PROCESS COSTING

PROJECT REPORT
ON
THE CONCEPT OF process

costing

COURSE: ADVANCED COST ACCOUNTING

SUBMITTED BY:
PRATIK KHOLE (ROLL NO.120)
Master of Commerce (Part-1)
(SEM-I)

K.M.AGRAWAL COLLEGE
OF
ARTS , COMMERCE & SCIENCE
KALYAN (WEST).

UNIVERSITY OF MUMBAI
2013-14

PROCESS COSTING

CERTIFICATE

THIS IS TO CERTIFY THAT MR.PRATIK KHOLE

HAS SATISFACTORILY CARRIED OUT THE PROJECT WORK
ON THE TOPIC
THE CONCEPT OF process

costing

For
MCOM (SEM I) IN THE
ACADEMIC YEAR 2013-14.

SIGNATURE OF PROJECT GUIDE: -

_______________

SIGNATURE OF CO-ORDINATOR: -

_______________

(MCOM COURSE)
SIGNATURE OF EXTERNAL EXAMINER: -

_______________

PROCESS COSTING

DECLARATION
I, PRATIK KHOLE THE STUDENT OF K.M.AGRAWAL COLLEGE OF MCOM
(SEM-I) HERE BY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON- T
THE CONCEPT OF process

costing

IN THE ACADEMIC YEAR 2012-13

THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY
KNOWLEDGE.

PLACE: KALYAN

DATE: ___/___/_____

________________________
PRATIK KHOLE

PROCESS COSTING

ACKNOWLEDGEMENT
I EXPRESS MY GRATEFUL THANKS TO PROJECT GUIDE
PROF.

FOR HER TIMELY GUIDANCE AND HELP RENDRED

AT EVERY STAGE OF THE PROJECT WORK.

I EXPRESS SINCERE THANKS TO OUR PRINCIPAL
PROF.

WHO HAS GIVEN HER VALUABLE MORAL

SUPPORT, MOTIVATION, INSPIRATION, AND EDUCATIONAL ATMOSPHERE IN THE

INSTITUTE FOR THE SUCCESSFUL COMPLETION OF THE PROJECT WORK.
I ALSO WISH TO EXPRESS MY REGARDS TO THE LIBRARIAN FOR HER COOPERATION IN PROVIDING ME WITH NECESSARY REFERENCE MATERIALS.
I ALSO EXPRESS MY THANKS TO FACULTY MEMBERS AND FOR COOPERATION AND HELP GIVEN IN COMPLETING THIS PROJECT.

PRATIK KHOLE
(RESERCHER)

PROCESS COSTING

Table Of Contents
SR.
NO.
1.
2.
3.
4.
5.
6.

TITLE

PAGE
NO.

INTRODUCTION

MEANING

CHARACTERISTICS OF PROCESS COSTING

8-9

ADVANTAGES OF PROCESS COSTING

10

LIMITATIONS OF PROCESS COSTING

11

IMPORTANT TERMS TO UNDERSTAND

12

FORMAT APPROACH PROCESS ACCOUNTING QUESTIONS AND ITS

7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17
18
19

STEPS

13-14

PROCESS LOSSES & GAINS

15-20

PRODUCT FLOW

21-23

EQUIVALENT UNITS

24-26

ACCOUNTING TREATMENT OF SPOILAGES

27

TRANSFERRED IN

28-29

VALUATION PROCESS FOR

COST STATEMENT

SIGN.

30

COST OF PRODUCTION REPORT

31-36

JOINT AND BY-PRODUCTS COSTING

37

BY-PRODUCT AND ITS ACCOUNTING TREATMENT

38

TOTAL COST PER UNIT DETERMINATION USING NRV METHOD

39-42

CONCLUSION

43

REFERENCE

44

PROCESS COSTING
1. INTRODUCTION
Process costing is a method of costing used mainly in manufacturing where units are
continuously mass-produced through one or more processes. Examples of this include the
manufacture of erasers, chemicals or processed food.
In process costing it is the process that is costed (unlike job costing where each job is
costed separately). The method used is to take the total cost of the process and average it over the
units of production.
Process costing is a method used in a situation where production follows a series of
sequential processes. The method is used to ascertain the cost of a product or service at each
stage of production, manufacture or process. It is generally applied in particular industries where
continuous mass production is possible. In view of the continuous nature of the process and the
uniformity of the output, it is not possible or necessary to identify a particular unit of output with
a time of manufacture. The cost of any particular unit must be taken as the average cost of
manufacture over a period. This can be complicated because of the need to apportion costs
between completed output and unfinished production at the end of the period. Wastage must also
be accounted for. In process costing, it is the average cost incurred that concerns management.
Process costing is used in a variety of industries, including food processing, paper
milling, chemical and drug manufacturing, oil refining, soap making, textiles, box-making, paint
and ink manufacturing, brewery, flour milling, bottling and canning, biscuits products, meat
products, sugar making, etc. It is probably the most widely used cost accounting system in the
world.
Process costing is a form of operations costing which is used where standardized
homogeneous goods are produced. This costing method is used in industries like chemicals,
textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of
industries also. It is assumed in process costing that the average cost presents the cost per unit.
Cost of production during a particular period is divided by the number of units produced during
that period to arrive at the cost per unit.

1. MEANING
6

PROCESS COSTING
Process Costing is a method of costing. It is employed where each similar units of
production involved in different series of process from conversion of raw materials into finished
output. Thus, .unit cost is determined on the basis of accumulated costs of each operation or at
each stage of manufacturing A product. Charles T. Horngren defines process costing as "a
method of costing deals with the mass production of the like units that usually pass the
continuous fashion through a number of operations called process costing." The application of
process costing where industries adopting costing procedure for continuous or mass production.
Textiles, chemical works, cement industries, food processing industries etc. are the few examples
of industries where process costing is applied.
Process costing is a method of costing under which all costs are accumulated for each
stage of production or process, and the cost per unit of product is ascertained at each stage of
production by dividing the cost of each process by the normal output of that process.

DEFINITION:
CIMA London defines process costing as that form of operation costing which applies
where standardize goods are produced

2. CHARACTERISTICS OF PROCESS COSTING

7

PROCESS COSTING
Although, details will vary from one business concern to another, there are common
features in most process costing systems that should be taken note of.
These are:
I. Clearly defined process cost centers will normally be set up for each operational stage,
which can be identified. Expenditure for each cost centre is collected and, at the end of the
accounting period, the cost of the completed units are then transferred into a stock account
or to a further process cost centre. Accurate records are, therefore, required of units
produced and part produced units and the total cost incurred by the cost centers.
II. The cost unit chosen should be relevant to the organisation.
III. The cost of the output of one process is the raw material input cost of the following
process. The cost incurred in a process cost centre could include, therefore, costs
transferred from a previous process plus the raw materials, Labour and overhead costs
relevant to the cost centre.
IV. Wastage due to scrap, chemical reaction or evaporation is unavoidable. The operation or
manufacturing should, however, be in such a way that wastage can be reduced to the barest
minimum.
V. Either the main product or by-product of the production process may require further
processing before reaching a marketable state.
VI. Continuous or mass production where products which passes through distinct process or
operations.
VII. Each process is deemed as a separate operations or production centres.
VIII. Products produced are completely homogenous and standardized.
IX. Output and cost of one process are transferred to the next process till the finished product
completed.
X. Cost of raw materials, labour and overheads are collected for each process.
XI. The cost of a finished unit is determined by accumulated of all costs incurred in all the
process divided by the number of units produced.

PROCESS COSTING
XII. The cost of normal and abnormal losses usually incurred at different stages of production is
added to finished goods.
XIII. The interconnected processes make the final output of by-product or joint products
possible.
XIV. The production is continuous. The product is homogeneous, The process is standardized.
Output of one process become raw material of another process. The output of the last
process is transferred to finished stock
XV. Costs are collected process-wise, Both direct and indirect costs are accumulated in each
process. If there is a stock of semi-finished goods, it is expressed in terms of equivalent
units. The total cost of each process is divided by the normal output of that process to find
out cost per unit of that process.

PROCESS COSTING

3. ADVANTAGES OF PROCESS COSTING

The main advantages of process costing are :
I. Determination of the cost of process and unit cost is possible at short intervals.
II. Effective cost control is possible.
III. Computation of average cost is easier because the products produced are homogenous.
IV. It ensures correct valuation of opening and closing stock of work in progres~ in each
process.
V. It is simple to operate and involve less expenditure.
VI. Costs are be computed periodically at the end of a particular period
VII. It is simple and involves less clerical work that job costing
VIII. It is easy to allocate the expenses to processes in order to have accurate costs.
IX. Use of standard costing systems in very effective in process costing situations.
X. Process costing helps in preparation of tender, quotations
XI. Since cost data is available for each process, operation and department, good managerial
control is possible.

10

PROCESS COSTING

4. LIMITATIONS OF PROCESS COSTING

The main Disadvantages of process costing are :
I. Computation of average cost does not give the true picture because costs are
obtained on historical basis.
II. Operational weakness and inefficiencies on processes can be concealed.
III. It becomes more difficult to apportionment of joint costs, when more than one type
of products manufactured.
IV. Valuation of work in progress is done on estimated basis, it leads to inaccuracies in
total costs.
V. It is difficult to measure the performance of individual workers and supervisors.
VI. Cost obtained at each process is only historical cost and are not very useful for
effective control.
VII. Process costing is based on average cost method, which is not that suitable for
performance analysis, evaluation and managerial control.
VIII. Work-in-progress is generally done on estimated basis which leads to inaccuracy in
total cost calculations.
IX. The computation of average cost is more difficult in those cases where more than
one type of products is manufactured and a division of the cost element is necessary.
X. Where different products arise in the same process and common costs are prorated
to various costs units.
XI. Such individual products costs may be taken as only approximation and hence not
reliable.

11

PROCESS COSTING

5. IMPORTANT TERMS TO UNDERSTAND

In a manufacturing process the number of units of output may not necessarily be the same
as the number of units of inputs. There may be a loss.
1) Normal loss :This is the term used to describe normal expected wastage under usual operating
conditions. This may be due to reasons such as evaporation, testing or rejects.
2) Abnormal loss:This is when a loss occurs over and above the normal expected loss. This may be due to
reasons such as faulty machinery or errors by labourers.
3) Abnormal gain:This occurs when the actual loss is lower than the normal loss. This could, for example,
be due to greater efficiency from newly-purchased machinery.
4) Work in progress (WIP):This is the term used to describe units that are not yet complete at the end of the period.
Opening WIP is the number of incomplete units at the start of a process and closing WIP is the
number at the end of the process.
5) Scrap value:Sometimes the outcome of a loss can be sold for a small value. For example, in the
production of screws there may be a loss such as metal wastage. This may be sold to a scrap
merchant for a fee.
6) Equivalent units:This refers to a conversion of part-completed units into an equivalent number of whollycompleted units. For example, if 1,000 cars are 40% complete then the equivalent number of
completed cars would be 1,000 x 40% = 400 cars. Note: If 1,000 cars are 60% complete on the
painting, but 40% complete on the testing, then equivalent units will need to be established for
each type of cost. (See numerical example later.)

12

PROCESS COSTING

6. FORMAT APPROACH PROCESS ACCOUNTING QUESTIONS AND

ITS STEPS
For each process an individual process account is prepared. Each process of production is
treated as a distinct cost centre.

Items on the Debit side of Process A/c.

Each process account is debited with
a) Cost of materials used in that process.
b) Cost of labour incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some pre determined.
e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process).

Items on the Credit side:

Each process account is credited with a) Scrap value of Normal Loss (if any) occurs in that process.
b) Cost of Abnormal Loss (if any occurs in that process).

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

13

PROCESS COSTING
STEP 1:- Draw up a T account for the process account. (There may be more than one process,
but start with the first one initially.) Fill in the information given in the question.

PROCESS ACCOUNT
Particulars
Opening WIP
Materials
Labour
Overheads
Abnormal gain

Units
XXX

Rs.

Particulars

Units

Rs.

XXX

XXX

XXX

XXX

XXX

XXX Normal Loss

XXX Transfer to
process 2 or
XXX finished goods
XXX Abnormal loss
XXX Closing WIP

XXX
XXX

XXX
XXX

XXX

XXX

XXX

XXX

STEP 2:- Calculate the normal loss in units and enter on to the Process account. (The value will
be zero unless there is a scrap value see Step 4).
STEP 3:- Calculate the abnormal loss or gain (there wont be both). Enter the figure on to the
Process account and open a T account for the abnormal loss or gain.
STEP 4:- Calculate the scrap value (if any) and enter it on to the Process account. Open a T
account for the scrap and debit it with the scrap value.
STEP 5 :-Calculate the equivalent units and cost per unit.
STEP 6:- Repeat the above if there is a second process.

Note: Although this proforma includes both losses and WIP, the Paper F2/FMA syllabus
specifically excludes situations where both occur in the same process. Therefore, dont expect to
have to complete all of the steps in the questions.

14

PROCESS COSTING

7. PROCESS LOSSES & GAINS:

In many process, some loss is inevitable. Certain production techniques are of such a
nature that some loss is inherent to the production. Wastages of material, evaporation of material
is un available in some process. But sometimes the Losses are also occurring due to negligence
of Laborer, poor quality raw material, poor technology etc. These are normally called as
avoidable losses. Basically process losses are classified into two categories
(a) Normal Loss (b) Abnormal Loss
1. NORMAL LOSS:
Normal loss is an unavoidable loss which occurs due to the inherent nature of the
materials and production process under normal conditions. It is normally estimated on the basis
of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal
spoilage, and normal defectiveness. It may occur at any time of the process.
No of units of normal loss: Input x Expected percentage of Normal Loss.
The cost of normal loss is a process. If the normal loss units can be sold as a crap then the
sale value is credited with process account. If some rectification is required before the sale of the
normal loss, then debit that cost in the process account. After adjusting the normal loss the cost
per unit is calculates with the help of the following formula:

COST OF GOOD UNIT : Total cost increased Sale Value of Scrap

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

ABNORMAL LOSSES = ACTUAL LOSS NORMAL LOSS

The value of abnormal loss is done with the help of following formula:
VALUE OF ABNORMAL LOSS :

Total cost increase Scrap value of normal loss x Units of abnormal loss
Input units Normal loss units

15

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

Abnormal Loss A/C.

DR.

CR.

PATICULARS

UNITS

TO PROCESS A/C.

XXX

RS.

PARTICULERS

XXX BY BANK
BY COSTING P &

UNITS

RS.

XXX

XXX

XXX

XXX

XXX

XXX

L A/C.
XXX

XXX

3. ABNORMAL GAINS:
The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in
process industries in normal conditions) and slight differences are bound to occur between the
actual output of a process and that anticipates. This difference may be positive or negative. If it is
negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss
is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain
calculated in the similar manner of abnormal loss. The formula used for abnormal gain is:
Abnormal Gain :Total Cost incurred Scrap Value of Normal Loss x Abnormal Gain Unites
Input units Normal Loss Units
The sales values of abnormal gain units are transferred to Normal Loss Account since it
arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a
Real Gain.

Abnormal Gain A/C.

16

PROCESS COSTING

DR.

CR.

PARTICULARS

UNITS

RS.

PARTICULARS

TO NORMAL
LOSS A/C.

XXX

XXX BY PROCESS A/C.

TO COSTING
P & L A/C.

XXX

XXX

XXX

XXX

UNITS

RS.

XXX

XXX

XXX

XXX

ILLUSTRATION:
Product A is obtained after it passes through three distinct processes. You are required to
prepare Process accounts from the following information:
PARTICULARS

PROCESS
X
RS.

Y
RS.

Z
RS.

TOTAL
RS.

MATERIAL

5,200

3,960

5,924

15,084

DIRECT WAGES

4,000

6,000

8,000

18,000

PRODUCTION
OVERHEADS

18,000

1,000 Units @ Rs. 6 Per Unit were introduced in Process X. Production overhead to be
distributed as 100% on Direct Wages.

ACTUAL OUTPUT
UNIT

NORMAL LOSS
PERCENTAGE

VALUE OF
17

PROCESS COSTING

PROCESS X
PROCESS Y
PROCESS Z

RS.

950
840
750

5%
10%
15%

SCRAP PER
UNIT
4
8
10

SOLUTION :

PROCESS X A/C.
DR.
PARTICULAR
MATERIAL
INTRODUCED @ RS. 6
PER UNIT

UNITS

RS.

UNITS

CR.
RS.

50

200

950

19,000

1,000

19,200

UNITS

CR.
RS.

NORMAL LOSS

95

760

ABNORMAL LOSS

15

600

840

19,000

950

34,960

UNITS

CR.
RS.

PARTICULAR
NORMAL LOSS

1,000

6,000

MATERIAL

TRANSFERRED TO
PROCESS Y @ RS. 20
5,200 PER UNIT

DIRECT WAGES

4,000

PRODUCTION
OVERHEADS
1,000

4,000
19,200

PROCESS Y A/C.
DR.
PARTICULAR
TRANSFERRED FROM
PROCESS X

UNITS
950

RS.

PARTICULAR

19,000

MATERIAL

3,960

DIRECT WAGES

TRANSFERRED TO
6,000 PROCESS Z @ RS. 40
PER UNIT

PRODUCTION
OVERHEADS
950

6,000
34,960

PROCESS Z A/C.
DR.
PARTICULAR

UNITS

RS.

PARTICULAR

18

PROCESS COSTING
TRANSFERRED FROM
PROCESS Y

NORMAL LOSS
840

MATERIAL
DIRECT WAGES

8,000

PRODUCTION
OVERHEADS

8,000
36
876

1,260

750

57,000

876

58,260

33,600
FINISHED GOODS
5,924 (@ RS. 76)

ABNORMAL GAIN @
RS. 76 PER UNIT

126

2,736
58,260

ABNORMAL LOSS A/C.

DR.

CR.
PARTICULAR

RS.

To Process Y

PARTICULAR

RS.

600 By Cash (sale of Scrap of

Abnormal
Loss units)
By Costing Profit And
Loss A/C.
600

120
480
600

ABNORMAL GAIN ACCOUNT

DR.

CR.
PARTICULAR

TO PROCESS Z A/C.
TO COSTING P&L A/C.

RS.

PARTICULAR

RS.

360 BY PROCESS Z A/C.

2,376

2,736

2,736

2,736

Working Note:PROCESS Y:(A) Normal loss :-

950 X 10
100

== 95 Units

19

PROCESS COSTING

Scrap value = 95 X 8 = Rs. 760.

(B) Abnormal loss
Normal production 950-95
Actual production
Abnormal loss

Units
855
840
15

(C) Cost of Normal Production. 34,960 - 760 = 34,200.

Cost of Normal Production per unit
Cost of Abnormal Loss:-

34,200 = Rs. 40 per units

845

40 X 15 = 600

Abnormal Loss has been credited with Rs.120 being the amount realized from the sale of
scrap and Abnormal Loss.

PROCESS Z:
(A) Normal Process. 15% of 840 units = 840 X 15 = 126 Units
100
Sale of scrap = 126 X Rs. 10 = Rs. 1,260
(B) Abnormal gain
Actual production
Estimated production

Units
750
714
36

The Cost of Abnormal Gain has been calculated in the usual way
Abnormal Gain A/C has been debited with Rs.360 being less amount, recovered on the
sale of loss of units which were 90 units instead of normal 126 units. i.e., 36 x 10 = Rs. 360.

8. PRODUCT FLOW
As a product passes from one cost centre to another, per unit cost and total cost should be
determined. As shown in figure 2, the total cost incurred at the lower level of processing is to be

20

PROCESS COSTING
seen as the transferred in cost of the higher level to which cost of additional material and
conversion cost must be added before arriving at its total costs. That total cost may be a
transferred in cost, if the production process is not complete, or the final total cost of production,
if finished products have been arrived at. Product flows have to be accompanied by their total
costs at each level of processing.

ILLUSTRATION :A product passes through three distinct processes (A, B, and C) to completion. During the
period 15th May, 2009, 1000 liters were produced. The following information is obtained:

PARTICULARS

PROCESS A

MATERIAL COST

PROCESS B

40,000
20,000
5,000

LABOUR COST

PROCESS C

15,000
25,000
3,000

5,000
15,000
3,000

DIRECT OVERHEADS COST

Indirect overhead expenses for the period were N30,000 apportioned to the processes on
the basis of wages. There was no work-in-process at the beginning or end of the period.
Required:
Calculate the cost of output to be transferred to finished goods stock and the cost per liter.

SOLUTION:PROCESS A A/C.
PARTICULAR

COST/LITER TOTAL

PARTICULAR

COST/LITER TOTAL

21

PROCESS COSTING
MATERIALS

40

40,000 TRANSFERRED

LABOUR

20

20,000 TO PROCESS B

DIR. EXPENSES

5,000

INDIRECT EXP.

10

10,000

75

75,000

75

75,000

75

75,000

PROCESS B A/C.
PARTICULAR
PROCESS A

COST/LITER TOTAL PARTICULAR

COST/LITER TOTAL
75
75,000 TRANSFERRED

MATERIALS

15

15,000 TO PROCESS C

LABOUR

25

25,000

DIR. EXPENSES

3,000

INDIRECT EXP.

12.5
130.50

12,500
1,30,500

130.50

1,30,500

130.50

1,30,500

PROCESS C A/C.
PARTICULAR
PROCESS B
MATERIALS
LABOUR

COST/LITER TOTAL PARTICULAR

130.50 1,30,500 OUTPUT TO
5

COST/LITER TOTAL

5,000 FINISHED

15

15,000 GOODS STOCK

DIR. EXPENSES

3,000

INDIRECT EXP.

7.50
161

7,500
1,61,000

161

1,61,000

161

1,61,000

Note:
(A) Indirect expenses were apportioned as follows:
Process A = 20,000 x 30,000 =
60,000

10,000

Process B = 25,000 x 30,000 =

60,000

12,500

22

PROCESS COSTING

Process C = 15,000 x 30,000 =

60,000

7,500
30,000.

(B) The cost per liter of the product is N161 and, so, the selling price must be higher than that
amount if the business is to make any profit

(C) Indirect expenses include all expenses that cannot be directly traced to the productive
process and, so, they include general administrative, selling and distributive cost.

9. EQUIVALENT UNITS
At the end of a given period, in the course of the production process, it is virtually certain
that some items will only be partly completed (working- process). Some of the costs of the
period, therefore, are attributable to these partly completed units as well as to those that are fully
completed. In order to spread the costs equitably over part-finished and fully completed units, the
concept of equivalent units is used.

23

PROCESS COSTING
For the calculation of costs, the number of equivalent units is the number of equivalent
fully completed units which the partly completed units represent. For example, in a given period
production was 3,000 completed units, and 1,600 partly completed were deemed to be 60%
complete.
Total equivalent production = completed units plus equivalent units produced in work in
progress.
= 3,000 + (60% of 1,600)
= 3,000 + 960
= 3,960 units
The total costs for the period would be spread over the total equivalent production as follows:
Cost per unit =

Total Cost
Total equivalent production (units)

In calculating equivalent units, it is more desirable to consider the percentage completion

of each of the cost elements: material, labour and overhead. Here, each cost element must be
treated separately and then the costs per unit of each element are added to give the cost of a
complete unit.

ILLUSTRATION :The production and cost data of Elsemco Shoemakers for the month of January, 2005
were as follows:
Materials

4,22,400

Labour

3,95,600

Overhead

2,25,000

Total cost

10,43,000
24

PROCESS COSTING

Production was 8,000 fully completed units and 2,000 partly completed. The percentage
completion of the 2,000 units work-in process was:
Material

80%

Labour

60%

Overhead

50%

Required:
Find the value of completed production and the value of work-in process (WIP).

SUGGESTED SOLUTION :Cost

elements
Material
Labour
Overhead

Equiv. units in Fully comply

Total
Total cost
WIP
units
production
2000 X 80%
8,000
9,600
4,22,400
= 1,600
2000 X 60%
8,000
9,200
3,95,600
= 1,200
2,000 X 50% =
8,000
9,000
2,25,000
1,000

Cost /
unit
44

10,43,000

112

Value of completed units

43
25

= 112 x 8,000
= 8,96,0000

Value of WIP = TC Value of completed units

= 1,043,000 8,96,000
= 1,47,000

To check the value of WIP, the cost per each cost element is to be multiplied by the
number of equivalent units of production in WIP related to each cost element.

25

PROCESS COSTING

Elements of units in WIP

No.
equiv.
WIP

of Cost / unit

1,600
1,200
1,000

Material
Labour
Overhead

Value

44
43
25

Total

70.400
51,600
5,000
1,47,000

PROCESS ACCOUNT
Elements
Material
Labour
Overhead

WIP b/d

Units
10,000

10,000
2,000

Total cost
Elements
4,22,400 Goods transferred
3,95,600 to next stage
2,25,000 WIP c/d
10,43,000
1,47,000

Units

Total cost

8,000
2,000

8,96,000
1,47,000

10,000

10,43,000

10. ACCOUNTING TREATMENT OF SPOILAGES :In many industries, the amount of the process output will be less than the amount of the
materials input. Such shortages are known as process losses or spoilages, which may arise due to
a variety of factors such as evaporation, scrap, shrinkage, unavoidable handling, breakages, etc.
If the losses are in accordance with normal practice they are known as normal process
losses. But where losses are above expectation, they are known as abnormal losses, and as such
they should be charged to an appropriate account pending investigation.
Normal process spoilages are unavoidable losses arising from the nature of the
production process and, so, it is logical and equitable that the cost of such losses is included as

26

PROCESS COSTING
part of the cost of good production. This is because in the production of good units normal
spoilage occur. Since the spoilage arises under efficient operating conditions, it can be estimated
with some degree of accuracy.
Abnormal process spoilages are those above the level deemed normal in the production
process. Abnormal spoilage cannot be predicted and may be due to special circumstances such as
plant breakdown, inefficient working, or unexpected defects in materials. Abnormal spoilage is
the difference between actual spoilage in the period and the normal (estimated) spoilage.
Abnormal gain is where the actual spoilage is less than the normal spoilage.
The cost of abnormal spoilage is to be charged to the profit and loss account unlike the
cost of normal spoilage which is to be part of the good products total cost. Process account is to
be credited as abnormal loss account is debited. The abnormal loss account is then to be closed to
the profit and loss account.
Abnormal gain realized is to be credited to the abnormal gain account as process account
is debited. The abnormal gain account is to be closed to the credit of profit and loss account.

11.TRANSFERRED IN :It is important to remind the reader that the output of one process level forms the input
material to the next process level. The full cost of the completed units transferred forms the input
material cost of the subsequent process and, by its nature, must be 100% complete. Material
introduced is an extra material required by the process and should always be shown separately. If
there are partly completed units at the end of one period, there will be opening WIP at the
beginning of the next period. The values of the cost elements of the brought forward WIP are
normally known and they are to be added to the costs incurred during the period.

ILLUSTRATION :27

PROCESS COSTING
A process has a normal spoilage of 5% which has a resale value of N150 per kg. Find the
cost per kg of good production, if material cost is 27,000 and conversion cost is 13,000 of
producing 100 kg.
Find the abnormal spoilage and its value if good production was 91 kg and cost per kg of
good production is the same (that is 413.16 per kg).
SUGGESTED SOLUTION :Abnormal spoilage = 9 kg - 5 kg = 4 kg

PROCESS ACCOUNT
Particulars
Material

(kg.)
100

conversion

Value

Particulars

27,000 Good
13,000 production
Normal

Kg.

Value
91

37,598

750

1,652

100

40,000

spoilage
Abnormal
spoilage
100

40,000

Note:
Abnormal Spoilage Cost Was Determined As Follows:
Total Cost - (Cost Of Good Prod. + Cost Of Normal Spoilage)
40,000 - (91 X 413.16 + 5 X 150)
40,000 - (37,598 + 750)
40,000 - 38,348 = 1,652

ABNORMAL SPOILAGE ACCOUNT

Particulars

Value

Particulars

value

28

PROCESS COSTING
Process a/c.

1,652 Profit & Loss A/c.

1,652

1,652

1,652

12.VALUATION PROCESS
FOR
COST STATEMENT
A number of stages are passed through in the valuation process for cost statement.

First,
The physical flow of the units of production must be calculated having regards to the
total number of units to be accounted for, regardless of the degree of completion.

Secondly,
The equivalent units involved in the physical flow are to be calculated. In this respect, it
is often necessary to divide the flow into its material cost element and conversion cost element as
the degree of Completion may vary between them.

Thirdly,
Having already established the physical units to be accounted for by means of the first
two stages, the total equivalent units and the current equivalent units involved are to be

29

PROCESS COSTING
calculated. These are to be accounted for in respect of the cost elements (transferred in cost,
material cost and conversion cost).

Fourthly,
The unit costs are to be calculated, paying attention to the stock valuation method
assumed (FIFO, WAP, LIFO, etc.).

Fifthly and finally,

The total cost of the transferred out products and work-in-process are to be calculated,
ensuring that all costs are accounted for.

13.COST OF PRODUCTION REPORT

This report is to show the number of units of output to be accounted for, the total
equivalent units of completed output, the cost statement showing the impact of all the cost
elements and the cost of completed units as well as that of the work-in-progress at the end of the
reporting period. In the illustration that follows, two methods of stock valuation, FIFO and WAP,
would be used and two processes of production are assumed.

ILLUSTRATION :Within the production department of Savannah Sugar Company Limited, there are two
processes which produce the finished product. Raw materials are introduced initially at the
commencement of Process 1 and further raw materials are added at the end of process 2.
Conversion costs accrue uniformly throughout both processes. The flow of the product is
continuous, the completed output of process 1 passes immediately into process 2 and the
completed output of process 2 passes immediately into the finished goods warehouse.
The following information is available for the month of June:

Process 1
Particulars

Unit / Rs.
30

PROCESS COSTING
unit 35,000

Opening WIP

2,10,000

Materials
Conversion (2/5 complete)

52,500

Completion of units in June

unit 1,68,000

Units commenced in June

unit 1,40,000

Closing WIP
( complete as to conversion)
Material introduced in June
Conversion cost added in June

unit 7,000
7,70,000
6,30,000

Process 2
Particulars
Opening WIP

Unit / Rs.
unit 42,000

Materials from process 1

3,43,000

Conversion (2/3 complete)

3,92,500

Completion of units in June

unit 1,54,000

Units commenced in June

Closing WIP
(2/8 complete as to conversion)
Material introduced in June
Conversion cost added in June

unit 56,000
4,62,000
22,0,5,000

Required:
Give the cost of production report of Theresa Alice Sugar Company Limited for the
month of June, using each of the WAP and FIFO methods, and showing clearly the cost of
finished production and WIP at end of the period.

SUGGESTED SOLUTION :Tutorial Note:

31

PROCESS COSTING
The units to be accounted for, total equivalent units and current equivalent units are to be
determined before going to the cost statement, using each of the two stock valuation methods.
The heading of the report should be well expressed.
Cost of Production Report of Theresa Alice Sugar Company Limited for the month of
June, using Weighted Average Price (WAP) Method.

Process 1
Physical flow of units of material :WIP (beginning)

35,000

Material introduced

1,40,000

Total units to be accounted for

1,75,000

Particulars

Equivalent Units
Material

Units Accounted For :Units Completed & Transferred Out

WIP (Ending)
Total Units Accounted For

1,68,000
7,000
1,75,000

Conversion

1,68,000
7,000(100%)

1,68,000
3,500(50%)

1,75,000
35,000
1,40,000

1,71,500
14,000
1,57,500

Total Equivalent Units (TEU)

Less :- WIP (Beginning)
Current Equivalent Units

Note :(a) Conversion WIP ending = 1/2 x 7,000 = 3,500 units

(b) Conversion WIP beginning = 2/5 x 35,000 = 14,000 units

COST STATEMENT
Cost Elements

Material
Conversion

Cost of
WIP
(beginning)

Current
Cost

Total Cost

2,10,000
52,500

7,70,000
6,30,000

9,80,000
6,82,500

2,62,500

14,00,000

16,62,500

T. E. U.

1,75,000
1,71,500

Cost
/Unit
5.60
3.98
9.58
32

PROCESS COSTING

Cost of units completed and transferred out = 168,000 x 9.58

= 1,609,440

Cost of WIP (Ending)

Material
Conversion

7,000 x 1 x 5.6
7,000 x x 3.98

= 39,200
= 13,930
53,130
Another way (which is easier) of determining the cost of WIP ending is to find the
difference between total cost and cost of the completed units.
Cost of WIP (end)

= TC Cost of completed units

= 1,662,500 - 1,609,440
= 53,060

Note:
The difference of N70 is due to the approximation made to two decimal places.
Cost of Production Report Using First-In-First-Out (FIFO) Method.
Process 1
Particulars
Material
Conversion

Current cost
7,70,000

C. E. Units
1,40,000

Units Cost
5.50

6,30,000

1,57,500

4.00

Cost of Closing WIP

Material 7,000 x 1 x 5.5 =

38,500

Conversion 7,000 x x 4.0 =

14,000
52,500

Units completed & transferred out

= 168,000 units

Cost of the completed unit

= TC cost of closing WIP

= 1,662,500 52,500
33

PROCESS COSTING
= 1,610,000.

Process 2, Using WAP Method

Physical flow of units of material
WIP (beginning)

42,000

Units transferred in

1,68,000

Units to be accounted for

2,10,000

Particulars

Equivalent Units
Transferred in.

Material

conversion

Units Accounted For :Units Completed in the period

1,54,000

1,54,000

1,54,000

1,54,000

56,000

56,000

000

21,000

2,10,000

1,54,000

1,75,000

42,000
1,68,000

000
1,54,000

28,000
1,47,000

WIP (Ending)
Total Units Accounted For

2,10,000

Total Equivalent Units (TEU)

Less :- WIP (Beginning)
Current Equivalent Units

COST STATEMENT
Cost Elements
Transferred In
Material
Conversion

Cost of
WIP
(beginning)
3,43,000
0
3,92,000
7,35,000

Current
Cost

Total Cost

T. E. U.

Cost
/Unit

16,09,440
4,62,000
22,05,000

19,52,440
4,62,000
25,97,000

2,10,000
1,54,000
1,75,000

9.2973
3.0000
14.8400

42,76,440

50,11,440

TC/UNITS

27.1373

Cost of complete units = 154,000 x 27.1373 = 4,179,144.20

Cost of WIP (Ending)

34

PROCESS COSTING
Transferred in

56,000 x 1 x 9.2973

520,648.80

Material

56,000 x 0 x 3

0.00

Conversion

56,000 x 3/8 x 14.84

311,640.00
832,288.80

Another Way
Cost of Ending WIP

= TC Cost of completed units

= 5,011,440 4,179,144.20
= 832,295.80

Note that the difference of 7 is due to the approximation made to four decimal places.

Process 2:
Using FIFO Method
PARTICULARS

CURRENT
COST

TRANSFERRED IN
MATERIALS
CONVERSION

CURRENT
EQUIV. UNITS

UNIT
COST

16,09,440

1,68,000

9.58

4,62,000

1,54,000

3.00

22,05,000

1,47,000

15.00
27.58

Cost of Closing WIP

Transferred in

56,000 x 1 x 9.58

= 5,36,480

Material

56,000 x 0 x 3

= 0

Conversion

56,000 x 3/8 x 15

= 3,15,000
851,480

Units completed and transferred out

= 154,000 units

Cost of completed units

= TC Cost of ending WIP

= 5,011,440 851,480
= 4,159,960.

35

PROCESS COSTING

14.JOINT AND BY-PRODUCTS COSTING

The process costing principle discussed in this chapter is about determining the cost of
processing some inputs that yield the same type of product. At the end of the processing
activities, only one type of product would result from the processed raw material.
However, it is not always that we have only one type of product from a processing
operation. It is possible for a single raw material to yield two or more products simultaneously
when processed. Such products are known as joint products. For example, when crude oil (a
single raw material) is processed or refined, petrol, kerosine, gas, etc, could be obtained from it.
The cost of processing a production input (raw material) that would amount to joint
products is known as joint cost. The joint cost is to be restricted to the split-off point (point after
which each joint product would be incurring separate processing cost). Joint cost is not to be
traced to any particular product but rather to all the joint products as a group. There are many
ways of apportioning joint cost to joint products for financial accounting purposes. These would
be discussed in this chapter.
In practice, it is normal to identify one product out of the joint products as the main or
principal product and the rest to be treated as joint products or as by-products. In the example
above, it is clear that petrol is the main product to be identified as crude oil is processed. Pairs of
shoes could be main products as leather is processed, while bags, wallets, etc, could be joint or
by-products.
One way of differentiating between by-product and joint product is to consider their cost
of production or sales value. A product that cost between 10% to 15% of the main product cost
should be treated as a byproduct. Any product that costs between 15% to 40% of the main
product cost is a joint product. Any product that costs above 40% of the identified main product
cost should also be treated as a main product. As a result of changes in price, therefore, a byproduct can become a joint-product or even a main product and vice versa.

36

PROCESS COSTING

15.BY-PRODUCT AND ITS ACCOUNTING TREATMENT

A by-product is a secondary product arising as a result of a processing activity aimed at
producing a certain main product. The market value of a by-product less the processing cost after
the split off point is usually negligible, compared to the total market value of all the joint
products or the market value of the main product.
The usual treatment of by-product is to deduct its Net Realizable Value (NRV) from the
total joint cost (JC) and then divide the net joint cost among the joint or main products. The NRV
of the by-product is the difference between its market value and its separate processing cost.
ILLUSTRATION
Wambai Shoemakers has a process that yields two main products: A and B and a byproduct C at a total cost of N3,000,000. There are 1000 units of C requiring no further processing
and each can be sold at N60 with negligible market cost. The two main products take equal share
of joint cost.
REQUIRED
What should be the share of Product A from the Joint Cost?
SUGGESTED SOLUTION
The total market value of Product C = 1000 x 60 = 60,000.
This is its NRV, since its market cost is negligible.
Net Joint Cost = 3,000,000 60,000 = 2,940,000
Share of Product A = 2,940,000 = 1,470,000
2
NOTE
It can be concluded that in deducting the NRV of by-product C from the Joint Cost, we
are in effect assigning to the by-product a joint cost which is equal to its NRV.

37

PROCESS COSTING

16.ACCOUNTING TREATMENT OF JOINT COST

There are three usual bases of sharing joint cost to the joint (or main) products. These are
the Physical Units Basis, Sales Value (at the point of separation) and Net Realization Basis.
PHYSICAL UNIT BASIS
Under this method, the joint cost is shared among the joint products on the basis of the
quantities of physical units, provided all the products are measured by a common unit of
measurement, such as kilograms or liters. The problem with this method is that consideration is
not given to price and, so, it does not consider the value of the products. Usually, the value of
products is the most important factor to be considered.
ILLUSTRATION
Anadariya Company Ltd., Tiga has a processing system that produces three products:
Kuli, Sudi and Tuni with 5,000 kg, 3,000 kg and 2,000 kg, respectively, in a year. The total cost
incurred up to the split off point in the year 2000 was 1,000,000. Use the physical units basis to
share the joint cost among the three products. Calculate also their unit cost.
SUGGESTED SOLUTION
(a) The Ratio
K = 5,000 x 100 = 50%
10,000
S = 3,000 x 100 = 30%
10,000
T = 2,000 x 100 = 20%
10,000
Share of joint cost
K = 50% of 1,000,000 = 500,000
S = 30% of 1,000,000 = 300,000
T = 20% of 1,000,000 = 200,000
(b) Unit Cost based on the share of joint cost
K = 5,00,000 = 100/unit
5,000

38

PROCESS COSTING
S = 3,00,000 = 100/unit
3,000
T = 2,00,000 = 100/unit
2,000
SALES VALUE (AT THE POINT OF SEPARATION)
Under this method, the joint cost is shared among the joint products on the basis of their
sales value before further processing. At the split off point, market value can be estimated per
unit of each of the joint products. The ratios of the sales value of the joint products are to be used
as basis of apportioning the joint cost.
The problems with this method are two-fold: One, a product may have zero value at the
point of separation but significant value with little processing cost after the split-off point.
Secondly, a product may have high selling price at the split-off point and hence high sales value
but may involve large selling and distribution cost (advert, carriage, etc) so that its value is much
less than its selling cost.
ILLUSTRATION
`Assuming that Anadariya Company Ltd has estimated the following selling prices for its
three products at the point of separation:
K

400/unit

440/unit

340/unit

Use the Sales Value method to apportion the joint cost and determine the per unit cost of each of
the three products.
SUGGESTED SOLUTION :(A)
PRODUCT
UNIT
SP/UNITS

SALES VALUE

RATIO

SHARE OF JC

5,000

400

20,00,000

50%

5,00,000

3,000

440

13,20,000

33%

3,30,000

2,000

340

6,80,000

17%

1,70,000

40,00,000

10,00,000

(B) Unit cost based on the share of joint cost:

K = 5,00,000 = 100/Unit.

S = 3,30,000 = 110/Unit.

39

PROCESS COSTING
5,000

3,000
T = 1,70,000 = 85/Unit.
2,000

ILLUSTRATION
Assuming that the sales values in illustration are market prices after further processing
and that separate processing and marketing costs are as follows:
K = 2,00,000
S = 3,00,000
T = 1,60,000
Determine the share of the joint cost to the three (3) products. Show also the per unit cost
of each of the three products.
SUGGESTED SOLUTION:(1)
PRODUCT

UNIT

SP/UNITS

SALES VALUE

SPC

NRV

SHARE OF JC

VALUE
K

5,000

400

20,00,000

2,00,000

18,00,000

5,00,000

3,000

440

13,20,000

3,00,000

10,20,000

3,30,000

2,000

340

6,80,000

1,60,000

5,20,000

1,70,000

33,40,000

10,00,000

40,00,000
Note:

(A) Net Realizable Value (NRV) = Sales Value Less separate processing costs (SPC).
(B) The total of the NRV of all the joint products is obtained and the joint cost is shared in
proportion to the NRV of each product.
(C) This method is the best as it considers the quantity (units) produced of all the joint
products, their sales values and their further processing costs.
(2) Unit cost based on the share of joint cost:
K = 538,922 = 108/unit
5,000

S = 305,389 = 102/unit
3,000

T = 155,689 = 78/unit
2,000

40

PROCESS COSTING

17.TOTAL COST PER UNIT DETERMINATION USING NRV METHOD

Total cost of a joint product is given by its share of joint cost plus its further processing
and marketing cost. To arrive at its total cost per unit, the total cost is divided by the units
produced. Using illustration 7-11, total cost per unit could be determined for each of the three
products as follows:
K=

538,922 + 200,000
5,000

738,922
5,000

147.78

S=

305,389 + 300,000
3,000

605,389
3,000

201.80

T=

155,689 + 160,000
2,000

315,689
2,000

157.84

If there are closing inventory of Product K (900 units), S (500 units) and T (400 units),
the value of closing stock for reflection in the balance sheet could be determined as follows:
K=

900 x 147.78 =

133,002

S=

500 x 201.80 =

100,900

T=

400 x 157.84 =

63,136
297,038

Note:
It should be understood that profit is always the difference between total revenue (sales
value) and total cost. That economics principle is very much applicable in joint-product costing.

41

PROCESS COSTING

18. CONCLUSION
This chapter has introduced the meaning of process costing, its application areas, and how
it can be put to use for proper accountability. The characteristics of process costing, how
products flow in the course of processing, the equivalent units of production to be transferred to
the next stage of production, accounting for spoilages/losses and the valuation process for cost of
production report have all been treated. Finally, cost of production and report write-ups have
been adequately illustrated, using highly standardized exercises. Process costing, which is
arguably the most widely used costing in the world, has been given adequate coverage it
deserves.
The chapter has also put the readers through joint products costing, where three different
methods of apportioning joint cost to joint products were discussed. By-product, and its
accounting treatment, has also been discussed.

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PROCESS COSTING

19.REFERENCE:LOTS OF BOOKS AND WEBSITES ARE AVAILABLE FOR THIS PROJECT BUT THE
ABOVE MATERIAL OR INFORMATION ABOUT THE PROCESS COSTING IS
COLLECTED FROM THE FOLLOWING SOURCES:1. INTERNET
2. COST ACCOUNTING TEXTBOOKS
3. COST ACCOUNTING REFERENCE BOOKS
COST ACCOUNTING S P GUPTA, AJAY SHARMA, SATISH AHUJA FK
PUBLICATIONS.

43