final project process-costing
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PROCESS COSTING
PROJECT REPORT
ON
“THE CONCEPT OF process costing”
COURSE: ADVANCED COST ACCOUNTING
SUBMITTED BY:
PRATIK KHOLE (ROLL NO.120)
Master of Commerce (Part-1)
(SEM-I)
K.M.AGRAWAL COLLEGE
OF
ARTS , COMMERCE & SCIENCE
KALYAN (WEST).
UNIVERSITY OF MUMBAI2013-14
1
PROCESS COSTING
CERTIFICATE
THIS IS TO CERTIFY THAT MR.PRATIK KHOLE
HAS SATISFACTORILY CARRIED OUT THE PROJECT WORK
ON THE TOPIC
“THE CONCEPT OF process costing”
For
MCOM (SEM I) IN THE
ACADEMIC YEAR 2013-14.
SIGNATURE OF PROJECT GUIDE: - _______________
SIGNATURE OF CO-ORDINATOR: - _______________
(MCOM – COURSE)
SIGNATURE OF EXTERNAL EXAMINER: - _______________
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PROCESS COSTING
DECLARATION
I, PRATIK KHOLE THE STUDENT OF K.M.AGRAWAL COLLEGE OF MCOM
(SEM-I) HERE BY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON- “T
“THE CONCEPT OF process costing”
IN THE ACADEMIC YEAR 2012-13
THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY
KNOWLEDGE.
PLACE: KALYAN
DATE: ___/___/_____
________________________
PRATIK KHOLE
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PROCESS COSTING
ACKNOWLEDGEMENT
I EXPRESS MY GRATEFUL THANK‘S 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)
4
PROCESS COSTING
Table Of Contents
SR.NO.
TITLEPAGENO.
SIGN.
1. INTRODUCTION 6
2.MEANING 7
3.CHARACTERISTICS OF PROCESS COSTING 8-9
4.ADVANTAGES OF PROCESS COSTING 10
5.LIMITATIONS OF PROCESS COSTING 11
6.IMPORTANT TERMS TO UNDERSTAND 12
7.
FORMAT APPROACH PROCESS ACCOUNTING QUESTIONS AND
ITS STEPS13-14
8.PROCESS LOSSES & GAINS 15-20
9.PRODUCT FLOW 21-23
10.EQUIVALENT UNITS 24-26
11.ACCOUNTING TREATMENT OF SPOILAGES 27
12.TRANSFERRED IN 28-29
13.VALUATION PROCESS FOR COST STATEMENT 30
14.COST OF PRODUCTION REPORT 31-36
15.JOINT AND BY-PRODUCTS COSTING 37
16.BY-PRODUCT AND ITS ACCOUNTING TREATMENT 38
17TOTAL COST PER UNIT DETERMINATION USING NRV METHOD 39-42
18CONCLUSION 43
19 REFERENCE 44
5
PROCESS COSTING
1. INTRODUCTION
Process costing is a method of costing used mainly in manufacturing where units are
continuously mass-produced through one or more processes. Examples of this include the
manufacture of erasers, chemicals or processed food.
In process costing it is the process that is costed (unlike job costing where each job is
costed separately). The method used is to take the total cost of the process and average it over the
units of production.
Process costing is a method used in a situation where production follows a series of
sequential processes. The method is used to ascertain the cost of a product or service at each
stage of production, manufacture or process. It is generally applied in particular industries where
continuous mass production is possible. In view of the continuous nature of the process and the
uniformity of the output, it is not possible or necessary to identify a particular unit of output with
a time of manufacture. The cost of any particular unit must be taken as the average cost of
manufacture over a period. This can be complicated because of the need to apportion costs
between completed output and unfinished production at the end of the period. Wastage must also
be accounted for. In process costing, it is the average cost incurred that concerns management.
Process costing is used in a variety of industries, including food processing, paper
milling, chemical and drug manufacturing, oil refining, soap making, textiles, box-making, paint
and ink manufacturing, brewery, flour milling, bottling and canning, biscuits products, meat
products, sugar making, etc. It is probably the most widely used cost accounting system in the
world.
Process costing is a form of operations costing which is used where standardized
homogeneous goods are produced. This costing method is used in industries like chemicals,
textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type
of industries also. It is assumed in process costing that the average cost presents the cost per unit.
Cost of production during a particular period is divided by the number of units produced during
that period to arrive at the cost per unit.
6
PROCESS COSTING
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”
7
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.
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.
8
PROCESS COSTING
XII. The cost of normal and abnormal losses usually incurred at different stages of production is
added to finished goods.
XIII. The interconnected processes make the final output of by-product or joint products
possible.
XIV. The production is continuous. The product is homogeneous, The process is standardized.
Output of one process become raw material of another process. The output of the last
process is transferred to finished stock
XV. Costs are collected process-wise, Both direct and indirect costs are accumulated in each
process. If there is a stock of semi-finished goods, it is expressed in terms of equivalent
units. The total cost of each process is divided by the normal output of that process to find
out cost per unit of that process.
9
PROCESS COSTING
3. ADVANTAGES OF PROCESS COSTING
The main advantages of process costing are :
I. Determination of the cost of process and unit cost is possible at short intervals.
II. Effective cost control is possible.
III. Computation of average cost is easier because the products produced are homogenous.
IV. It ensures correct valuation of opening and closing stock of work in progres~ in each
process.
V. It is simple to operate and involve less expenditure.
VI. Costs are be computed periodically at the end of a particular period
VII. It is simple and involves less clerical work that job costing
VIII. It is easy to allocate the expenses to processes in order to have accurate costs.
IX. Use of standard costing systems in very effective in process costing situations.
X. Process costing helps in preparation of tender, quotations
XI. Since cost data is available for each process, operation and department, good managerial
control is possible.
10
PROCESS COSTING
4. LIMITATIONS OF PROCESS COSTING
The main Disadvantages of process costing are :
I. Computation of average cost does not give the true picture because costs are
obtained on historical basis.
II. Operational weakness and inefficiencies on processes can be concealed.
III. It becomes more difficult to apportionment of joint costs, when more than one type
of products manufactured.
IV. Valuation of work in progress is done on estimated basis, it leads to inaccuracies in
total costs.
V. It is difficult to measure the performance of individual workers and supervisors.
VI. Cost obtained at each process is only historical cost and are not very useful for
effective control.
VII. Process costing is based on average cost method, which is not that suitable for
performance analysis, evaluation and managerial control.
VIII. Work-in-progress is generally done on estimated basis which leads to inaccuracy in
total cost calculations.
IX. The computation of average cost is more difficult in those cases where more than
one type of products is manufactured and a division of the cost element is necessary.
X. Where different products arise in the same process and common costs are prorated
to various costs units.
XI. Such individual products costs may be taken as only approximation and hence not
reliable.
11
PROCESS COSTING
5. IMPORTANT TERMS TO UNDERSTAND
In a manufacturing process the number of units of output may not necessarily be the same
as the number of units of inputs. There may be a loss.
1) Normal loss :-
This is the term used to describe normal expected wastage under usual operating
conditions. This may be due to reasons such as evaporation, testing or rejects.
2) Abnormal loss:-
This is when a loss occurs over and above the normal expected loss. This may be due to
reasons such as faulty machinery or errors by labourers.
3) Abnormal gain:-
This occurs when the actual loss is lower than the normal loss. This could, for example,
be due to greater efficiency from newly-purchased machinery.
4) Work in progress (WIP):-
This is the term used to describe units that are not yet complete at the end of the period.
Opening WIP is the number of incomplete units at the start of a process and closing WIP is the
number at the end of the process.
5) Scrap value:-
Sometimes the outcome of a loss can be sold for a small value. For example, in the
production of screws there may be a loss such as metal wastage. This may be sold to a scrap
merchant for a fee.
6) Equivalent units:-
This refers to a conversion of part-completed units into an equivalent number of 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.)
12
PROCESS COSTING
6. FORMAT APPROACH PROCESS ACCOUNTING QUESTIONS AND
ITS STEPS
For each process an individual process account is prepared. Each process of production is
treated as a distinct cost centre.
Items on the Debit side of Process A/c.
Each process account is debited with –
a) Cost of materials used in that process.
b) Cost of labour incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some pre determined.
e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process).
Items on the Credit side:
Each process account is credited with -
a) Scrap value of Normal Loss (if any) occurs in that process.
b) Cost of Abnormal Loss (if any occurs in that process).
Cost of Process:
The cost of the output of the process (Total Cost less Sales value of scrap) is transferred
to the next process. The cost of each process is thus made up to cost brought forward from the
previous process and net cost of material, Labour and overhead added in that process after
reducing the sales value of scrap. The net cost of the finished process is transferred to the
finished goods account. The net cost is divided by the number of units produced to determine the
average cost per unit in that process. Specimen of Process Account when there are normal loss
and abnormal losses.
13
PROCESS COSTING
STEP 1:- Draw up a T account for the process account. (There may be more than one process,
but start with the first one initially.) Fill in the information given in the question.
PROCESS ACCOUNT
Particulars Units Rs. Particulars Units Rs.
Opening WIPMaterials
LabourOverheadsAbnormal gain
XXX
XXX
XXXXXX
XXXXXXXXX
Normal LossTransfer to process 2 or finished goods Abnormal lossClosing WIP
XXX
XXX
XXXXXX
XXX
XXX
XXXXXX
XXX XXX XXX XXX
STEP 2:- Calculate the normal loss in units and enter on to the Process account. (The value will
be zero unless there is a scrap value – see Step 4).
STEP 3:- Calculate the abnormal loss or gain (there won’t 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, don’t expect to
have to complete all of the steps in the questions.
14
PROCESS COSTING
7. PROCESS LOSSES & GAINS:
In many process, some loss is inevitable. Certain production techniques are of such a
nature that some loss is inherent to the production. Wastages of material, evaporation of material
is un available in some process. But sometimes the Losses are also occurring due to negligence
of Laborer, poor quality raw material, poor technology etc. These are normally called as
avoidable losses. Basically process losses are classified into two categories
(a) Normal Loss (b) Abnormal Loss
1. NORMAL LOSS:
Normal loss is an unavoidable loss which occurs due to the inherent nature of the
materials and production process under normal conditions. It is normally estimated on the basis
of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal
spoilage, and normal defectiveness. It may occur at any time of the process.
No of units of normal loss: Input x Expected percentage of Normal Loss.
The cost of normal loss is a process. If the normal loss units can be sold as a crap then the
sale value is credited with process account. If some rectification is required before the sale of the
normal loss, then debit that cost in the process account. After adjusting the normal loss the cost
per unit is calculates with the help of the following formula:
COST OF GOOD UNIT : Total cost increased – Sale Value of Scrap Input – Normal Loss units
2. ABNORMAL LOSS:
Any loss caused by unexpected abnormal conditions such as plant breakdown,
substandard material, carelessness, accident etc. such losses are in excess of pre-determined
normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses
are more than expected losses. The units of abnormal losses in calculated as under :
ABNORMAL LOSSES = ACTUAL LOSS – NORMAL LOSS
The value of abnormal loss is done with the help of following formula:
VALUE OF ABNORMAL LOSS :
Total cost increase – Scrap value of normal loss x Units of abnormal lossInput units – Normal loss units
15
PROCESS COSTING
Abnormal Process loss should not be allowed to affect the cost of production as it is
caused by abnormal (or) unexpected conditions. Such loss representing the cost of materials,
Labour and overhead charges called abnormal loss account. The sales value of the abnormal loss
is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c.
Abnormal Loss A/C.DR. CR.
PATICULARS UNITS RS. PARTICULERS UNITS RS.
TO PROCESS A/C. XXX XXX BY BANK XXX XXX
BY COSTING P &
L A/C.
XXX XXX
XXX XXX XXX XXX
3. ABNORMAL GAINS:
The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in
process industries in normal conditions) and slight differences are bound to occur between the
actual output of a process and that anticipates. This difference may be positive or negative. If it is
negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual
loss is less than the normal loss then it is called as abnormal gain. The value of the abnormal gain
calculated in the similar manner of abnormal loss. The formula used for abnormal gain is:
Abnormal Gain :-
Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain UnitesInput 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.
16
PROCESS COSTING
Abnormal Gain A/C.DR. CR.
PARTICULARS UNITS RS. PARTICULARS UNITS RS.
TO NORMAL LOSS A/C.
XXX XXX BY PROCESS A/C. XXX XXX
TO COSTING P & L A/C.
XXX XXX
XXX XXX XXX XXX
ILLUSTRATION:
Product A is obtained after it passes through three distinct processes. You are required to
prepare Process accounts from the following information:
PARTICULARS PROCESS
XRS.
YRS.
ZRS.
TOTALRS.
MATERIAL 5,200 3,960 5,924 15,084
DIRECT WAGES 4,000 6,000 8,000 18,000
PRODUCTION OVERHEADS
18,000
1,000 Units @ Rs. 6 Per Unit were introduced in Process X. Production overhead to be
distributed as 100% on Direct Wages.
ACTUAL OUTPUT NORMAL LOSS
17
PROCESS COSTING
UNITRS.
PERCENTAGE%
VALUE OF SCRAP PER
UNITPROCESS 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.
MATERIAL INTRODUCED @ RS. 6 PER UNIT
MATERIAL
DIRECT WAGES
PRODUCTION OVERHEADS
1,000 6,000
5,200
4,000
4,000
NORMAL LOSS
TRANSFERRED TO PROCESS Y @ RS. 20 PER UNIT
50
950
200
19,000
1,000 19,200 1,000 19,200
PROCESS Y A/C.
DR. CR.PARTICULAR UNITS RS. PARTICULAR UNITS RS.
TRANSFERRED FROM PROCESS X
MATERIAL
DIRECT WAGES
PRODUCTION OVERHEADS
950 19,000
3,960
6,000
6,000
NORMAL LOSS
ABNORMAL LOSS
TRANSFERRED TO PROCESS Z @ RS. 40 PER UNIT
95
15
840
760
600
19,000
950 34,960 950 34,960
PROCESS Z A/C.
18
PROCESS COSTING
DR. CR.PARTICULAR UNITS RS. PARTICULAR UNITS RS.
TRANSFERRED FROM PROCESS Y
MATERIAL
DIRECT WAGES
PRODUCTION OVERHEADS
ABNORMAL GAIN @ RS. 76 PER UNIT
840
36
33,600
5,924
8,000
8,000
2,736
NORMAL LOSS
FINISHED GOODS(@ RS. 76)
126
750
1,260
57,000
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 AbnormalLoss units)By Costing Profit And Loss A/C.
120
480600 600
ABNORMAL GAIN ACCOUNTDR. CR.
PARTICULAR RS. PARTICULAR RS.
TO PROCESS Z A/C.TO COSTING P&L A/C.
3602,376
BY PROCESS Z A/C. 2,736
2,736 2,736
Working Note:-
19
PROCESS COSTING
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 855Actual production 840Abnormal loss 15
(C) Cost of Normal Production. 34,960 - 760 = 34,200.
Cost of Normal Production per unit 34,200 = Rs. 40 per units 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 Units100
Sale of scrap = 126 X Rs. 10 = Rs. 1,260
(B) Abnormal gain UnitsActual production 750Estimated 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.
8. PRODUCT FLOW
20
PROCESS COSTING
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 :-
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
LABOUR COST
DIRECT OVERHEADS COST
40,000 15,000 5,000
20,000 25,000 15,000
5,000 3,000 3,000
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.
21
PROCESS COSTING
PARTICULAR COST/LITER TOTAL PARTICULAR COST/LITER TOTAL
MATERIALS
LABOUR
DIR. EXPENSES
INDIRECT EXP.
40
20
5
10
40,000
20,000
5,000
10,000
TRANSFERRED
TO PROCESS B 75 75,000
75 75,000 75 75,000
PROCESS B A/C.
PARTICULAR COST/LITER TOTAL PARTICULAR COST/LITER TOTAL
PROCESS A
MATERIALS
LABOUR
DIR. EXPENSES
INDIRECT EXP.
75
15
25
3
12.5
75,000
15,000
25,000
3,000
12,500
TRANSFERRED
TO PROCESS C 130.50 1,30,500
130.50 1,30,500 130.50 1,30,500
PROCESS C A/C.
PARTICULAR COST/LITER TOTAL PARTICULAR COST/LITER TOTAL
PROCESS B
MATERIALS
LABOUR
DIR. EXPENSES
INDIRECT EXP.
130.50
5
15
3
7.50
1,30,500
5,000
15,000
3,000
7,500
OUTPUT TO
FINISHED
GOODS STOCK 161 1,61,000
161 1,61,000 161 1,61,000
Note:
(A) Indirect expenses were apportioned as follows:
22
PROCESS COSTING
Process A = 20,000 x 30,000 = 10,00060,000
Process B = 25,000 x 30,000 = 12,50060,000
Process C = 15,000 x 30,000 = 7,50060,000 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.
9. EQUIVALENT UNITS
23
PROCESS COSTING
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
The total costs for the period would be spread over the total equivalent production as follows:
Cost per unit = Total CostTotal 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:
24
PROCESS COSTING
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:
Find the value of completed production and the value of work-in process (WIP).
SUGGESTED SOLUTION :-
Cost elements
Equiv. units in WIP
Fully comply units
Total production
Total cost Cost / unit
Material 2000 X 80% = 1,600
8,000 9,600 4,22,400 44
Labour 2000 X 60% = 1,200
8,000 9,200 3,95,600 43
Overhead 2,000 X 50% = 1,000
8,000 9,000 2,25,000 25
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
25
PROCESS COSTING
= 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 equiv. WIP
Cost / unit Value
Material Labour Overhead
1,6001,2001,000
444325
70.40051,600 5,000
Total 1,47,000
PROCESS ACCOUNT
Elements Units Total cost Elements Units Total cost
Material LabourOverhead
10,000 4,22,4003,95,6002,25,000
Goods transferred to next stage WIP c/d
8,0002,000
8,96,0001,47,000
10,000 10,43,000 10,000 10,43,000WIP b/d 2,000 1,47,000
10. ACCOUNTING TREATMENT OF SPOILAGES :-
In many industries, the amount of the process output will be less than the amount of the
materials input. Such shortages are known as process losses or spoilages, which may arise due to
a variety of factors such as evaporation, scrap, shrinkage, unavoidable handling, breakages, etc.
26
PROCESS COSTING
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
plant breakdown, inefficient working, or unexpected defects in materials. Abnormal spoilage is
the difference between actual spoilage in the period and the normal (estimated) spoilage.
Abnormal gain is where the actual spoilage is less than the normal spoilage.
The cost of abnormal spoilage is to be charged to the profit and loss account unlike the
cost of normal spoilage which is to be part of the good products‟ total cost. Process account is to
be credited as abnormal loss account is debited. The abnormal loss account is then to be closed to
the profit and loss account.
Abnormal gain realized is to be credited to the abnormal gain account as process account
is debited. The abnormal gain account is to be closed to the credit of profit and loss account.
11.TRANSFERRED IN :-
It is important to remind the reader that the output of one process level forms the input
material to the next process level. The full cost of the completed units transferred forms the input
material cost of the subsequent process and, by its nature, must be 100% complete. Material
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PROCESS COSTING
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).
SUGGESTED SOLUTION :-
Abnormal spoilage = 9 kg - 5 kg = 4 kg
PROCESS ACCOUNT
Particulars (kg.) Value Particulars Kg. Value
Material
conversion
100 27,000
13,000
Good
production
Normal
spoilage
Abnormal spoilage
91
5
4
37,598
750
1,652
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)
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PROCESS COSTING
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
12.VALUATION PROCESS FOR
COST STATEMENT
A number of stages are passed through in the valuation process for cost statement.
First,
The physical flow of the units of production must be calculated having regards to the
total number of units to be accounted for, regardless of the degree of completion.
Secondly,
The equivalent units involved in the physical flow are to be calculated. In this respect, it
is often necessary to divide the flow into its material cost element and conversion cost element as
the degree of Completion may vary between them.
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PROCESS COSTING
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.).
Fifthly and finally,
The total cost of the transferred out products and work-in-process are to be calculated,
ensuring that all costs are accounted for.
13.COST OF PRODUCTION REPORT
This report is to show the number of units of output to be accounted for, the total
equivalent units of completed output, the cost statement showing the impact of all the cost
elements and the cost of completed units as well as that of the work-in-progress at the end of the
reporting period. In the illustration that follows, two methods of stock valuation, FIFO and WAP,
would be used and two processes of production are assumed.
ILLUSTRATION :-
Within the production department of Savannah Sugar Company Limited, there are two
processes which produce the finished product. Raw materials are introduced initially at the
commencement of Process 1 and further raw materials are added at the end of process 2.
Conversion costs accrue uniformly throughout both processes. The flow of the product is
continuous, the completed output of process 1 passes immediately into process 2 and the
completed output of process 2 passes immediately into the finished goods warehouse.
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PROCESS COSTING
The following information is available for the month of June:
Process 1
Particulars Unit / Rs. Opening WIP
Materials
Conversion (2/5 complete)
Completion of units in June
Units commenced in June
Closing WIP
(½ complete as to conversion)
Material introduced in June
Conversion cost added in June
unit 35,000
2,10,000
52,500
unit 1,68,000
unit 1,40,000
unit 7,000
7,70,0006,30,000
Process 2
Particulars Unit / Rs.
Opening WIP
Materials from process 1
Conversion (2/3 complete)
Completion of units in June
Units commenced in June
Closing WIP(2/8 complete as to conversion)
Material introduced in June
Conversion cost added in June
unit 42,000
3,43,000
3,92,500
unit 1,54,000
unit 56,000
4,62,000
22,0,5,000
Required:
Give the cost of production report of Theresa Alice Sugar Company Limited for the
month of June, using each of the WAP and FIFO methods, and showing clearly the cost of
finished production and WIP at end of the period.
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PROCESS COSTING
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 :-
WIP (beginning) 35,000
Material introduced 1,40,000
Total units to be accounted for 1,75,000
Particulars Equivalent Units
Units Accounted For :-Units Completed & Transferred Out 1,68,000WIP (Ending) 7,000Total Units Accounted For 1,75,000
Total Equivalent Units (TEU)Less :- WIP (Beginning)Current Equivalent Units
Material Conversion
1,68,0007,000(100%)
1,75,00035,000
1,68,0003,500(50%)
1,71,50014,000
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 WIP
(beginning)
Current Cost
Total Cost T. E. U. Cost /Unit
32
PROCESS COSTING
Material Conversion
2,10,00052,500
7,70,0006,30,000
9,80,0006,82,500
1,75,0001,71,500
5.603.98
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 ½ x 3.98 = 13,930
53,130
Another way (which is easier) of determining the cost of WIP ending is to find the
difference between total cost and cost of the completed units.
Cost of WIP (end) = TC – Cost of completed units
= 1,662,500 - 1,609,440
= 53,060
Note:
The difference of N70 is due to the approximation made to two decimal places.
Cost of Production Report Using First-In-First-Out (FIFO) Method.
Process 1
Particulars Current cost C. E. Units Units Cost
Material
Conversion
7,70,000
6,30,000
1,40,000
1,57,500
5.50
4.00
Cost of Closing WIP
Material 7,000 x 1 x 5.5 = 38,500
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PROCESS COSTING
Conversion 7,000 x ½ 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
Units to be accounted for 2,10,000
Particulars Equivalent Units
Units Accounted For :-
Units Completed in the period 1,54,000
WIP (Ending) 56,000
Total Units Accounted For 2,10,000
Total Equivalent Units (TEU)
Less :- WIP (Beginning)
Current Equivalent Units
Transferred in. Material conversion
1,54,000
56,000
1,54,000
000
1,54,000
21,000
2,10,000
42,000
1,54,000
000
1,75,000
28,000
1,68,000 1,54,000 1,47,000
COST STATEMENT
Cost Elements Cost of WIP
(beginning)
Current Cost
Total Cost T. E. U. Cost /Unit
34
PROCESS COSTING
Transferred InMaterial Conversion
3,43,0000
3,92,000
16,09,4404,62,000
22,05,000
19,52,4404,62,000
25,97,000
2,10,0001,54,0001,75,000
9.29733.0000
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 = 311,640.00832,288.80
Another Way
Cost of Ending WIP = TC – Cost of completed units
= 5,011,440 – 4,179,144.20
= 832,295.80
Note that the difference of 7 is due to the approximation made to four decimal places.
Process 2:
Using FIFO Method
PARTICULARS CURRENT COST
CURRENT EQUIV. UNITS
UNITCOST
TRANSFERRED IN
MATERIALS
CONVERSION
16,09,440
4,62,000
22,05,000
1,68,000
1,54,000
1,47,000
9.58
3.00
15.0027.58
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
35
PROCESS COSTING
Cost of completed units = TC – Cost of ending WIP
= 5,011,440 – 851,480
= 4,159,960.
14.JOINT AND BY-PRODUCTS COSTING
The process costing principle discussed in this chapter is about determining the cost of
processing some inputs that yield the same type of product. At the end of the processing
activities, only one type of product would result from the processed raw material.
However, it is not always that we have only one type of product from a processing
operation. It is possible for a single raw material to yield two or more products simultaneously
when processed. Such products are known as joint products. For example, when crude oil (a
single raw material) is processed or refined, petrol, kerosine, gas, etc, could be obtained from it.
The cost of processing a production input (raw material) that would amount to joint
products is known as joint cost. The joint cost is to be restricted to the split-off point (point after
which each joint product would be incurring separate processing cost). Joint cost is not to be
traced to any particular product but rather to all the joint products as a group. There are many
ways of apportioning joint cost to joint products for financial accounting purposes. These would
be discussed in this chapter.
In practice, it is normal to identify one product out of the joint products as the main or
principal product and the rest to be treated as joint products or as by-products. In the example
above, it is clear that petrol is the main product to be identified as crude oil is processed. Pairs of
shoes could be main products as leather is processed, while bags, wallets, etc, could be joint or
by-products.
36
PROCESS COSTING
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.
15.BY-PRODUCT AND ITS ACCOUNTING TREATMENT
A by-product is a secondary product arising as a result of a processing activity aimed at
producing a certain main product. The market value of a by-product less the processing cost after
the split off point is usually negligible, compared to the total market value of all the joint
products or the market value of the main product.
The usual treatment of by-product is to deduct its Net Realizable Value (NRV) from the
total joint cost (JC) and then divide the net joint cost among the joint or main products. The NRV
of the by-product is the difference between its market value and its separate processing cost.
ILLUSTRATION
Wambai Shoemakers has a process that yields two main products: A and B and a 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.
37
PROCESS COSTING
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.
16.ACCOUNTING TREATMENT OF JOINT COST
There are three usual bases of sharing joint cost to the joint (or main) products. These are
the Physical Units Basis, Sales Value (at the point of separation) and Net Realization Basis.
PHYSICAL UNIT BASIS
Under this method, the joint cost is shared among the joint products on the basis of the
quantities of physical units, provided all the products are measured by a common unit of
measurement, such as kilograms or liters. The problem with this method is that consideration is
not given to price and, so, it does not consider the value of the products. Usually, the value of
products is the most important factor to be considered.
ILLUSTRATION
Anadariya Company Ltd., Tiga has a processing system that produces three products:
Kuli, Sudi and Tuni with 5,000 kg, 3,000 kg and 2,000 kg, respectively, in a year. The total cost
incurred up to the split off point in the year 2000 was 1,000,000. Use the physical units basis to
share the joint cost among the three products. Calculate also their unit cost.
SUGGESTED SOLUTION
(a) The Ratio
K = 5,000 x 100 = 50%10,000
S = 3,000 x 100 = 30%10,000
T = 2,000 x 100 = 20%10,000
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PROCESS COSTING
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
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
39
PROCESS COSTING
K
S
T
5,000
3,000
2,000
400
440
340
20,00,000
13,20,000
6,80,000
50%
33%
17%
5,00,000
3,30,000
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
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
VALUE
NRV SHARE OF JC
K
S
T
5,000
3,000
2,000
400
440
340
20,00,000
13,20,000
6,80,000
2,00,000
3,00,000
1,60,000
18,00,000
10,20,000
5,20,000
5,00,000
3,30,000
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).
40
PROCESS COSTING
(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
17.TOTAL COST PER UNIT DETERMINATION USING NRV METHOD
Total cost of a joint product is given by its share of joint cost plus its further processing
and marketing cost. To arrive at its total cost per unit, the total cost is divided by the units
produced. Using illustration 7-11, total cost per unit could be determined for each of the three
products as follows:
K = 538,922 + 200,000 = 738,922 = 147.785,000 5,000
S = 305,389 + 300,000 = 605,389 = 201.803,000 3,000
T = 155,689 + 160,000 = 315,689 = 157.842,000 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
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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.
18. CONCLUSION
This chapter has introduced the meaning of process costing, its application areas, and how
it can be put to use for proper accountability. The characteristics of process costing, how
products flow in the course of processing, the equivalent units of production to be transferred to
the next stage of production, accounting for spoilages/losses and the valuation process for cost of
production report have all been treated. Finally, cost of production and report write-ups have
been adequately illustrated, using highly standardized exercises. Process costing, which is
arguably the most widely used costing in the world, has been given adequate coverage it
deserves.
The chapter has also put the readers through joint products costing, where three different
methods of apportioning joint cost to joint products were discussed. By-product, and its
accounting treatment, has also been discussed.
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PROCESS COSTING
19. REFERENCE:-
LOTS OF BOOKS AND WEBSITES ARE AVAILABLE FOR THIS PROJECT BUT THE
ABOVE MATERIAL OR INFORMATION ABOUT “THE PROCESS COSTING” IS
COLLECTED FROM THE FOLLOWING SOURCES:-
1. INTERNET
2. COST ACCOUNTING TEXTBOOK’S
3. COST ACCOUNTING REFERENCE BOOK’S
COST ACCOUNTING – S P GUPTA, AJAY SHARMA, SATISH AHUJA – FK
PUBLICATIONS.
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