basis of total raw materials cost, that is, Rs. 3,60,000, joint cost allocation to joint products are to be
In this method, joint costs are apportioned to products based on the ratio of the sales value of joint products. This results in uniform gross profit percentage for each product. This method is based on the principle that products which have the highest market value should bear the largest share of the joint costs production.
Illustration 10.27
P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 6,00,000. The following details apply:
Product | Units Processed | Ultimate Sales Value Rs. |
---|---|---|
P |
1,00,000 |
0.50 |
Q |
75,000 |
4.00 |
R |
50,000 |
4.00 |
S |
75,000 |
6.00 |
These prices are market prices or sales prices for products at split-off-point, that is, it is assumed that they can be sold in their present state. You are required to allocate joint costs to the products on a market-value basis.
Solution
Market value less cost to complete individual product method:
This is a variation of the market value method. It is used where one or more products require an additional processing from the split-off point. This is due to the following reasons:
Illustration 10.28
P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 6,00,000. Further details are as follows:
You are required to allocate the joint costs by Realizable Value Method.
Solution
Column (7) is filled up after completing all the 6 columns and cost allocation is calculated as follows and then values are to be transferred to Column 7. Computation of joint costs apportioned to joint products are as follows:
The various methods used for valuing and costing by-products may be grouped as follows:
The following are the non-cost methods of accounting for by-products:
In this method, the revenue arising from the sale of a by-product is credited to P&L A/c, as an other income.
This method is suitable where the value of a by-product is small or negligible when compared with the main product. But this method suffers from a serious limitation as no value is given to the by-product stock which leads to the overvaluation of major product stock.
Illustration 10.29
Sale of product “A” during a period amounted to Rs. 80,000. The total production costs amounted to Re 1 per unit and the quantity produced was 48,000 units. Sale was to the tune of 40,000 units. The selling and distribution costs amounted to Rs. 8000. Sale of the by-product “B” was to the extent of Rs. 10,000. Some customers returned goods amounting to Rs. 4,000. Using other income method cost the by-Product.
Solution
Particulars | Amount Rs. | |
---|---|---|
Step 1: Sales of Product “A” (40,000 units) (given) |
|
80,000 |
Step 2: LESS: Cost of goods sold: |
|
|
|
Rs. |
|
Total production costs: (48,000 × Re 1) = |
|
48,000 |
Less: Closing stock: (8,000 × Re 1) = |
8,000 |
40,000 |
Step 3: GROSS PROFIT (Step 1 – Step 2) |
|
40,000 |
Step 4: Selling & distribution expenses (given) |
|
8,000 |
Step 5: Profit from operations (Step 3 – Step 4) |
|
32,000 |
|
Rs. |
|
Step 6: Sale of by-product “B”: |
10,000 |
|
Less: Returns from customers: |
4,000 |
6,000 |
Step 7: Net profit (Add Step 5 + Step 6) |
|
38,000 |
Method (ii): Total Cost LESS Revenue from the Sale of By-Products.
Under this method, the net sales value of by-products produced is treated as a reduction in the cost of the major product and the WIP account is credited.
Illustration 10.30
Sale of product “A” during the year amounted to 1,000 units at Rs. 20 each. The total number of units produced was 1,200 units and the production costs were Rs. 16 per unit. The sale of by-product “B” amounted to Rs. 2,400 out of which goods worth Rs. 1,200 were returned by customers.
The selling and distribution costs amounted to Rs. 1,000. Using total cost less revenue from the sale of byproduct, cost the by-products.
Particulars | Amount | |
---|---|---|
Step 1: Sales value of product “A” |
|
20,000 |
Step 2: LESS: Cost sales: |
Rs. |
|
(i) Total production costs – 1,200 units × Rs. 16 |
19,200 |
|
(ii) Less: By-product sales |
1,200 |
|
Step 3: Net cost by-product “A” |
18,000 |
|
Step 4: LESS: Closing stock of Product A: |
|
|
|
|
|
of Net cost of Product |
3000 |
15,000 |
Step 5: GROSS PROFIT (Step 1 – Step 4) |
|
5,000 |
Step 6: Add: Other income: |
|
|
(i) Sales of by-product “B” |
5,000 |
|
(ii) Less: Sales returns |
2,000 |
3,000 |
Step7: Net profit |
|
8,000 |
Method (iii): Total Costs LESS value of By-Products (including Subsequent Costs and Distribution Expenses)
This is an improvement over the previous methods. Here selling and administrative expenses are charged only against the by-products sold.
Illustration 10.31
Sale of Product “A” during the period was 200 units at Rs. 20 each. The total number of units produced were 2,400 units and the joint production cost amounted to Rs. 30.000. Subsequent costs on account of the main product “A” amounted to Rs. 1,000. By-product “B” sales (2000 units at Re 1) yielded Rs. 2,000 while unsold stock of the same by-product amounted to 3,000 units. Subsequent costs incurred on account of the by-product “B” amounted to Rs. 1,000. (i.e., for 5,000 units). The total selling and administrative expenses amounted to Rs. 1,000 of which Rs. 100 can be attributable to the sale of the by-product. Using the total cost less value of the by-products (including subsequent costs and distribution expenses), cost by-Product “B”.
Solution
Method (iv): Total cost less value of by-products (including selling and administration expenses).
In this method, the selling and administrative expenses with respect to by-products has to be deducted from its sales value. The net amount is credited to the cost of the main product.
Illustration 10.32
Sale of product “A” during the period was 2,000 units at Rs. 10 each. The total number of units produced were 2,400 units and the unit cost production was Rs. 7.50. The sale of by-product “B” amounted to Rs. 2,400 out of which goods worth Rs. 800 were returned to customers. The total selling and administrative expenses connected with main product A was Rs. 500 out of which the cost incurred for the sale of by-product “B” was Rs. 100. Using the total cost less value of by-products (including selling and administrative expenses) method, cost the by-product.
Solution
Decision to sell or further process the joint products:
Many manufacturing organizations are often confronted with the decision whether to sell or further process the joint products. Decision is based on the profitability of further processing. The incremental revenue expected is compared with the costs expected to be incurred on further processing of joint products. The incremental revenue is the difference between the sales value after further processing and sales value at the split-off point. If the incremental revenue exceeds the additional costs of further processing, then further processing may be recommended
Illustration 10.33
In a factory producing joint products of two varieties, the following data are extracted from the books:
Total Rs. | |
---|---|
Sales of products A&B |
15,00,000 |
Direct material |
4,50,000 |
Direct labour |
2,20,000 |
Variable overhead (150% a labour) |
3,30,000 |
Fixed overhead |
4,00,000 |
The analysis of sales reveals that the percentage of sale of Product A is .
The management contemplates to process further the joint products so that they could be sold at higher rates. Facilities for this are available. The additional expenditure for the further processes and total sales expected at higher selling prices are given as follows. Make your recommendations presenting the effect of the proposal.
Solution
Recommendations: (1) Based on the result, Product “B” will yield an additional profit of Rs. 20,000 due to further processing. So it can be recommended that Product “b” can be processed further.
(2) As the product “A” does not show any additional profit on further processing, the decision to process further or not to process further may be taken by considering other factors—other non-cost factors, for example, increasing price in future, utilizing the existing capacity in a suitable way, eliminating the competitor, and so on.
In the process costing, the finished product of one process is the raw material for the subsequent process. For such transfers, the normal cost is generally taken as a base. Some other methods are also available to determine transfer prices. Transfer prices may be defined as, “A price related to goods or other services transferred from one process or department to another or from one member of a group to another. The extent to which costs and profit are covered by the price is a matter of policy.”
For fixation of transfer prices, the following methods are widely used:
Transfer prices may be determined by any of the above methods. The most widely used practice is “cost-plus-profit method”. Under this method, the output of one process is transferred to the next process on the basis of cost plus a percentage of profit. The difference between the cost and the transfer price is referred to as the “inter-process profits.” These are profits made by the transfer of output from one process to the subsequent process.
Illustration 10.34
The following are the details in respect of two processes “A” and “B” of a process industry:
Process A Rs. | Process B Rs. | |
---|---|---|
Materials |
20,000 |
– |
Labour |
24,000 |
40,000 |
Overheads |
12,000 |
20,000 |
Closing Stock |
8,000 |
16,000 |
The output of Process A is transferred to Process B at a price calculated to give a profit of 20% on the transfer price and the output of Process B is charged to finished stock on a similar basis.
Of the output transferred to finished stock, the stock costing Rs. 20,000 remained unsold at the end of the accounting period and the balance realized was Rs. 2,00,000. There was no opening stock and no closing WIP. Show:
Solution
Note: 20% on transfer price = 25% on cost.
(b) Value of Closing Stock for Balance Sheet Purposes:
Unrealized profits are to be segregated from the value of stocks at the end, in order to show the closing stocks as cost for balance-sheet purposes.
Step 1:
Step 2:
(i) For Process B: Closing stock |
= |
Rs. 16,000 |
(ii) Total cost incurred |
= |
Rs. 1,20,000 |
(iii) Cost from Process A |
= |
Rs. 60,000 |
|
|
|
|
|
(vi) Unrealized profit |
= |
20% of Rs. 8,000 = Rs. 1,600 |
Step 3:
(i) Finished stock: Closing stock |
= |
Rs. 20,000 |
(ii) Here, the entire stock came from Process “B” |
|
|
(iii) Profits made by B = 20% of Rs. 20,000 |
= |
Rs. 4,000 |
(iv) Cost to Process B = (Rs. 20,000 – Rs. 4,000) |
= |
Rs. 16,000 |
(v) Amount that came from Process A |
= |
|
|
= |
8,000 |
(vi) Profit made by A |
= |
Rs. 8,000 × 20% |
|
= |
Rs. 1,600 |
(vii) Total unrealized profits: |
|
|
|
A = |
1,600 |
|
B = |
4,000 |
|
|
5,600 |
Results are shown in the following table:
The provision to be made may be straight away calculated by using the following formula:
Percentage profit added by transfer or process × × Closing stock of transferee process
NOTE: This formula will not be applicable in finding out the profits made by a process which transfers the output to finished stores.
Important Note
20% on transfer price How it comes? |
= |
25% on cost |
Let transfer price be |
= |
Rs. 100 (assumed) |
Profit 20% on transfer price |
= |
Rs. 20 (profit %) |
Then cost |
= |
Rs. 80 |
|
|
Take another example:
Profit 25% on transfer price |
= |
? % on cost |
Let transfer price |
= |
Rs. 100 |
Profit 25% on transfer price |
= |
Rs. 25 (profit %) |
Then cost |
= |
Rs. 75 |
|
|
|
Formula:
Percentage of profit on cost =
where P = Percentage of profit on transfer price
PROFESSIONAL COURSE LEVEL ADVANCED PROBLEMS
Illustration 10.35
Model: Quantity of raw material fed into Process I
In a manufacturing unit, raw material passes through processes 1, 2, 3, and 4 and the output of each process is the input of the subsequent processes. The loss in four processes 1, 2, 3 and 4 are, respectively, 25%, 20%, 20% and of the input. If the end product at the end of process is 20,000 kg, what is the quantity of raw material to be fed at the beginning of Process I and the cost of the same at Rs. 2 per kg?
[C.A. – (Inter) – Modified]
Solution
Let the input in Process 1 be taken as 100 kg (assumption) Then, the input into and output from different processes are worked as follows:
When output is 40 kg → input is 100 kg
|
|
|
|
= |
50,000 kg |
∴ Material cost of the raw material (input) |
= |
Rs. 2.00 × 50,000 kg |
|
= |
Rs. 1,00,000. |
Illustration 10.36
Model: Computation of raw material cost
An article passes through three successive operations from the raw material stage to the finished product stage. The following data are available from the production records of a particular month:
[C.A. – (Inter)]
Solution
(a) Statement showing input, rejection and output in operations
(i) |
Finished output after last operation |
= |
100 (given) |
|
Add: Rejected quantity in last operation 20% of 100 |
= |
20 |
(ii) |
Output from Operation 2 or input into Operation 3 |
= |
120 |
|
Add: Rejected quantity in Operation 2, 10% of 20 |
= |
12 |
|
|
|
132 |
(iii) |
Output from Operation 1 or |
|
|
|
Input into Operation 2 |
= |
132 Nos |
|
Add: Rejected quantity in Operation 1 50% of 132 = 66 |
= |
66 |
|
∴ Input required in Operation 1 |
= |
198 |
(b) Calculation of raw material cost (1 piece of finished product)
(i) |
198 pieces are required to produce 100 pieces of finished product |
||
(ii) |
Weight of 198 pieces of raw materials |
= |
198 Nos × 0.25 kg |
|
|
= |
49.5 kg |
(iii) |
Raw material cost of 100 pieces of finished products |
= |
Rs. 50 × 49.5 kg |
|
|
= |
Rs. 2,475 |
|
|
|
|
|
|
= |
Rs. 24.75 |
Illustration 10.37
Model: Equivalent production – Average cost method
The process inventory in Process No. 2 at the beginning of the period was valued at Rs. 5,900 made up of Rs. 2,800 towards materials; Rs. 2,000 towards labour; and Rs. 1,100 towards overhead for 100 units. The value added during the period was Rs. 1,07,200 towards an introduction of 4,100 units from the previous process besides Rs. 81,600 towards labour and Rs. 38,800 towards overheads. Out of 3,600 units completed, 3,300 units were transferred to the next process leaving the balance in stock. About 400 units were held back in the process with half completion towards labour and overheads while 200 units were lost in the processing considered normal and hence should be borne by the entire inventory. Prepare a cost of production statement using average cost basis.
[I.C.W.A. – (Inter)]
Solution
Illustration 10.38
Model: Equivalent Production – FIFO Method
From the following details, prepare statement of equivalent production, statement of cost and compute the value of
(1) Output transferred and (2) Closing WIP:
Opening of WIP Costs: 2,000 units
|
Rs. |
Materials (100% complete) |
37,500 |
Labour (60% complete) |
15,000 |
Overhead (60% complete) |
7,500 |
Units introduced into this process are 8,000 units
There are 2,000 units in the process and the stage of completion is estimated to be:
Materials = 100%
Labour = 50%
Overhead = 50%
8,000 units are transferred to the next process.
The Process Costs for the Period Are | Rs. |
---|---|
Materials |
5,00,000 |
Labour |
3,90,000 |
Overhead |
1,95,000 |
[C.A. – (Inter)]
Solution
Cost of Output Transferred
1. |
Opening stock of WIP: |
Rs. |
|
(Opening cost + Current cost) |
|
|
Rs. 60,000 + Rs. 60,000: |
1,20,000 |
2. |
Add: Cost of units introduced and completed |
|
|
(Ref: Statement of apportionment of cost): |
8,25,000 |
|
Total: |
9,45,000 |
Illustration 10.39
Model: Cost sheet and Normal loss
A product which uses 100 tonnes as input per month passes through two processes. The details of cost in Process 1 for November 2009 are as follows:
Process I | Cost Per Tonne Rs. |
---|---|
Direct material cost |
13,050 |
Direct labour cost |
3,900 |
Overhead |
6,750 |
The total loss in Process I is 2% of input and the Scrap is 8% of input with a value of Rs. 6,000 per tonne.
The material to Process II is transferred at cost. The process of direct labour cost at Process II is Rs. 4,500 per tonne of input. The overhead is 60% of direct labour cost. The scrap at Process II is 20% of input with a value of Rs. 6,000 per tonne. Draw up a cost sheet to present the manufacturing cost of the product showing clearly the cost of scrap and waste at each stage of manufacturing.
[C.A. – (Inter)]
Solution
* Cost per unit
Illustration 10.40
Model: Abnormal loss and Abnormal gain and By-products
Product Zenu is made by three sequential processes I, II and III. In Process III, a by-product arises and after further processing in process XY at a cost of Rs. 2 per unit, by-product XYZ is produced. Selling and distribution expenses of Re. 1 per unit are incurred in marketing XYZ at a selling price of Rs. 9 per unit.
Budgeted production overhead for the month was Rs. 84,000 output of product XYZ in 420 units.
Absorption is based on a percentage of direct wages.
There are no stocks at the beginning or at the end of the month. You are required, using the information given, to prepare for:
[I.C.W.A. – (Inter)]
Solution
WORKING NOTES:
NOTE 1: Calculation of overhead absorption rate
Direct wages method of overhead absorption
Process I
1. Calculation of normal loss:
10% of 10,000 units (Input in Process I) = 1,000 units
NOTE 2: Calculation of Abnormal Loss:
|
Units |
Input |
10,000 |
Less: 10% Normal Loss |
1,000 |
Expected Normal Output |
9,000 |
Actual Output |
8,800 |
∴ Abnormal Loss |
200 |
NOTE 3: Valuation of finished output and abnormal loss:
|
|
Rs. |
Total cost incurred in Process I: (Rs. 20,000 + Rs. 6,000 + Rs. 5,000 + Rs. 4,000 + 20,000) |
= |
55,000 |
Less: Scrap value of normal loss 1000 unit × Re 1 |
= |
1,000 |
Effective cost of normal production |
= |
54,000 |
|
|
|
|
|
Process II
NOTE 1: Calculation of normal loss:
5% of 8,800 units (Input of finished output from Process I = 440 units)
NOTE 2: Calculation of abnormal gain:
|
|
Units |
Input (finished output from Process I) |
= 8,800 |
|
Less: 5% Normal loss (5% of 8,800) |
= 440 |
|
Expected normal output |
= 8,360 |
|
Actual output |
= 8,400 |
|
∴ Abnormal gain |
= 40 |
|
NOTE 3: Valuation of finished output and abnormal gain:
|
|
Rs. |
Total costs incurred in this Process II |
|
|
(Rs. 52,800 + Rs. 12,640 + Rs. 6,000 + 6,200 + Rs. 24,000) |
= |
1,01,640 |
Less: Scrap value of normal loss (440 × Rs. 3) |
= |
1,320 |
Effective cost of normal production |
|
1,00,320 |
Unit cost of finished output and abnormal gain |
= |
Rs. 1,00,320 |
|
|
8,360 units |
|
= |
Rs. 12 per unit |
Process III
NOTE 1: Calculation of normal loss: 10% of 8,400 (Input from Process II) = 840 units.
NOTE 2: Calculation of abnormal loss:
|
Units |
Input (from Process II) |
8,400 |
Less: 10% normal loss |
840 |
|
7,560 |
Less: By-products |
420 |
Expected output |
7,140 |
Actual output |
7,000 |
∴ Abnormal Loss |
140 units |
NOTE 3: Valuation of finished output and abnormal loss:
|
Rs. |
Rs. |
Total cost incurred in this Process III = |
|
1,78,080 |
(Rs. 1,00,800 + Rs. 23,200 + Rs. 10,000 + 4,080 + Rs. 40,000) |
|
|
Less: (i) Scrap value of normal loss (840 × 5) |
= 4,200 |
|
(ii) *By-product transferred to Process XY at opportunity cost |
= 2,520 |
6,720 |
(420 units x Rs. 6) |
|
|
|
|
|
|
|
By-Product
*For valuation of by-product opportunity cost method is used as worked out in the following manner:
Sale price of by-product |
= |
Rs. 9 per unit |
Less: (i) Processing cost Rs. 2/unit |
|
|
(ii) Selling and distribution cost Re 1/unit |
= |
Rs. 3 per unit |
∴ Opportunity cost |
= |
Rs. 6 per unit |
Illustration 10.41
Model: Joint Products
X Ltd produced four joint products A, B, C and D, all of which emerged from the processing of one raw-material. The following are the relevant data:
Production for the Period:
Joint Product | No. of Units | Selling Price Per Unit Rs. |
---|---|---|
A |
500 |
16.00 |
C |
400 |
8.00 |
D |
200 |
22.00 |
While the company budgets for a profit of 10% of sales value, the other estimated costs are as follows:
Rs. | |
---|---|
Carriage inwards |
2,000 |
Direct wages |
6,000 |
Manufacturing Overheads |
4,000 |
Administration overhead is 10% of sales value. You are required to
[C.A. – (Inter)]
Solution
Computation of Maximum Price that may be paid for the raw material
Particulars | Rs. | Rs. |
---|---|---|
Cost of joint products (Working Note 2) |
|
36,000 |
Less: Other costs: |
|
|
Carriage inwards |
2,000 |
|
Direct wages |
6,000 |
|
Manufacturing overhead |
4,000 |
|
Administration overhead |
4,000 |
16,000 |
Maximum price to be paid for raw materials |
|
20,000 |
WORKING NOTES:
1: Calculation of Total Sales Value:
2: Total cost of joint products:
= Total sales value – Budgeted profit (10% of sales value)
= Rs. 40,000 – (10% of 40,000) Rs. 4,000
= Rs. 36,000.
B (i). Comprehensive Statement (Based on Units)
B (ii). Comprehensive Statement (Based on Sales Value)
Illustration 10.42
Model: Joint cost determination
Two Products A and B are obtained in a crude form and require further processing at a cost of Rs. 10 for A and Rs. 7 for B per unit before sale. Assuming a net margin of 25% on cost, their sale prices are fixed at Rs. 20.00 and Rs. 12.00 per unit, respectively. During the period, the joint cost was Rs. 1,20,000 and the output were
A 8,000 units
B 5,000 units
Ascertain the joint cost per unit.
[C.A. – (Inter) – Modified]
Solution
Particulars | Product A | Product B |
---|---|---|
Output (in units) |
8,000 |
5,000 |
Rs. |
Rs. |
|
Step 1: Selling price per unit |
20.00 |
12.00 |
Step 2: Less: Margin at 25% on sales |
5.00 |
3.00 |
Step 3: Cost of sales |
15.00 |
9.00 |
Step 4: Post-split-off cost |
10.00 |
7.00 |
Step 5: Joint cost per unit |
5.00 |
2.00 |
Step 6: Share in joint cost - (Apportion in the ratio of 4:1 Rs. 1,20,000) |
96,000 |
24,000 |
Step 7: Joint cost/unit ascertained |
(96,000 ÷ 8000) |
(24,000 ÷ 5000) |
12.00 |
4.80 |
* Calculation of total joint cost ratio between two products:
Output = 8,000 5,000
Total pre-split-off cost = (8,000 × Rs. 5) |
= |
Rs. 40,000; (5,000 × 2) Rs. 10,000 |
Total joint cost between two products |
= |
40,000:10,000 |
|
= |
4 : 1 |
Illustration 10.43
Model: Inter-Process: Profits
Product “x” passes through three processes before it is completed and transferred to the finished stock. The following data are available for the month of April.
Output of Process 1 is transferred to Process 2 at 25% on the transfer price.
Output of Process 2 is transferred to Process 3 at 20% on the transfer price.
Output of Process 3 is transferred to Finished Stock at 10% on the transfer price.
Stocks in progress have been valued at Prime Cost. Finished Stock has been valued at the price at which it was received from Process 3. Sales amounted to Rs. 8,00,000
*Provision for internal process profits as on April 1 were:
Rs. | |
---|---|
Included in Process 2 |
2,790 |
Included in Process 3 |
5,380 |
Included in Finished Stock |
13,068 |
*NOTE: |
These provisions would be created in the previous month in respect of closing stock. Consequently, they are brought into account for April as provisions in respect of internal process profits in the opening stock. |
Prepare and Compute
[I.C.W.A. – Modified]
Solution
*Note 1: Calculation of profit on output transferred:
Value of opening stock |
= |
Rs. 16,000 |
Less: Provision for internal process profit as on April 1 |
= |
Rs.2,790 |
∴ Cost of opening stock |
= |
Rs.13,210 |
NOTE 1: Calculation of profit element in closing stock
NOTE 2: Calculation of profit on the output transferred
20% Profit on transfer price = 25% on cost
∴ 25% on cost
Process 3
1. Calculation of cost of opening stock =
Value of opening stock |
= |
Rs. 20,000 |
Less: Provision for internal process profit on April 1 |
= |
5,380 |
Cost of opening stock: |
= |
Rs. 14,620 |
NOTE 1: Calculation of profit element in closing stock.
Profit element = Value of stock – Cost of stock
= Rs. 30,000 – Rs. 21,930
= Rs. 8,070.
NOTE 2: Calculation of profit on output transferred.
10% profit on transfer price on cost
the profit on cost = × Rs. 6,30,000
4. Finished Stock Account:
|
Rs. |
Calculation on the cost of opening stock: |
|
Value of opening stock: |
40,000 |
Less: Provision for internal process Profit as on April 1 |
13,068 |
|
26,932 |
NOTE 1: Calculation of profit element in the closing stock
Profit element |
= |
Value of stock – Cost of stock |
|
= |
Rs. 60,000 – Rs. 40,396 |
|
= |
Rs. 19,604. |
(5) Gross profit or actual realized profit is presented as follows:
Rs. | Rs. | |
---|---|---|
(i): Process I |
|
60,000 |
(ii): Process 2 |
1,00,000 |
|
Add: Opening Provision |
2,790 |
|
|
1,02,790 |
|
Less: Closing Provision |
1,396 |
1,01,394 |
(iii): Process 3 |
70,000 |
|
Add: Opening Provision |
5,380 |
|
|
75,380 |
|
Less: Closing Provision |
8,070 |
66,210 |
(iv): Finished Goods |
1,20,000 |
|
Add: Opening Provision |
13,068 |
|
|
1,33,068 |
|
Less: Closing Provision |
19,604 |
1,13,464 |
(v) Total gross profit (or) actual realized profit |
|
3,42,168 |
Closing stock will appear at cost in the balance sheet as:
Rs. | |
---|---|
Stock in Process 1 |
20,000 |
Stock in Process 2 |
6,604 |
Stock in Process 3 |
21,930 |
Finished stock |
40,396 |
|
88,930 |
Process costing is a method of costing in which cost of operating each process and cost of transfer from one process to another are ascertained. It is suitable for firms manufacturing products in a continuous flow, without reference to specific orders or jobs. For example, iron and steel, textiles, glass, cement, rubber, paper, mining industries such as oil, coal, chemical industries, electricity generation, water supply and so on.
Salient Features: (i) Costs Flow from Process to Another. (ii) Average Unit Cost Consumption (iii) Products not Distinguishable in Processing Stage (iv) Inclusion of Normal Spoilage in the Cost of Total Units (v) Equivalent Production Consumption (vi) Emergence of More Than one Product.
Process Losses and Gains: Normal loss is inevitable. Abnormal loss—any loss in excess of normal loss. Abnormal gain occurs when the actual output from the process is more than normal output. Items of various expenses and suitable bases to apportion their are explained in illustrations 1 and 2. Accounting treatment of normal loss, abnormal loss and abnormal gain is shown in illustrations 10.3 to 10.11.
Equivalent Production: It represents the production of a process in terms of complete units. Procedure to convert incomplete units into equivalent of completed units is explained in illustrations 10.12 to 10.20.
Joint Products are produced (separated) in the course of processing. Such products have a significant saleable value. These products are not identifiable as separate products until a certain stage called “split-off” point.
Features of Joint Products: (i) All products have equal importance (ii) All are main products (iii) Not identifiable till split off point (iv) No control over relative products (v) No single product can be produced individually.
By products are recovered incidentally in course of processing. They are of relatively small sallable value. By products may be sold in original form or after further processing Co-products represent products produced from different raw materials and from different processing operations.
Accounting for Joint Product Costs: The methods of allocation of joint costs are: (i) Average Unit Cost Method (ii) Weighted Average Method (iii) Physical Units Method (iv) Stand and Cost Method (v) Market Value Method and (vi) Realisable Value Method. Each one is explained through illustrations Nos 10.22 to 10.28
Accounting for By-products is illustrated in illustrations Nos 10.29 to 10.33.
Transfer prices represent prices related to goods or other services transferred from one process to another. Methods used to fix transfer prices are (i) Absorption Cost Method (ii) Cost Plus profit (iii) Marginal Cost and (iv) Standard Cost Method.
Process Costing: A costing method applied where goods are produced or services rendered from a sequence of continuous or repetitive operations or processes.
Equivalent Units: A notional quality of completed units substituted for an actual quantity of incomplete physical units in progress.
Transfer Price: A price related to goods or other services transferred from one process or department to another.
Joint Products: Two or more products separated in the course of processing.
By-Products: Products produced incidentally in the course of processing.
Joint Cost: The cost of a basic raw material till separation.
QUESTION BANK
I: State whether the following statements are true or false
Answers:
1. True |
2. True |
3. False |
4. True |
5. True |
6. False |
7. False |
8. True |
9. False |
10. True |
11. False |
12. False |
13. True |
14. True |
15. False |
16. True |
17. False |
18. False |
19. True |
20. True |
21. False |
22. False |
23. False |
24. True |
25. True |
|
|
|
II: Fill in the blanks with apt word(s)
Answers:
III: Multiple choice questions choose the correct answer
Answers:
1. (a) |
2. (b) |
3. (c) |
4. (d) |
5. (a) |
6. (b) |
7. (b) |
8. (d) |
9. (c) |
10. (a) |
11. (c) |
12. (c) |
13. (a) |
14. (b) |
15. (c) |
16. (d) |
17. (a) |
18. (b) |
19. (c) |
20. (d) |
[I.C.W.A. – (Inter)]
[C.A. – (Final)]
[Model: No losses: No units]
1. Sai & Co. produces a product through two processes “A” and “B”. Prepare the process accounts from the following details relating to March 2010.
Process A Rs. |
Process B Rs. |
|
---|---|---|
Material |
1,35,000 |
45,000 |
Labour |
1,80,000 |
75,000 |
Chargeable expenses |
15,000 |
30,000 |
The overheads amounting to Rs. 51,000 are to be apportioned on the basis of labour.
[Ans: Cost of Process A: Rs. 3,66,000 Process B: 5,31,000]
[Model: No losses – Units given]
2. In course of a manufacture, a product passes through three processes A, B and C till its completion. During December 2009, 5,000 units of the finished product were produced and the following expenses were incurred:
Indirect expenses amounted to Rs. 60,000 which is to be apportioned to the processes on the basis of direct wages. Raw materials worth Rs. 60,000 were issued to Process A. Ignore the question of process stocks and prepare the process accounts and the cost per unit in each process.
[Ans: Cost of process: A: Rs. 1,50,000; B: 2,36,000;
C: Rs. 3,01,000 Cost per unit: A: Rs. 30; B: 47.20;
C: Rs. 60.20]
[Model: No losses, stock of materials given]
3. From the following figures, show the cost sheet of the three processes of manufacture. The production of each process is passed on to the next till completion:
[Madras 2007, 1994 and Bangalore 1988 – Modified]
[Ans: Cost of manufacture : Process A: Rs. 72,000 &
Re 1 per unit
Process B: Rs. 1,12,200 & Rs. 1.50/unit
Process C: Rs. 2,16,000 & Rs. 2.25/unit
Wastage in each process, assumed as normal: A:
Nil; B: 3,000 units; C: 1,000 units]
[Model: Normal loss – No scrap value]
4. 750 units were introduced into a process at a cost of Rs. 50,000. Cost of labour and overheads amounted to Rs. 30,000 and Rs. 20,000, respectively. The normal loss in the process is 6% of input, which has no recovery value. Show the process account.
[Ans: Normal loss: 45 units; Cost of out put (705 units): Rs. 1,00,000]
[Model: Normal loss – with the scrap value]
5. From the following information prepare process account and normal loss account.
Input of raw material 1,000 units @ Rs. 6/unit
Direct materials – Rs. 5,200
Direct wages – Rs. 4,000
Production overheads – Rs. 4,000
Actual output transferred to Process II – 950 units
Normal loss – 5%
Value of scrap per unit Rs. 4 per unit
[Madras 2007]
[Ans: Output at Rs. 20 per unit – Rs. 19,000; Normal Loss – Rs. 200]
[Model: Normal loss in weight and scrap]
6. A particular brand of scent passed through three important processes. During the weakened on 15 January 2010, 600 bottles were produced. The cost books show the following information:
The indirect expenses for the period were Rs. 1,600 (indirect expenses are charged on labour basis).
The by-products were sold for Rs. 240 (Process B)
The residue was sold for Rs. 125.50 (Process C)
Prepare the accounts in respect of each of the processes, showing its cost and cost of production of the finished product per bottle.
[Madras University, Periyar University]
[Ans:
[Model: Loss in weight, Scrap, and so on-Vegetable oil refining]
7. The following are the extracts from the costing books of an oil manufacturing company, in which three processes are used:
Coconut purchased 600 quintals worth Rs. 60,000.
Casks (drums) costing |
Rs. 20,000 |
Crude oil purchased |
400 Quintals |
Refined oil purchased |
300 Quintals |
Finished oil |
280 Quintals |
Coconut sacks sold for Rs. 10,000; Copra residue 170 quintals sold for Rs. 5,000; By-products of refining process being 75 quintals sold for Rs. 400.
Prepare crushing, refining, finishing (including casking) process accounts.
[Ans: Crushing process: Output 400 quintals @ Rs. 205 = Rs. 82,000
Refining process: Output 300 quintals @ Rs. 358.67 = Rs. 1,07,600
Finishing process: Output 280 quintals @ Rs. 511.07 = Rs. 1,43,100]
[Model: Loss in weight – Partial transfer to next process]
8. A chemical company produced three chemicals during the month of December 2009, by three consecutive processes. In each process, 2% of the total weight put in is lost and 10% is scrap which from Process I and II realizes Rs. 100 per tonne and from Process III Rs. 20 per tonne. The products of the three processes are dealt with as follows:
Prepare process cost accounts, showing cost per tonne of each product.
[Delhi B.Com – Modified]
[Ans:
[Model: Abnormal Loss alone]
9. In process A, 100 units of raw materials were introduced at a total cost of Rs. 1,000. The other expenditure, incurred by the process was Rs. 602. Of the units introduced, 10% are normally lost in the course of manufacture and they posses a scrap value of Rs. 3 each. The output of Process A was only 75 units.
[Ans: Abnormal loss – 15 units – value Rs. 262
Cost of output – 75 units at Rs. 17.467 = Rs. 1,310
Abnormal loss transferred to P&L A/c = Rs. 217]
[Model: Abnormal gain only]
10. Product A is obtained after it passes through three distinct processes. About 2,000 kg of material at Rs. 5 per kg were issued to Process I. Direct wages amounted to Rs. 900 and production overhead incurred was Rs. 500. Normal loss is estimated at 10% of input. The wastage is sold at Rs. 3 per kg. The actual output is 1,850 kg. Prepare Process I account.
[Bharathiar University
Calicut University
Madras University]
[Ans: Abnormal gain 50 kg value = Rs. 300;
Cost of output = 1,850 kg@ Rs. 6 = Rs. 11,100]
[Model: Abnormal loss and gain]
11. A product passes through two distinct processes A and B and then to finished stock. The output of A passes direct to “B” and that of “B” passes to the finished stock. From the following information, you are required to prepare the process accounts:
Process A | Process B | |
---|---|---|
Materials consumed (Rs.) |
12,000 |
6,000 |
Direct labour (Rs.) |
14,000 |
8,000 |
Manufacturing expenses (Rs.) |
4,000 |
4,000 |
Input in Process A (units) |
10,000 |
– |
Input in Process A (value) |
10,000 |
– |
Output (units) |
9,400 |
8,300 |
Normal wastage (% of output) |
5% |
10% |
Value of normal wastage |
8 |
10 |
per 100 units (Rs.) |
No opening or closing stock is held in process.
[Madurai University
Bharathiar University
Periyar University
Madras University
C.S. (Inter)]
[Ans: Process A: Abnormal wastage (loss) 100 units
value = Rs. 421.
Cost of Process “A” output – 9,400 units at
Rs. 4.206 per unit = Rs. 39,539.
Process B: Abnormal wastage – 160 units value =
Rs. 1,086
Cost of Process “B” output: 8,300 units at Rs. 6.79
per unit = Rs. 56,359.]
12. The product of a manufacturing concern passes through two processes A and B and then to the finished stock. It is ascertained that in each process normally 5% of the total weight is lost and 10% is scrap which from Process A and B realized Rs. 80 per tonne and Rs. 200 per tonne, respectively.
The following figures relate to both processes:
Process A | Process B | |
---|---|---|
Materials (in tonnes) |
1,000 |
|
Cost of materials (Rs. per tonne) |
125 |
70 |
Wages (Rs.) |
28,000 |
200 |
Manufacturing expenses (Rs.) |
8,000 |
10,000 |
Output (in tonnes) |
830 |
5,250 |
|
|
780 |
Prepare process cost accounts showing cost per tonne of each process. There was no stock or WIP in any process.
[Sri Venkateswara University
Mysore University
Calcutta University
Madras University
Delhi University]
[Ans: Process A: Abnormal loss: 20 tonnes
Value Rs. 3,600; Cost of output 830
Tonnes Rs. 180 per tonne = Rs. 1,49,400
Process B: Abnormal gain = 15 tonnes
Value = Rs. 3,150; Cost of output = 780 tonnes @ 210 per tonne = Rs. 1,63,800]
13. A product passes through three processes I, II & III. From the following information prepare the process accounts assuming that there were no opening or closing stocks.
The wastage of Process I was sold at 25 paise per unit, that of Process II at 50 paise per unit and that of Process III at Re 1 per unit.
Raw materials of 10,000 units were introduced into Process I in the beginning at a cost of Re 1 per unit.
[Periyar University
Madras University
Madurai Kamaraj University]
[Ans: Process I: Abnormal loss – 200 units value Rs. 350;
Transfer to Process II – 9,500 units at Rs. 1.75
each = Rs. 16,625.
Process II: Abnormal gain – 75 units, Value –
Rs. 225; Transfer to Process III – 9,100 units at
Rs. 3 each = Rs. 27,300.
Process III: Abnormal loss – 272 units; Value –
Rs. 1,156; Transfer to finished stocks = 8,100 units
at Rs. 4.25 each = Rs. 34,425.]
14. Product B is obtained after it passes through three district processes. The following information is obtained from the accounts for the ending on 31 December 2009:
1,000 units at Rs. 3 each were introduced to Process I. There was no stock of materials or work-in-process at the beginning or at the end of each process. The output of each process passes to the next process and finally to the finished stores. Production overheads recovered on 100% of direct wages. The following additional data are obtained:
Prepare process cost accounts and abnormal loss or gain account.
[Mysore University
Bharathidasan University
Madras University
C.S. (Inter) – Modified]
[Ans:
[Model: Partial sale of output from each process – Abnormal loss – Abnormal gain]
15. A product is produced in three consecutive processes. The details are shown as follows:
Management expenses were Rs. 17,500 and selling expenses Rs. 10,000. Two-thirds of the output of Process I and one-half of the output of Process II are passed on to the next process and the balances are sold. The entire output of Process III is sold.
Prepare the three process accounts and a statement of profit.
[Bharathidasan University
Madurai Kamaraj University
Andhra University
Madras University]
[Ans:
[Model: Equivalent Production] (When there is only closing WIP without process loss)
16. Prepare a statement of equivalent production and a statement of cost and process account from the following information:
|
Units introduced: |
7,600 |
|
Output (units) |
6,000 |
Process cost: |
Rs. |
Materials |
14,560 |
Labour |
21,360 |
Overhead |
14,240 |
Degree of completion of WIP:
|
Material |
80% |
|
Labour |
70% |
|
Overhead |
70% |
[Madras]
[Ans: Closing WIP – 1,600 units
Equivalent units: Material – 7,280;
Labour – 7,120; Overheads – 7,120
Cost per unit: Material – Rs. 2; Labour – Rs. 3;
Overhead – Rs. 2
Value of finished units: Rs. 42,000
Value of closing WIP – Rs. 8,160; Total process
A/c – Rs. 50,160]
[Model: Only closing WIP with normal loss in process]
17. From the following data of a processing industry, calculate 1) Equivalent Production 2) Cost per unit of equivalent production 3) Cost of units completed and awaiting completion:
No. of units introduced in the process |
4,000 |
No. of units completed and transferred to the next process |
3,000 |
No. of units in the process at the end of the period |
800 |
Stage of completion:
Materials |
80% |
Labour |
70% |
Overheads |
70% |
Normal process loss at the end of the process 200 units
Value of scrap – Re 1 per unit
Value of raw materials – Rs. 7,480
Wages – Rs. 10,680
Overheads – Rs. 7,120
[Madras]
[Ans:
[Model: When there is only closing WIP with normal and abnormal losses in process]
18. VRV Ltd. furnishes you the following information relating to Process “C” for the month of December 2009:
[Madras – Modified]
[Ans: Equivalent units: Material – 9,900; Labour – 9,715;
Overheads – 9,715.
Cost per unit: Material – Rs. 4.50; Labour –
Rs. 2.20; Overheads – 4.30.
Abnormal loss = Rs. 485.
Total of process A/c: Rs. 1,07,798
Abnormal loss transferred to P&L A/c Rs. 360]
[Model: When there are opening and closing WIP without any process losses – FIFO method]
19. From the following details prepare a statement of equivalent production, a statement of cost and a statement of evaluation:
Opening WIP |
2,000 units |
Materials (100% complete) |
Rs. 15,000 |
Labour (60% complete) |
Rs. 6,000 |
Overhead (60% complete) |
Rs. 3,000 |
Units introduced into the process |
8,000 |
There are 2,000 units in the process and the start of completion is estimated to be:
Material 100%; Labour & overheads 50% 8,000 units are transferred to the next process The process costs for the period are:
Materials |
Rs. 2,00,000 |
Labour |
Rs. 1,56,000 |
Overheads |
Rs. 78,000 |
[Madras]
[Ans: Equivalent units: Material – 8,000; Labour & Overheads – 7,800.
Cost per unit: Material – Rs. 25; Labour – Rs. 20;
Overhead – Rs. 10.
Value of closing WIP: Rs. 80,000.
Cost of units completely processed in the period:
Rs. 3,30,000.
Value of work done on opening WIP: Rs. 24,000.
Value of units transferred to next process:
Rs. 3,78,000.]
[Model: Average cost method]
20. From the following details, prepare a statement of equivalent production, a statement of cost and find the value of:
Opening WIP – 2,000 units
Materials 100% complete – Rs. 7,500
Labour 60% complete – Rs. 3,000
Overheads 60% complete – Rs. 1,500
Units introduced into the process – 8,000
There are 2,000 units in the process and the stage of completion is expected to be:
Materials – 100%; Labour – 50%; Overheads – 50% and 8,000 units are transferred to the next process. The process costs for the period are:
Materials – Rs. 1,00,000; Labour – Rs. 78,000; Overheads: Rs. 39,000.
[Ans: Equivalent units: Materials – 10,000; Labour and
Overheads – 9,000.
Cost per unit: Material – Rs. 10.75; Labour – Rs. 9;
Overheads – Rs. 4.50.
Value of finished units transferred to next process
Rs. 1,94,000.
Value of closing WIP – Rs. 35,000.]
[Model: Inter–process profits]
When there are no stocks in the processes
21. The following are details in respect of Process X and Process Y of a processing factory:
Process × Rs. | Process Y Rs. | |
---|---|---|
Materials |
10,000 |
– |
Labour |
10,000 |
14,000 |
Overheads |
4,000 |
10,000 |
The output of Process X is transferred to Process Y at a price calculated to give a profit of 20% on the transfer price and the output of Process Y is charged to the finished stock at a profit of 25% on the transfer price. Finished goods from Process Y were sold for Rs. 1,00,000 from the finished stock.
You are asked to show the process accounts and ascertain the total profit assuming there was no opening or closing WIP.
[Bharthiar & Madras]
[Ans:
[Model: Joint products and By–products]
I: Methods of apportioning cost to joint products Average Unit Cost Method
22. Bhamini Industries produces three products X, Y and Z from a joint process. The joint processing cost before separation amounted to Rs. 1,25,000. The output of X, Y and Z was 10,000, 12,000 and 3,000 units, respectively. Apportion the joint cost among the products using the average unit cost method.
[Ans: Average unit cost: Rs. 5; Apportioned joint cost:
X: Rs. 50,000; Y: Rs. 60,000; Z: Rs.15,000]
[Model: Physical units method]
23. A coke-manufacturing company produces the following products by putting 5,000 tonnes of coal @ Rs. 25 per tonne into the common process.
Coke |
3,500 tonnes |
Tar |
1,200 tonnes |
Sulphate |
52 tonnes |
Benzol |
48 tonnes |
Apportion the joint cost among the products on the basis of the physical units method
[Madras]
[Ans: Coke: Rs. 91,46; Tar: Rs. 31,250; Sulphur: Rs.
1,354; Benzol: Rs. 1,250]
[Model: Survey method]
24. Two products X and Y are produced from a joint process at a total cost of Rs. 1,52,000 till the split-off point. The output was X – 1,400 tonnes and Y– 600 tonnes. A technical survey assigns a weightage of 2 and 8, respectively, for the products. You are required to apportion the joint cost of the process to the products on the basis of survey.
|
X |
Y |
|
Rs. |
Rs. |
[Ans: (i) Share of joint cost |
56,000 |
96,000 |
(ii) Cost per unit |
40 |
160 |
[Model: Market value at separation point method]
25. The joint cost of making 50 units of Product A, 100 units of Product B and 150 units of Product C is Rs. 900. The selling prices of products A, B and C are Rs. 2, Rs. 3 and Rs. 4, respectively. The products did not require any further processing costs after the split-off point. You are required to apportion the joint cost
[Madras]
[Ans:
[Model: Market value after further processing cost method]
26. The following particulars have been obtained about three joint products manufactured from the same raw materials:
The joint product of manufacture before the products are separated is Rs. 120. Allocate the cost of joint products.
[Bangalore University]
[Ans:
[Model: Apportionment of joint costs among main product and by-products]
27. Calculate the estimated cost of production of byproducts X and Y at the point of separation from the main product.
By-Products | ||
---|---|---|
X | Y | |
Selling price per unit |
Rs. 12 |
Rs. 24 |
Cost per unit after separation from the main product |
Rs. 3 |
Rs. 5 |
Units produced |
500 |
200 |
Selling expenses amount to 25% of total works cost, that is, including both pre-separation and post-separation works cost. Selling prices are arrived at by adding 20% of the total cost, that is, the sum of works cost and selling expenses.
[Sri Sathya Sai University
Rohtak University
Madras University]
[Ans : Cost of production at the point of separation:
X: Rs. 2,500; Y: 2,200.
Net profit – X: Rs. 1,000; Y: Rs. 800
Selling expenses – X: Rs. 1,000; Y: Rs. 800]
28. A company produces a main chemical product M and in the process a by-product “B” is also produced. The costs up to the point of separation are Rs. 1,20,000.
The separate additional costs incurred after separation are Rs. 33,000 and Rs. 3,000, respectively. The quantities emerging at the separation point are 1,50,000 kg and 30,000 kg, respectively. All the production is sold at the following prices:
M at Rs. 1.96 per kg
B at Re 0.20 per kg.
Selling and distribution overheads applicable to the above quantities are Rs. 1,900 and Rs. 365, respectively.
Prepare a statement of profit or loss for both “M” and “B” on each of the following basis:
[Madras]
[Ans:
Joint cost – M: Rs. 1,20,000; B: Nil
Joint cost – M: Rs. 1,00,000; B: Rs. 20,000
Joint cost – M: Rs. 1,17,600; B: Rs. 2,400]
[Model: Normal loss]
29. The following data are available performing to a product after passing through two processes A and B.
Output transferred to Process C from B–9,120 units for Rs. 49,263.
Expenses incurred in Process C:
|
Rs. |
Sundry materials |
1,480 |
Direct labour |
6,500 |
Direct expenses |
1,605 |
The wastage of Process C is sold at Re 1 per unit. The overhead charges were 168% of direct labour. The finial product was sold at Rs. 10 per unit fetching a profit of 20% on sales.
Find the percentage of wastage in Process C and prepare Process C account
[B.Com (Hons) – Delhi]
[Model: Normal loss]
30. Zap is produced refining chemicals through a process which involves a process loss of 15%. During a period, 8,000 grams of chemicals which cost 80 paise per gram were introduced into the process which yielded 6,000 gms of Zap. The wages looked to the process amounted to Rs. 1,200 and overheads apportioned there amounted to Rs. 1,140. The waste from process was sold for 20 paise per gram.
[M.Com – Madras]
[Ans:
31. Production in a manufacturing company passes through three distinct processes I, II and III. The output of each process is transferred to the next process and the output of Process III is transferred to the finished goods stock. The normal wastage in each process and the realizable value of the same are given as follows:
Process | % of Normal Waste Related to Input | Realizable Value Per Unit |
---|---|---|
I |
5 |
Re 0.70 |
II |
7 |
Re 0.80 |
III |
10 |
Re 1.00 |
The details of cost data and output for a month are as follows:
Process I was fed with 40,000 units of input costing Rs. 3,20,000. There was no opening or closing WIP.
Prepare the process accounts for the month.
[I.C.W.A. Inter]
[Ans: Total: Process I: Rs. 5,60,000; Process II:
Rs. 6,98,600; Process III: Rs. 8,32,160
Abnormal wastage in Process II – Rs. 14,584
Abnormal gain in Process III – Rs. 22,272]
[Model: Equivalent production: loss and WIP]
32. AB Ltd. is engaged in the process engineering industry. During a particular month, 2,000 units were introduced in Process X. The normal loss is estimated at 5% of the input. At the end of the month, 1,400 units had been produced and transferred to Process Y: 460 were incomplete units and 140 units had to be scrapped at the end of the process. The incomplete units reached the following degree of completion:
|
Materials: |
75% |
|
Labour: |
50% |
|
Overheads: |
50% |
Following are the further details regarding Process X:
Cost of 2,000 units introduced: |
Rs. 58,000 |
Additional materials consumed: |
Rs. 14,400 |
Direct labour: |
Rs. 33,400 |
Allocated overheads: |
Rs. 16,700 |
Note: The scrapped units fetched Rs. 10 each.
Required:
[I.C.W.A. – Inter]
[Ans:
[Model: Equivalent Production : WIP and Loss]
33. Roy & Johnson (P) Ltd gives the following particulars relating to Process A in its plant for the month of December 2009:
WIP (opening balance) on 1 December 2009 – 500 units
|
Cost |
Rs. |
|
Material |
4,800 |
|
Labour |
3,200 |
|
Overheads |
6,400 |
|
|
14,400 |
Units introduced during the month – 19,500 units Processing costs incurred during the month:
|
|
Rs. |
|
Materials |
1,86,200 |
|
Labour |
72,000 |
|
Overheads |
1,06,400 |
|
|
3,64,600 |
Output: Units transferred to Process B: 18,200 units
Units scrapped (completely processed): 1,400 units
WIP (closing balance) = 400 units
Degree of completion: Materials – 100%; Labour and overhead 50%
Normal loss in processing is 5% of the total input and the normal scrapped units fetch Re 1 each.
Prepare the following statements for Process A for December 2009
[I.C.W.A. – Inter]
[Ans:
[Model WIP – Equivalent units]
34. During the month of January, Rs. 22,500 worth of materials, Rs. 11,250 of labour and Rs. 6,750 of factory overheads were introduced into Process I. At the end of the month, 40,000 units had been produced and transferred to the next process and 10,000 units were incomplete. It was estimated that the incomplete units had reached a stage in the production as follows:
Materials 100% and Labour and Overheads 50% each. In the next Process II, Rs. 22,475 worth of materials, Rs. 15,225 of labour, Rs. 14,500 of factory overheads were added. The units produced and transferred to the finished stock amounted to 35,000 and 5,000 units were left in the process, with 25% complete as to material, labour and overhead.
Prepare a statement of production, statement of cost, a statement of evaluation and the necessary process accounts
[I.C.W.A. – Inter]
[Ans:
Process I: Materials – 50,000; Labour & Overhead – 45,000 each
Process II: Materials – 36,250; Labour – 36,250 and Overhead – 36,250
Process I: Material – Re 0.45; Labour – Re 0.25; Overhead – Re 0.15
Process II: Material – Re 0.62; Labour – Re 0.42; Overhead – Re 0.40
[Model WIP (Opening and Closing WIP) – Weighted Average Method]
35. The following information is obtained in respect of Process I for the month of February:
Opening stock: 10,000 units |
Rs. 6,500 |
Degree of completion: |
|
Material – 100% – |
Rs. 4,500 |
Labour – 50% – |
Rs. 1,250 |
Overhead – 50% – |
Rs. 750 |
|
30,000 units |
Transfer to Process II |
|
Direct material added in |
Rs. 18,400 |
process– |
|
Direct labour amounted to – |
Rs. 9,180 |
Production overhead incurred – |
Rs. 6,180 |
|
20,000 units |
Closing stock
Degree of completion:
Material 100%
Labour 25%
Overhead 25%
Prepare process accounts.
[I.C.W.A. (Inter)]
[Ans: Equivalent Production: Materials – 50,000;
Labour – 35,000; Overheads – 35,000
Cost per equivalent units: Materials – Re 0.458;
Labour – Re 0.298 Overheads – Re 0.198
Total cost: Rs. 40,260; Completed units – Rs.
28,620; Closing Stock – Rs. 11,640]
36. Model: WIP (Both opening and closing) FIFO method (Figures same as in Q. No. 35)
[Ans: Equivalent production (units): Materials – 40,000;
Labour – 30,000 and overhead – 30,000 (Opening +
Processed + Closing)
Cost per equivalent unit: Material – Re 0.460;
Labour – Re 0.306; Overhead – Re 0.206.
Cost total in process A/c: Rs. 40,260.]
[Model WIP (both opening and closing) abnormal gain]
37. The following information is obtained in respect of Process 2 accounts for the month of July:
Opening stock: 1,600 units – Rs. 276
Degree of completion: Materials |
–70% |
Labour |
– 60% |
Overhead |
– 60% |
Transfer from Process 1 |
– 10,200 units at |
|
Rs. 19,400 |
Transfer to Process 3 |
– 9,200 units |
Direct material added in Process 2 |
– Rs. 8,960 |
Direct labour amounted to |
– Rs. 4,380 |
Production overhead incurred |
– Rs. 4,380 |
Units scrapped |
– 800 units |
Degree of completion: Material |
–60% |
Labour |
–40% |
Overhead |
–40% |
There was a normal loss in the process of 10% of production. Units scrap realized Re 1 each.
Prepare:
[Ans: Equivalent units: Material I– 9,200; Material II –
8,960; Labour 8,760; Overhead 8,760.
Cost per equivalent unit: Material transferred from
Process I: Rs. 2 and materials added in process:
Re 1; Labour and Overhead: Re 0.50 each
Process A/c (2) Total: Rs. 37,196
Abnormal Gain: 200 units; Value: Rs. 800]
[Model: Inter-process profit]
38. Product A passes through three processes before it is completed and transferred to the finished stock. There were no stocks in hand and no WIP too on 1June. The following data were available in respect of Processes 1,2 and 3 for the month of June
Stocks of finished goods amounted to Rs. 1,11,000 and the stock was valued at Rs. 5000. The output of each process is transferred to the next process at an amount which will yield 20% of profit on the transfer price. The transfer from Process 3 to the finished stock is to be similarly treated.
Prepare (a) Necessary process accounts and finished stock account showing the profit element at each stage and (b) Ascertain the value of closing stock for the purpose of balance sheet.
|
Total |
Profit |
|
Rs. |
Rs. |
[Ans: Process account No. 1: |
42,500 |
7,500 |
Process account No. 2: |
64,000 |
11,500 |
Process account No. 3: |
99,500 |
18,000 |
Closing stock A/c: Total Rs. 1,15,000] |
Closing stock will appear in the balance sheet at cost
|
Rs. |
Stock in Process 1 |
5,000 |
Stock in Process 2 |
5,571 |
Stock in Process 3 |
7,394 |
Finished Stock |
3,113 |
|
21,078 |
[Model: Inter–process profit]
39. Product “X” passes through three processes before it is completed and transferred to the finished stock.
The following data are available for the month of June
Output of Process I is transferred to Process II at 25% on the transfer price.
Output of Process II is transferred to Process III at 20% on the transfer price.
Output of Process III is transferred to the finished stock at 10% on the transfer price.
Stocks in progress have been valued at prime cost. Finished stock has been valued at the price at which it was received from Process III. Sales amounted to Rs. 4,00,000. [Provision for internal process profits as on 1 June were
|
Rs. |
Included in Process II |
1,395 |
Included in Process III |
2,690 |
Included in finished stock |
6,534 |
|
10,619 |
These provisions would be created in the previous month in respect of closing stock. Consequently, they are brought into the account of June month as provisions in respect of internal process profits in the opening stock.]
Prepare and compute (a) Process accounts showing profit element at each stage (b) Actual realized profit (c) Stock valuation for balance-sheet purposes (d) Provision for profit A/c.
[Ans:
40. A product passes through three processes before it is completed. The output of each process is charged to the next process at a price calculated to give a profit of 20% on the transfer price. The output of Process III is charged to the finished stock account on a similar basis. There was no WIP at the beginning of the year and the overheads have been ignored. Stocks in each process have been valued at prime cost of the process. The following data are obtained at the end on 31 March 2010:
From the above information, prepare:
[M.Com; Madras – Modified]
[Ans: profit: Process I – Rs. 10,000; Process II -
Rs. 20,000; Process III – Rs. 30,000; Finished stock - Rs. 45,000.
Unrealized profit in closing stock: Process I: Nil;
Process II: Rs. 2,000; Process III: Rs. 5,600.
Finished stock – Rs. 5,240.
Actual realized profit – Rs. 92,160
Closing stock for balance–sheet purpose -
Rs. 62,160]
[Model: Joint products and By-products]
41. A company operates a chemical process which produces four products K, L, M and N from a basic raw material. The company’s budget for a month is as follows:
|
Rs. |
Raw materials consumption |
17,520 |
Initial processing wages |
16,240 |
Initial processing overheads |
16,240 |
The company presently intends to sell Product L at the point of split-off without any further processing. The remaining products K, M and N are to be further processed and sold. However, the management has been advised that it would be possible to sell all the four products at the split-off point without further processing and if this course was adopted the selling prices would be as follows:
The joint costs are to be apportioned on the basis of the sales value realization at the point of split-off.
Required:
[C.A. & I.C.W.A. – Inter]
[Ans:
42. In a process line of XY company, three joint products are produced. For the month of March 2010, the following data are available.
Pre-separation point costs amounted to Rs. 20,000. The joint products are manufactured in one common process, after which they are separated and may undergo further individual processing. The pre-separation costs are apportioned to joint products accordingly to weight.
You are required to prepare a statement showing the estimated profit or loss for each product and in total.
[I.C.W.A. Inter – Modified]
[Ans: L – Rs. 7,500 (loss); M – Rs. 1,000 (profit); N – Rs. 9,000 (profit)]
43. In a manufacturing company 10,000 kl of “A” is processed to produce 6,000 kl of “B” and 4,000 kl of “C”. The joint cost before the separation point came to an amount of Rs. 24,000. From the following particulars, calculate the apportionment of joint cost and the profit of each product under (a) physical measurement (b) market value at separation point and (c) market value after further processing.
B Rs. |
C Rs. |
|
---|---|---|
Unit selling price at separation point |
5 |
3–75 |
Unit selling price after further processing |
7 |
7–50 |
Further processing costs after separation |
5,000 |
7,500 |
[Ans:
44. In a concern engaged in the process industry, four products emerge from a particular process of operation. The total cost of input for the period ended on 30 September is Rs.. 2,53,500. The details of output, additional cost after split-off point and sales value of the products are appended as follows:
If the products are sold at a split-off point, without further processing, the sales value would have been:
|
|
Rs. |
|
A |
1,15,000 |
|
B |
90,000 |
|
C |
55,000 |
|
D |
80,000 |
You are required to prepare a statement of profitability based on the product being sold:
[I.C.W.A. – Inter]
[Ans:
[Model: Joint producer and By–product costing]
45. A manufacturing unit imports raw material and the process is to produce three different products, namely, bright, light and white. The raw material has an FOB value of Rs. 5 per kg and freight and insurance are charged at 10% of FOB price. Customs duty as 120% of CIF is levied at the time of import. Auxiliary duty at 20% is also charged on CIF price. Countervailing duty is charged on CIF plus duty at 10%. The landed cost includes 5% for clearing charges.
Bright and light are joint products while white emerges as a by-product. The value of by-product after deducting 30% (10% being notional profit and 20% for selling expenses) from sales value is credited to process account. The unit consumed 4,000 kg of raw materials during a year. The relevant data are as follows:
Assuming additional cost other than material at Rs. 15,800 for all products (includes Rs. 800 for white), prepare a statement showing:
[I.C.W.A. – Inter]
[Ans: