Compiled by: Chhaya Sehgal The Winning Edge

A PROBLEM ON PROCESS COSTING Q4. Product P is manufactured by sequential processes I, II, III. From the following information, prepare process I, II, and III A/cs and abnormal loss/gain A/c. ITEM Misc material Wages Mfg Expenditure Normal Loss (% of Input) Scrap Value of Normal Loss Actual output PROCESS - I 8000 25000 15000 5% Rs 8/unit 925 PROCESS - II 10000 18000 12000 8% 850 PROCESS - III 3000 20000 10000 6% Rs 12/unit 805

1000 units were introduced to process I @ Rs 40 per unit. Solution. Working Notes - Process I A/c 1. 2. 3. 4. Process I A/c DR CR INPUT UNITS AMOUNTOUTPUT UNITS AMOUNT To units introduced 1000 40000 By Normal Loss 50 400 @ Rs 40 (5% of 1000 units at Rs 8) To Misc Material 8000 By Abnormal 25 2305 Loss @ Rs 92.21 To wages 25000 By Transfer to 925 85295 Process - II @ Rs 92.21 To Manufacturing 15000 Expenses Total 1000 88000 1000 88000 Normal Quantity Net Cost Cost/unit Abnormal Loss = Input Normal Loss = 1000 50 = 950 units = Input Cost Scrap Value of Normal Loss = 48000 + 40000 400 = 87600 = Net Cost /Normal Quantity = 87600/(1000 -50) = 92.21 = Normal Qty Actual Qty = 950 925 = 25 units

Compiled by: Chhaya Sehgal The Winning Edge

Working Notes - Process II A/c 1. 2. 3. 4. Process II A/c DR UNITS AMOUNT OUTPUT 925 85295 By normal Loss (8% of 925 units) 10000 18000 12000 925 125295 925 125295 By Abnormal Loss @ Rs 147.23 By Transfer to Process - III @ Rs 147.23 CR UNITS AMOUNT 74 0 Normal Quantity Net Cost Cost/unit Abnormal Loss = Input Normal Loss = 925 74 = 851 units = Input Cost Scrap Value of Normal Loss = 125295 0 = 125295 = Net Cost /Normal Quantity = 125295/851 = 147.23 = Normal Qty Actual Qty
= 851 850 = 1 unit

INPUT To units Transferred from process I @ Rs 92.21 To Misc Material To wages To Manufacturing Expenses Total

1 850

147 125148

Working Notes - Process III A/c 1. 2. 3. 4. Normal Quantity Net Cost Cost/unit Abnormal gain = Input Normal Loss = 850 51 = 799 units = Input Cost Scrap Value of Normal Loss = 158148 612 = 157536 = Net Cost /Normal Quantity = 157536/799 = 197.17 = Normal Qty Actual Qty = 799 805 = 6 units

Compiled by: Chhaya Sehgal The Winning Edge

Process III Account INPUT To units Transferred to Process - III @ Rs 147.23 To Misc Material To wages To Mfg Expenses To abnormal gain @ 197.17 Total Abnormal Loss A/c DR UNITS AMOUNT OUTPUT 25 2305 By scrap value @ Rs 8/1 147 By scrap value By Profit & Loss A/c 26 2452 CR UNITS AMOUNT 25 200 1 NIL 2252 2452 DR UNITS AMOUNT OUTPUT 850 125148 By normal Loss @ 6% of 850 3000 20000 10000 1183 159331 856 159331 By Transfer to finished goods @ 197.17 CR UNITS AMOUNT 51 612

805

158719

6 856

INPUT To process I A/c To process II A/c

Total

26

Abnormal Gain A/c DR CR UNITS AMOUNT OUTPUT UNITS AMOUNT 6 72 By Process III A/c 6 1183 1 6 1111 1183 6 1183

INPUT To Scrap Value Process III A/c @ Rs 12 To Profit and Loss A/c Total

Compiled by: Chhaya Sehgal The Winning Edge PROBLEM ON APPLICATION OF STANDARD COSTING FOR COMPUTING MATERIAL, LABOUR, OVERHEAD VARIANCES Illustration 5: Standard cost of Product A: 1 Unit Direct 60 units of X at Re.1 per unit Materials: 40 units of Y at Re.1.5 per unit 100 10 Normal loss 10% 90 units Scrap value at Re.1 per unit Direct Wages: Process 1 3 hours at Rs.10 per hour Process 2 1 hour at Re.10 per hour Process 3 2 hours at Re.5 per hour Variable Process 1 Rs.3 per unit of A overheads: Process 2 Rs.3 per unit of A Process 3 Rs.4 per unit of A Fixed overhead @ 20% of wages cost PRODUCTION COST ADMINISTRATION COSTS SELLING AND DISTRIBUTION COSTS TOTAL COST PROFIT SELLING PRICE 30 10 10 3 3 4 50

Rs 60 60 120 (10)

Rs

120 110

10 10 180 10 190 10 200 50 250

If during a period, 1000 units of product A are manufactured and sold, and the actual costs are ascertained as below, the standard costs and actual costs could be compared as follows: Total Variances Product A Element of cost Direct material Direct wages PRIME COST Variable overhead Fixed overhead Administration Selling and Distribution TOTAL COST Profit Sales variance Sales (F) Favourable Standard Rs 1,10,000 50,000 1,60,000 10,000 10,000 10,000 10,000 2,00,000 50,000 2,50,000 Actual Rs. 1,40,000 55,000 1,95,000 8,000 18,000 12,000 15,000 2,48,000 52,000 3,00,000 1,000 units

Variances
(F) Rs. (A) Rs. 30,000 5,000 35,000 8,000 2,000 5,000 (2,000) (2,000) (50,000) (A) Adverse 50,000

(2,000)

Compiled by: Chhaya Sehgal The Winning Edge The above illustration demonstrates the main advantage of a standard costing system: management is given clear information to enable them to decide on future policy. It can be clearly seen that the total cost of product A during the period was Rs.48,000 more than the standard set. The adverse variance of Rs.30,000 on direct material should be closely investigated. Despite adverse costs, profit is marginally higher than anticipated, due to selling prices exceeding those budgeted.

Quick look of the Variances under Material, Labour and Overhead Cost
Material Cost Variance: Material Usage Variance: Material Price Variance: Material Mix Variance: Material Yield Variance: Labour Cost Variance: Labour Efficiency Variance: Labour Rate Variance: Labour Mix Variance: Labour Yield Variance: Controllable Variance: The difference between the standard cost of material specified and the actual cost of material used. The portion of the material cost variance which is due to the difference between the standard quantity specified and the actual quantity used. The portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid. The portion of the usage variance which is due to the difference between the standard and the actual composition of a mixture. The difference between the standard yield specified and the actual yield obtained. The difference between the standard wages specified and the actual wages paid. The portion of the labour cost variance, which is due to the difference the standard labour hours specified and the actual labour hours expended. The portion of the labour cost variance which is due to the difference Between the standard rate specified and the actual rate paid. The portion of the Labour efficiency variance which is due to the Difference between the standard and actual composition of labour component. The difference between the standard yield specified and the actual yield obtained. The portion of the overhead variance which is due to the difference between the flexible budget based on actual production and the actual overhead incurred. The portion of the overhead variance which is due to the difference between the flexible budget based on the actual production and the applied overhead. The portion of the controllable variance which is due to the difference between the flexible budget based on inputs and the actual overhead incurred.

Volume Variance:

Spending Variance:

Compiled by: Chhaya Sehgal The Winning Edge Efficiency Variance: The portion of the controllable variance which is due to the difference between the flexible budget based on outputs and the flexible budget based on inputs. The difference between the standard overhead specified and the actual overhead incurred.

Overhead Variance: Q 6.

Calculate RM, Labour and Variable Overhead Variances Standard for 100 Units of Finished Goods RMs 1500 Kgs @ Rs 3/Labour 600 Hrs @ Rs 4/Variable Overhead 600 Hrs @ Rs 1.50 Total Variable Cost for Standard 100 Units Actual for 2500 Units of finished goods RMs 37250 Kgs @ Rs 3.10 Labour 15260 Hrs @ Rs 4.15 Variable Overhead 15260 Hrs @ Rs 1.40 Total Variable Cost for Actual production = = = = = = = = Rs 4500/Rs 2400/Rs 900/Rs 7800/Rs 115475/Rs 63329/Rs 21364/Rs 200168/-

Sol.

Raw Material Cost Variance

= (Actual RM Cost RM cost for actual production at Standard rates) = (115475 2500x45) = 2975 (A) Raw Material Rate Variance = Actual Quantity (Actual Rate Standard Rate) = 37250 (3.1 3.0) = 3725 (A) Raw Material Usage Variance = Standard Rate (Actual RM Usage Standard usage for actual production) = 3.0 (37250 2500 x 15) = 750 (F) Labour Cost Variance = Labour Cost for Actual Production Labour cost for actual production at standard rates = (63329 2500 x 6 x 4) = 3329 (A) Labour Efficiency Variance = Standard Labour Rate (Actual hrs Standard Hrs for actual production) = 4 (15260 2500 x 6) = 1040 (A) Labour Rate Variance = Actual Hours (Actual Rate Standard Rate) = 15260 (4.15 4) = 2289 (A) Variable overhead Variance = Actual Variable Overheads Overheads for actual production at standard rates = (21364 2500 x 6 x 1.5) = 1136 (F) Variable Overhead Rate Variance = Actual Hrs (Actual Rate Standard Rate) = 15260 (1.4 1.5) = 1526 (F) Variable Overhead Efficiency Variance = Standard Rate (Actual Overhead Hours Hrs required at Standard Rate for Actual Production) = 1.5 (15260 15000) = 1.5 (260) = 390 (A)

Compiled by: Chhaya Sehgal The Winning Edge Statement of Variances Material Cost Variance Material Price/Rate Variance Material Usage Variance Labour Cost Variance Labour Rate Variance Labour Efficiency Variance Variable Overhead Cost Variance Variable Overhead Rate Variance Variable Overhead Eff. Variance Rs 2975/- (A) Rs 3725/- (A) Rs 750/- (F) Rs 3329/- (A) Rs 2289/- (A) Rs 1040/- (A) Rs 1136/- (F) Rs 1526/- (F) Rs 390/- (A)

Humour Break
Once a man went to a Veterinary Doctor in India and said: Doctor I have come on vacation for a month so that I can get myself treated fully within this period. Doctor: I think you should go to the Doctor opposite to my clinic, see that board. Man: No, Doctor, I have come to you only. Doctor: But, gentleman I am a Veterinary Doctor. I am an animal specialist. I do not treat human beings. Man: I know, Doctor very well and that is why I have come to you only... Doctor: I can not - because you speak like me, think like me, talk like me which means you are a human being and not an animal. Man: I know I am a human but listen to my complaints first; Doctor: OK. Tell me. Man: I sleep vigilantly like dog thinking about my work load whole night. I get up in the morning like a horse I go to work running like a deer. I work all the day like a donkey. I run around for 11 months like a bull without any holiday. I wag my tail in front of all my bosses. I play with my children like a monkey if I get time. I am like a rabbit before my wife. Doctor: are you an Accountant? Man: Yes Doctor: Instead of telling this long history you should have told me in the beginning itself that you are an accountant. Come man, no one can treat you better than me.