BBM Semester III COSTING FUNDAMENTALS

PROCESS COSTING

Process costing is that form of operation costing which is used to ascertain the cost of
the product at each process or stage of manufacture.

Features of Process Costing

1. The production is continuous and the final product is the result of a sequence of
processes.
2. Costs are accumulated by processes.
3. The products are standardized and homogeneous.
4. The cost per unit produced is the average cost which is calculated by dividing the
total process cost by the number of units produced
5. The finished product of each but last process becomes the input of the next
process in sequence and that of the last process is transferred to the finished
goods stock.
6. The sequence of operations or processes is specific and pre – determined.
7. Some loss of materials in processes (due to chemical action, evaporation, etc) is
unavoidable.
8. Processing of a raw material may give rise to the production of several products.
These several products produced from the same material may be termed as joint
products or by products.

Application of Process Costing

The industries in which process costing is used are as follows:

1. Textile mills
2. Sugar industry
3. Chemical industry
4. Oil refining
5. Cement industry
6. Paper industry
7. Food processing
8. Steel industry
9. Paint industry
10. Soap industry
11. Milk dairy
12. Meat products factory
13. Biscuit industry
14. Distillation process

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Comparison Process Costing and Job Costing

Process Costing Job Costing

1. Costs are complied process –
wise and cost per unit is the
average cost i.e the total cost
of the process divided by the
number of units produced.
2. Production is of standardized
products and cost units are
identical.
3. Production is for stocks.
4. Costs are computed at the end
of a specific period.
5. The cost of one process is
transferred to the next process
in the sequence.
6. On account of continuous
nature of production, work – in
– progress in the beginning and
end of the accounting period is
a regular feature.
7. Cost control is comparatively
easier. This is because factory
processes and products are
standardized.
Costs are separately ascertained for
each job, which is cost unit.
Production is of non – standard
items with specifications and
instructions from the customers.
Production is against orders from
customers.
Costs are calculated when a job is
completed.
Cost of a job is not transferred to
another job but to finished stock
account.
There may or may not be work – in –
progress in the beginning and end of
accounting period.
Cost control is comparatively more
difficult because each cost unit or job
needs individual attention.

Advantages of Process Costing

1. It is possible to determine process costs periodically at short intervals. Unit
cost can be computed weekly or even daily if overhead rates are used on
predetermined basis.
2. It is simple and less expensive to find out the process costs.
3. It is possible to have managerial control by evaluating the performance of
each process.
4. It is easy to allocate the expenses to processes in order to have accurate
costs.
5. It is easy to quote the prices with standardization of process. Standard
costing can be established easily in process type of manufacture.

Disadvantages of Process Costing

1. Costs obtained at the end of the accounting period are only of historical
value and are not very useful for effective control.

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2. Work in progress is required to be ascertained at the end of an accounting

period for calculating the costs of continuous process. Valuation of work in
progress is generally done on estimated basis which introduces further
inaccuracies in total cost.
3. Where different products arise in the same process and common costs
are appropriated to various cost units. Such individual product’s costs may
be taken as only approximation and hence not reliable but may be taken
as best.
4. There is a wide scope of errors while calculating average costs. An error
in one average cost will be carried through all processes to the valuation
of work in progress and finished goods
5. The computation of average cost is more difficult in those cases where
more than one type of product is manufactured and a division of the cost
element is necessary.

Normal Loss

The amount of loss which cannot be avoided because of the nature of material or
process is normal process loss. Such a loss is quite expected under normal conditions.
It is caused by factors like chemical change, evaporation, withdrawls for tests or
sampling, etc.

Abnormal Loss

This type of loss occurs due to abnormal reasons such as carelessness, machine break
down, use of defective materials, etc. If the actual loss is more than normal loss, then it
is abnormal loss.

Value of Abnormal Loss = Abnormal Loss units X Cost per unit

Cost per unit = Total Cost – Value of Normal Loss

Input – Normal Loss (in units)

Abnormal Gain
If the actual loss is less than normal loss, then it results in abnormal gain.

Value of Abnormal Gain = Abnormal Gain units X Cost per unit

Abnormal Gain Units = Actual Output + Normal Loss - Input

Cost per unit = Total Cost – Value of Normal Loss

Input – Normal Loss (in units)

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BBM Semester III COSTING FUNDAMENTALS

PROBLEMS

A. When there is no Process Loss

1) A Product passes through three process before being completed. 1,000 units of
raw materials are introduced at Rs 20 per unit. Following information is obtained
for the month of July 2009:

Process A (Rs) Process B (RS) Process C (Rs)

Other Materials 4,000 2,000 1,000
Direct Labour 5,000 4,000 6,000
Direct Expenses 600 500 400
The overhead of Rs 6,000 is shared in the ratio of labour. There is no process
loss. Prepare Process Accounts.

2) A product passes through three distinct processes to completion. These

processes are numbered respectively 1, 2 and 3. During the week ended 15 th
January 2007, 500 units are produced. The following information is obtained:

Process 1 (Rs) Process 2 (RS) Process 3 (Rs)

Direct Materials 3,500 1,600 1,500
Direct Labour 2,500 2,000 2,500
The overhead expenses for the period were Rs 1,400 apportioned to the
processes on the basis of wages.
No work – in – progress or process stocks existed at the beginning or at the end
of the week. Prepare Process Accounts.

B. When there is Normal Loss without Realisable Value

3) A product is obtained through three processes, viz; P, Q, R. The details are as

follows:

P Q R
Raw material introduced in units 2,000 ------ -----
Purchase cost of Raw Materials per unit (Rs) 25 -------- ------
Other materials (direct) (Rs) 5,000 3,000 2,000
Direct Wages (Rs) 10,000 12,000 14,000
Direct Expenses (Rs) 1,500 1,600 1,700
Normal Loss (% of input) 8% 5% 2%
Indirect expenses of Rs 12,000 shared in the ratio of 5:4:3. Prepare Process
Accounts and determine cost per unit in each process.

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C. When Normal Loss Has a Scrap Value

4) A product passes through processes X, Y and Z. The details are as below:

X Y Z
Raw material introduced (kgs) 5,000 ------ -----
Cost of Raw Materials for kg(Rs) 12 -------- ------
Other materials (direct) (Rs) 6,000 8,000 5,000
Direct Labour Cost (Rs) 16,000 15,000 14,000
Expenses (Rs) 2,000 1,000 800
Normal Loss (% of input) 10% 8% 5%
Scrap value (Rs per kg) 3 2 1
Overhead charges of Rs 13,640 to be shared in the ratio of input quantity.
Prepare Process Accounts and calculate cost per unit of output in each process.

5) The following are the expenses incurred in case of an article. Prepare process
account and calculate the cost per unit
Process A (Rs) Process B (Rs)
Materials (250 units) 5,000 1,000
Labour 4,000 3,000
Other expenses 2,000 1,250
Normal loss 4% 5%
Sale of normal loss per unit 5 8

D. When there is Sale of Output

6) A product passes through process A, B & C. The details are as below:

X Y Z
Raw material issued (units) 10,000 ------ -----
Cost of Raw Materials per unit (Rs) 20 -------- ------
Standards Loss (% of input) 10% 5% 2%
Scrap value per unit (Rs) 7 10 15
Sundry materials (Rs) 24,000 20,000 18,000
Labour Cost (Rs) 1,20,000 1,10,000 1,00,000
Expenses (Rs) 28000 9,400 10,000
Output sold (% of output) 20% 30% 100%
Sale value of output per unit (Rs) 50 65 100
Indirect expenses of Rs 66,000 shared in the ratio of 5:4:3. Prepare Process
Accounts and Calculate cost per unit of output in each process and profit or loss
on sale of output.

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7) Karnataka Ltd processes a patent material used in buildings. The material is

produced in three consecutive grades – soft, medium and hard.

Process I Process II Process III

Raw material used 1,000 tons ------------ -------
Cost per ton of raw material Rs 200 ------ ------
Manufacturing wages and expenses Rs 87,500 Rs 39,500 Rs 10,710
Weight lost (% of input of the process) 5% 10% 20%
Scrap (sale price Rs 50 per ton) 50 tons 30 tons 51 tons
Selling price per ton Rs 350 Rs 500 Rs 800

Management expenses were Rs 17,500 and selling expenses Rs 10,000. Two – thirds
of the output of Process I and one – half of the output of Process II are passed on to
the next process and the balance is sold. The entire output of Process III was sold.

Prepare process accounts.

E. When Quantity of Raw Material Introduced in Each Process

8) Sourab Co Ltd produces a product through three stages. In each stage 2% of

total input is lost and 10% is scrap which from Process 1 and Process 2 realises
Rs 100 a ton, from Process 3 Rs 20 a ton. The details are as below:

Process 1 Process 2 Process 3

Passed on to next process 75% 50% -----
Sent to warehouse 25% 50% 100%
Raw materials (Rs) 1,20,000 28,000 1,07,840
Raw material quantity (tons) 1,000 140 1,348
Manufacturing wages (Rs) 20,500 18,520 15,000
General expenses 10,300 7,240 3,100

Prepare Process Accounts and ascertain cost per ton.

F. When there is Abnormal Loss and Abnormal Gain

9) A product passes through three processes. The details are as follows:

Process I Process II Process III

Units introduced 10,000 ------------- --------------
Costs per unit 12 -------------- --------------
Other materials 24,000 30,000 20,000

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Labour 75,000 80,000 90,000

Overheads 50,000 40,000 30,000
Normal loss 5% 8% 10%
Scrap value per units 4 10 15
Actual output 9,300 8,700 7,800
Prepare process accounts, abnormal loss account, abnormal gain account and normal
loss account. Calculate cost per unit of each process.

10) A product passes through 3 processes A, B and C. The normal wastage of each
process is 3%, 5% and 8% respectively. The wastage of each process Rs 75, Rs 238
and Rs 728 respectively.

10,000 units were issued to process A on 1/4/2010 at a cost of Re 1 per unit. The other
expenses were as follows:
Process A Process B Process C
Sundry materials 1,000 3,000 500
Labour 8,000 13,000 5,300
Direct expenses 475 1,338 388
Actual output 9,500 units 9,100 units 8,100 units
Prepare process accounts, assuming that there was no opening or closing stock. Also
give Abnormal Loss, Abnormal Gain account and Normal Loss Account.

11) Product A is obtained after it passes through 3 distinct processes. The following
information is obtained from the accounts for the week ending 31 st October 2008

Items Total Process 1 Process 2 Process 3

Direct materials 7,542 2,600 1,980 2,962
Direct wages 9,000 2,000 3,000 4,000
Production overhead 9,000
1,000 units at Rs 3 each were introduced to Process 1. There is no stock of material or
work in progress at the beginning or at the end of the period. The output of each
process passes direct to next process and finally to finished stock. Production overhead
is recovered 100% of direct wages. The following additional data is obtained:
Process Output during the week Percentage of normal Value of scrap per unit
loss to input
Process 1 950 5% 2`
Process 2 840 10% 4
Process 3 750 15% 5
Prepare Process accounts ,Abnormal Loss, Abnormal Gain account and Normal Loss
Account..

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12) The following details are extracted from the costing records of an oil refinery for the
week ended 30th Sept; 20011.

Purchase of 500 tonnes of copra Rs 2, 00,000.

Crushing Refinery Finishing
plant plant
Cost of labour 2,500 1,000 1,500
Electric power 600 360 240
Sundry material 100 2,000 ---------
Repairs to plant & machinery 280 330 140
Steam 600 450 450
Factory expenses 1,320 660 220
Cost of casks ---------- ----------- 7,500

300 tonnes of crude oil was produced.

250 tonnes of oil was produced by refining process.
248 tonnes of refined oil was finished for delivery.
Copra sack sold Rs 400
175 tonnes of copra residue sold for Rs 11,000
Loss in weight in crushing 25 tonnes.
45 tonnes by – product was obtained from refining process values at Rs 6,750.
You are required to show the accounts in respect of each of the following stages of
manufacture for the purpose of arriving at the cost per tonne of each process and also
the total cost per tonne of finished oil.

13) A product passes through three processes A, B & C. The details of expenses
incurred on the three processes during the year 2003 were as under:

Processes A B C
Units introduced 10,000
Cost per unit Rs 100
Rs Rs Rs
Sundry materials 10,000 15,000 5,000
Labour 30,000 80,000 65,000
Direct expenses 6,000 18,150 27,200
Selling price per unit of output 120 165 250
Management expenses during the year were Rs 80,000 and selling expenses were Rs
50,000. These are not allocable to the processes.

Actual output of the three process was : A – 9,300 units; B – 5,400 units and C – 2,100
units. Two – thirds of the output of Process A and one – half of the output of Process B

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was passed on to the next process and the balance was sold. The entire output of
Process C was sold.

The normal loss of the three processes, calculated on the input of every process was:
Process A – 5%; B – 15% and C – 20%. The loss of Process A was sold at Rs 2 per
unit, that of B at Rs 5 per unit and of C at Rs 10 per unit.
Prepare the three process accounts

G. When there is Opening and Closing Stock

14) The product of a company passes through three different processes P, Q and R. It
is ascertained from past experience that loss in each process is incurred as under:
Process P: 2%, Process Q: 5%, Process R: 10%
The percentage of loss in each case is computed on the basis of number of units
entering the process concerned.
The loss of each process has a scrap value. The loss of Process P and Q is sold at Re
1 per unit. And that of Process R at Rs 4 per unit.

The company gives you the following information for the month of July 2009:

2,000 units of crude material were introduced in Process P at a cost of Rs 8 per unit.
Besides this following were the other expenses:
Process P(Rs) Process Q (Rs) Process R (Rs)
Materials consumed 8,000 3,000 2,000
Direct labour 12,000 8,000 6,000
Works expenses 2,000 1,000 3,000
Units Units Units
Output 1,950 1,925 1,890
Stock : July 1 200 300 500
Stock : July 31 150 400 300
Rs Rs Rs
Stock: valuation on 19 27 36.5
July 1 per unit
Stock on 31st July 2009 are to be valued at cost as shown by month’s production
accounts. Prepare the Process accounts.

H. When Output is Transferred at a Profit

15) A product passes through 2 processes X and Y. the output of the process X is
charged to Process Y at a price which includes profit of 20% on actual cost and the

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BBM Semester III COSTING FUNDAMENTALS

output of Process Y is charged to finished stock at a price which includes a profit of 10%
on actual cost. The following data are available for the month of July 2004.

Process X Process Y
Material (2,500 units) 1,250 1,250
Labour 625 500
Overheads 1,875 750
There is no partly finished work in either process. Out of the finished stock 1,500 units
had been sold for Rs 7,500.
Prepare the process accounts and finished stock account.

16) The following are the details in respect of Process X and Process Y of a Processing
Factory

Process X (Rs) Process Y (Rs)

Materials 15,000 -------
Labour 15,000 21,000
Overheads 6,000 15,000
The output of Process X is transferred to Process Y at a price calculated to give profit of
20% on the transfer price and the output of Process Y is charged to finished stock at a
profit at 25% on transfer price. The finished goods department realized Rs 1, 50,000 for
the finished goods received from Process Y. Prepare process accounts.

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