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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
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: - _______________


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
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 CO-


OPERATION IN PROVIDING ME WITH NECESSARY REFERENCE MATERIALS.

I ALSO EXPRESS MY THANKS TO FACULTY MEMBERS AND FOR CO-


OPERATION AND HELP GIVEN IN COMPLETING THIS PROJECT.

PRATIK KHOLE
(RESERCHER)
Table Of Contents

SR. PAGE
TITLE SIGN.
NO. NO.
INTRODUCTION 6
1.
MEANING 7
2.
CHARACTERISTICS OF PROCESS COSTING 8-9
3.
ADVANTAGES OF PROCESS COSTING 10
4.
LIMITATIONS OF PROCESS COSTING 11
5.
IMPORTANT TERMS TO UNDERSTAND 12
6.
FORMAT APPROACH PROCESS ACCOUNTING QUESTIONS AND ITS
13-14
7. STEPS
PROCESS LOSSES & GAINS 15-20
8.
PRODUCT FLOW 21-23
9.
EQUIVALENT UNITS 24-26
10.
ACCOUNTING TREATMENT OF SPOILAGES 27
11.
TRANSFERRED IN 28-29
12.
VALUATION PROCESS FOR COST STATEMENT 30
13.
COST OF PRODUCTION REPORT 31-36
14.
JOINT AND BY-PRODUCTS COSTING 37
15.
BY-PRODUCT AND ITS ACCOUNTING TREATMENT 38
16.
TOTAL COST PER UNIT DETERMINATION USING NRV METHOD 39-42
17
CONCLUSION 43
18
19 REFERENCE 44

CHAPTER-I
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.
OBJECTIVES
The internship program was carried out having focus on the following objectives:
To study various process cost components
To study of the cost function of various department
To study the various methods like FIFO , WIP

Methodology to Data Collection


The internship report is based on the secondary data. The data are collected from the company
sources and other office staffs.

CHAPTER-II
COMPANY PROFILE
Jasper Industries Private Limited1
Instrument Amount in Rs Crore Rating Action
Term Loans 69.00 [ICRA]BBB- (Negative)
(revised from Rs 30.50 reaffirmed/assigned
crore)
Cash Credit 25.00 [ICRA]BBB- (Negative) reaffirmed
Inventory 70.00 [ICRA]BBB- (Negative) reaffirmed
Funding
Bank 0.75 [ICRA]A3 reaffirmed
Guarantee
Unallocated 5.50 [ICRA]BBB-/[ICRA]A3 reaffirmed
Limits (revised from Rs 2.00
crore)

ICRA has reaffirmed/assigned the long term rating of [ICRA]BBB- (pronounced ICRA triple B
minus) to the Rs.169.50 crore1 (revised from Rs 125.50 crore) fund based limits of Jasper Industries
Private Limited (JIPL)2. ICRA has also reaffirmed the short term rating of [ICRA]A3 (pronounced
ICRA A three) assigned to the Rs. 0.75 crore bank guarantee limits and reaffirmed the ratings of
[ICRA]BBB-/[ICRA]A3 assigned to the Rs. 5.50 crore (revised from Rs 2.00 crore) unallocated
limits of JIPL. The outlook on the long term rating remains negative.

1 100 lakh = 1 crore = 10 million


2 For complete rating scale and definitions, please refer to ICRAs website www.icra.in or other ICRA Rating Publications.
The reaffirmation of ratings continues to factor in the established track record of the company as a
dealer of commercial vehicles (CV) of Tata Motors Limited (TML), which is the market leader in
the domestic commercial vehicle space (market share of 44.37%3 during 11MFY2016) and the
benefits arising from JIPLs position as the sole authorized dealer of TML across all ten districts in
Telangana and three districts in Andhra Pradesh (covering the Hyderabad and Vijayawada territory).
The ratings also factor in the wide sales & service network of JIPL; strong association of Jasper
group with TATA group of companies4; increase in revenues by 43% in FY2016 owing to improved
CV demand mainly driven by Medium & Heavy Commercial Vehicle (MHCV) segment; and
improved operating margins from 1.86% in FY2015 to 2.39% in FY2016 owing to higher share of
MHCV vehicle sales.

The ratings are however constrained by significant increase in debt levels with the company
availing two new term loans totaling to Rs 44.00 crore and also increase in group advances; the
company has taken new term loans towards investments in group companies and for buying of back
buildings from Tata Motors Limited (TML) which was earlier sold to them. The ratings continue to
be constrained by large group advances and competition from dealers of established and new CV
manufacturers; limited pricing flexibility with JIPL given that the margins on vehicle sales, spares
and services are controlled by Tata Motors Limited (TML); and significant debt repayment
obligations over the medium term given that the expected accruals to be lower than repayment
obligations. Therefore, the ability of the company to refinance the ensuing repayments will be a key
monitorable.

Going forward, the companys ability to reduce the debt levels in a timely manner by reducing stake
in the power venture along with selling of immovable assets of promoters/group companies,
improvement in profitability and cash accruals in the dealership business will be a key rating
sensitivity from credit perspective.

Company Profile
JIPL was established in 1955 by Mr. Badiga Seshagiri Rao as a partnership firm and was later
converted into private limited company in 1987. It was one of the first sixteen dealers appointed by
TML in the year 1955. Started with its first outlet at Vijayawada, today the company has around 87
touch points spread across all ten districts of Telangana and three districts of Andhra Pradesh
including Hyderabad and Vijayawada where it is the exclusive dealer for TML commercial vehicles.
Jasper group is also involved in sale of passenger vehicles of TML, manufacturing of automotive
applications of TML. The group is also executing 135MW thermal power project in association
with Tata Steel near Cuttack in Odisha. The power plant would mainly cater to the captive needs of
Tata Steel and will be operational from May,2016.

Recent Results
The company reported a net profit of Rs. 1.39 crore on operating income of Rs. 1012.64 crore in
FY2016 (Provisional and Unaudited) as against net loss of Rs.2.14 crore on operating income of Rs.
712.00 crore in FY2015.

May 2016
3 Based on data reported by Society of Indian Automobile Manufacturers (SIAM)
4 The Jasper group is also involved in sale of passenger vehicles of TML, manufacturing of automotive applications for
TML and is also executing 135 MW power project in association with TATA Steel Ltd
For further details please contact:
Analyst Contacts:
Mr. K. Ravichandran, (Tel. No. +91-44-45964301)
ravichandran@icraindia.com

Relationship Contacts:
Mr. Jayanta Chatterjee (Tel. No. +91-80-43326401)
jayantac@icraindia.com

Copyright, 2016, ICRA Limited. All Rights Reserved.


Contents may be used freely with due acknowledgement to ICRA
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issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any
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CHAPTER-III
LITERATURE & THEORITICAL STUDY

1. MEANING
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
INTRODUCTION:

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.

1.2 MEANING OF PROCESS COSTING

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.

1.2.1 Definition:
CIMA London defines process costing as that form of operation costing which applies where

standardize goods are produced

1.2.2 Features of Process Costing:


(a) The production is continuous

(a) The product is homogeneous

(b) The process is standardized

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

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


(e) Costs are collected process-wise

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

(g) If there is a stock of semi-finished goods, it is expressed in terms of equivalent units

(h) The total cost of each process is divided by the normal output of that process to find out cost

per unit of that process.

1.2.3 Advantages of process costing:


1. Costs are be computed periodically at the end of a particular period

1. It is simple and involves less clerical work that job costing

2. It is easy to allocate the expenses to processes in order to have accurate costs.

3. Use of standard costing systems is very effective in process costing situations.

4. Process costing helps in preparation of tender, quotations

5. Since cost data is available for each process, operation and department, good managerial

control is possible.

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

1. Process costing is based on average cost method, which is not that suitable for performance

analysis, evaluation and managerial control.

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

calculations.
3. 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.

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

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

reliable.

1.3 DISTINCTION BETWEEN JOB COSTING AND PROCESS COSTING


Job order costing and process costing are two different systems. Both the systems are

used for cost calculation and attachment of cost to each unit completed, but both the

systems are suitable in different situations. The basic difference between job costing

and process costing are:


1.4 VALUATION OF WORK-IN-PROGRESS

1.4.1 Meaning of Work-in-Progress:


Since production is a continuous activity, there may be some incomplete production at the end

of an accounting period. Incomplete units mean those units on which percentage of completion

with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such

incomplete production units are known as Work-in-Progress. Such

Work-in-Progress is valued in terms of equivalent or effective production units.

1.4.2 Meaning of equivalent production units :


This represents the production of a process in terms of complete units. In other words, it

means converting the incomplete production into its equivalent of complete units. The term

equivalent unit means a notional quantity of completed units substituted for an actual quantity

of incomplete physical units in progress, when the aggregate work content of the incomplete

units is deemed to be equivalent to that of the substituted quantity. The principle applies when

operation costs are apportioned between work in progress and completed units.

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

completed Equivalent unit should be calculated separately for each element of cost (viz. material,

labour and overheads) because the percentage of completion of the different cost component may be

different.

1.4.3 Accounting Procedure:


The following procedure is followed when there is Work-in- Progress
(1) Find out equivalent production after taking into account of the process losses, degree of

completion of opening and / or closing stock.


(1) Find out net process cost according to elements of costs i.e. material, labour and overheads.
(2) Ascertain cost per unit of equivalent production of each element of cost separately by

dividing each element of costs by respective equivalent production units.

(3) Evaluate the cost of output finished and transferred work in progress

The total cost per unit of equivalent units will be equal to the total cost divided by effective units

and cost of work-in progress will be equal to the equivalent units of work-in progress multiply by

the cost per unit of effective production.

In short the following from steps an involved.


Step 1 prepare statement of Equivalent production
Step 2 Prepare statement of cost per Equivalent unit
Step 3 Prepare of Evaluation
Step 4 Prepare process account
The problem on equivalent production may be divided into four groups.
I. when there is only closing work-in-progress but without process losses

I. when there is only closing work-in-progress but with process losses

II. when there is only opening as well as closing work-in progress without process losses

III. when there is opening as well as closing work-in progress with process losses

Situation I :

Only closing work-in-progress without process losses :


In this case, the existence of process loss is ignored. Closing work-in-progress is converted into

equivalent units on the basis of estimates on degree of completion of materials, labour and

production overhead. Afterwards, the cost per equivalent unit is


calculated and the same is used to value the finished output transferred and the closing work-

inprogress

Situation II:

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


If there are process losses the treatment is same as already discussed in this chapter. In case of

normal loss nothing should be added to equivalent production. If abnormal loss is there, it should

be considered as good units completed during the period. If units scrapped (normal loss) have

any reliable value, the amount should be deducted from the cost of materials in the cost statement

before dividing by equivalent production units.

Abnormal gain will be deducted to obtain equivalent production.

Situation III:

Where there is opening and closing work-in progress without


process losses.
Since the production is a continuous activity there is possibility of opening as well as closing

work-inprogress. The procedure of conversion of opening work-in-progress will vary depending

on the method of apportionment of cost followed viz, FIFO, Average cost Method and LIFO.

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

(a) FIFO Method:


The FIFO method of costing is based on the assumption of that the opening work-in-progress

units are the first to be completed. Equivalent production of opening work-in-progress can be

calculated as follows:

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

(b) Average Cost Method:


This method is useful when price fluctuate from period to period. The closing valuation of

work-inprogress in the old period is added to the cost of new period and an average rate obtained. In
calculating the equivalent production opening units will not be shown separately as units of work-

inprogress but included in the units completed and transferred.

(c) Weighted Average Cost Method:


In this method no distinction is made between completed units from opening inventory

and completed units from new production. All units finished during the current accounting

period are treated as if they were started and finished during that period. The weighted

average cost per unit is determined by dividing the total cost (opening work-in-progress cost +

current cost) by equivalent production.

(d) LIFO Method:


In LIFO method the assumption is that the units entering into the process is the last one first

to be completed. The cost of opening work-in-progress is charged to the closing work-in-

progress and thus the closing work-in progress appears cost of opening work-in-progress. The

completed units are at their current cost.

1.5 The five steps in process costing:

Step 1. Summarize the flow of physical units of output.

Step 2. Compute output in terms of equivalent units.

Step 3. Compute equivalent-unit costs.

Step 4. Summarize total costs to account for.


Assign total costs to units completed and to ending
Step 5. work in process.

1.6 The two common process-costing methods


PROCESS COSTING

The weighted-average method and the first-in, first-out (FIFO) method are two

common process-costing methods. The primary difference between the two methods

is that the FIFO method segregates current period production costs and units from the

production costs and units that are part of beginning work in process. The chapter also

discusses use of standard costs and process costing with transferred-in costs.

19
PROCESS COSTING

1.7 If the steps listed above are combined into a single report:

Step 1A
: Analyze the flow of physical units through the
-in-process
work inventory
account. Units to be

accounted for (inflows) must equal Units Accounted For (outflows).


Step 2 1B Calculate equivalent units only for Units Completed and Transferred Out

and Ending Balance in Work-In-Process. Multiply physical units by percent complete

20
PROCESS COSTING

for each cost column (materials, labor and overhead) for each line and total equivalent

units for each cost column.

Step 2A: Total costs in beginning inventory and costs added during the period for each cost
column
(materials, labor and overhead) and in total.
Step 2B: For each cost column (materials, labor and overhead), divide total costs from Step

2A by total equivalent units from Step 2 to compute cost per equivalent unit.

Step 3: For Completed and Transferred Out, multiply equivalent units from Step 2 by

cost per equivalent unit from Step 2B for each cost column (materials, labor and

overhead). For Ending Balance, multiply equivalent units from Step 2 by cost per

equivalent unit from Step 2B for each cost column (materials, labor and overhead).

Total costs assigned in each cost column and the total column. Total costs to be

assigned in Step 2A must equal total costs assigned in Step 3.

Note that labor and overhead may be combined as conversion cost only if the percent complete
is the same.

Limitations:

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

effective control.

21
PROCESS COSTING

2. Process costing is based on average cost method, which is not that suitable for

performance analysis, evaluation and control.

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

total cost calculations.

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

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

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

to various costs units. Such individual products costs may be taken as only

approximation and hence not reliable.

Frequently Used Terms in Process Costing:

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.

22
PROCESS COSTING

Abnormal loss

This is when a loss occurs over and above the normal expected loss. This may due to

reasons such as faulty machinery or errors by labourers.

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.

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.

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 fora fee.

23
PROCESS COSTING

Application of Process Costing

Cost Flow Chart

24
PROCESS COSTING

Process Account Format


Process I A/c
Particular Uni Rs. Particulars Uni Rs
s ts ts .
To Direct Material XX XX By Normal Loss A/c XX XXX
X
To Direct Wages XXX By Abnormal Loss XX XXX
A/c
To Direct XXX By Process II A/c XX XXX
Expenses (output transferred.
to next process)
To Production XXX By Closing Stock A/c XX XXX
Overheads
To Abnormal XX XXX
Gains 25

XX XXX XX XXX
PROCESS COSTING

2. CHARACTERISTICS OF 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.

26
PROCESS COSTING

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.
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.

27
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

28
PROCESS COSTING

XI. Since cost data is available for each process, operation and department, good managerial
control is possible.

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.

29
PROCESS COSTING

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.

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):-

30
PROCESS COSTING

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 wholly-
completed 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.)

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).

31
PROCESS COSTING

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.

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 Units Rs. Particulars Units Rs.

Opening WIP XXX XXX Normal Loss XXX XXX


Materials XXX Transfer to
process 2 or XXX XXX
Labour XXX finished goods
Overheads XXX Abnormal loss XXX XXX
Abnormal gain XXX XXX Closing WIP XXX XXX

XXX XXX XXX XXX

32
PROCESS COSTING

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.

CHAPTER-IV
DATA ANALYSIS & INTERPRITATION
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.

33
PROCESS COSTING

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
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 RS. PARTICULERS UNITS RS.

TO PROCESS A/C. XXX XXX BY BANK XXX XXX

BY COSTING P & XXX XXX


L A/C.
XXX XXX XXX XXX

34
PROCESS COSTING

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.


DR. CR.
PARTICULARS UNITS RS. PARTICULARS UNITS RS.

TO NORMAL XXX XXX BY PROCESS A/C. XXX XXX


LOSS A/C.

TO COSTING XXX XXX


P & L A/C.

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:

35
PROCESS COSTING

PARTICULARS PROCESS
X Y Z TOTAL
RS. RS. RS. RS.

MATERIAL 5,200 3,960 5,924 15,084


DIRECT WAGES 4,000 6,000 8,000 18,000
PRODUCTION 18,000
OVERHEADS

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

ACTUAL OUTPUT NORMAL LOSS


UNIT PERCENTAGE VALUE OF
RS. % SCRAP PER
UNIT
PROCESS X 950 5% 4
PROCESS Y 840 10% 8
PROCESS Z 750 15% 10

SOLUTION :
PROCESS X A/C.
DR. CR.
PARTICULAR UNITS RS. PARTICULAR UNITS RS.

36
PROCESS COSTING

MATERIAL NORMAL LOSS 50 200


INTRODUCED @ RS. 6 1,000 6,000
PER UNIT TRANSFERRED TO
PROCESS Y @ RS. 20 950 19,000
MATERIAL 5,200 PER UNIT

DIRECT WAGES 4,000

PRODUCTION
OVERHEADS 4,000
1,000 19,200 1,000 19,200

PROCESS Y A/C.
DR. CR.
PARTICULAR UNITS RS. PARTICULAR UNITS RS.

TRANSFERRED FROM NORMAL LOSS 95 760


PROCESS X 950 19,000
ABNORMAL LOSS 15 600
MATERIAL 3,960
TRANSFERRED TO
DIRECT WAGES 6,000 PROCESS Z @ RS. 40 840 19,000
PER UNIT
PRODUCTION
OVERHEADS 6,000
950 34,960 950 34,960
PROCESS Z A/C.
DR. CR.
PARTICULAR UNITS RS. PARTICULAR UNITS RS.

TRANSFERRED FROM NORMAL LOSS 126 1,260


PROCESS Y 840 33,600
FINISHED GOODS 750 57,000
MATERIAL 5,924 (@ RS. 76)

DIRECT WAGES 8,000

PRODUCTION
OVERHEADS 8,000

ABNORMAL GAIN @
RS. 76 PER UNIT 36 2,736

37
PROCESS COSTING

876 58,260 876 58,260

ABNORMAL LOSS A/C.


DR. CR.
PARTICULAR RS. PARTICULAR RS.

To Process Y 600 By Cash (sale of Scrap of


Abnormal
Loss units) 120
By Costing Profit And
Loss A/C. 480
600 600

ABNORMAL GAIN ACCOUNT


DR. CR.
PARTICULAR RS. PARTICULAR RS.

TO PROCESS Z A/C. 360 BY PROCESS Z A/C. 2,736


TO COSTING P&L A/C. 2,376

2,736 2,736

Working Note:-
PROCESS Y:-
(A) Normal loss :- 950 X 10 == 95 Units
100

Scrap value = 95 X 8 = Rs. 760.

(B) Abnormal loss Units


Normal production 950-95 855
Actual production 840
Abnormal loss 15

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

Cost of Normal Production per unit 34,200 = Rs. 40 per units

38
PROCESS COSTING

845

Cost of Abnormal Loss:- 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 Units


Actual production 750
Estimated production 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.

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
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 :-

39
PROCESS COSTING

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 PROCESS B PROCESS C


MATERIAL COST 40,000 15,000 5,000
20,000 25,000 15,000
LABOUR COST 5,000 3,000 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


MATERIALS 40 40,000 TRANSFERRED
LABOUR 20 20,000 TO PROCESS B 75 75,000
DIR. EXPENSES 5 5,000
INDIRECT EXP. 10 10,000

75 75,000 75 75,000

PROCESS B A/C.

PARTICULAR COST/LITER TOTAL PARTICULAR COST/LITER TOTAL

40
PROCESS COSTING

PROCESS A 75 75,000 TRANSFERRED


MATERIALS 15 15,000 TO PROCESS C 130.50 1,30,500
LABOUR 25 25,000
DIR. EXPENSES 3 3,000
INDIRECT EXP. 12.5 12,500
130.50 1,30,500 130.50 1,30,500

PROCESS C A/C.

PARTICULAR COST/LITER TOTAL PARTICULAR COST/LITER TOTAL


PROCESS B 130.50 1,30,500 OUTPUT TO
MATERIALS 5 5,000 FINISHED
LABOUR 15 15,000 GOODS STOCK 161 1,61,000
DIR. EXPENSES 3 3,000
INDIRECT EXP. 7.50 7,500
161 1,61,000 161 1,61,000

Note:
(A) Indirect expenses were apportioned as follows:

Process A = 20,000 x 30,000 = 10,000


60,000

Process B = 25,000 x 30,000 = 12,500


60,000

Process C = 15,000 x 30,000 = 7,500


60,000 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.

41
PROCESS COSTING

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.
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

42
PROCESS COSTING

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

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:

43
PROCESS COSTING

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

SUGGESTED SOLUTION :-
Cost Equiv. units in Fully comply Total Total cost Cost /
elements WIP units production unit
Material 2000 X 80% 8,000 9,600 4,22,400 44
= 1,600
Labour 2000 X 60% 8,000 9,200 3,95,600 43
= 1,200
Overhead 2,000 X 50% = 8,000 9,000 2,25,000 25
1,000
10,43,000 112

Value of completed units = 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.

Elements of units in WIP No. of Cost / unit Value


equiv.
WIP

1,600 44 70.400
Material
1,200 43 51,600
Labour
1,000 25 5,000
Overhead

44
PROCESS COSTING

Total 1,47,000

PROCESS ACCOUNT
Elements Units Total cost Elements Units Total cost
Material 10,000 4,22,400 Goods transferred
Labour 3,95,600 to next stage 8,000 8,96,000
Overhead 2,25,000 WIP c/d 2,000 1,47,000

10,000 10,43,000 10,000 10,43,000


WIP b/d 2,000 1,47,000

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
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

45
PROCESS COSTING

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.

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 :-
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).

46
PROCESS COSTING

SUGGESTED SOLUTION :-
Abnormal spoilage = 9 kg - 5 kg = 4 kg

PROCESS ACCOUNT
Particulars (kg.) Value Particulars Kg. Value

Material 100 27,000 Good 91 37,598


conversion 13,000 production 5 750
Normal
4 1,652
spoilage
Abnormal
spoilage

100 40,000 100 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
Process a/c. 1,652 Profit & Loss A/c. 1,652

1,652 1,652

47
PROCESS COSTING

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
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.).

48
PROCESS COSTING

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.

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.
Opening WIP unit 35,000
Materials 2,10,000
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) unit 7,000

49
PROCESS COSTING

Material introduced in June 7,70,000


6,30,000
Conversion cost added in June

Process 2
Particulars Unit / Rs.
Opening WIP 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) unit 56,000
Material introduced in June 4,62,000
Conversion cost added in June 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:
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 :-

50
PROCESS COSTING

WIP (beginning) 35,000


Material introduced 1,40,000
Total units to be accounted for 1,75,000
Particulars Equivalent Units
Material Conversion
Units Accounted For :-
1,68,000 1,68,000
Units Completed & Transferred Out 1,68,000
7,000(100%) 3,500(50%)
WIP (Ending) 7,000
Total Units Accounted For 1,75,000
1,75,000 1,71,500
Total Equivalent Units (TEU)
35,000 14,000
Less :- WIP (Beginning)
Current Equivalent Units 1,40,000 1,57,500

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 Cost of Current Total Cost T. E. U. Cost
WIP Cost /Unit
(beginning)

Material 2,10,000 7,70,000 9,80,000 1,75,000 5.60


Conversion 52,500 6,30,000 6,82,500 1,71,500 3.98

2,62,500 14,00,000 16,62,500 9.58

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


= 1,609,440

Cost of WIP (Ending)


Material 7,000 x 1 x 5.6 = 39,200
Conversion 7,000 x x 3.98 = 13,930
53,130

51
PROCESS COSTING

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 Current cost C. E. Units Units Cost
Material 7,70,000 1,40,000 5.50
Conversion 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
= 1,610,000.

Process 2, Using WAP Method


Physical flow of units of material
WIP (beginning) 42,000
Units transferred in 1,68,000

52
PROCESS COSTING

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
WIP (Ending) 56,000 56,000 000 21,000
Total Units Accounted For 2,10,000

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


Total Equivalent Units (TEU)
42,000 000 28,000
Less :- WIP (Beginning) 1,68,000 1,54,000 1,47,000
Current Equivalent Units

COST STATEMENT
Cost Elements Cost of Current Total Cost T. E. U. Cost
WIP Cost /Unit
(beginning)
Transferred In 3,43,000 16,09,440 19,52,440 2,10,000 9.2973
Material 0 4,62,000 4,62,000 1,54,000 3.0000
Conversion 3,92,000 22,05,000 25,97,000 1,75,000 14.8400
7,35,000 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)
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.

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PROCESS COSTING

Process 2:
Using FIFO Method
PARTICULARS CURRENT CURRENT UNIT
COST EQUIV. UNITS COST

TRANSFERRED IN 16,09,440 1,68,000 9.58

MATERIALS 4,62,000 1,54,000 3.00

CONVERSION 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.

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.

54
PROCESS COSTING

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 by-
product can become a joint-product or even a main product and vice versa.

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

55
PROCESS COSTING

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 by-
product 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.

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.

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PROCESS COSTING

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
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

57
PROCESS COSTING

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
S = 440/unit
T = 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

K 5,000 400 20,00,000 50% 5,00,000


S 3,000 440 13,20,000 33% 3,30,000
T 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.
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

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PROCESS COSTING

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


S 3,000 440 13,20,000 3,00,000 10,20,000 3,30,000
T 2,000 340 6,80,000 1,60,000 5,20,000 1,70,000

40,00,000 33,40,000 10,00,000

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 S = 305,389 = 102/unit T = 155,689 = 78/unit


5,000 3,000 2,000

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:

59
PROCESS COSTING

K= 538,922 + 200,000 = 738,922 = 147.78


5,000 5,000

S= 305,389 + 300,000 = 605,389 = 201.80


3,000 3,000

T= 155,689 + 160,000 = 315,689 = 157.84


2,000 2,000
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.

CHAPTER-V
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

60
PROCESS COSTING

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.

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:-

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PROCESS COSTING

1. INTERNET
2. COST ACCOUNTING TEXTBOOKS
3. COST ACCOUNTING REFERENCE BOOKS
COST ACCOUNTING S P GUPTA, AJAY SHARMA, SATISH AHUJA FK
PUBLICATIONS.

62

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