Methods of Costing

Dr. Contract Account Cr.

Particulars Amount Particulars Amount

1,00,000 By, Material on hand 25,000

50,000 2,20,000
10,000 15,000
To, Depreciation on plant 5,000

60,488
2,45,000 2,45,000

5.4 PROCESS COSTING AND JOINT & BY PRODUCTS

Process Costing

each process or stage of manufacture. This method of accounting used in industries where the process

process and the unit cost of the process for each and every process. Usually the industries where process

Features of Process Costing:

process.

reasons.

joint of separation is an important aspect of this method of costing.

particular period.
Applications of Process Costing:

Chemical works
Soap making Food products
Canning factory
Distillation process Coke works

Biscuit works Meat products factory

Milk dairy

264 COST ACCOUNTING

Difference between Job Costing and Process Costing:

Job Costing Process Costing

(i) That form of costing which applies where
where the work is undertaken to customer’s standardised goods are produced and
special requirements.

(ii)

to get an average cost per unit.

(iii) Losses are generally not segregated. Normal losses are carefully predetermined and

(iv) Overheads are allocated and apportioned to Units pass through the same processes.
Overheades are apportioned to processes on
to the time taken.

(v)
cost apportionment is necessary.
(vi) The standardised nature of products and
processing methods lends itself to the adoption
of standard costing.
(vii)
spread over fully complete output and partially
complete products using the concept of
equivalent units.
(viii)

calculated at the end of cost period.

Transfer of costs from one process to another is
made, as the product moves from one process
production. to another.

accounting period.

product unit is different and the production is

not continuous.
It requires more forms and details. It requires few forms and less details.
Normal Process Loss:

Where scrap possesses some value as a waste product or as raw material for an earlier process, the

Abnormal Process Loss:

COST ACCOUNTING 265

Methods of Costing

(Normal Cost of Normal Output)

(Normal Output)
Abnormal Gain:

a process and that anticipated. These differences will not always represent increased loss, on occasions

Equivalent Production:
This represents the production of a process in terms of completed units. In other words it means converting
the incomplete production units into its equivalent of complete units. In each process an estimate

Calculation of Equivalent Production:

units.

There are mainly three methods of calculating cost per unit, out of which FIFO method and Weighted
Average Method is used in equivalent production.
First In First Out Method [FIFO]:

and then the units introduced in the process are completed. The costs added in each process during
the current period is prorated to the production necessary to complete the opening work in progress, to

266 COST ACCOUNTING

the equivalent production under this method.
Average Method:

Weighted Average Method:

If a manufacturing unit is manufacturing two or more products, which are quite dissimilar to each other,
weighted average method is used. Under this method, weighted average is computed and used in
valuation of the incomplete units.

Illustration 24:

Particulars UNITS
Transfer to process II at cost 4,000
Direct wages 2,000
Direct material 3,000
Transfer to Finished stock 3,240

5 per unit.

Solution

Dr. PROCESS-II- Account Cr.

Particulars Units Particulars Units

4000 800 4000
2,000
3,000 3,240 22,275
To, Factory Overheads 12,000 @ 6.875 per unit

40 275

4,040 26,275 4,040 26,275

COST ACCOUNTING 267

Methods of Costing

Dr. Abnormal Gain Account Cr.

Units Units
40 200 40 275
75
40 275 40 275

Illustration 25:

TOTAL I II III
Material 15,084 5,200
Direct wages 18,000 4,000 6,000 8,000
18,000
1,000 units @
direct wages.
UNITS NORMAL LOSS
( per unit)
4
840 8
750 10

Solution
Dr. PROCESS-I- Account Cr.
Units Units
To, Material introduced 1000 1000 6,000 50 200
@
5,200
per unit
4,000
4,000
1000 19,200 1000 19,200

Dr. PROCESS-II- Account Cr.

Particulars Units Particulars Units

760
To, Direct Material 15 600
6,000
×15
6,000
840 33,600

268 COST ACCOUNTING

Dr. PROCESS-III- Account Cr.

Particulars Units Particulars Units

840 33,600 126 1,260
750 57,000
8,000 @ 76 per unit
8,000
36 2,736

×36
876 58,260 876 58,260

Illustration 26 :
A product passes through three processes— A, B and C. 10,000 units at a cost of 1.10 were issued to

Sundry materials 1,500 1,500 1,500

4,500 8,000 6,500
1,000 1,000 1,503

The wastage of process ‘A’ was sold at 0.25 per unit and that of ‘B’ at 0.50 per unit and that of C at
1.00.
10 per unit fetching

Solution
Dr. PROCESS-A- Account Cr.

Particulars Units Particulars Units

10000 11,000 500 125

1,500 2.64 25075

per unit
4,500
1,000
7,200
10000 25,200 10000 25,200
Dr. PROCESS-B- Account Cr.
Particulars Units Particulars Units
25,075 380

1,500 48,185
8,000 @ 5.283
1,000
12,800
48,375 48,375

COST ACCOUNTING
Methods of Costing

Dr. PROCESS-C- Account Cr.

Particulars Units Particulars Units

48,185 (Ref. Working Notes)
1,500 8424

6,500
1,503
10,400
68,088 68,088

Working Notes:

Cost per unit 8

100

Illustration 27:

Degree of completion
Opening stock 1,600 Units Material

Overhead
10,200 Units
Units
Units scrapped 800 Units

Closing stock 1,800 Units Material

Overhead

270 COST ACCOUNTING

Solution
Statement of Equivalent Production

Input Output Units Material Labour Overheads

Units Units Units
1600 Opening Stock 1600 30 480 40 640 40 640
10200 Normal Loss 1000
Finished Units 7600 100 7600 100 7600 100 7600
Closing Stock 1800 60 1080 40 720 40 720
12000
200 100 200 100 200 100 200
11800 11800 8760 8760

Illustration 28:

Stage of completion
200 units @ 4 per unit

Units introduced 1050

Closing stock 150 units

Material cost 1,050

2,250
1,125
4,425
Solution
Statement of Equivalent Production

Input Output Units Material Labour Overheads

Units Units Units
200 Opening Stock 200 60 120 60 120
1,050 Finished Stock 100 100 100

during this period

Closing Stock 150 100 150 70 105 70 105
1250 1,250 1,050 1,125 1,125

COST ACCOUNTING 271

Methods of Costing

Statement of Cost per unit

Particulars Cost Equivalent units Cost per unit

Material 1,050 1,050 1

2,250 1,125 2
1,125 1,125 1
Value of Closing Stock
Element Units Cost per unit Total Cost

Material 150 1 150

105 2 210
Overhead 105 1 105
465
Dr. Process Account Cr.
Particulars Units Particulars Units
200 800 By, Closing Stock 150 465
1050 1,050 By, Transfer to Finished Stock 1100 4,760
4.327 per unit
2,250
1,125
1,250 5,225 1,250 5,225

Element Units Cost per unit Total Cost

Material 800
120 2 240
Overhead 120 1 120
1,160
3,600
4,760
Illustration 29:
From the following information prepare process account.

800 Units @ 6 per unit 4,800

12,000 units costing 16,350

Normal process loss

Closing stock 1,800 units
Degree of Completion

16,670

272 COST ACCOUNTING

Solution
Statement of Equivalent Production
Input Output Units Material-I Material - II Labour Overheads
Units Units Units Units
800 Opening Stock 800 40 320 60 480 60 480
12000 Normal Loss
1100
Finished Units 100 100 100 100

Closing Stock 1800 100 1800 60 1080 50 50

12600 10700 10300 10280 10280
200 200 100 200 50 100 50 100
12800 12800 10500 10380 10380
Statement of Cost per unit

Particulars Cost ( ) Equivalent Cost ( ) Cost per unit ( )

16350 1.5
10500 10500 1.0
20760 10380 2.0
Overhead 15570 10380 1.5

Value of Abnormal Loss

Element Units Cost per unit ( ) Total Cost ( )

200 1.5 300
200 1.0 200
100 2.0 200
Overhead 100 1.5 150
850
Value of Closing Stock

Element Units Cost per unit ( ) Total Cost ( )

1800 1.5 2,700
1080 1.0 1,080
2.0 1,800
Overhead 1.5 1,350

Dr. Process Account Cr.

Particulars Units Particulars Units
800 4,800 1100 1,100
12000 16,350 1800
10,500 200 850
20,760 60,200
@ 6.206 per unit
16,670
12800 12800

COST ACCOUNTING 273

Methods of Costing

Illustration 30:

3 per unit
42,000

(viii) Units scrapped as normal loss were sold at 1 per unit

2.50 per unit.

Solution
Statement of Equivalent Production

Input Output Units Material Labour Overheads

Units Units Units
10000 Normal Loss 100
Finished Units 100 100 100
Closing Stock 350 100 350 50 175 50 175
50 100 50 80 40 80 40
10000 10000
Statement of Cost

Particulars Cost Equivalent Cost per unit

units
Material 44,550 4.5000

21,148 2.1768
Overhead 42,000 4.3232
Value of Closing Stock

Element Units Cost per unit Total Cost

Material 350 4.5 1575.00
175 2.1768
Overhead 175 4.3232 756.56
2712.50 Say, 2713

274 COST ACCOUNTING

 Value of Abnormal Loss

Element Units Cost per unit Total Cost

Material 50 4.5 225.000
40 2.1768 87.072
Overhead 40 4.3232
485

Dr. Process Account Cr.

Particulars Units Particulars Units
To, Material Introduced 10000 30000 100 100
14650 50 485
21148 350 2,713
42000
@ 11 per unit 1,04,500
10000 10000

Dr. Abnormal Loss Account Cr.

Particulars Units Particulars Units
50 485 50 125
360
50 485 50 485

Illustration 31:

stage of completion.

Material

Overhead

Cost of the 2,000 units 58,000

Additional Direct Material 14,400
33,400
Direct Overheads 16,700

Units scrapped relaised

COST ACCOUNTING 275

Methods of Costing

Solution
Statement of Equivalent Production

Input Output Units Material Labour Overheads

Units Units Units
2000 Normal Loss 100
Closing Stock 460 75 345 50 230 50 230
Finished Units 1,400 100 1,400 100 1,400 100 1,400
40 100 40 100 40 100 40
2000 2,000 1,785 1,670 1,670

Statement of Cost

Particulars Cost ( ) Equivalent Units Cost per unit ( )

71,400 1,785 40
33,400 1,670 20
Overhead 16,700 1,670 10

Value of Closing Stock

Element Units Cost per unit Total Cost

Material 345 40 13800

230 20 4600
Overhead 230 10 2300
20700

Value of Abnormal Loss

Element Units Cost per unit Total Cost

Material 40 40 1600
40 20 800
Overhead 40 10 400
2800

276 COST ACCOUNTING

Dr. Process - ‘X’ Account Cr.

Particulars Units Particulars Units

To, Material introduced 2000 58,000 By, Normal Loss 100 1,000
To, Additional Material 14,400 40 2,800
33,400 By, Closing Stock 460 20,700
To, Overheads 16,700
70 per unit.
1400
2000 1,22,500 2000 1,22,500

Illustration 32:

25 per 100 units and 50 per 100

units respectively.

16,000.
Particulars PROCESS A PROCESS B

Other Materials 16,000 5,000

8,000
8,200 1,500
Units Units
Output 36,500

April 1 6,000 5,000

April 30 5,000 8,000
Value of stock per unit on April 1st 1.20 1.60

Solution
Dr. Process A- Account Cr.

Particular Units Particular Units

To, Material Introduced 40000 16,000 800 200

To, Additional Materials 16,000 200 250

×200
40,000–800
48,750

8,200
40,000 40,000

COST ACCOUNTING 277

Methods of Costing

Dr. Process – A Finished Stock Account Cr.

Particular Units Particular Units
6,000 7,200 5,000 6,217
48,750
×5000
45,000
40,000
@ 1.243 per unit
45,000 45,000
Dr. Process-B- Account Cr.
Particulars Units Particulars Units
To, Transfer from process – A 40000 4000 2,000

To, Other Materials 5,000 36500

8,000
1,500
500 864
64,233–2,000
×500
40,000–4,000
40,500 40,500
Dr. Process – B Finished Stock Account Cr.

Particulars Particulars
5000 8,000 8000 13,705
36500
×8,000
41,500
33500
1.7132 per unit
41500 41500

Illustration: 33

Opening Stock 1,000 units

Value Direct Material (I)
118.
6,000 units at 2,360
4,700 units.
Direct material added in process 520
1,036
1,541
Units scrapped 300
Degree of completion

Closing stock 2,000 units

278 COST ACCOUNTING

Solution:
Statement of Equivalent Production

Input Particulars Output Material-II Labour Overheads

Units
Units % Units % Units % Units
1000 Opening stock
6000 Normal loss 250
Finished units 4700 4700 100 4700 100 4700 100 4700
Closing stock 2000 2000 60 1200 50 1000 40 800
50 50 100 50 80 40 60 30
7000 7000 6750 5740 5530

Statement of Cost
Material-I Material-II Labour Overheads
Opening stock 75 112 118
2360 520 1036 1541
2750

50 2700 595 1148 1659

Cost per unit ( ) 0.40 0.10 0.20 0.30
Calculation of closing stock:

Material I 800
Material II 120
200
Overheads 240
1360

Value of abnormal loss:

Material I 20
Material II 5
8
Overheads
42

COST ACCOUNTING
Methods of Costing

Dr. Process – 3 Account Cr.

Units Amount Units Amount

Particulars Particulars
1000 250 50
6000 2,360 50 42
520 2000 1,360
1,036 4700 4,700
1,541 @ 1 per unit
7000 6,152 7000 6,152

Joint and By-Products

Meaning of Joint Products:
In several industries more than one product emerge from the manufacturing process. These products
are sometimes produced intentionally while in some cases they emerge out of the main manufacturing

two or more products separated in the course of processing

separation.
Difference Between Joint products and Co-products:

to the need of the concern.

Features of Joint Products:

The processing of a particular raw material may result into the output of two or more products.

(c) The products are produced intentionally which implies that the management of the concerned

(e) The manufacturing process and raw material requirement is common up to a certain stage of

280 COST ACCOUNTING