DATE: 2021/05/09

SUBJECT: MANAGERIAL ACCOUNTING – ASSIGNMENT

SUBMITTED TO: MR ANWARI
SUBMITTED BY: ABDUL JAMIL DAWARI & MOHAMMAD HAMID
CLASS: SEMESTER 1st ENGLISH MORNING
TERM: 10th MBA

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 Brief Contents
Part1 Introduction
Part2 Definition
Part3 Advantage & disadvantage
Part4 Different Forms of process Accounts
Part5 Process costing system with Illustration
Part6 Process costing -4Main Elemnets of Production cost

Part7 brief information about

a- Equivalent units of Production
b- Equivalent Units of Production (weighted Average
Method)
c- Compute the cost per equivalent units

Part8Illustrations with solution (weighted-Average Examples,

compute and apply cost & computing the cost of units transferred
out)

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 Part 1 Introduction

Process Costing refers to a method of accumulating cost of production by process.

It represents a method of cost procedure applicable to continuous or mass
production industries producing standard products. Costs are compiled for each
.process or department by preparing a separate account for each process
Process costing can be applied in chemical works, oil refining, food
manufacturing, paint works, canning, textiles, paper, dairy, sugar, bakeries,
breweries, mining industries, public utility services etc. When a product is
manufactured through various processes, the output of each process is
transferred to the subsequent process and that of the last process is transferred
to the finished stock.

WHAT IS PROCESS COSTING MEANIGN AND CONCEPT?

Process Costing is probably the most widely used costing system. Process
Costing is a method of costing under which all costs are accumulated for
each stage of production and the cost per unit of product is ascertained at
each stage of production by dividing the total cost of each process by the
normal output of that process. It represents a type of costing procedure for
mass production industries producing standard products. Typically, in such
industries all goods produced are for stock, units produced are identical,
goods move down the production line in a continuous stream, and all
factory procedures are standardised, costs are compiled for each process or
department by preparing a separate account for each process. Thus, it is a
method of costing used to ascertain the cost of product at each stage of
.manufacturing
Process costing is an alternative method of cost accounting. Like job
costing, even process costing is a basic method by which costs are
accumulated by processes. In the case of job costing, costs are charged to
.each individual customer
This becomes necessary since each order of an individual customer is
different from that of the other. Being different, each order requires
different amounts of material, labour and overhead. Process costing is not
the same as specific order costing. Consequently, costs need not be
.collected and charged to a specific order

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In mass producing industries where like units pass through different stages
of production, the adoption of process costing necessitates cost
accumulation by these stages. Each stage is known as a process. Like units
move from one process to another till the stage of completion. Output of the
.earlier process becomes the input of the later process
Process Costing refers to a method of accumulating cost of production by
process. It represents a method of cost procedure applicable to continuous
or mass production industries producing standard products. Costs are
compiled for each process or department by preparing a separate account
.for each process

Part 2 Definition

Process costing is used in mass production industries producing standard

or identical products continuously through a series of processes or
operations. It is assumed that the same amount of materials, labor and
.overhead is chargeable to each unit processed
Each unit is processed similarly. It is not possible to trace the items of
prime cost of a particular order, as its identity is lost in continuous
production. The cost per unit can be ascertained at the end of any
manufacturing process by dividing the total cost of a process by the number
.of units produced in that process

Kohler has defined process costing as – “a method of cost accounting

whereby costs are charged to processes or operations and averaged over
.”units produced
CIMA has defined process costing as – “the basic costing method applicable
where goods or services result from a sequence of continuous or repetitive
operations or processes. Costs are averaged over the units produced during
”.the period
Process costing can be applied in chemical works, oil refining, food
manufacturing, paint works, canning, textiles, paper, dairy, sugar, bakeries,
breweries, mining industries, public utility services etc. When a product is
manufactured through various processes, the output of each process is
transferred to the subsequent process and that of last process is transferred
.to the finished stock

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 Part 3 Advantages & Disadvantages

*Advantages:
1. The cost of different processes as well as finished product can be
computed conveniently at short intervals, say, daily or weekly.
2. Control over cost and production can be advantageously effected as pre-
determined and actual data are available for each department or process.
3. It involves less clerical work because of the simplicity of cost records.
4. The average costs of homogeneous products can easily be computed.
5. Expenses can be allocated to different processes on rational basis and
accurate cost, thus, can be ascertained.
6. It enables the correct valuation of closing inventories.

*Disadvantages:
1. The cost, ascertained at the end of the process is called historical cost
which is of very small use for managerial control. Since it is based on
historical costs, it has all the weaknesses of historical costing.
2. The system of costing conceals weaknesses and inefficiencies in
processing.
3. It does not evaluate the efforts of individual workers or supervisors.
4. The valuation of work-in-progress on the basis of degree of completion is
merely a guess work.
5. If production is not homogeneous, as in the case of foundries making
castings of different sizes and shapes, the average cost may give an
incorrect picture of cost.

Part4Different Forms of Process

Accounts

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The process accounts can be prepared in different forms due to various
reasons like production of joint products and by-products, normal loss and
abnormal loss, or may be due to transfer of the product of one process to
another at profit and so on.

So, the process accounts can be prepared in the various

forms like:
(i) Simple process accounts having debit and credit columns.
(ii) Loss in weight due to evaporation or scrap, etc.
(iii) When there is sale of half manufacturing product during the
production process.
(iv) When there is a problem given regarding valuation of opening stock
and closing stock.
(v) Problems may relate the abnormal loss or abnormal effectives.
(vi) Problems related to joint products and by-products.
(vii) Problem related to oil refining process.
(viii) Transfer of product by adding profit to the next process.

Part5 Process Costing System (With

Illustrations)
Process costing system is a type of costing procedure which is used in
accounting for calculating cost in continuous or mass production industries
such as food processing, cement, sugar or potato chips. In these industries
it is not possible to identity separate units of production because of the
continuous nature of production processes involved.

The products are essentially homogenous (similar) in nature. All units are
processed in similar manner and it is assumed that the same amounts of
materials, labour and overheads are chargeable to each unit processed.
In the process costing system, costs are accumulated, period by period not
per job or batch by batch. Cost of each unit is calculated at the end of the
period (commonly one month or after one week as the case may be). Cost
per unit (average) is obtained by dividing the total cost applicable to a
production department during a particular period by the total number of
units produced during that period.
If the product is processed in more than one process, the output of the first
process is transferred to the second process. The output of the first process

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becomes the input of the second process. The output of second process is
transferred to third process and so on. The output of the last process is
transferred to Finished Stock Account.

Illustrating Process Costing:

An example of a manufacturing process of rice is given in Fig (below)

An example of a manufacturing process of cement is given in Fig (below)

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Part6 : Process Costing – 4 Main
Elements of Production Cost
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The following are the main elements of production
cost in process costing:
(i) Direct Material.
(ii) Direct Labor
(iii) Direct Expenses
(iv) Overheads.
Element # (i) Direct Material:
Under process costing generally all the material required for production is
purchased and issued to the first process. The output in whatever form of
the first process becomes the raw material for the next process and so on.
In different processes additional material may be added as per the nature
and the requirement of the product. The whole of material issued or used
for the process is shown in the debit side of the process account.
Element # (ii) Direct Labor:
The payment of wages or salaries to the workers engaged to carry out the
work of that particular process is debited to that process for which it is
paid. As the manufacturing procedure becomes more and more automatic
or capital intensive there the labor expenses start decreasing and overheads
start increasing. Whatever the labor cost of the process is shown in the
debit of that process.
Element # (iii) Direct Expenses:
All those expenses which are specially incurred for a process like corks,
bottles, bags or primary packing material is the direct expenses incurred for
that product or process.
Element # (iv) Overheads:
Overheads can be factory overheads, office overheads and selling and
distribution overheads. All these overheads expenses are distributed or
apportioned among all the processes on a reasonable and relevant base.
If base of distribution is not given in the problem then these are distributed
on the basis of labor cost because it is more scientific, relevant and
appropriate as most of the overheads are related to the welfare of the
workers. The share of the overheads of each process is shown in the debit of
the concerned process account.

Part7 brief information about

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a- Equivalent units of Production: equivalent units are the product of
the number of partially completed units and the percentage completion of those
units.
Equivalent units= units x percentage completion

b- Equivalent Units of Production (weighted Average Method):

The weighted average method of computing equivalent units of production
blends together the units and cost of current period with the units and cost
of previous period. Under this method, the equivalents units of production
in a department are equal to the units completed and transferred out plus
the equivalent units in in ending work in process inventory.
Formula
Under weighted average method, the equivalent units of production are
computed using the following formula:
Equivalent units of production = Units transferred out + (Units in ending
inventory × Percentage of complete

c- Compute the cost per equivalent units:

To calculate cost per equivalent unit by taking the total costs (both beginning work
.in process and costs added this period) and divide by the total equivalent units

Total costs assigned to units transferred out equals the cost per equivalent unit
times the number of equivalent units.
Cost per Equivalent Unit=production cost/equivalent units

Part 8 managerial Accounting Illustration (Equivalent units of

production & weighted- Average method):
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1-For the current period Alokizai Group of Companies started to produce
210000 units of water bottles and completed 177000 units , the remaining
33000 units in process 44% is completed , how many equivalent units of
production did Alokozai group of companies have for the period?
Solution:
177000+ (33000x44%)=177000+14520= 191520
It means that Alokozai Group of Companies completed 191520 units of 210000.

2-The Mexico Company manufactures a single product that goes through two
departments. The data relating to activity performed in first department during
the month of June is given below:

Solution: Matrial convertion

Units completed during June and 65000 65000
Transferred to next department
10500 7500
75500 72500

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15000x70%= 10500
15000x50%= 7500

3- The Robert company provides you the following data for

departmentX:

Solution: Matrial convertion

Units completed during January and 9600 9600
Transferred to next department

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 320 200
9920 9800
WIP January31:
800x40%= 320
800x25%= 200

4Illuration:

Solution:
Matrial convertion
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Units completed during May and 4800 4800
Transferred to next department
160 100
4560 4700
WIP January31:
400x40%= 160
400x25%= 100

Comput and Apply cost

Question2 cost Applied:
Beginning work in process inventory: 25000units
Materials: 90% completed $ 42000
Conversion: 60% completed $26000
Production started during June 80000units
Production completed during June 65000 Units
Cost added to production in June
Material Cost: $55000
Conversion Cost: $32000

Solution: Material conversion Total cost

Cost to be accounted for June:
Work in process June 1 42000 26000 68000

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Cost added to production in June 55000 32000 87000
Total cost 97000 58000
Equivalent Units 75500 72500

97000/75500= 1.28$ Cost per Equivalent unit=1.2+0.8= 2$

58000/72500= 0.8$

Material conversion total

Ending WIP Inventory:
Equivalent Units: 10500 7500
Cost per Equivalent unit 1.2 0.8
Cost of Ending WIP inventory 12600 6000 18600$
Units completed & transferred out:
Units transferred out 65000 65000
Cost per Equivalent unit 1.2 0.8
Cost of units transferred out 78000 52000 130000$

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__________________________________________________________

Question3 cost Applied:

Beginning work in process inventory: 400units
Materials: 55% completed $ 5300
Conversion: 30% completed $1800
Production started during June 10000units
Production completed during June 9600 Units
Cost added to production in June
Material Cost: $2800
Conversion Cost: $1200

Solution: Material conversion Total cost

Cost to be accounted for June:
Work in process June 1 5300 1800 7100
Cost added to production in June 2800 1200 4000
Total cost 8100 3000
Equivalent Units 9920 9800

8100/9920= 0.81$ Cost per Equivalent unit=0.8+0.3= 1.1$

3000/9800= 0.3$

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 Material conversion total
Ending WIP Inventory:
Equivalent Units: 320 200
Cost per Equivalent unit 0.8 0.3
Cost of Ending WIP inventory 256 60 316$
Units completed & transferred out:
Units transferred out 9600 9600
Cost per Equivalent unit 0.8 0.3
Cost of units transferred out 7680 2880 10560$

END

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