Documente Academic
Documente Profesional
Documente Cultură
ON
SUBMITTED BY:
(SEM-I)
K.M.AGRAWAL COLLEGE
OF
KALYAN (WEST).
UNIVERSITY OF MUMBAI
2013-14
CERTIFICATE
(MCOM COURSE)
KNOWLEDGE.
PLACE: KALYAN
DATE: ___/___/_____
________________________
PRATIK KHOLE
ACKNOWLEDGEMENT
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
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.
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
Registered Office
ICRA Limited
1105, Kailash Building, 11th Floor, 26, Kasturba Gandhi Marg, New Delhi 110001
Tel: +91-11-23357940-50, Fax: +91-11-23357014
Corporate Office
Mr. Vivek Mathur
Mobile: +91 9871221122
Email: vivek@icraindia.com
Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-
4545310 (D), 4545300 / 4545800 (B) Fax; +91- 124-4050424
Mumbai Kolkata
Mr. L. Shivakumar Mr. Jayanta Roy
Mobile: +91 9821086490 Mobile: +91 9903394664
Email: shivakumar@icraindia.com Email: jayanta@icraindia.com
3rd Floor, Electric Mansion A-10 & 11, 3rd Floor, FMC Fortuna
Appasaheb Marathe Marg, Prabhadevi 234/3A, A.J.C. Bose Road
Mumbai400025, Kolkata700020
Board : +91-22-61796300; Fax: +91-22-24331390 Tel +91-33-22876617/8839 22800008/22831411, Fax +91-33-22870728
Chennai Bangalore
Mr. Jayanta Chatterjee Bangalore
Mobile: +91 9845022459 Mr. Jayanta Chatterjee
Email: jayantac@icraindia.com Mobile: +91 9845022459
Email: jayantac@icraindia.com
5th Floor, Karumuttu Centre
634 Anna Salai, Nandanam 'The Millenia'
Chennai600035 Tower B, Unit No. 1004,10th Floor, Level 2 12-14, 1 & 2,
Tel: +91-44-45964300; Fax: +91-44 24343663 Murphy Road, Bangalore 560 008
Tel: +91-80-43326400; Fax: +91-80-43326409
Ahmedabad Pune
Mr. L. Shivakumar Mr. L. Shivakumar
Mobile: +91 9821086490 Mobile: +91 9821086490
Email: shivakumar@icraindia.com Email: shivakumar@icraindia.com
907 & 908 Sakar -II, Ellisbridge, 5A, 5th Floor, Symphony, S.No. 210, CTS 3202, Range
Ahmedabad- 380006 Hills Road, Shivajinagar,Pune-411 020
Tel: +91-79-26585049, 26585494, 26584924; Fax: Tel: + 91-20-25561194-25560196; Fax: +91-20-
+91-79-25569231 25561231
Hyderabad
Mr. Jayanta Chatterjee
Mobile: +91 9845022459
Email: jayantac@icraindia.com
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
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
(f) Both direct and indirect costs are accumulated in each process
(h) The total cost of each process is divided by the normal output of that process to find out cost
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
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
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.
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
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
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.
(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
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 :
equivalent units on the basis of estimates on degree of completion of materials, labour and
inprogress
Situation II:
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
Situation III:
on the method of apportionment of cost followed viz, FIFO, Average cost Method and LIFO.
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
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-
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 +
progress and thus the closing work-in progress appears cost of opening work-in-progress. The
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
20
PROCESS COSTING
for each cost column (materials, labor and overhead) for each line and total equivalent
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
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
4. The computation of average cost is more difficult in those cases where more than one
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
Normal loss
This is the term used to describe normal expected wastage under usual operating
22
PROCESS COSTING
Abnormal loss
This is when a loss occurs over and above the normal expected loss. This may due to
Abnormal gain
This occurs when the actual loss is lower than the normal loss. This could, for example,
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
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
23
PROCESS COSTING
24
PROCESS COSTING
XX XXX XX XXX
PROCESS COSTING
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
28
PROCESS COSTING
XI. Since cost data is available for each process, operation and department, good managerial
control is possible.
29
PROCESS COSTING
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.)
31
PROCESS COSTING
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.
32
PROCESS COSTING
STEP 2:- Calculate the normal loss in units and enter on to the Process account. (The value will
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.
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
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.
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.
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.
1,000 Units @ Rs. 6 Per Unit were introduced in Process X. Production overhead to be
distributed as 100% on Direct Wages.
SOLUTION :
PROCESS X A/C.
DR. CR.
PARTICULAR UNITS RS. PARTICULAR UNITS RS.
36
PROCESS COSTING
PRODUCTION
OVERHEADS 4,000
1,000 19,200 1,000 19,200
PROCESS Y A/C.
DR. CR.
PARTICULAR UNITS RS. PARTICULAR UNITS RS.
PRODUCTION
OVERHEADS 8,000
ABNORMAL GAIN @
RS. 76 PER UNIT 36 2,736
37
PROCESS COSTING
2,736 2,736
Working Note:-
PROCESS Y:-
(A) Normal loss :- 950 X 10 == 95 Units
100
38
PROCESS COSTING
845
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
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:
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.
75 75,000 75 75,000
PROCESS B A/C.
40
PROCESS COSTING
PROCESS C A/C.
Note:
(A) Indirect expenses were apportioned as follows:
(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:
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
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.
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
45
PROCESS COSTING
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
Note:
Abnormal Spoilage Cost Was Determined As Follows:
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
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
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
50
PROCESS COSTING
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)
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.
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
52
PROCESS COSTING
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
53
PROCESS COSTING
Process 2:
Using FIFO Method
PARTICULARS CURRENT CURRENT UNIT
COST EQUIV. UNITS COST
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.
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.
56
PROCESS COSTING
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
40,00,000 10,00,000
58
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
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.
59
PROCESS COSTING
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:-
61
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