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PROCESS COSTING

Introduction: process costing system is used in production of similar units and is carried on continuously through a series of processes or operations.
It is also known as continuous operation costing
Process costing assumes a sequential flow of cost from one process to another as units of output pass through a number of specified production
processes i.e. the units leave the first process and take their cost with them to the second process; the units leave the second process and take their
cumulative costs with them to the third process and this process continues till the last process; when the output is finally completed. The finished
product of the last process is transferred to the finished goods inventory. Thus the cost becomes cumulative as production moves along, the final
process determining the total cost.
CIMA define Process costing as “the costing method applicable where goods or services result from a sequence of continuous or repetitive operation
or processes, costs are average over the unit produced during the period.” Example: In Sugar industry normal processes are 1.Extraction of juice from
sugarcane 2. Conversion of juice into molasses 3 crystallization molasses 4 conversion of the crystals into white sugar.

Industries which use Process Costing

1. Manufacturing industries: steel making, paper, cement, flour mills, bricks, glass metal, manufacturing chemicals, etc.
2. Public utility services: electricity, gas and water supply.
3. Mining industries: coal, petroleum extraction and refining, etc.
4. Food processing industries: Example bakeries, canteen, vegetable processing, confectioners, fruit juice, etc.
Procedure: for each process a separate process account is opened. All direct expensive like material and labour as well as indirect expenses for
overhead relating to the product and debited to the process account concerned. The output of one process may be transferred to the other process at
cost price or market price inflated price. Reconciliation of input with output is very important. In general every process has some normal loss which
is credited to process account. Difference of input units with output and normal loss unit results in abnormal units (abnormal loss or gain).
Normal loss, Abnormal loss and Abnormal gain
Normal loss: the loss expected during the normal course of operation for unavoidable reasons is called normal loss and this is due to inherent result of
the particular process and thus uncontrollable in the short run. Cost of the units representing normal loss is borne by the good units produced if
normal loss has any scrap value search value is credited to the process account.

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Sometimes actual loss may be more than the anticipated normal loss the extra units which are lost are treated as abnormal loss and when actual loss is
less than the anticipated normal loss in that event abnormal gain arises.
Abnormal Loss: it is an accidental loss and cannot be predicted in advance. It is non repetitive and hence can be controlled by the management.
Abnormal loss units is the difference between the expected output and actual output. In other words abnormal loss arises when the actual loss exceeds
the normal loss. The cost of abnormal loss units is credited to process account and debited to the abnormal loss account. The cost of abnormal loss is
the product of production cost per unit and abnormal loss units.
Abnormal Gain: any unusual extra ordinary savings in normal loss is treated as an abnormal gain i.e. when the loss is less than the normal expected
loss the difference is considered as abnormal gain. Abnormal gain is accounted similar to that abnormal loss. Abnormal gains will be debited to the
process account and credited to abnormal gain account. At the same time normal loss account is adjusted with the amount of scrap sales already
recognized on the units representing abnormal gain. The balance of abnormal gain after adjusting with the normal loss account is transferred to
Costing P/L Account.
Inter process profits
In certain industries where process costing is used the output of one process may be transferred to the other at a price higher than the cost of
production i.e. at the market value or at cost plus a predetermined percentage of profit. The difference between the cost and this transfer price is
known as inter process profit.
Example: A unit of process a cost ₹100.It is transferred to process B at ₹120. Hence, the inter process profit is ₹20. In order to compute profit
element in closing inventory and to obtain the net realized profit for the period three columns are to be made on each side of the process account and
the closing stock are to be deducted from the debit side instead of showing them on the credit side. The cost of closing stock is calculated by using
the unitary method and the profit on closing stock is the difference between the total and the cost of the closing stock.
Advantages:
1. It helps in evaluating the efficiency of each process
2. It helps in the introduction of a system of standard costing.
3. It helps in the control of costs by comparing them with the market price.
4. Comparison between the cost of the output and the market value of the output at that particular stage of completion becomes easy.
Disadvantages:
1. Use of inter process profits involves some complications
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2. The closing stock of finished goods and the work in progress include some unrealized profits and this requires certain adjustments.
Equivalent Production Units:
CIMA define equivalent unit as “a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress,
when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity of completed units. “
Example: 150 units 50% complete = 75 equivalent units. Equivalent completed units= Actual number of units in the process of manufacture x
percentage of work completed. In the process industries there is likely to be partly completed units at the end of the accounting period which will be
carried to the next accounting period. It is also called closing and opening work in progress.
E.g. Closing WIP consists of 2000 units which are 25% complete
Hence equivalent production = 2,000 units x 25% = 500 units.
There are various methods for valuation of WIP:
1. First-In-First-Out (FIFO) Method.
2. Last-In-Last-Out (LIFO) Method
3. Weighted Average Cost (WAC) Method.
Steps involved in Valuation of WIP
Step 1: Prepare the statement of equivalent production in which the input units and output units reconciled on physical unit basis .i.e. Opening Stock
of WIP + Closing Stock of WIP + Normal Loss + Abnormal Loss (or less Abnormal Gain)
Step 2: Compute the equivalent units taking into consideration the physical quantity and the percentage of completion.
Step 3: Prepare the statement of cost in which the cost per equivalent units is computed
Step 4: Prepare the statement of evaluation in which the cost of units completed and transferred to the next process, closing stock of WIP, Abnormal
loss (or gain) is computed. This is done by multiplying the cost per equivalent units with the respective number of equivalent units.
Step 5: Prepare the Process Account using the values calculated in the previous step.
Illustration 1: From the following data, prepare process accounts indicating the cost of each process and the total cost. The total units that pass
through each process were 240 for the period.
Process 1 Process 2 Process 3

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Materials 150000 50000 20000

Labour 80000 200000 60000
Other Expenses 26000 72000 25000

Indirect expenses amounting to 85000 may be apportioned on the basis of wages. There was no Op. or Cl. Stock.
Solution:
Dr. Process – I account Cr.
Per Per
Particulars unit Total Particulars unit Total
To Material a/c 625 150000 By Process – II a/c 1150 276000
To Labour a/c 334 80000 (Transfer to process – II)
To Other expenses a/c 108 26000
To Indirect expenses a/c 83 20000
1150 276000 1150 276000

Dr. Process – II account Cr.

Per Per
Particulars unit Total Particulars unit Total
To process – I a/c 1150 276000 By Process – III a/c 2700 648000
To Material a/c 208 50000 (Transfer to process – III)
To Labour a/c 834 200000

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To Other expenses a/c 300 72000

To Indirect expenses 208 50000
a/c
2700
648000 2700 648000
Dr. Process – III account Cr.
Per Per
Particulars unit Total Particulars unit Total
To process – II a/c 2700 648000 By Finished stock 3200 768000
a/c
To Material a/c 83 20000 (Transferred)
To Labour a/c 250 60000
To Other expenses a/c 104 25000
To Indirect expenses 63 15000
a/c
3200 768000 3200 768000

*Apportionment of Indirect expenses among process – I, process – II and process – III

Total wages to process (I + II + III) = 80000 + 200000 + 60000 = 340000.
Apportionment to:
Process – I = (85000/340000) * 80000 = 20000
Process – II = (85000/340000) * 200000 = 50000 and
Process – III = (85000/340000) * 60000 = 15000

Illustration 2. A product passes through 3 processes. The output of each process is treated as the raw material of the next process to which it is
transferred and output of the third process is transferred to finished stock.

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Process 1 Process 2 Process 3

Materials issued 40000 20000 10000
Labour 6000 4000 1000
Manufacturing overhead 10000 10000 15000

10000 units have been issued to the process – I and after processing, the output of each process is as under:
Process Output Normal Loss
Process – I 9750 units 2%
Process – II 9450 units 5%
Process – III 8000 units 10%

No stock of material or of work – In – progress was left at the end. Calculate the cost of the finished articles.

Solution:

Dr. Process – I account Cr.

Particulars Units Total Particulars Units Total
To Material a/c 10000 40000 By Normal loss a/c (2% of 200 -
10000 units)
To Labour a/c - 6000 By Abnormal loss a/c (5.7142 * 50 286
50 units)
To Manufacturing OH - 10000 By process – II a/c (5.7142 * 9750 55714
a/c 9750 units)

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10000 56000 10000 56000

Cost per unit of completed units and abnormal loss:

Total Cost / (Inputs – Normal Loss) = [56000 / (10000 units – 200 units)] = Rs. 5.7142
Dr. Process – II account Cr.
Particulars Units Total Particulars Units Total
To process – I a/c 9750 55714 By Normal loss a/c (5% * 488 -
9750 units)
To Material a/c - 20000 By Process – III a/c 9400 91051
(9.6862 * 9400 units)
To Labour a/c - 4000
To Manufacturing OH a/c - 10000
To Abnormal gain a/c 138 1337
(9.6862 * 138 units)
9888 91051 9888 91051

Cost per unit of completed units and abnormal gain:

Total Cost / (Inputs – Normal Loss) = [89714 / (9750 units – 488 units)] = Rs. 9.6862
Dr. Process – III account Cr.
Particulars Units Total Particulars Units Total
To process – II a/c 9400 91051 By Normal loss a/c (10% * 940 -
9400 units)
To Material a/c - 10000 By Abnormal loss a/c 460 6364

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(13.8358 * 460 units)

To Labour a/c - 1000 By finished stock a/c 8000 110687
(13.8358 * 8000 units)
To Manufacturing OH - 15000
a/c
9400 117051 9400 117051
Cost per unit of completed units and abnormal loss:
Total Cost / (Inputs – Normal Loss) = [117051 / (9400 units – 940 units)] = Rs. 13.8358

Illustration 3. RST limited processes product z through two distinct processes - process - I and process - II. On completion, it is transferred
to finished stock. From the following information for the year 2018 - 2019, prepare Process - I, Process - II and finished stock account.
Particulars Process – I Process – II
Raw materials used 7500 units -
Raw materials cost per unit Rs. 60 -
Transfer to next process/finished stock 7050 units 6525 units
Normal loss (on inputs) 5% 10%
Direct wages Rs. 135750 Rs. 129250
Direct Exp 60% of direct wages 65% of direct wages
Manufacturing OH 20% of direct wages 15% of direct wages
Realisable value of scrap per unit Rs. 12.50 Rs. 37.50

6000 units o finished goods were sold at a profit of 15% on cost. Assume that there was no Op. or Cl. Stock of work in process.
Solution:
Dr. Process – I account Cr.

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Particulars Units Amt Particulars Units Amt

To Raw Material used a/c 7500 450000 By Normal loss a/c (5% 375 4688
(60 * 7500 units) of 7500 units)
To Direct wages a/c - 135750 By Abnormal loss a/c 75 7259
(96.7947 * 75 units)
To Direct Exp a/c - 81450 By process – II a/c 7050 682403
(96.7947 * 7050 units)
To Manufacturing OH a/c - 27150
7500 694350 7500 694350

Cost per unit of completed units and abnormal loss:

(Total Cost – Realisable value from normal loss) / (Inputs – Normal Loss) =
(694350 – 4688) / (7500 units – 375 units) = 689662 / 7125 units = Rs. 96.7947

Dr. Process – II account Cr.

Particulars Units Amt Particulars Units Amt
To Process – I a/c 7050 682403 By Normal loss a/c (10% 705 26438
of 7050 units)
To Direct wages a/c - 129250 By finished stock a/c 6525 913824
(140.0496 * 6525 units)
To Direct Exp a/c - 84013
To Manufacturing OH a/c - 19387

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To Abnormal gain a/c 180 25209

(140.0496 * 180 units)
7230 940262 7230 940262

Cost per unit of completed units and abnormal loss:

(Total Cost – Realisable value from normal loss) / (Inputs – Normal Loss) =
(915053 – 26438) / (7050 units – 705 units) = 888615 / 6345 units = Rs. 140.0496
Dr. Finished stock account Cr.
Particulars Units Amt Particulars Units Amt
To Process – II 6525 913824 By cost of sales a/c (140.0496 * 6000 840298
a/c 6000)
By bal c/d 525 73526
655 913824 6525 913824

Income statement
Particulars Amount Particulars Amount

To cost of sales a/c 840298 By abnormal gain a/c (180 units * 18459
(140.0496 – 37.50))
To abnormal loss a/c (75 units * 6322 By sales a/c (840298 * 115%) 966343
(96.7947 – 12.50))
To Net profit a/c 138182

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984802 984802

Illustration 4. Opening work - in - process 1000 units (60% complete); cost - 110000. Units introduced during the period 10,000 units;
cost – 1930000, transferred to next process - 9000 units.
Closing work - in – process 1000 units (75% complete); Normal loss is estimated at 10% of total input including units in process at the
beginning. Scraps realize Rs. 10 per unit. Scraps are 100% complete.
Using FIFO method, compute equivalent production and cost per equivalent unit, also evaluate the output.

Solution:
Equivalent
Input Output production
Particulars units Particulars units Equivalent
% units
Opening W-I-P 1000 From opening w-i-p 1000 40 400
Units introduced 10000 From fresh inputs 8000 100 8000
Units completed 9000
(transferred to next
process)
Normal Loss {10% 1100 - -
(1000 + 10000
units)}
Cl. w-i-p 800 75 600
Abnormal loss (b/f) 100 100 100
11000 11000 9100
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Computation of cost per equivalent Production unit:

Cost of the process (for the period) 1930000
Less: Scrap value of normal loss (10 * 1100 units) (11000)
Total process cost 1919000

Cost per equivalent unit = (1919000 / 9100 units) = Rs. 210.88

Statement of evaluation
Particulars Equivalent Cost per Amount
units EU
Op. w-i-p completed during the period 400 210.88 84.352
Add: Cost of w-i-p at beginning - - 110000
Complete cost of 1000 units of opening w-i-p 1000 194.35 194352
Completely processed units 8000 210.88 1687040
Abnormal loss 100 210.88 21088
Closing w-i-p 600 210.88 126528

(The difference in total amount may arise due to rounding off error)
Process Explained:
a) Total Units completed and Transferred is 9,000 units. Out of these 9,000 units, 1,000 units have been taken from opening WIP and the rest is
from the fresh units introduced.
b) The opening WIP is 60% complete in respect of costs, hence, 40% more work is to be done during the period.

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c) Total cost for cost elements for the period (current period only) is accumulated.
d) The realisable value of scrap (i.e. normal loss) is deducted from the total cost as accumulated above.
e) Total cost less realisable value is divided by equivalent units to get cost per equivalent unit.
f) The equivalent cost as calculated above is multiplied by the equivalent units of completely processed goods, abnormal loss and closing WIP to
get the value.
g) Cost of units completed and transferred is calculated separately for Opening WIP and fresh inputs.

Illustration 5. Refer to information provided in Illustration 4 above and solve this by Weighted Average Method:

Solution:

Statement of equivalent units (under weighted average method):

Equivalent
Input Output production
Particulars units Particulars units % Equivalent
units
Opening W-I-P 1000 Units completed 9000 100 9000
(transferred to next
process)
Units introduced 10000 Normal Loss {10% 1100 - -
(1000 + 10000
units)}
Cl. w-i-p 800 75 600
Abnormal loss (b/f) 100 100 100
11000 11000 9700

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Computation of cost per equivalent production unit:

Cost of op. w-i-p 110000
Cost of the process (for the period) 1930000
Less: Scrap value of normal loss (10 * 1100 units) (11000)
Total process cost 2029000

Cost per equivalent unit = 2029000 / 9700 units = Rs. 209.18

Statement of evaluation
Equivalent Cost per Amount
Particulars units EU
Units completed and transferred to next 9000 209.18 1882620
process
Abnormal loss 100 209.18 20918
Closing w-i-p 600 209.18 125508

(The difference in total amount may arise due to rounding off error)
Process Explained:
a) Total Units completed and Transferred is 9,000 units. All the 9,000 units have been considered as equally complete in respected of cost.
b) Total cost for cost elements for the period and opening WIP is accumulated.
c) The realisable value of scrap (i.e. normal loss) is deducted from the total cost as accumulated above.
d) Total cost less realisable value is divided by equivalent units to get cost per equivalent unit.
e) The equivalent cost as calculated above is multiplied by the equivalent units of completely processed goods, abnormal loss and closing WIP to get
the value.
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Illustration 6. A product passes through three processes— A, B and C. 10,000 units at a cost of `1.10 were issued to Process A. The other direct
expenses were as follows:
PROCESS – A PROCESS – B PROCESS - C
Sundry materials 1500 1500 1500
Direct labour 4500 8000 6500
Direct expenses 1000 1000 1503

The wastage of process ‘A’ was 5% and in process ‘B’ 4%

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.
The overhead charges were 160% of direct labour. The final product was sold at `10 per unit fetching a profit of 20% on sales. Find out the
percentage of wastage in Process ‘C’.

Solution:

Dr. Process – A Account Cr.

Particulars Units Amt Particulars Units Amt
To Material introduced 10000 11000 By normal loss a/c 500 125
a/c (10000 * 5%) * 0.25
To Additional material 1500 By transfer to process – B 9500 25075
a/c a/c @ Rs. 2.64 per unit
To Direct labour a/c 4500
To Overheads a/c 7200
To Direct expenses a/c 1000
10000 25200 10000 25200

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Dr. Process – B Account Cr.

Particulars Units Amt Particulars Units Amt
To Transfer from 9500 25075 By normal loss a/c (9500 * 380 190
process – A a/c 4%) * 0.5
To Direct material a/c 1500 By transfer to process – C 9120 48185
a/c @ Rs. 5.283
To Direct labour a/c 8500
To Overheads a/c 12800
To Direct expenses a/c 1000
9500 48375 9500 48375

Dr. Process – C Account Cr.

Particulars Units Amt Particulars Units Amt
To Transfer from 9120 48185 By normal loss a/c (Ref. 696 696
process – B a/c working notes)
To Direct material a/c 1500 By transfer to finished 8424 67392
stock a/c @ Rs. 8/unit
To Direct labour a/c 6500
To Overheads a/c 10400
To Direct expenses a/c 1503
9120 68088 9120 68088
Working Notes:
(a)
Sale price per unit 10
Less: Profit @ 20% 2

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Cost per unit 8

(b) Let the No. of units of loss in Process ‘C’ be ‘X’
Scrap value = X × 1 = Rs. X
68,088 – X = 8(9,120-x) units
68,088 = 72,960 – 7x
7x = 4,872
X= 696 units
Percentage of Normal wastage = (696 / 9120) * 100 = 7.63%
Illustration 7.

Degree of completion
Opening Stock 1600 units Material – 70%
Labour – 60%
Overhead – 60%
Transfer from process I 10200 units
Transfer to next process 9200 units
Units scrapped 800 units
Normal loss – 10% of units
Closing stock 1800 units Material – 60%
Labour – 40%
Overhead – 40%

Prepare a Statement of Equivalent Production.

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Solution:
Statement of Equivalent Production
Input Output Units Material Labour Overheads
% Units % Units % Units
1600 Op. stock 1600 30 480 40 640 40 640
10200 Normal loss 1000 - - - - - -
Finished units 7600 100 7600 100 7600 100 7600
Cl. stock 1800 60 1080 40 720 40 720
12000 9160 8960 8960
Less: Abnormal Gain 200 100 200 100 200 100 200
11800 11800 8960 8760 8760

Illustration 8. From the following information compute (i) Equivalent production (ii) statement of apportionment of cost, (iii) prepare
Process Account.
Work-in-progress (opening) Stage of completion
200 units @ 4 per unit 100% Material
40% Labour & Overheads
Units introduced 1050
Transfer to next process 1100 units
Closing stock 150 units 100% Material
70% Labour and Overhead

Other information: 18 Amount

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Material cost 1,050

Labour 2,250
Production Overhead 1,125
4,425

Solution:
Statement of Equivalent Production
Input Output Units Material Labour Overheads
% Units % Units % Units
200 Op. stock 200 - - 60 120 60 120
1050 Finished units 900 100 900 100 900 100 900
(1100 – 200)
During this
period
Cl. stock 150 100 150 70 105 70 105
1250 1250 1050 1125 1125
Statement of Cost per unit
Particulars Amount Equivalent Units Cost per unit
Material 1,050 1,050 1
Labour 2,250 1,125 2
Production Overhead 1,125 1,125 1
Value of Closing Stock
Element Units Cost per unit Total Cost

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Material 150 1 150

Labour 105 2 210
Overhead 105 1 105

Dr. Process Account Cr.

Particulars Units Amount Particulars Units Amount
To Opening Stock 200 800 By Closing Stock 150 465
A/c
To Material A/c 1050 1,050 By Transfer to Finished Stock 1100 4,760
A/c @ 4.327 per unit

To Labour A/c 2,250

To Overheads A/c 1,125
1,250 5,225 1,250 5,225

Working Note for checking transfer value to the finished stock:

Element Units Cost per unit Total Cost

Material - - 800
Labour 120 2 240
Overhead 120 1 120
1,160
900 x 4 3,600
4,760

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Illustration 9. From the following information prepare process account.

OPENING STOCK DEGREE OF COMPLETION

800 units @ Rs. 6/unit Rs. 4,800 Material I – 100%
Material II – 60%
Labour& OH – 40%
Transfer from Process NO - I
12,000 units costing Rs. 16,350
Transfer to next process 9,700 units
Normal process loss 10%
Closing stock 1,800 units

Degree of Completion: For units scrapped: Material 100% Labour and Overheads 50%.
For closing stock: Material 60%; Labour and overheads 50%
Scrap realized Re. 1.00 per unit
Other information: Material Rs. 10,500; Labour Rs. 20,760; Overheads Rs. 16,670

Solution:

Statement of Equivalent Production

Input Output Units Material - I Material - Labour Overheads
II
% Units % Units % Units % Units

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800 Op. stock 800 - - 40 320 60 480 60 480

12000 Normal 1100 - - - - - - - -
loss (800
+ 12000 –
1800) *
10%
Finished 8900 100 8900 100 8900 100 8900 100 8900
units
(9700 –
800)
Cl. stock 1800 100 1800 60 1080 50 900 50 900
12000 10700 10300 10280 10280
Add: Ab. 200 100 200 100 200 50 100 50 100
loss
12800 12800 10900 10500 10380 10380

Statement of Cost per unit

Particulars Cost Equivalent Cost Cost per unit
Material-I 16350 10900 1.5
Material-II 10500 10500 1.0
Labour 20760 10380 2.0
Overhead (16,670-1,100) 15570 10380 1.5

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Value of Closing Stock

Element Units Cost per unit Total Cost
Material-I 1800 1.5 2,700
Material-II 1080 1.0 1,080
Labour 900 2.0 1,800
Overhead 900 1.5 1,350
6,930

Dr. Process Account Cr.

Particulars Units Amt Particulars Units Amt
To Opening Stock A/c 800 4,800 By Normal Loss A/c 1100 1,100
To Transfer from 12000 16,350 By Closing Stock A/c 1800 6,930
Process-I A/c
To Material A/c 10,500 By Abnormal Loss A/c 200 850

To Labour A/c 20,760 By Transfer to Next 9700 60,200

Process A/c @ 6.206
per unit
To Overheads A/c 16,670
12800 69,080 12800 69,080

Illustration 10. SM Ltd, furnished you the following information relating to process B for the month of October, 2017.
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a) Opening work-in-progress- NIL
b) Units introduced - 10,000 units @ 3 per unit
c) Expenses debited to the process; Direct materials Rs. 14,650; Labour Rs. 21,148; Overheads Rs. 42,000
d) Finished output - 9,500 units
e) Closing work-in-progress 350 units; Degree of completion : Material 100%; Labour and overheads 50%
f) Normal loss in process- one percent of input
g) Degree of completion of abnormal loss: Material 100%; Labour and Overheads 80%
h) Units scrapped as normal loss were sold at Rs. 1 per unit
i) All the units of abnormal loss were sold at Rs. 2.50 per unit.

Prepare:
(a) Statement of Equivalent Production
(b) Statement of Cost
(c) Process - B Account
(d) Abnormal Loss Account

Solution:
Statement of Equivalent Production
Input Output Units Material Labour Overheads
% Units % Units % Units
10000 Normal loss 100 - - - - - -
Finished Units 9500 100 9500 100 9500 100 9500
Cl. stock 350 100 350 50 175 50 175
Abnormal loss 50 100 50 80 40 80 40
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10000 10000 9900 9715 9715

Statement of Cost
Particulars Cost Equivalent Cost per unit
units
Material (30000+14650)-100 44,550 9,900 4.5000
Labour 21,148 9,715 2.1768
Overhead 42,000 9,715 4.3232

Value of Closing Stock

Element Units Cost per unit Total Cost
Material 350 4.5 1575.00
Labour 175 2.1768 380.94
Overhead 175 4.3232 756.56
2712.50
Say Rs. 2713
Value of Abnormal Loss
Element Units Cost per unit Total Cost
Material 50 4.5 225.000
Labour 40 2.1768 87.072
Overhead 40 4.3232 172.928
485

Dr. Process Account Cr.

Particulars Units Amount Particulars Units Amount
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To Material Introduced 10000 30000 By Normal Loss 100 100

A/c
To Material A/c 14650 By Abnormal Loss 50 485
A/c
To Labour A/c 21148 By Closing Stock 350 2,713
A/c
To Overheads A/c 42000 By Transfer to Next 9500 1,04,500
Process @ 11 per
unit
10000 107798 10000 1,07,798
Abnormal Loss Account
Dr. Cr.
Particulars Units Amount Particulars Units Amount
To Process A/c 50 485 By Debtors / Cash 50 125
a/c
By Costing P & L A/c - 360
50 485 50 485

Illustration 11. AB Ltd. is engaged in process Engineering Industry. During the month of April, 2015, 2,000 units were introduced in Process ‘X’.
The normal loss was estimated at 5% of input. At the end of the month 1,400 units had been produced and transferred to process Y. 460 units
incomplete and 140 units after passing through fully the entire process had to be scrapped. The incomplete units had reached the following stage of
completion.

Material 75% completed

Labour 50% completed
Overhead 50% completed

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Following are the further information on the Process ‘X’:

Amount
Cost of the 2,000 units 58,000
Additional Direct Material 14,400
Direct Labour 33,400
Direct Overheads 16,700

Units scrapped realized Rs. 10 each. Prepare Statement of Equivalent Production, Statement of Cost, Statement of Evaluation and the Process
X Account.

Solution:

Statement of Equivalent Production

Input Output Units Material Labour Overheads
% Units % Units % Units
2000 Normal loss 100 - - - - - -
Finished Units 1400 100 1400 100 1400 100 1400
Cl. stock 460 75 345 50 230 50 230
Abnormal loss 40 100 40 100 40 100 40
2000 2000 1785 1670 1670

Statement of Cost
Particulars Cost Equivalent Cost per unit
units
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Material (58000 + 14400) – 1000 71400 1785 40

Direct Labour 33400 1670 20
Overhead 16700 1670 10

Value of Closing Stock

Element Units Cost per unit Total Cost
Material 345 40 13800
Labour 230 20 4600
Overhead 230 10 2300
20700

Value of Abnormal Loss

Element Units Cost per unit Total Cost
Material 40 40 1600
Labour 40 20 800
Overhead 40 10 400
2800

Dr. Process X Account Cr.

Particulars Units Amount Particulars Units Amount
To Material Introduced 2000 58000 By Normal Loss 100 1000
a/c A/c

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To Additional Material 14400 By Abnormal Loss 40 2800

A/c A/c
To Labour A/c 33400 By Closing Stock 460 20700
A/c
To Overheads A/c 16700 By Transfer to 1400 98000
Next Process @70
per unit
2000 122500 2000 122500

Illustration 12. The product of a manufacturing unit passes through two distinct processes. From the past experience the incidence of wastage is
ascertained as under:
PROCESS ‘A’ 2%
PROCESS ‘B’ 10%
In each case the percentage of wastage is computed on the number of units entering the process concerned. The sales realisation of wastage in
Process A and B are Rs. 25 per 100 units and Rs. 50 per 100 units respectively.

The following information is obtained for the month of April, 2015; 40,000 units of crude material were introduced in Process A at a cost of Rs.
16,000.
PROCESS A PROCESS B
Particulars (amount) (amount)
Other Materials 16,000 5,000
Direct Labour 9,000 8,000
Direct Expenses 8,200 1,500
Units Units
Output 39,000 36,500
Finished Product Stock:
April 1 6,000 5,000
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April 30 5,000 8,000

Value of stock per unit on April 1st 1.20 1.60

Stocks are valued and transferred to subsequent process at weighted average costs. Prepare respective Process Accounts and Stock
Accounts.
Solution:
Dr. Process A - Account Cr.
Particulars Units Amount Particulars Units Amount
To Material Introduced 40000 16000 By Normal Loss A/c 800 200
a/c (40000 * 2%) *
25/100
To Additional Material 16000 By Abnormal Loss A/c 200 250
A/c {(49200 –
200)/(40000 – 800)}
* 200
To Direct Labour A/c 9000 By transfer to Process 39000 48750
– A Finished stock a/c
To Direct Expenses A/c 8200
40000 49200 40000 49000

Dr. Process – A Finished Stock Account Cr.

Particulars Units Amount Particulars Units Amount
To Opening 6,000 7,200 By Closing Stock A/c (55950 5,000 6,217
Stock A/c / 45000) * 5000

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To Transfer 39,000 48,750 By Transfer to Process B A/c 40,000 49,733

from Process – @ 1.243 per unit
A A/c
45,000 55,950 45,000 55,950

Dr. Process-B- Account Cr.

Particulars Units Amount Particulars Units Amount
To Transfer from 40000 49,733 By Normal Loss A/c 4000 2,000
process – A Finished (40000x 10%) x
Stock A/c 50/100
To Other Materials A/c 5,000 By Transfer to 36500 63,097
Process-B Finished
Stock A/c
To Direct Labour A/c 8,000
To Direct Expenses A/c 1,500
To Abnormal Gain A/c 500 864
{(64,233–2,000)/
)40,000–4,000)} ×500
40,500 65,097 40,500 65,097
Dr. Process – B Finished Stock Account Cr.
Particulars Units Amount Particulars Units Amount
To Opening Stock A/c 5000 8,000 By Closing Stock A/c 8000 13,705
To Transfer from 36500 63097 By Transfer to next 33500 57392
process – B a/c process a/c @

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1.713/unit
41500 71,097 41500 71,097

Illustration 13. The following information is obtained in respect of process 3 of the month of August:

Opening Stock 1,000 units

Value Direct Material (I) Rs. 390; Direct material (II) Rs.
75;
Direct Labour – RS. 112; Production overhead –
Rs. 118.
Process 2 transfer 6,000 units at Rs. 2,360
Process 4 transfer 4,700 units.
Direct material added in process Rs. 520
Direct labour employed Rs. 1,036
Production Over Heads Rs. 1,541
Units scrapped 300
Degree of completion Direct material 100%
Direct labour 80%
Production overhead 60%
Closing stock 2,000 units
Degree of completion: Direct material 60%
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Direct labour 50%

Production overhead 40%

Normal loss: 5% of production units scrap realised 0.20 each.

Prepare Process Account on weighted Average method.

Solution:
Statement of Equivalent Production
Input Particulars Out. Units Material – II Labour Overheads
Units % Units % Units % Units
1000 Op. Stock - - - - - - - -
6000 Normal loss 250 - - - - - - -
Finished 4700 4700 100 4700 100 4700 100 4700
Units
Cl. stock 2000 2000 60 1200 50 1000 40 800
Abnormal 50 50 100 500 100 50 100 50
loss
7000 7000 6750 1785 1670 1670

Statement of Cost
Material-I Material-II Labour Overheads

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Opening stock 390 75 112 118

Add: during the
2360 2360 520 1036 1541
period
2750
Less: Scrap value of 50 2700 595 1148 1659
Normal Loss (250 *
0.2)
Cost per unit (Rs.) 0.40 0.10 0.20 0.30

Calculation of closing stock:

Amount
Material I 2000 * 0.40 = 800
Material II 200 x 0.10 = 120
Labour 1000 x 0.20 = 200
Overheads 800 x 0.30 = 240
= 1360

Value of abnormal loss:

Amount
Material I 50 * 0.40 = 20
Material II 50 x 0.10 = 5
Labour 40 x 0.20 = 8
Overheads 30 x 0.30 = 9
= 42

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Dr. Process – 3 Account Cr.

Particulars Units Amount Particulars Units Amount
To Opening Stock 1000 695 By Normal loss A/c 250 50
A/c
To Transfer from 6000 2360 By Abnormal loss A/c 50 42
Process 2 A/c
To Material A/c 520 By Closing stock A/c 2000 1360

To Labour A/c 1036 By transfer to process – 4700 4700

4 a/c @ Re. 1 per unit
To Overheads A/c 1541
7000 6152 7000 6152

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