PROCESS COSTING or studying this chapter, you should be able to: ‘Understand the meaning of process costing and the type of industries in which this method of costing is used w the problems peculiar to process costing erstand the method of preparing process accounts tand the accounting adjustments relating to ‘normal and abnormal process stand the valuation of work-in-progress in terms of equivalent production tand the purpose and accounting adjustments relating to inter-process profits Introduction Process costing is probably the most widely used method of cost ascertainment. It is used in production industries producing standard products, like steel, sugar and chemical: such industries, produced are identical and all all factory processes are standardized, are produced Renaud waiting for any instructions or orders from customers and are into warehouse for sale. Raw materials ove down the production line through a Costing is applicable in: of processes in a particular sequence = Textiles mills Md costs are compiled for each process or * Chemical works tment by preparing a separate account for + Oil refining Process, + Cement manufacture + Paper manufacture | Characteristics of + Food processing s Costing * Steel mills 1. The production is continuous and the ’ zane manufacture ba + Soap making hal product is the result of a sequence ore me + Confectionaries Plastic manufacture, ete.9.2 Process Costing The products are standardized and homogeneous, + The cost per unit Produced is the average cost which is calcul total process cost by the number of units produced. . The finished Product of each but last Process becomes the raw Material fe NeXt process in Sequence and that of the last proc = B00ds stock. ; €ss is transferred to the 6 The sequence of Operations or Processes is specific and predetermined ~ Some loss of materials in i i F Processes (due to chemical action, evaporat; unavoidable, mun a lated by div; a Processing of a raw materials may give rise to the These several products produced from the same joi Production of several prog Mt products or by-products, Taw material may be termed Process Costing and Job Costing—a Comparison A comparison of Process and job costing methods will help in the better understanding, Process costing system. Process costing Job costing Costs are compiled process-wise and Cost per unit is the average cost, iie., the total cost of the Process divided by the number of units Produced. 2. Production is of standardized Products and cost units are identical. Costs are separately ascertained for job, which is cost unit Production is of non-standard items specifications and instructions from customers. Production is for stocks, Production is against orders from custom 4. Costs are computed at the end of a Costs are calculated when a job is comp specific period. 5, The cost of one process is transferred Cost of a job is not transferred to ano to the next process in the sequence. Job but to finished stock account, 6. On account of continuous nature of There may or may not be work-in-progi Production, work-in-progress in the in the beginning and end of the accoun beginning and end of the accounting period, period is a regular feature, A Cost control is comparatively easier, This is because factory processes and Cost control is comparatively more di because each cost unit or job needs individ attention, cess Costing Procedure The en stages in process costing procedure are: factory is divided into a number of processes and an account is for each process. Each process account is debited with material cost, labour cost, and overheads allocated or apportioned to the process.Process Costing 9.3 t process in the sequence. In other ym output of a process is transferred to the nex: wi S input of the next process. ord5, finished output of one Process become: finished output of the last Process (i.e, the fi i é gr Goods Account. i¢ final product) is transferred to the process A A/C Process B A/c Process C A/c Finished Goods A/c pri Gr. Dr. Cr. Dr. Cr. gat | Output Input | Output Input | Output or Fig. 9.1 Process costing procedure. stration 9.1 A product passes through three distinct ubered respectively, 1, 2 and 3. During the week e ‘he following information is obtained: Processes to completion. These processes nnded 31 January, 1,000 units are produced, Process | Process 2 Process 3 #. z £. Materials 6,000 3,000 2,000 Labour 5,000 4,000 5,000 Direct expenses 1,000 200 1,000 The indirect expenses for the period were %2,800, apportioned to the processes on the basis of gbour cost. ” Prepare process accounts showing total cost and cost er unit Process 1 Account Output: 1,000 units Per unit| Toral | Particulars Per unit | Total z z z ez 6 6,000 | By Output transferred 5 5,000 to, Process 2 1 1,000 1 1,000 3 1 13,000 ses rs pa Mirect expenses as a % of labour = 5,000 + 4,000 45,000 2,800 100 = 20% 14,000 *94 Process Costing Process 2 Account Output: 1,000 Particulars Per unit| Total | Particulars Per unit | 79 z z z z To Process 1 (Transfer 13.00 13,000 | By Output transferred To Materials 3.00 3,000 to Process 3 21.00 | 2, To Labour 4.00 | 4,000 To Direct expenses 0.20 200 To Indirect expenses 0.80 800 q 21.00 | 21,000 21.00 | 21 Process 3 Account Output: 1,000 w Particulars Per unit| Total | Particulars Per unit | Tor z 3 z z To Process 2 21 |21,000 | By Output transferred To Materials 2 | 2,000 to finished stock 30 | 30, To Labour 5 | 5,000 To Direct expenses 1 1,000 To Indirect expenses 1 1,000 30° [30,000 30 | 30, Finished Stock Account Units z To Process 3 1,000 30,000 Sections in this Chapter There are certain accounting adjustments which are peculiar to process costing accordingly, this chapter is broadly divided into three sections: () Process losses and wastages (ii) Valuation of work-in-progress—Equivalent Production (ii) Inter-process profits A LOSSES AND WASTAGES In industries which ethploy process costing, a certain amount of loss occurs at various stages of production. Such a loss may arise due to chemical reaction, ev: inefficiency, etc. It is, therefore, necessary to keep accurate records of both input ‘output. Where loss occurs at a late stage in manufacture, it is apparent that financial is greater. This is because more and more costs are incurred in processes as move towards completion stage. Process losses may by classified into (a) normal, and (6) abnormal,Process Costing 9.5 | Process Loss li i i Bee ied unten, } Withdrawals for tests or sampling and al Process Loss of loss Sere ee due to carelessness, machine breakdown, accident, use ive materials, etc. Thus, it arises due to abnormal factors and represents a loss his over and above the normal loss, ‘accounting procedure for normal and abnormal loss differs, -counting Treatment of Normal Loss iis fundamental costing Principle that the cost of normal losses should be borne by the ood ion. Normal loss is generally determined as a Percentage of input. Sometimes cha loss is due to loss of weight, say, due to evaporation or chemical action. Since sch a wastage is not physically present, obviously it cannot have any value. However, when normal loss is physically present in the form of scrap, it may have ‘same value, ie.,.it may be sold at some price. Whenever scrapped material has any value, tis credited to the Process Account. This is illustrated below. tion 9.2 The following information is given in respect of process 4. Material 1,000 kgs @ %6 per kg Labour 5,000 Direct expenses 1,000 Indirect expenses allocated to Process A 21,000 Normal wastage 10% of input Prepare Process A Account when: (@) Scrap value of normal loss is nil (6) Scrap arising out of normal has a sale value of @1 per unit lution (@) When scrap value of normal loss is nil: Process A Account kgs @ | Particulars 1,000 By Normal loss By Transfer to Process 2 13,000 = 713,000 + 900 units = T1444 .86 Process Costing ‘The normal loss is absorbed by good production and as a result the cost per Production inflates, When there is nto loss, the cost per unit produced Ge, 13,000 + 1,000 units). But when there is a normal loss, the cost per unit is higher (6) When scrap of normal loss has a sale value of @1 per unit. Process A Account Particulars kgs @ | Particulars To Material 1,000 6,000 } By Normal loss To Labour 5,000 | By Transfer to To Direct exp. 1,000 Process 2 To Indirect exp. 1,000 ; 1,000 | 13,000 Cost per unit 12,900 + 900 units 14.33 Whenever any value is realized from the sale of normal wastage, it reduces the eo extent, Accounting Treatment of Abnormal Process Loss It has been stated earlier that abnormal loss is due to carelessness, accidents, m i breakdown and other abnormal reasons. Unlike normal loss, abnormal loss is not ab by good production, rather it is transferred to Costing Profit and Loss Account, | because if the cost of abnormal loss were to fall upon the good production, the cost Will fluctuate and the information provided would be misleading, In order to overcon and also to disclose the cost of abnormal loss, the following procedure may be ad (a) Allow for normal loss in the manner described earlier. (6) After considering normal loss, find out the cost per unit in that process, done by the following formula: Total cost — Value of normal loss Units introduced — Normal loss units (©. Multiply the cost per unit (calculated as above) by the number of units of abno loss. This gives the total value of abnormal loss. (@) Credit the relevant Process Account with the quantity and value of abnormal (©) The balance figure in the Process Account is the cost of good units produc the process. This can also be found by multiplying cost per unit with the of good units produced. Open ‘Abnormal Loss Account’ and debit it with the quantity and value of abnon loss shown in the Process Account, Sale proceeds from abnormal loss are ered to Abnormal Loss Account. Any balance left in this account is net loss transferred to Costing Profit and Loss Account. Cost per unit = i Illustration 9.3 Fifty units are introduced into a process at a cost of rupee one each, The to : Gitional expenditure incurred by the Process is 830, Of the units introduced, 10% are nom f spoiled in the course of manufacture, these possess a scrap value of 20.25 eagh. Owing TO only 40 units are produced: You are required to prepare (i) Process Account, and (ii) Abnormal Avcount, ,Process Costing 9.7 Process Account Units z Particulars Ih sel 50] 50004 By w Units < ve lormal loss 5 125 < sxpenses 30.00: By Abnormal loss 5 8.75* By Transfer to next Process (B/F 00 50 80.00 ) 40 | 70. ——— 50 80.00 Foust of abnormal loss is calculated as follows Total cost — Value of normal loss %80-125 _ 78.75 pet Unit =“ Tnput — Normal loss Gn units) = mie Aso cost al loss (in units) Units50-5. 4g “75 © qast of abnormal loss = Abnormal loss units x Cost per unit = 5 * 81.75 = 88.75 Abnormal Loss Account Units & | Particulars Units z 5 8.75| By Sales 5 1.25 By Profit and Loss A/c 7.50 (Balanced figure) 5 8.75 5]. 8-75 | Gain or Effectiveness jenormal process loss represents the loss that would be expected under normal tions. It is an estimated figure. The actual loss may be greater or less than the normal Ifthe actual loss is greater than normal loss, it is known as abnormal loss. But if fal loss is less than normal loss, a gain is obtained which is termed as abnormal gain srejectiveness. The value of abnormal gain is calculated in a manner similar to abnormal is It is shown on the debit side of the Process Account and credit side of the Abnormal in Account, Like abnormal loss, ‘it is ultimately transferred to Costing Profit and Loss nt. This is illustrated below. the figures of Illustration 9.3, except that output is 47 units, show how the process at will be prepared. Also prepare Abnormal Gain Account. Nnormal output is 45 units and actual output is 47 units, there is an abnormal gain of i. This is shown in the following account. i Process Account [Units @ | Particulars Units z 50 50 | By Normal loss 30 | By Transfer to next process9.8 Process Costing *The value of abnormal gain is calculated as follows: 80 - 1.25 50-5 units x 2 units = 83.50 It should be noted that the method of valuation of ‘abnormal gain is the same as that abnormal loss. Abnormal Gain Account Particulars Units z Particulars Units To Normal loss A/c (Shortfall By Process A/c 2 in the sale of normal loss) | 2 0.50 To Profit & Loss A/c (B.F.) 3.00 2 3.50 Tllustfation 9.4 A product passes through three processes A, B and C. The normal wast fach process is as follows: Process A — 3 per cent, Process B — 5 percent, and Process ~ 8 per cent. Wastage of Process 4 was sold at 25 p. per_unit, that of Process B at 50 p. unit and that of Process C at &1 per unit. 10,000 units were issued to Process A in the beginning of October 2012 at a cost 1 per unit. The other expenses were as follows: Process A Process B Process C Sundry materials 1,000 21,500 %500 Labour 5,000 8,000 6,500 Direct expenses 1,050 1,188 ‘ 2,009 Actual output 9,500. units 9,100 units 8,100 Prepare the Process Accounts, assuming that there were no opening or closing stocks. give the Abnormal Wastage and Abnormal Gain Accounts. Solution Process A Account Particulars Units & | Particulars Units 10,000 To Units introduced 10,000 | By Normal wastage 300 To Sundry materials 1,000 | (3% of 10,000) To Labour 5,000 | By Abnormal wastage 200 To Direct expenses 1,050 | By Process B (transfer) 9,500, 10,000 | 17,050 10,000 17,050 ~ %75, *Value of abnormal wastage = 75.999 — 300 units * 200 units = %350Process B Account Process Costing 9.9 S Units © Particulars Units z 4 16,625 process A . By Normal wastage 475 (9) pont piaterials wie (8% or 9,500) é . By Process ‘ 27,300 ee. Wit 'Y Process C (transfer) | 9,100 . pawnormal gain 75 225% / 9,575 27,538 9,875 | 27,538 an. 8223132238 peas! Bain 5 500 — 475 units ~ %225 Process C Account Units z Particulars Units w ‘Tp Process B 9,100° | 27,300 By Normal Wastage 728 728 (transfer) ' (8% of 9,100) Jo Sundry materials 500 | By Abnormal wastage | 279 1156* ip Labour 6,500 | By Finished goods Direct expenses 2,009 (transfer) 8,100 | 34,425 9,100 | 36,309 9,100 | 36,309 . 236,309 -z728 , ‘*Abnormal wastage = 9100-728 units. * 272 units = 71,156 . Abnormal Wastage Account Units im Particulars Units = 200 350 | By Sales of scrap in Process B 272 1,156 Process A @ 20.25 200 50 Process C @ @1 272 | ope By Profit and Loss Alc (B/F) 1,184 ——— [St 472 1,506 472 | 1,506 Abnormal Gain Account ® | Particulars Units z 38] By Process B 7S |* 225 4 75 225ee ct 910 Process Costing hen the Output of a Process Is Partly Sold and Partly Trang, the Next Proc srreg Sometimes the output of a process may be partly sold and Partly transferred t¢ the Process for further processing. For example, in a textile mill, part of the output of 4 Process may be sold and the remaining output is passed on to the Weaving Process 4 further processing, A part of the output so sold will contain an element of profit gp which will be revealed in the Process Account, But when a part of the output jg sent Warehouse for sale, it is at cost and does not contain an element of profit or loss, Pini Mustration 9. | XYZ Lid manufactures and sells three chemicals produced by consecutive py, known as X, ¥ and Z, In each process 2% of the total weight put in is lost and 10% is scrap, w, from processes X and Y realized 100 a tonne and from Z 8200 a tonne. The products of the thr Processes are dealt with as follows: 2 x y Zi Sent to warehouse for sale 25% = * 50% 100% Passed on the next process 13% 50% = The following particulars relate to the month of May: Materials used (tonnes) 1,000 140, 1,348 Cost per tonne of materials (®) 120 200 % Mfg. expenses (®) 30,800 25,760 18,199 Prepare an account for each process, showing the cost per tonne of each product Solution Process X Account Particulars Tonnes @ |. Particulars Tonnes To Materials (@ 2120) To Mfg. exp. 1,000 | 1,20,000 | By’ Loss in weight (2% of 1,000) By Scrap (10% of 1000) By Warehouse (25% of 880) By Process ¥ (transfer) 30,800 1,50,800 Working Ni 1. Transfer to warehouse = ©152800=210,000 5. 399 tonnes = 835,200, 880 tonnes: Similar calculation has been made in Process Y. 2. As the question js silent about the nature of loss, it is presumed that both weight loss and are normal. Process Y Account Particulars e Particulars To Process X (transfer) By Loss in weight (2% of 800) To Materials By Scrap To Mfg. exp. By Warehouse By Process Z (transfer) 1,59,360Process Costing 9.14 Process z Account Tonnes z Particulars Tonnes z a fens [te [inna | aweriaam | 1,700 2,01,620 as ee tae 1,700 2,01,620 tion 8.6 Chemicals Lid processes poy i in three consecutive grades—soft, move Material us oR, medium and ial ed in buildings. The material is Process I | Process If Process Ill Seedalniused 1,000 tonnes per tonne 2200 = facturing wages and exp, %87,500 0 jght lost (% of input of the process) Biaetd Sie-if0 4 % 10% 20% Gale mee ee Per tonne) 50 tonnes 30 tonnes 51 tonnes price per tonne 350 %500 800 __ Management expenses were 217,500 and selling expenses Process | and one-half of the output of Process I! are are sold. The entire output of Process III is sold. ent of profit. Make approximations, ution 710,000. Two-thirds of the output Passed on to the next process and the Prepare the three Process accounts and where necessary, Process I Account lars Tonnes @ | Particulars Tonnes] = Raw materials 1,000 | 2,00,000 | By Weight lost 50 _ Mfg. wages By Scrap 50 2,500 and expenses — | 87,500 | By Sales 300 | 1,05,000 Profit (B.F.) = 10,000 | By Process Il (transfer)*| 600 | 1,90,000 1,000 | 2,97,500 1000 | 2,97,500 ‘Cost of 600 tonnes transferred to Process Il is calculated below: fs Total cost — Scrap value _ 285,000 Per tonne = Units produced ‘9009.12 Process Costing Process II Account Particulars Praciaats || Pertleware ht loss To Process 1 transfer| 600 | 1,90,000} By ba To Mfg. wages and By Re expenses - 39,500 | By i ss Il - 13,500 | By Proce To Profit (B/F) (transfer) | eeiot ei 600 2,43,000 *Cost of 255 tonnes transferred to Process tL _ 22,28,000 , 955 tonnes = €1,14,000 $10 tonnes Process III Account Particulars Tonnes z Particulars Tonnes To Process Il (transfer) | 255 | 1,14,000 | By Weight loss Z To Manufacturing By Scrap “ah wages and expenses _ 10,710 | By Sales To Profit (B.F.) = 240 255 1,24,950 ass Notes: 1. Profit in each process is a balancing figure. 2. It is assumed that weight loss and scrap are normal. Statement of Profit/Loss $i Profit as per Process I 10,000 Profit as per Process II 13,500 Profit as per Process Il 240 Total profit 23,740 Less: Management expenses* Selling expenses 27,500 Net Loss 3,760 “Note: It is assumed that management expenses and selling expenses are not allocabl processes. Therefore, these have been charged in Profit/Loss Statement. Solution by Alternative Method (Illustration 9.6) Process I Account Particulars Tonnes a Particulars Tonnes To Raw materials 1,000 } 2,00,000 | By Weight lost 50 To Mfg. exp. and wages | — 87,500 | By Scrap 50Process Costing 9.13 By Cost of goods sold transfer to P&L A/c* 300 | 95,000 By Process 11 Ave (BF) | 600 |1,90,000 1,000 |2,87,500 L___ | 1,000 )2,87,500_ “Ost Of goods sold %2,85,000 2 1/3 = €95,000. 1,000 | 2,87,500 pre 500 Process II Account alas Tonnes is Particulars Tonnes: z sess | Ale 600 1,90,000) By Weight loss 60 Mig. exP- WaBeS = 39,500 | By Scrap 30 1,500 to By Cost of goods sold transfer to P&L A/c 255 |1,14,000 _| By Process {11 A/c 255 |1,14,000 600 | 229,500 600. |2,29,500 a BIND a 1} KN | 229,500 Process III Account pe onses |S eael aaa Particulars Tonnes z Process II A/c 255 114,000] By Weight loss SI — qo Mie. exp. and wages | — 10,710 | By Serap st | 2,550 By Cost of goods sold transfer to P&L Ale 153_|1,22,160 255 | 124,710 255 [1,24,710 Profit and Loss Account Tonnes z Tonnes] & To Cost of goods sold By Sales ~ Process 1 300 |1,05,000 Process 1 300 95,000 u 255 |1,27,500 IL 255 1,14,000 ul 153 }1,22,400 ul 153, 1,22,160 By Net Loss 3,760 To Management exp. 17,500 To Selling exp. 10,000 708 3,58,660. 708 |3,58,660 WORK-IN-PROGRESS (EQUIVALENT PRODUCTION) ~~ costing mainly deals with continuous type of production. At the end of the accounting id, there may be some work-in-progress ie, semi-finished goods may be in the pipeline. Yaluation of such work-in-progress is done in terms of equivalent or effective production, Equivalent Production ivalent production Tepresents the production of a process in terms of completed units, “in-progress at the end of an accounting period are converted into equivalent leted units, This is done by the following formula: Equivalent _ Completed 4. { No. of units of ) , ( Degree of ) Production ~ units work in progress completion in %9.14 Process Costing are estimated to be For example, if there are 50 units in work-in-progress and th 60% complete, then their equivalent production is 50 units x 60% = 30 units. In each process, an estimate is made of the degree of completion of work-in-progress in terms of percentage. Such an estimate must be accurate because any error in such estimation will lead to erroneous valuation of work-in-progress stock which enters into final accounts. Evaluation of Equivalent Production After work-in-progress has been converted into equivalent completed units, the following steps are taken to evaluate it: (i Find out the total cost (net) for each element of cost, i.¢., material, labour and overheads. Scrap value of normal loss is deducted from the material cost. f equivalent production separately for each element (i) Ascertain the cost per unit jing the total cost of each element by the respective of cost. This is done by div’ number of equivalent units. (iii) At this rate of cost per unit, ascertain the value of finished production and work- in-progress. For the purpose of computation of equivalent production and its evaluation, the following three statements are generally prepared: (a) Statement of equivalent production (6) Statement of cost (per unit) (c) Statement of evaluation These three statements may also be combined in one comprehensive statement called “Statement of Production, Cost and Evaluation.’ For clear understanding, illustrations on equivalent production are classified into the following two categories. (a) When there is no opening stock, i.e., when there is only closing stock of work-in-/ progress. In such a situation there may or may not be process losses. (b) When there is opening as well as closing stock—Here also, there may or may not be process losses. When there is no opening stock and no process loss © In such a case, valuation of work-in-progress in terms of equivalent production is comparatively simple, Procedure followed in this type of situation is shown in the following illustration, Illustration 9.7 In process A, on | March, there was no work-in-progress. During the month March, 2,000 units of material were issued at a cost of 718,000. Labour and overheads totalled %9,000 and %6,600 respectively. On 31 March, 1,500 units were completed and transferred to next process, On the remaining $00 units, which were incomplete, degree of completion was as follows: q Materials 100% Labour 60% Overheads 30%Process Costing 9-15 prepare: (a) Statement of Equivalent Production (b) Statement of Cost (c) Statement of Evaluation (d) Process Account Statement of Equivalent Production Output Equivalent units Trems Units Material Labour Overhead Ory. % On % Ory. % Finished output 1,500 | 1,500 100 | 1,500 100 | 1,500 100 Work-in-progress 500 500 100 | 300 60 150 30 Total 2,000 | 2,000 — | 1,800 — | 1,650 = Statement of Cost Fement of cost Cost Equivalent Cost per units z units z (a) (@B) (A+B al 18,000 2,000 9 hee 9,000 1,800 5 Overhead 6,600 1,650 4 Total 18 Statement of Evaluation z Finished goods, (1,500 718) 27,000 Value of work-in-progress: z Materials 500 units @ %9 per unit 4,500 300 units @ %5 per unit 1,500 Overhead 150 units @ %4 per unit 600 6,600 Process A Account Particulars Units z Particulars Tot Materials 2,000) 18,000} By Next process Ale To Labour 9,000 | By Work-in-progress ¢/d ~ To Overhead 6,600 2,000} 33,600 __ When there is no opening stock of work-in-progress but there are process losses—as discussed earlier, losses are inherent in process operations. Normal and abnormal process losses are treated differently in the calculation of equivalent production, Normal Loss—Equivalent units of normal loss are taken as nil. In other words, normal 'oss is not added in the equivalent production. However, realizable value of normal scrap 's deducted from the cost of material so as to calculate the net material cost. This net “a cost becomes the basis of calculating the material cost per unit in the statement of9.16 Process Costing Abnormal Loss—This is treated as if this were good production lost. ‘Abnormal loss, thug is added to equivalent production with due consideration to its degree of completion. Unleg the degree of completion is specified, it may be ‘assumed that abnormal loss units are 100% complete in respect of all elements of cost. by good finished production. | elements of cost, i.¢., material deducted to obtain equivalent production. Abnormal Gain—Units of abnormal gain are represented is therefore, always taken as 100% complete in respect of al labour and overheads. Abnormal gain is +e introduced into Process I. The normal loss wat h 1,400 units had been produced and transferre ‘crapped. It was estimate Mustration 9.8 During a month, 2,000 units we estimated at 5% on input. At the end of the mont! to next process, 460 units were uncompleted and 140 units had been that uncompleted units had reached a stage in production as follows: 75% completed Material Labour 50% completed Overheads 50% completed The cost of 2,000 units introduced was %5,800. Direct materials introduced during the process amounted to 21,440, Production overheads incurreds were @1,670. Direct labour %3,340, Units scrapped realized @1 each. The units scrapped have passed through the process, so were 10 material, labour and overheads. You are required to: (a) prepare a Statement of Equivalent Production; (b) evaluate the cost of abnormal loss, finished goods and closing stock; and (c) prepare the Process | Account and Abnormal (ICWA Inter, Adapted) 10% completed as regards Loss Account. Solution Statement of Equivalent Production Input Ouput Equivalent units Units Units|___ Material Labour Overhead Oy. % Oty. % Qty. % 2,000 | Normal loss Wiu=s—| - -| - = Abnormal loss 40 40 100 40 100 40 100 Finished production 1,400 | 1,400 100 | 1,400 100 | 1,400 100 Work-in-progress 460 345 15 230 50 230 2,000 | Total 2,000 Equivalent Production 1,785 1,670 1,670 Statements of Cost Element of cost Cost Equivalent z production (units) (A) (B) Materials: Units introduced * 5,800 Direct materials 1,440 7,240Process Costing 9-17 - gerap value of loss (normal) 100 7,140 1,785 s 3,340 1,670 2 1,670 1,670 wl 12,150 pe Statement of Evaluation Element of| Equivalent Cost per Cost | Total cost cost production unit & z z Material 40 A 160 Labour 40 p 80 Overhead 40 1 40 280 Material 1,400 4 5,600 Labour 1,400 2 2,800 Overhead 1,400 1 1,400 9,800 an :| Material 345 4 7380 “work-in-progress: : wo Labour 230 2 460 Overhead 230 1 230 2,070 12,150 Process I Account Units a Particulars Units ie To Units introduced 2,000 | 5,800 | By Normal loss 100 100 Jo Direct material 1,440 | By Abnormal loss 40 280 “fo Direct wages 3,340 | By Finished production ‘To Production overheads 1,670 | __ transferred to Process II] 1,400 | 9,800 By Balance c/d (work-in-progress) 460 | 2,070 2,000 | 12,250 2,000 | 12,250 Abnormal Loss Account Particulars Units | _% | Particutars Units z =. x To Process I 40 280| By Sale of scrap 40 40 By Costing P&L A/c 240 40 | 280 40 | 280 When there is opening as well as closing stock of work-in-progress In such a case there are two methods of calculating equivalent production: (i) FIFO Method, and (ii) Average Cost Method. These methods have been discussed in detail, further.918 Process Costing FIFO (First-in, First out) Method This method is based on the assumption that work-in-progress moves on a first-in-fir out basis. This means that unfinished work on the opening stock is completed first, before Work on any new units is taken up. Thus no units from opening work-in-progress will be left incomplete and none of these find a place in the closing work-in-progress. In other words, closing stock will be calculated out of the materials introduced during the current period and will be valued at the current cost. The costs incurred during the current period will be distributed over opening stock of work-in-progress (for its completion), units introduced and completed during the period and closing stock of work-in-progress. This is done by dividing the costs incurred by the relevant equivalent production so as to arrive at the per unit cost of equivalent production. FIFO method gives satisfactory results when prices of materials, rates of wages and overheads are relatively stable. Computation of Equivalent Production under FIFO Method. The following steps are taken in the computation of equivalent production: (i) State the opening stock of work-in-progress in equivalent completed units. This is done by applying the percentage of work needed to complete the unfinished work of the previous period. For example, if there are 200 units of opening work-in-progress which are 70% complete, then the equivalent units of this will be 200 x 30% (work required to complete the incomplete portion) = 60 units. (ii) Ascertain the number of units introduced into the process and deduct the number of units of closing work-in-progress. This gives the number of units started and completed during the period. Add these units to the opening stock of work-in- progress calculated in (i) above. (iii) Add to the above the equivalent completed unit of closing work-in-progress. This can be determined by applying the percentage of work done on the finished units at the end of the period. ation 9.9 Opening work-in-progress (30% complete) — 2,000 units Put into the process during the month — 20,000 units Transferred to next process — 18,000 units Closing work-in-progress (40% complete) — 4,000 units Calculate equivalent production, Solution Equivalent units Opening work-in-progress (70% unfinished work * 2,000 units) 1,400 Add: No. of units introduced and completed during the month: Units put into process 20,000 Less: Units not completed 100 16,000 Add: Closing stock-work done [4,000 units « 40%] 1,600 Equivalent production _ 19,000 The above calculation may be made by the following alternative method: Units completed during the month Add: Closing stock—work done (4,000 40%] Less: Opening stock—work already done [2,000 30%] Equivalent productionProcess Costing 9. tion 9-10 The following information pertains to Process A: ; u pening work-in-progress (40% complete) valued at %560 200 Ypts introduced during current period 1,000 Finished output during the petiod transferred to Process B 1,100 Closing work-in-progress (30% complete) ‘100 Costs incurred during the period 8,400 Make the necessary calculations and prepare Process A Account Statement of Equivalent Production Jnput : Output Equivalent Production Units | Items Units Units % 200 | Opening wip 200 120 60% 1,000 | Introduced and completed 900 900 100% Baa Closing stock 30 30% 1,200 | Total 1,200 1,050 ing WIP requires 60% to complete the work because 40% was completed in the previous period. tion of cost per unit Cost incurred during the period’ = %8,400 "Equivalent production during the period = 1,050 units Cost per unit = %8,400 + 1,050 units = %8 Statement of Evaluation Equivalent Cost Total units per unit cost z z Opening stock of WIP introduced and completed Process A Account Units F Particulars 200 560 By Finished Production Opening WiP on incurred transfer to Process B| uring the period 1,000 | 8,400 | By Closing WIP 1,200 | 8,960 finished production transferred to Process B is caloulated as follows; wie s) = Old cost %560 + Current cost 2960 units introduced and completed during the period (900 units) 1,100 units completed = B1,520 37,2009.20 Process Costing factures a product in one costing and manu ba FIFO method. fh month is valued according to progress showed the Mlustration 9.11 A company follows proce: process, The work-in-progress at the end of eac [At the beginning of the month of January, the inventory of wor 400 units, 40% completed, valued as follows: Materials 3,600 Labour e400) Overheads ja1,0008 8,000 urchased for 75,000. Wages and overheads in ue of materials to production 2,500 units. There was materials were Pp 0, respectively. Actual iss into stock in the month was In the month of January, the month amounted to 279,800 and %21,28 was 268,500. Finished production taken i no loss in the process. ‘At the end of the month, the work-in-progress inventory was S00 units 80% complete as regards materials and 60% complete, as regards labour and overheads, ‘You are required to compute equivalent production and prepare process account (ICWA Inter) Solution Statement of Production Input] Particulars Output Equivalent production Eee unlis | Material Labour Overhead om] % | om | % | om | % 400| Opening stock of WIP | 1400). 240 |» 60". 240 | Sor | 240 | 60° Completely processed 2,600| during the period | 2,100 | 2,100 | 100 | 2,100 | 100 [2,100 } 100 Closing stock of wip | 500] 400] 80] 300 | 60 | 300) 60 3,000 3,000 Equivalent units 2,740 2,640 2,640 “Opening stock is only 40% complete, it requires the remaining 60% material, labour and overhead for completion. Statement of Cost Total cost Equivalent Per unit (a ~ b) (Aye units (B) z Materials 68,500 2,740 25.00 Labour 79,800 2,640 30.23 Overhead 21,280 2,640 8.06 Total 63.29 Statement of Evaluation Items Cost Equivalent Rate Amount element units ys z Opening WIP Material 240 25.00 6,000 Labour 240 30.23 7282Ove thead Process Costing 9.24 sarosuced and 4 5.06 1,934 jeted laterial —_— com? Labour 15,186 Overhead 52,500 63,483 F 16,926 ing WIP Materials rosin’ Labour 132,909 Overhead Process Account =a) S| rs U pee el Particulars : To Opening WIP 400 ; Units z To Material 2,600 y Hsishéa stock 2,500 |1,56,095* alae ¥ Closing WIP 500 | 21,485 qo Overhea 3,000 3,000 | 1,77,580 a ‘Note: Cost of finished goods of 2,500 uni ts com 2 Opening stock (400 units) %8,000 + 15,199 2? Mllows: Introduced and completed (2,100 units) sa its 32,909 Total 1,56,095 Average Cost Method inthis method, the cost of opening work-in-progress is not ke i iti 4 ‘Pt separately but is averaged withthe additional costs incurred during the period. This method i of opening work-in-progress and new pr et jus combines the cost duction. Information relat completion of opening WIP is not required, n relating to ‘degree of In order to find out the cost per unit of equivalent Production, the cost of each element (nateria, labour and overheads) applicable to the opening work-in-progress is added to the cost incurred in the current period for that element. A single cumulative total and unit cost is obtained. Units completed and transferred as well as closing work-in-progress will be valued at this average unit cost. The use of average method is illustrated below. Ilustration 9.12 The following figures related to single industrial process: Opening stock (10,000 units): z Material 2,250 Wages 650 Overheads 400 3,300 Units introduced (40,000 units): z Material 9,250 Labour 4,600 Overheads 3,100 During the period 30,000 units were completed and 20,000 units remained in process.Process Costing The degree of completion of closing stock or WIP was as under: Materials 100% Labour 25% Overheads 25% Make the necessary computations and prepare Process Account by using average method, Solution Statement of Equivalent Production Input Particulars Output Equivalent production units units Material |Labour & overhead 10,000 | Opening work-in-progress | 10,000 10,000 10,000 40,000 | Units started and finished (40,000 — 20,000) 20,000 20,000 20,000 Closing work-in-progress (Material 100% complete, labour and overhead 25%) 20,000 20,000 5,000 50,000 50,000 Equivalent Units 50,000 35,000 Statement of Cost A (B) © (D) (C*D) Cost element | Opening Cost Total cost | Equivalent Cost cost put in (A+B) | production | per unit z z z units Materials 2,250 9,250 11,500 50,000 0.23 Wages 650 4,600 5,250 35,000 0.15 Overhead 400 3,100 3,500 35,000 0.10 Total 0.48 Statement of Evaluation Cost of finished goods 30,000 units @ %0.48 = 14,400 Closing work-in-progress: Materials (100% complete) 20,000 x 0.23 = 4,600 Labour (25% complete) 5,000 x 20.15 750 Overheads (25% complete) 5,000 x %0.10 = 500 Cost of closing WIP = 35,850 Process Account Particulars Units z Particulars Units e To Opening WIP By Completed To Material and transferred 30,000 | 14,400 To Wages By Closing To Overhead work-in-process 20,000 | 5,850Process Costing 9.23 fo Method ¥S Average Cost Methog Sled FIFO and average methods have certg hod is either simpler or more Accurate thar me methods is regarding the treatment of In FIFO method, opening stock of worl carned to complete this opening work. in a eventages and it cannot be said that one ie other. The main difference between these © Opening, Stock-in-progress. si-in-progress is kept as a separate figure. Costs “prog . fs cost and the sum of these two ¢, eiceoe .d to material, labour and overhead cost: |, the cost of opening work-in-progress is & computed by dividing the total of these * incurred during the period. The cost per unit Costs by equivalent units, pow to choose between FIFO and Average Method oth FIFO and ae eres have advantages and disadvantages. If one were to ean | these methods in an examination question, the following rules may be followed: 1, Use FIFO ~ If the cost of the oy i pening work-in-progress in one lump sum figure and the stage of completion is given, For Example: ere one lump sum figur Given: Opening work-in-progress 1,000 units Cost 218,000 Stage of completion: Materials 100% Labour O% Overheads % 2. Use Average — If the cost of opening work-in-progress is given in terms of materials, labour and overhead but the stage of completion is not given. For example: Given: Opening work-in-progress 1,000 units ‘Cost— Materials 710,000 Labour 4,000 Overheads 34,000 . FIFO or Average—Your Choice — If the degree of completion and the cost in terms of materials, labour and overheads of the opening work-in-progress are given, then cone has a choice between FIFO and Average methods. For example: Given: Opening work-in-progress 1,000 units Degree of completion and cost: Material (100% Complete) 10,000 _ Labour (60% Complete) 4,000 Overhead (60% Complete) 4,000 4. Where the question specifies a method to be followed, then that method must be followed, Mustration 9.13 The following information relates to Process X for May 2010: Opening work-in-progress 200 units Introduced during the month 1,600 units9.24 Process Costing 1,480 unit Completed during the month a coe Closing work-in-progress Degree of Completion Material ae Overheads Opening work-in-progress 100) iB a 50% Closing work-in-progress 100% eS 254% Costs & aut ® Opening work-in-progress 2,400 wi 3,240 Costs incurred during the period 19,200 , 6,368 Assuming materials were introduced in the beginning of the process and labour ang Oveth were incurred uniformly throughout the process, prepare process account using ~ (a) FIFO Method (b) Average Method. Solution (a) FIFO Method @ Statement of Production Input | Particulars Output egaiyalent Units units units Material Labour Onerhaal units | % | Units | % | Unis] 200 | Opening WIP 200 — — | 100 50 | 100 | 5 1,600 | Units introduced = = = = = | —| Finished output | 1,280* | 1,280 | 100 | 1,280 | 100 | 1,280 | in * — | Closing WIP 320 | 320 | 100 80 25 80 | 35 1,800 | Total 1,800 | 1,600 1,460 1,460 * Units introduced and completed during the month inits completed — Units of opening W.1.P 480 — 200 = 1,280 units. Wi Statement of Cost Cost element % Equivalent units Cost per unit iq é Pe a (A (B) (A> B) Material 19,200 1,600 12.00 Labour 6,368 1,460 4.36 Overhead 6,368 1,460 4.36 Total 20.72 (iii) Statement of Evaluation Particulars Elements of Equivalent | Per unit | Cost Tol cost units z z cost Opening WIP Material 2 a = - Labour 100 436 436 Overhead 100 436 436 82 (Contd)pinihed Production chosing WIP Process Costing 9-25 Material 1,280 12.00 Labour 1,280 4.36 Overhead 1280 436 26,526 Material 320 12.00 Labour #0 4.36 Overhead 80 4.36 oa Process A Account Units € Particulars F ing WIP I ico + 320 + 320) ‘To Material 200 1,600 6,368 6,368 34,976 1,800 3,040 By Completed production (3,040 + 872 + 26,526) 19,200 By Closing WIP ‘Statement of Production Particulars Equivalent Units Materials. | Labour | Overhead Indentity is_| Opening WiP = = — lost 1,480 Finished Production _ 1,480 1,480 1,480 320 Closing WIP (Labour ia, and overhead 25%) 320 80 80 1,800 1,800 1,560 1,560 Statement of Cost Equivalent Cost per Opening WLP. + Cost incurred = Total units unit z z z z FiA00 ot 19.200 oe. 21600 | be fog) | elnolog B20 tb 6k an 6,688 - + 1,560 = 4.29 3200+ 6368 = 6688 + = 1,560 = 4.29 20.58 Statement of Evaluation Element of | Equivalent Per unit Total cost units z cost & Overhead Material 1,480 12,00 Labour 1,480 4.29 Overhead 1,480 4,29 Material 320 12,00 Labour 80. 4.29 80 4.29 30,450Process Costing Process Account Ur Units z nits 9 Opening WIP 300 | 3,040 | By Finished output 1,480 | 304 1,600 | 19,200 = 6,368 By Closing wIiP 320 45 To Overhead = 6,368 [1.800 | 34,976 1,800 INTERNAL PROCESS PROFITS (Inter-process profits) harge the output of each process to the next pr 0 the transferor process. The transfer price plus a fixed percentage. Thus each process j d no process obtains the benefits of saving, or inefficiency of the earlier processes, In some businesses, it is a practice to not at cost but at a price showing profit t be either the current market price or cost charged with its input at current price an has to bear the losses caused by the efficiency brief, the objects of such intemal process profit are: (a) To show whether the cost in each process com| (b) To make each process stand on its own efficiency and economy. (c) Toassist in making decisions, such as to buy a partly-processed material rather to process work internally or to sell a partly-processed product or to process j further. Internal process profits have the disadvantage of complicating the costing records, complications brought into the accounts arise from the fact that inter-process profit, introduced, remains included in the price of process stocks, finished stocks-and work-i progress. For balance sheet purposes, such stocks have to be reduced to actual cost bec: a firm cannot make profits by trading with itself. The inclusion of inter-process profits should be best avoided unless the benefits outwei the added complications. However, the object of internal process profits can also be achiev by making separate cost analysis and reports outside the costing records or by adopting. standard costing system where standard should be set for each process. The procedure involved in inter-process profits is demonstrated in the following illus petes with the market prices. Illustration 9.14 4 Ltd produces product ‘AXE’ which passes through two processes bef it is completed and transferred to finished stock. The following data relate to October 202 Processes Particulars Opening stock Direct materials Direct wages Factory overheads Closing Stock Inter-process profit included in opening stock Output of Process I is transferred to Process Il at 25% profit on the transfer price.Process Costing 927 ess Il is transferred t0 finished stock at 20% profit on the transfer price y of Prove, valued at prime cost, Finished stock is valued at the price at which ' nom process HH Sales during the period js %1,40,000 ne {Accounts and Finished Stock Account showing the profit element at each stage - (CA Inter) Account Con | Profit | Total Cost | Profit gs z z z as | By Process II | 40,500 | 13,500 | 54,000 Spent | 7,500 —| 7,500 0 Kk ie 15,000 — | 15,000 pirect 11,200 — | 11,200 fo! vase 33,700 33,700 : cars 3,700 3,700 i 30,000} — | 30,000 ie, | 10500 — | 10,500 40,500} — | 40,500 rofl — | 13,500 | 13,500 K « | 40,500 | 13,500 | 54,000 40,500 | 13,500 | 54,000 oa Process II Account Cost | Profit | Total Cost | Profit | Total z z z z z z ‘To Opening By Finished stock 7,500} 1,500 | 9,000 stock a/c |75,750 | 36,750 |1,12,500 gq Process 1 | 40,500 }13,500 | 54,000 ‘To Direct material 15,750] — | 15,750 To Direct ‘ wages 11,250; — |_11,250 75,000 | 15,000 | 90,000 Less: Closing stock 3,750| 750 | 4,500 71,250 | 14,250 | 85,500 s | 400] — | _ 4,500) _ | 75,750} 14,250 | 90,000 To Profit —|22,500 | 22,500 [75.750 36,750 |1,12,500 75,750 | 36,750 |1,12,50028 Process Costing Finished Stock Account Profi, Total Co ¢ ° e To Opening By Sales stock 8,250] 22,500 To Process II 36,750)1,12,500 90,000 |45,000]1,35,000 $2,500 Less: Closing stock 7,500 | 3,750] 11,250 [32,500 41,250} 1,23,750 To Profit —| 16,250] 16,250 82,500 | 57,500] 1,40,000 Working Notes: 1. Reserve for w Process I: Nil Process II: ‘alized profit in closing stock Cost ; Cost of stock = TFaah * Closinestock= 0 oo5 X 4,500 = 83,750 Profit = Total — Cost = 4,500 ~ 3,750 = 750 Finished Stock 90,000 1,35,000 Profit = Total ~ Cost = 11,250 ~ 7,500 = 3,750 2. Profit for the month Cost of stock = sot > Clossing stock = 11,250 = 87,500 c Process I: " Process I: udoths 22,500 Add: Unrealized profit in opening stock é 1,500 24,000 Less: Unrealized profit in closing stock ye 750 Finished stock ‘Add: Unrealized profit in opening stock Less: Unrealized profit in closing stock Total profit PROBLEMS AND SOLUTIONS Problem 9.1 In a manufacturing unit, the raw material passes through four processes 1, I, II and IV and the output of each process is the input of the subsequent process. The loss in the four processes I, Il, III and IV are respectively 25%, 20%, 20% and 16%% of the input, If the end product at the end of process IV is 40,000 kgs, what is the quantity of raw materials required along with its cost to be fed at the beginning of Process I when the cost of the same is %5 per kg.Process Costing 9-29 is input minus loss in process. Suppose input in Process 1 = 100 kas 10 acess in Paces 1 = 100 ~ 25% = 75 kgs in Pro! 7 oto process It = 75 kgs - 20% = 60 kgs io process IIL = 60 kgs ~ 20% = 48 kgs ot process 1V = 400 kgs - 164% = 40 kgs ut pt jn Process IV is 40,000 kgs, then input in Process I will be whe? 100 = 40,000 kgs x “4q- = 1,00,000 kgs Raof materials introduced in Process I = 1,00,000 kgs at 25 = 25,00,000. From the following particulars, prepare Process X account showing the cost of output: als in tonnes 1,000 Manufacturing expenses 710,000 jpfmaterial per tonne @125 es %26,000 Output in tonnes 830 as genained that in the process normally 5% of te total weight is lost and 10% is scrap seis 286° Z80 per tonne. There was no stock or work-in-progress, orl yn sutio Process X Account Particulars Tonnes z Particulars Tonnes| = 1,000 |1,25,000 | By Weight 50 = 26,000 | By Scrap @ 280 100 | 8,000 me 10,000 | By Abnormal Loss @ %180* 2» 3,600 By Output @ 2180 830 | 1,49,400 per tonne* 1,000 |1,61,000 1,000 | 1,61,000 (50 + 100) problem 9.3 A product passes through two processes. The output of Process | becomes the input of Process II and the output of Process Il is transferred to warehouse. The quantity ofraw materials introduced into Process 1 is 20,000 kgs at $10 per kg. The cost and output data for the month under review are as under: Process I Process II Direct materials 60,000 740,000 Direct labour 40,000 30,000 Production overheads 339,000 40,250 ~ Normal loss 8% 3S% Output . 718,000 17,400 Loss realization of @/unit 2.00 3.00 The company’s policy is to fix the selling price of the end product in such a way as to yield “profit of 20% on selling price.9.30 Process Costing Required (Prepare the Process Ac (ii) Determine the selling price per unit of the end product Process I Account kgs & | Particulars Ej To Raw materials 20,000}2,00,000 | By Normal toss To Direct materials 60,000] By Abnormal loss j To Direct labour 40,000 400) a To Production overhead 39,000 | By Transfer to Process 11 | 18 op, ‘ 20,000 3,39,000 [an eo 000 335 %3,39,000-3,200 _ _3,35,800 Cost per kg of output ~ ¥20,000= 1,600 ~ 18-400 ig ~ 825 Cost of abnormal loss = 400 kg @ 718.25 = %7,300 Process II Account Particulars kgs & | Particulars To Process I account | 18,000] 3,28,500| By Normal loss To Direct materials 40,000| By Transfer warehouse To Direct labour 30,000 To Production overhead 40,250 To Abnormal gain 300 7,650 18,300| 4,46,400 100 _ %4,36,050 Cost per kg of output = a Cost of abnormal gain = 300 kg @ %25.50 = 37,650 Gi Selling price per kg = 825.50 x 100 = 331.875 Problem 9.4 Product B is obtained after it passes through three distinct process. Te following information is obtained from the accounts for the week ending 31 October 2012 ete te old any ONE rs sk NO eee aie Process Items Total 7 i = z z z : Direct materials 7,542 2,600 1,980 2902 Direct wages 9,000 2,000 3,000 4,000 Production overhead 9,000 1,000 units at &3 each were introduced to Process 1. There was no stock of materi or vo in-progress at the beginning or at the end of the period. The output of each process passes dist the next process and finally to finished stock. Production overhead cost is recovered on 101 direct wages. The following additional data are obtained: