 INTRODUCTION

 MEANING
1) Process :A Process means a distinct manufacturing operation or stages.
In Process Industries, the raw material goes through a number of
processes in a sequence before the finished product is finally produced.
For example production of coconut oil involve the following distinct
processes:
(1) COPRA CRUSHING (2) REFINING AND (3) FINISHING.

2) Process Costing: Process costing is method of costing used to find out

the cost of the product in each process. wheldon has defined process
costing as “a method of costing used to ascertain the cost of the product
at each stage or operation of manufacture …..”According to CIMA,
London-“it is that form of operation costing where standardized goods
are produced”

3) Process Cost: According to CAS – 1 when the production process is such

that goods are produced from a sequence of continues or repetitive
operation or processes, the cost incurred during a period is considered as
process cost.

 APPLICABILITY AND NECESSITY

1
 Process Costing is applicable to several mining , manufacturing and public
utility industries, e.g. mines and quarries producing minerals and ores;
industries producing textiles , chemicals, soap, paper, plastics, alcohol,
refined oil, electricity, gas and so on.

It becomes necessary to apply process costing to the Industries belonging to

any of the following categories:

 ONE PRODUCT, MANY PROCESSES: A factory may produce a

single item through a number of processes or departments. it
becomes necessary to find out the cost of each process or department
separately to control wastage etc.

 MANY PRODUCTS, MANY CYCLES: A bakery can use the same

equipments to produce either bread or cakes. it may produced only
bread in one cycle and change over to production of cakes in the next
cycle. each cycle is treated as a separate process so as to find out the
cost of the item produced in a particular cycle or process.

 MANY PRODUCTS, SAME PROCESS: an oil refinery can obtain

many joint products such as refined oil, gas, steam etc. in the same
process. Process Costing is employed to ascertain the individual cost
of each such product.
 [A] ADVANTAGES

2
 (1) PERIODICAL DETERMINATION OF COSTS:Process costs can be
collected and determined for even a short period like a day, a week or a
month. In Job Costing, on the other hand, costs can be collected and
determined only after the job is complete, which may take months or
evens years.

(2) SIMPLE AND CHEAP:Process costing is much simple, easy and less
expensive method of costing as compared to other methods. There is no
need for an elaborate system of identifying the direct costs of a job or a
batch.

(3) MANAGERIAL CONTROL:Being a simple system to establish and

operate, process costing facilitates greater control of the management
over costs, wastage etc.

(4) STANDARD PROCESS AND PRODUCTS:Since the processes and

products are standard, it is easy to make decisions regarding pricing,
quotations, tenders etc.

 [B] DISADANTAGES

3
 (1) NO DETAILED ANALYSIS: Process Costing does not give a details
analysis of the cost as (i) it emphasizes the period rather than the unit or
the product, and (ii) it gives an average cost rather that the specific cost
of the product.

(2) HISTORICAL COSTS: Process Costing gives only historical costs

which are not useful for forecast of future trends etc.

(3) ESTIMATES: The determination of percentages of normal loss,

wastage, distribution of costs over by – products and joint products,
valuation of work in progress involve estimate based on arbitrary
decision of the management.

 PROCESS COSTING V/S JOB COSTING

4
 NO. PROCESS COSTING JOB COSTING

1. It is period costing i.e. costs of all It is specific costing; i.e. cost of job
processes during a period are is ascertained till it ends, whatever
ascertained. the time it takes.

2. Cost unit is each process. Cost unit is the job order.

3. Direct costs are much more than Costs are directs as well as indirect.
indirect.

4. It normally involves work - in - It may not involve work - in –

process. progress.

5. Cost of one process is transferred Cost of each job is separate.

to next process.

 Costing PROCUDER – SIMPLE

PROCESS

5
Accounting Procedure

The accounting prouder in process costing is as follows:

1. Separate Process A/c:the entire manufacturing operation is divided in

to separate stages or process. each process of production is treated as a
distinct cost centre a separate process account is opened to record the cost
incurred in such process.

2. Debit side of Process A/c:each process account is charged with the

expenses directly incurred for that process and plus its share of the
overheads. the process account is debited with the direct and indirect
expenses ( material, wages and overheads) pertain to that process.

a) Material:the raw material, sundry material and stores

required for a process are issued directly from the stores
against a material requisition slip. in addition, the cost of
units transferred from the earlier process, if any , also
appears on the debit side of the process account.
b) Labour :wages paid to workers directly employed in a
process are debited to the process account. like material, the
distinction between direct and indirect labour is not
important in process costing. Indirect labour expenses (e.g.
manager`s salary) may, if necessary, be debited on the basis
of ratio of direct wages.

6
 c) Expenses:the expenses directly related to the process such
as repairs of machinery, power etc. are debited to the
respective process account. Indirect expenses are
apportioned over and absorbed by various processes on a
suitable basis such as ratio of material costs, labour costs or
prime costs.

3.Credit side of Process A/c :The Process account is credited with tha
sale value of residue etc.

4. Net cost of Process: The net cost of the output of the process (total
cost less sale value of residue) is transferred to the next process. the cost of
each process is thus made up of (i) cost brought forward from previous
process and (ii) net cost of material, labourand overheads added in the
process less sale value of residue. the net cost of the last process is
transferred to finished goods account.

5. Average Unit Cost: The net cost is divided by the number of units
produced to determine the average cost per unit in that Process.

 PRO-FORMA PROCESS ACCOUNT

7
 A PRO-FORMA PROCESS ACCOUNT WOULD APPEAR AS
FOLLO:

Dr. Process Account Cr.

Particular Unit Rat Particular Unit Rat

s s e s s e

To
By Sale of
Transfer
Residue
from
(1) Earlier
Process
By
Transfer
To
to next
Material
process /
finished
To Wages
goods
To
Expenses

To
Overheads

8
 WASTE AND LOSSES

MEANING

A manufacturing process is likely to give rise to some waste and losses. let
us first be clear about the exact meaning of these terms – viz waste and
losses.

 Waste: It represents the portion of basis raw materials lost in

processing having no recoverable value. Waste may be visible -
remnants of basis raw materials – invisible; e.g. disappearance of
basic raw materials through evaporations, smoke etc. normal waste is
absorbed in the cost of net output , whereas abnormal waste is
transferred to the costing profit and loss account.

 Spoilage: It is the term used for materials which are badly

damaged in manufacturing operations, and they cannot be rectified
economically and hence taken out of process to be disposed of in
some manner without further processing. Spoilage may be either
normal or abnormal. Normal spoilage costs are included in costs
either charging the loss due to spoilage to the production order or by

9
 charging it to production overhead so that it is spread over all
products.

 Salvage: It signifies those units or portions of production which

can be rectified and turned out as good units by the application of
additional material,labour or other service. For example, some
mudguards produced in a bicycle factory may have dents; or there
may be duplication of page or omission some pages in a book.
Defectives arise due to sub-standards materials, bad – supervision,
bad – planning, poor workmanship, inadequate – equipment and
careless inspection.

 Rectification: In the case of articles that have been spoiled, it is

necessary to take steps to salvage/reclaim as much of the loss as
possible. For this purpose : (i) all defective units should be sent to a
place fixed for the purpose ;(ii) these should be dismantled ;(iii) goods
and serviceable parts should be separated and taken into stock;(iv)
parts which can be made serviceable by further work should separated
and sent to the workshop for the purpose and taken in to stock after
the defects have been removed; and (v) parts which cannot be made
serviceable should be collected in one place for being melted or sold.

10
  Scrap: It has been defined as the incidental residue from certain
types of manufactures, usually of small amount and low value,
recoverable without further processing. Scarp may be treated in cost
accounts in the following ways:-

I. Where the value of scrap is negligible, it may be excluded from costs.

In other words, the cost of scrap is borne by good units and income
scrap is treated as other income.

II. The sale value of scrap net of selling and distribution cost is deducted
from overhead to reduce the overhead rate. A variation of this method
is to deductedthe net realizable value from material cost. This method
is followed when scraps cannot be aggregated job or process-wise.

III. When scrap is identifiable with a particular job or process and its
value is significant, the scrap account should be charged with full
cost. The credit is given to the job or process concerned. The profit or
loss in the scrap account, on realization, will be transferred to the
costing profit and loss account.

 CAS – 6
The provision of CAS – 6 (Material Cost) relating to scrap, waste, etc. are
as follows –

11
 Scrap : Scrap means discarded material having some value in few
cases and which is usually either disposed of without further treatment
(other than reclamation and handling) or reintroduced into the production
in place of raw material.
 Waste:Waste means material los during production or storage due to
various factors such as evaporation, chemical reaction, contamination,
unrecoverable residue, shrinkage, etc., and discarded material which may
or may not have value.
 Spoilage:Spoilage means production that does not meet with
dimensional or quality standards in such way that it cannot be rectified
economically and sold for a disposal value.
 Marketable scrap:The production process may generate
marketable scrap or waste. Realized or realizable value of scrap pr waste
shall be credited to the cost of production.
 Reprocessed scrap:In case, scrap or waste does not have ready
market and it is used for reprocessing, the scrap or waste value is taken at
a rate of input cost depending upon the stage at which such scrap or
waste is recycled. The expenses incurred for making the scrap suitable
for reprocessing shall be deducted from value of scrap or waste.

 ACCOUNTING FOR LOSSES

Actual Basis : -

In this case, the actual sale value of scrap, spoilage or defectives is credited
to the process account. Thus amount of loss ( cost less sale value) relating to
defective units is wholly charged to the process account. This means that the
amount of loss is absorbed by or spread over the good units. However, losses

12
 are of two types, normal loss and abnormal loss. Normal loss denotes the
unavoidable or uncontrollable loss .Abnormal loss on the other hand,
denotes the avoidable or controllable loss.In actual basis , no distinction is
made between normal and abnormal loss. Hence in this method, the cost per
unit may vary from period to period. This vitiates or distorts the unit costs of
process.

Normal Basis : -
The normal basis of scrap accounting seeks to * enable the management
to control avoidable costs by distinguishing between the normal loss and the
abnormal loss, and avoid variations in unit costs due to change in amounts of
scrap. In this method of scrap accounting the figure of normal loss for each
process is fixed on the basis of past experience or technical data. Any loss
above this figure is treated as abnormal loss. Any loss below this figure is
treated as abnormal gains. Normal loss is treated as normal cost of
production. Normal loss is treated as normal cost of production. But cost of
abnormal loss or gain is taken out from the process account. The net
financial loss on account of abnormal loss is debited to the costing profit and
loss account. The account of abnormal Gains is credited to the costing profit
and loss account.

 Worksheet : Calculation For Normal Loss

Etc.

Steps What is to be How is it to be

calculated calculated

13
 1. Normal Loss = Input x % of Normal Loss

2. Normal Output = Input – Normal Loss

3. Unit Cost Normal Cost

= ------------------------
Normal Output

Cost of Process – Sale Value of Normal Loss

= --------------------------------------------------------------
Input – Normal Loss
4. Abnormal Loss
Or
Abnormal Gains

5. Cost of Actual = Normal Output – Actual Output

Output
6.
Cost of Abnormal
7. Loss

Cost of Abnormal = Unit Cost X Units of Actual Output

Gains

= Unit Cost X Units of Abnormal Loss

= Unit Cost X Units of Abnormal Gains

 Proforma Journal Entries

14
 NO. Entry Amount
1. Normal Loss Account Dr. Sales Value of Normal Loss
To Process….Account

2. Next Process Account Dr. Cost of Good Output

To Process….Account
3. Abnormal Loss Account Dr. Cost of Abnormal Loss
To Process….Account
4. Process …….. Account Dr. Cost of Abnormal Gain
To Abnormal Gains Account

5. Actual Sale Dr. Units of Normal Loss x Sale Price

To Normal Loss Account

6. Cash / Debtor Sale Value of Abnormal Loss

To Abnormal Loss Account
7. Abnormal Gain Account Dr. Sale Value of Abnormal Gain
To Normal Loss Account

8. Costing P & L Account Dr. Cost – Sale Value of Abnormal

To Abnormal Loss Account Loss

9. Abnormal Gain Account Dr. Cost of Abnormal Gains – Sale

To Costing P & L Account Value of Abnormal Gains

 Proforma Process Accounts

{ NORMAL BASIS }

15
Process A Accounts ( Normal Loss )
Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Material b/f
By Normal
Loss A/c
To Direct
Material
By Transfer to
To Direct
next process
Wages

To
DirectExpenses

To Overheads

Process B Accounts ( Abnormal Loss )

Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Material
By Normal
Loss A/c
To
DirectMaterial
By Transfer to
To Direct
next process
Wages

To Direct
Expenses

To Overheads

Process C Accounts ( AbnormalGain )

16
 Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Transfer
By Normal
from (1)
Loss A/c
Earlier Process

To Direct
By Transfer to
Material
next process
To Direct
Wages

To Direct
Expenses

To Overheads

Normal Loss Accounts

Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Process A/c
By Actual Sale
A
A
To Process A/c
By Actual Sale
B
B
To Process A/c
By Actual Sale
C
C

By Abnormal
Gain A/c

17
 Abnormal Gain Account
Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Normal Loss
By Process A/c
A/c
C

To Costing
Profit & Loss
A/c

Abnormal Loss Account

Dr.
Cr.
Particulars Units Rate Particulars Units Rate

To Process B
By Actual Sale
( Cost )
B

By Costing
Profit & Loss
A/c

18
Notes:

1.Quantity Reconciliation

Particulars Process Process B Process C

A

Input (i) xx xx Xx

xx xx xx
Less : Normal Loss
Xx xx xx
= Normal Production (ii)
xx xx xx
Actual Production
- xx -
Abnormal Loss
xx
Abnormal Gain

Sale of Scrap (i – ii)

Normal Cost
2.Unit Cost = ----------------------
Normal Output

Cost of Process – Scrap Value of Normal Loss

2.Unit Cost = ------------------------------------------------------------------
Input - Normal Loss

19
 VALUATION OF WORK –IN-PROCESS
EQUIVALENT UNITS

We have studies earlier how work - in-progress is valued in case of

Units Costing or Contract Costing. Let us now study how work-in-process is
valid in case of process costing. In the process industries there is likely to be
partly competed units at the end of accounting period that will be carried to
the next accounting period. Such units of unfinished work are in different
stages of completion .Hence they cannot be taken as full units for the
purpose of calculation of units costs. Let us consider the following example:

Dr. PROCESS Cr.

Particulars Units Rs. Particular Units Completion Rs.

To Material 40,000 50,000 By Transferred 30,00 100%
to Process B 0
To Labour 10,000
By Closing
To 10,000 Work-in-process 50%
Overhead 10,00
0
40,000 70,000 40,00 70,000
0

The problem now is-how to compute the units cost of the output ? If we
simply divided Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value
both the completed units at the same rate. Therefore , the unfinished units
should be converted into completed units. In the above examples, 10,000
partly finished units on which 50% of the work has been completed are
equivalent to 5,000 fully completed units. on which Such incomplete units

20
so computed in term of completed units are knows as equivalent units. The
total output or production in terms of completed units is 30,000 + 5,000 =
35,000. Now we can divided the input cost Rs.70,000 by Produced units
35,000 to get the Units cost of Rs. 2.the output transferred to process B can
be valued at Rs. 60,000 (30,000 x 2). The work-in-process can be valued at
Rs. 10,000 (5,000 x 2).

21
 STEPS IN CALULATION OF
EQUIVALENT UNITS AND UNIT COST
The calculation of the equivalent units and cost of output transferred to
process B will be worked out as follows:

Step 1 : Reconcile Input and Output

We should consider the physical flow of production – the units of input and
output. In the above example, Input is 40,000 units and output is (i) 30,000
units transferred to process B and (ii) 10,000 units of closing work –in –
process. The total output of 40,000units agrees with the total input of 40,000
units. However, the output is not all of fully competed units. To make the
output and input comparable, we must convert the production into
Equivalent Units.

Step 2 : Calculate Equivalent Units.

Completed units = 30,000

Work-in-process units = 10,000 at 50%competion = 5,000

Equivalent Units = 35,000

Step 3 : Calculate Total Cost of Material, Labour and Overhead

50,000 + 10,000 + 10,000 = Rs.70,000

Step 4 : Calculate Cost of each Equivalent Unit

Cost per Equivalent Units Rs.70,000 / 35,000 = Rs. 2.

22
 Step 5 : Calculate Cost of production and cost of Work –in-process

Cost of production transferred = 30,000 x Rs.2 = Rs.60,000

Cost of work-in-process = 10,000 x 50% x Rs.2 = Rs.10,000

=Rs.70,000

This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).

Illustration 5 : (Work- Sheet Format : Only Closing Stock of WIP)

The above steps can be presented in a more refined format as shows below
which can be used by the students for problem involving only closing work-
in-process.

Solution:

[A] EQUVIVALENT UNITS (EU)

Particular Qty.Reconciliation Equivalent Units [EU]

Input Output Material[M] Labour[L] Overheads[O]

% EU % EU % EU
1. Fresh Units Introduced 40,000
2. Fresh Units Completed 30,000 100 30,000 100 30,000 100 30,000
3. Closing WIP 10,000 50 5,000 50 5,000 50 5,000

Total Units of [A] 40,000 40,000 35,000 35,000 35,000

[B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total

1.Cost incurred during the process 50,000 10,000 10,000 70,000
2.Less: Sale of Normal Scrap -- -- -- --
Total Cost [B] 50,000 10,000 10,000 70,000
Equivalent Units [A] 35,000 35,000 35,000
Cost Per EU[C =B + A] 1.43 0.29 0.29 2.00

23
[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total (Rs.)

1.Finished Units Tfd.to Next 30,000 2.00 60,000
Process
2.Closing Work-in-process 5,000 1.43 7,143
- Material 5,000 0.29 1,429
- Labour 5,000 0.29 1,428 10,000
- Overheads 70,000
Total Cost [B] Apportioned

24
 FLOW OF COST – AVERAGE OR FIFO
When there are no opening W-I-P units as in the example above, valuation of
closing W-I-P is simple (see Para 6.3 below). In such cases, the entire
closing W-I-P comes out of the current cost and is valued accordingly,
However, when there is opening stock of work -in-process, the production
completed during the period comes out of(i) units completed out of the
opening stock of WIP; and (ii) units started and completed in the process in
the current period. The cost of units completed out of the opening stock of
WIP will include partly the cost carried over from the previous period .Since
the input have different costs, the problem arises of which rate to use for
valuation of the output. The unit cost such situation, may be calculated under
either of the two method, viz, (i) the weighted average cost method or (ii)
the first -in, first out (FIFO) method.

 AVERAGE METHOD

Under the Average Method, Total cost in the process is divided by the Total
equivalent units produced by the process to ascertain the cost per equivalent
unit. Total costs of the process mean the total of the current production costs
and the cost of the opening work-in-process. Total Equivalent Units
produced by the process mean the total of the units completed during the
period and Equivalent Units of work performed on the opening and closing
work-in-process. According to the Average Method (or, more accurately, the
Weighted Average Method), the cost of the opening work –in-process is
added to the cost incurred in the current period and average cost worked out.
It should be noted that in the calculating the equivalent units under the
weighted average method, the work done in the past is treated as if done in

25
the current period. The closing WIP under this method is made of the
average costs of opening WIP and current production.

 FIFO MEHTOD

The method is based on the assumption that the materials in process moves
on a first-in, first-out basis. FIFO method assumes that the work on the
opening stock is before the materials put into the process during the current
period are taken up. The units completed during the process being usually
more than the opening stock, it is assumed that no units from the opening
work-in-process will be left incomplete and so none of them will find place
in the closing work –in-process. Under the FIFO method, the cost of work
completed in a period are worked out in two parts. i.e. separately for (a)
opening work-in-process competed, and (b) units started and completed in
the period. Under the FIFO method, cost of closing WIP is based on the cost
of the current production only. In the FIFO method, the procedure of
calculation of equivalent units is different as the units competed from
opening work-in-process and from current production have to be accounted
for separately.

26
 ILLUSTRATIONS
Let us consider the following example to understand the procedure of
valuation under these two methods.
Illustration 6: (Average)
Process A Period :
September, 2003

Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000

Units brought into process- 50,000.

Cost incurred

- Material Rs. 60,000

- LabourRs. 25,000
- Overheads Rs. 15,000

Transfer to process: 40,000 Competed units (entirely competed production)

Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the

value of closing W-I-P.

Solution:

Step 1: Quantity Reconciliation:

Particulars Units Particulars Units

Opening work-in-process(40%) 10,000 Units completed 40,000
Units started 50,000 Closing work-in- 20,000
60,000 process(75%) 60,000

Step 2: Computation of equivalent units:

Particulars Units
Units competed 40,000
Closing work-in-process (75%) 15,000
Equivalent Units 55,000

27
 It should be noted that in calculating the equivalent units under the weighted
average method, the work done in the past is taken to have been done in the
current period.

Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000.

Step 4: Cost per equivalent unit = Rs. 1,10,000 ÷ 55,000 = Rs. 2

Step 5: Cost competed units transferred to process = 40,000×Rs.2 = Rs.

80,000

Cost of closing work-in-process = 20,000 × 75% × Rs.2 = Rs.

30,000

Rs. 1,
10,000

[Average Method]

[A] EQUVIVALENT UNITS (EU)

Particular Qty.Reconciliatio Equivalent Units [EU]
n
Input Output Material[M] Labour[L] Overheads[O]
% EU % EU % EU
1. Opening Work-in-Process 10,000
2. Fresh Units Introduced 50,000
3. Units Tfd. to Next Process 40,000 100 40,000 100 40,000 100 40,000
4. Closing Work-in-Process
20,000 75 15,000 75 15,000 75 15,000
Total Units of [A] 60,000 60,000 55,000 55,000 55,000

28
 [B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total

1.Cost of Opening WIP 10,000 -- -- 10,00
2.Cost incurred during the 60,000 25,000 15,000 0
process 1,00,00
Total Cost [B] 0
Equivalent Units [A] 70,000 25,000 15,000 1,10,00
Cost Per EU[C =B + A] 0
55,000 55,000 55,000
1.27 0.45 0.27 2.00

[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total

(Rs.)
1.Finished Units Tfd.to Next 40,000 2.00 80,000
Process
2.Work-in-process Closing Stock 15,000 1.27 19,091
- Material 15,000 0.45 6,818
- Labour 15,000 0.27 4,091 30,000
- Overheads 1,10,000
Total Cost [B] Apportioned

The Process Account will be shown as follows:

Dr. Process A Account Cr.

Particulars Units % Rs. Particulars Units % Rs.

Work-in- Transferred to
process(b/f) 10,00 40% 10,000 Process B 40,00 100% 80,000
Material 0 60,000 Work-in- 0
Labour 50,00 25,000 process(c/f) 75% 30,000
Overhead 0 15,000 20,00
0

29
 60,00 1,10,000 60,00 1,10,000
0 0

 ELEMENT – WISE COST OF WIP

Normally, It may be necessary to work out the unit process cost for each
element of cost separately because material, labour and overhead may be in
different stage of completion in the work-in-process inventory. All materials
are usually you issued input and into the process in the beginning itself.
Therefore, the closing work-in-process in generally taken as 100% compete
in so far as the materials elements is concerned. For materials added at the
end of the process, the percentage of completion will be zero.

 EVALUATION OF METHOD
[1] Average Method:

(1) The weighted average method is simpler of the two and is widely used in
practice

(2) But, Average method mixes up the costs in different period and does not
correctly reflect the extent of change of costs from period to period.

[2] FIFO Method:

(1) FIFO method is more suitable from the point of view of control as the
past and current costs are separated.

30
(2)FIFO method is,however,complicated and tracing out the costs in to two
parts from process to process become tedious, particularly when the number
of processes in many.

(3) FIFO system is neither suitable nor rational when spoiled units are
involved because apportionment of such units between the opening the
inventory and current production is not possible.

[3] When choice Becomes Unnecessary

The difference in the result obtained by the two method would not be
signification or would disappear all together If :

(1) There is no opinion inventory, and so the question of first –in, first-out
does not arise at all.
(2) Opening inventory very small, compared to the fresh units introduce
in the process.
(3) The stage of completion of opening inventory is not sufficiently
advance so that the previous costs have practically no effect on current
costs.
(4) There is not much difference in costs from period to period.

31
 PROCESS LOSSES/ GAINS
(1) Meaning: In many process, the physical quantity of output is found to be
less than that of the input, the difference being attributable to wastage,
spoilage, shrinkage, evaporation etc. occurring in course of manufacture. In
order to compute connect cost per unit. The units entering a process must be
reconciled with the output coming out of the process, and the loss units, as
they are called, must be analyzed to determine the factor leading to the loss.
If a product passes through several processes, the lost units will have an
effect not only on the unit cost of the process in which they arise but also on
the cost of the subsequent processed on the cumulative unit cost of the final
output.

(2) Normal Loss: Units may be lost at beginning of a process, during a

process, or at the end of a process. The treatment of normal spoilage costs in
process accounts depends upon the stage at which the spoilage (rejection or
loss) is assumed to occur.

(i) At Beginning: When normal spoilage occurs at the beginning of a

process, it is assumed that the lost units never entered in the process. In the
Computation of equivalent units, the normal spoilage units are ignored with
in the result that the cost of spoilage in charged to the production units

32
competed and to abnormal spoilage, if any , as well as the to the closing
work-in-process.

(ii) At End:If the normal spoilage occurs at the end of a process, as is

more common, the spoiled units are taken into account for computing
equivalent units so that to cost of normal spoilage in charged only to the
good units produced as well as to abnormal spoilage, if any, but no amount
is charged to the closing work-in-process. The usual practice is to
determined the cost of normal spoilage separately add it back to the cost of
good units produced. If the spoiled units can be sold scrap, the scrap value is
credited to the process account as the cost of the spoilage or loss.

(3) Abnormal Loss: Abnormal spoilage of defective work may arise in a

process due to unforeseen factors. The cost of such abnormal loss in not
include in the cost of the process but the average cost of the lost units is
charge to an Abnormal Loss Account which is credited with the scrap and
closed by transfer to the Profit and Loss Account. Thus, in computing the
value of abnormal loss, scrap value of the abnormal lost units will be
ignored but in working out the loss for charging to Profit and Loss Account,
this will be taken into consideration.

(4) Abnormal Gains:Sometime, when the actual loss in process is less than
the anticipated loss, the difference between the two is considered to be
abnormal gain. The value of the abnormal gain is calculated in the same way
as described above for abnormal loss and is credited to an Abnormal Gain
Account which is ultimately closed by transfer to the Profit and Loss
Accounts. The scrap value of the normal anticipated loss in the process
where abnormal gain occurs is credited to the process account with the result

33
that the net debit to the process is the cost of abnormal gains less the value
of scrap for the normal loss.

34
 Case study

VOX is a company that assembles camcorders from components bought in

from suppliers. A camcorder component kit is issued from stores to the
assembly line when another camcorder has to be assembled.

There are partially completed camcorders (WIP) at the end of each month.
Incomplete camcorders are assembled in order of completeness, ie the one
closest to completion is finished first, the second closest to completion next,
etc.
The following data was obtained for June:
 Opening WIP: 25 component kits - GBP2,000 (100% complete – all
components issued to factory); assembly work done in the previous
month - GBP1,800 (60% complete); total value of opening WIP:
GBP3,800
 Costs incurred: 100 components kits - GBP8,200; assembly line -
GBP10,450
 Output: 95 camcorders
 Closing WIP: 30 component kits - 100% complete; assembly work -
50% complete.

The value of WIP is determined in relation to the components issued to the

factory and the extent to which a camcorder has been assembled. All
components required to make a camcorder are issued to the factory at the
start of the assembly process. So opening and closing WIP are 100%
complete in terms of components.

35
However, opening WIP is only 60% complete in terms of assembly and
closing WIP is 50% complete. The figures relating to the completion
percentages for assembly will be an average since some items may be 40%
complete and others 80% complete.

The cost for component kits is the actual cost (GBP8,200) of the 100
component kits issued to the factory in June. The cost for assembly work is
the actual cost (GBP10,450) of the work undertaken by the factory in June.
The first step is to calculate how many camcorders were started and
completed in June. Table 1 shows that 70 camcorders fall into this category
since 25 of the completed camcorders were started in May.

Table 1: started and completed in current period

Total output 95
Opening WIP 25
Started and completed in June 70

The next step is to calculate the number of equivalent units for components.
The figure for opening WIP is 0, since no more components were issued to
these partially completed products. A figure of 70 is included for the 70
camcorders started and completed in June; 30 is included for closing WIP
since all the components required to assemble these camcorders were issued
in June. The total equivalent units for components is 100 (table 2).

The calculation of equivalent units for assembly is not as simple since the
assembly work is not 100% for opening and closing WIP. A figure of 10 is

36
included for opening WIP since this represents the remaining work (40%)
that had to be done in June ie 25 x (100% - 60%); 70 is included for the
camcorders started and completed in June; 15 (30 x 50%) is included for the
assembly work undertaken in June in relation to the closing WIP. The total
equivalent units for assembly work is 95 (table 2).

Table 2: equivalent units

Components Assembly
Opening WIP 0 10
Started and completed in June 70 70
Output 70 80
Closing WIP 30 15
100 95
The cost of an equivalent unit for components and assembly for June is:
 Component kits: GBP8,200 / 100 ie GBP82 per equivalent unit
 Assembly: GBP10,450 / 95 ie GBP110 per equivalent unit.
The value of output is obtained by multiplying the equivalent units by the
cost per equivalent unit for components and assembly then adding these
figures to opening WIP:
 Output: GBP3,800 + (10 x GBP110) + (70 x GBP82) + (70 x
GBP110) ie GBP18,340 (Table 3).
The value of closing WIP is obtained by multiplying the equivalent units by
the cost per equivalent unit for components and assembly:
 Closing work: (30 x GBP82) + (15 x GBP110) ie GBP4,110 (Table 3).
Table 3: Valuation of output and closing WIP

37
 Total Component Assembly
s
Opening WIP GBP3,800
Work to complete opening WIP GBP1,100 GBP0 GBP1,10
Started and completed in June GBP13,44 GBP5,740 0
0 GBP7,70
0
June output GBP18,34
0
Closing WIP GBP4,110 GBP2,460 GBP1,65
0
The above figures are then used to prepare the process account for June
(Table 4).

Table 4: Process account

June process account

Opening WIP GBP3,800 Output GBP18,340

Components GBP8,200 Closing WIP GBP4,110
Assembly costs GBP10,450
GBP22,450 GBP22,450
Process costing uses actual costs to value output and closing WIP. It
consequently provides little information about performance since it doesn’t
compare actual performance against a benchmark, ie standard cost.
An analysis must be undertaken to gain an insight into performance. The
analysis for June revealed:
Average cost of a component kit has increased from GBP80 (Opening WIP:
GBP2,000 / 25) to GBP82

38
Cost of an equivalent unit of assembly work has decreased from GBP120
(Opening WIP: GBP1,800 / 25 / 0.6) to GBP110.
While this analysis is useful, it only highlights trends since it does not
compare performance against a standard. A company must operate a
standard costing system to obtain control information.

39