Chapter 10. Process Costing – Cost Accounting

10

Process Costing

LEARNING OBJECTIVES

After studying this chapter you should be able to:

  1. Understand the meaning and definition of process costing.

  2. Enumerate the salient features of process costing.

  3. Distinguish between job costing and process costing.

  4. Know the different types of processing.

  5. Identify the elements of manufacturing cost in a process industry.

  6. Understand and apply process losses and wastages.

  7. Explain the concept of equivalent production.

  8. Prepare all necessary accounts relating to process accounts.

  9. Explain the terms: by-products, joint products and co-products.

  10. Understand and apply the accounting treatment of by-products and joint products.

  11. Realize the importance of inter-process profits.

  12. Explain the meaning of key terms.

In certain manufacturing industries, a product has to pass through different stages and through continuous sequence of operations. For such industries the method of costing differs. For instance, in a textile industry the production process occurs continuously and through various stages—namely, carding, warping, spinning, drawing, sizing, winding, weaving, painting, folding, and so on. Hence, the necessity arises to devise a suitable method to compute the cost of a product in such organizations. Process costing is a method of costing in such organizations. This chapter aims at explaining all the features with respect to process costing.

10.1 MEANING AND DEFINITION OF PROCESS COSTING

Process costing is one of the methods of costing. The cost of operating each process and the cost of transfer from one process to another are determined under this method. Process costing is a different type of cost procedure for continuous or mass production industries. In those industries, the output consists of like units, where each unit would be processed in the same manner. It is generally suitable for firms manufacturing products in a continuous flow, without any reference to specific orders or jobs.

Process costing may be defined as, “the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are arranged over the units produced during the period”.

Process costing is used to ascertain the cost of a product at each operation, process or stage of manufacture. This method of costing is used in the following types of industries:

  1. Manufacturing industries such as iron and steel, textiles, glass, cement, rubber, food processing, soap, paper, biscuits, and so on.
  2. Mining industries such as coal and oil.
  3. Chemical industries
  4. Public utility services such as generation of electricity, water supply, and so on
10.2 SALIENT FEATURES OF PROCESS COSTING

The following are the features of process costing.

10.2.1 Costs Flow From One Process to Another

As in any manufacturing organizations, costs relating to direct material, direct wages and factory overheads are incurred here also, which are charged to process accounts. As manufacturing is continuous, the cost of the finished output of one process becomes the cost of the raw material input of the next process.

10.2.2 Average Unit Cost Consumption

An average cost per unit is calculated by dividing the total costs by the output in a period.

10.2.3 Not Distinguishable

The products are not distinguishable in the processing stage.

10.2.4 Normal Spoilage

The cost of normal spoilage or wastage is included in the cost of the total units produced.

10.2.5 Equivalent Production Computation

The units which are incomplete at each stage of production are converted into equivalent production based on the degree of incompleteness.

10.2.6 Work-in-Progress (WIP) at Year End

At the end of the accounting period, there will be some stock of semi-finished goods or WIP. The reason is due to the continuous nature of manufacturing process. Hence, apportionment of process cost has to be made between the finished product and WIP at the end of each accounting period.

10.2.7 Emergence of More Than One Product

At the end of different processes, more than one product may be produced. They are “joint products” or “byproducts”.

10.3 JOB COSTING VS. PROCESS COSTING

The following are the differences between Job Costing and Process Costing:

Basis of Distinction Job Costing Process Costing

1. Nature of production

Each job is manufactured against specific requirements Production is of continuous flow, without any reference to specific order or job

2. Cost unit

Each job is taken as a cost unit

Each unit is taken as a cost unit

3. Cost accumulation

Costs are collected and accumulated against each job

Costs are allocated for each process

4. Cost ascertainment

Cost of a job is calculated when the job is completed

Costs are calculated at the end of accounting period

5. Cost control

Increases paper work and more managerial attention is needed for cost accounting and cost control

As the product is homogeneous cost accounting and cost control are comparatively easy

6. WIP

WIP may or may not exist

At the end of accounting period, WIP will always exist

10.4 PROCESS LOSSES AND GAINS

Loss is inevitable in process industries. Loss arises due to chemical reactions, evaporation, shrinkage, scrapping, spoilage, and so on. Losses may be of two types-normal and abnormal. In some processes, abnormal gain may also occur.

10.4.1 Normal Process Loss

Normal loss is unavoidable. It arises under efficient operating conditions. It is an inherent result of the given process. Normal loss consists of:

  1. Losses which are inherent in the process or materials
  2. Spoiled units unavoidable in the process

Accounting Treatment:

  1. Normal loss can be estimated in advance, generally as a percentage of input based on technical estimates or past experience.
  2. Normal loss is recorded in terms of quantity and the cost per unit is increased, as they are absorbed by units of production.
  3. In case the scrap has some value, the same may be credited to process account.

10.4.2 Abnormal Loss

Any loss which is in excess of normal loss may be termed as abnormal loss. It is controllable. Abnormal loss arises due to unfavourable or unexpected conditions such as bad workmanship, sub-standard materials, machinery break down, accidents, and so on. Abnormal loss includes abnormal waste, scrap and so on.

  1. It is excluded from process costs and shown separately.
  2. Abnormal loss has to be valued based on the average unit cost of good production. It should be treated as a period cost and written off to the costing profit and loss account (P&L A/c) of the relevant period.
  3. The value of abnormal loss is calculated by using the formula as noted under:
  4. If abnormal loss has got any scrap value, the same should be credited to abnormal loss account and the balance is to be written off to costing P&L A/c.
  5. All costs relating to abnormal loss is to be debited to abnormal loss account and credited to process account

10.4.3 Abnormal Gain

Where the actual output from the process is more than the normal output expected, the difference is called abnormal gain. To put in other words, the quantum of loss is lesser than the estimated percentage of the normal loss and the difference is termed as “abnormal gain” or “effectives”.

Accounting treatment:

  1. Abnormal gain has to be shown separately
  2. It should be valued based on the average unit cost of good production and credited to the costing P&L A/c.
  3. The value of abnormal gain is calculated by using the formula:
10.5 ELEMENTS OF MANUFACTURING COST

The following are the elements of production or manufacturing cost in a process industry.

10.5.1 Direct Materials

Direct materials or raw materials are issued to each process against authorized requisitions. Once they are processed, the same is transferred to the next process where further materials are added which continues till the raw materials are converted into finished products. At the end of each process or of each costing period, the requisitions are sorted according to their processes and their values issued on a material summary sheet. On its basis, the journal entry has to be passed to debit the various process accounts and the material control account is credited. Consumption for low-value materials are determined based on the periodical stock taking.

10.5.2 Direct Labour

In case of process industries, direct labour is comparatively insignificant. Where direct labour is fully occupied in a process, an analysis of their time is carried out and accordingly their wages are allocated to that process. In case a direct worker is engaged in more than one process, the time sheet is used for apportioning his time and wages to the process. The journal entry is then passed debiting various process accounts and crediting the wages control account.

10.5.3 Direct Expenses

Expenses incurred for a given process has to be directly charged to the respective process.

10.5.4 Overheads

As processes are highly automated, there will be an increase in the manufacturing overhead followed by a fall in the direct labour cost. However, in practice, several items of expenses do not associate with any particular process. Hence, it is necessary to apportion them to various processes on a suitable basis, as shown under:

Items of Expenses Basis of Distribution

1. Rents, rates and taxes

Area occupied by each process

2. Power

Horse power of plant or meter readings

3. Fire insurance

Value of asset

4. Water, gas, steam, etc.

Meter readings or technical estimates

5. Depreciation

Value of asset

Amounts of overheads are to be debited into “Manufacturing Overhead Control Account” (or) the total of overheads is to be apportioned to the process in a lumpsum.

Illustration 10.1

A manufacturer makes two types of articles “ L” and “M”. They undergo two processes-namely, factory and finishing. Raw materials used in the factory and general expenses are apportioned in the ratio of output of each class. The output for the year that ended on 31 December 2009 was 6,000 for “ L” and 4,000 for “M”. The actual cost of labour for each process is ascertained. Other charges for each process are apportioned in the ratio of finishing wages.

From the following particulars, prepare a statement of the cost per article of each item in each process in the cost of manufacture and the profit per article. The selling prices are Rs. 500 and Rs. 400, respectively.

“Factory” raw materials:

  Rs.

“Factory” raw materials:

 

    Opening stock

4,00,000

    Purchases

20,00,000

    Closing stock

6,00,000

“Finishing” raw materials:

 

    Opening stock

1,50,000

    Purchases

6,50,000

    Closing stock

2,00,000

Factory wages

 

    L

2,00,000

    M

1,50,000

Finishing wages

 

    L

1,50,000

    M

1,00,000

Factory charges

6,00,000

Finishing charges

2,00,000

General expenses

2,40,000

Solution

Method I: Raw materials consumed are calculated as follows:

  Factory Rs. Finishing Rs.

Opening stock

4,00,000

1,50,000

Add: Purchases

20,00,000

6,50,000

 

24,00,000

8,00,000

Less: Closing stock

6,00,000

2,00,000

Raw materials consumed

18,00,000

6,00,000

Statement of Cost and Profit

Another method: The same problem can be solved by another approach, as explained as follows:

Process accounts for “factory” and “finishing” are to be prepared separately and the final figures are then transferred to the preparing statement of cost and profit.

STAGE I:

 

FACTORY PROCESS

STAGE II:

 

FINISHING PROCESS

STAGE III:

 

Statement of Total Cost and Profit

Illustration 10.2

The following information is extracted from the cost records of a factory producing a commodity in the manufacture of which three processes are involved. Prepare the process cost accounts, showing the cost of the output and the cost per unit at each stage of the manufacture. The value at which the units are to be charged to processes two and three is the cost unit of the processes one and two, respectively. Make assumptions wherever necessary:

[I.C.W.A. – Modified]

Solution

 

Assumption 1:

Wastages are normal. They have no realizable scrap value.

Assumption 2:

Opening and closing stocks are received from previous process, on which no further work is done in the process concerned.

Assumption 3:

Processing costs remain the same.

(I) Process I Account is prepared as follows:

 

Process I Account

*Cost per unit of Process No 1:

(II) Process II Account is prepared as follows:

II

 

Process II Account

* Cost per unit = (Rs. 88,000 − Rs. 8,800)

III

 

Process III Account

* Cost per unit = (1,31,600 − 3,600) =

Illustration 10.3

Model: Normal loss with scrap value

500 tonnes of raw material are used for producing a commodity which passes through two processes. The costs are as follows:

  Process I Rs. Process II Rs.

Materials

10,000

Labour

5,000

2,500

Work expenses

2,000

1,000

10% of the material is wasted in the process. The wastage is normal. The scrap realized is Rs. 300. You are required to show Process No. I. Account.

Solution

In this problem, the normal wastage with scrap value is given. They have to be credited to process account. After deducting this, the cost per unit of process is to be ascertained.

 

Process No. I

Cost per unit of Process No. I =

Illustration 10.4

Model: Normal wastage + Proportion of output reworked

500 tonnes of raw material are used for producing a commodity, which passes through two processes. The costs are as follows:

  Process I Rs. Process II Rs.

Materials

10,000

Labour

5,000

2,500

Work expenses

2,000

1,000

10% of the material is wasted in the process. 10% of the material is wasted in the process. 10% of material originally put in Process No. I is to be reworked. The scrap is realized at Rs. 300. You are required to show the process account.

Solution

In this problem, in addition to the normal wastage, 10% (proportion) has to be reworked in the same Process No. I account. The value of crude material is to be credited with the process account. While doing so (unless and otherwise any specific direction is given in the problem), the cost of other items (in this problem, labour and work expenses) are to be treated as waste, that is, they are to be ignored.

 

Process I

Cost per tonne of Process I =

Illustration 10.5

Model: Normal wastage + Reworking in earlier process

500 tonnes of raw material are used for producing a commodity which passes through two processes. The costs are as follows:

  Process I Rs. Process II Rs.

Materials

10,000

Labour

5,000

2,500

Work expenses

2,000

1,000

10% of the material is wasted in the process. 10% of the material originally put is to be reworked in Process No. 1. Show how the process account will appear at end of Process II.

Solution

 

Process I
Process II

* Note: Crude stock—this part of material will go to Process No. I, with other crude material whenever again put in Process I.

Illustration 10.6

Model: Loss in each process

The product AA′ is produced by passing the chemical CC′ through four processes, where the output of the earlier process becomes the input of the subsequent process.

The loss of materials expressed as a % of input is as follows:

    Process I – 20%, Process II – 10%, Process III – and Process IV –

The material lost in each process does not have any resale value.

You are required to calculate

  1. The cost per kg of product AA′ if the cost of chemical C′ is Rs. 10 per kg
  2. The capacity of the process plants for processes I, II, III and IV to hold material for processes expressed in metric tonnes of input for each process if the two conditions are to be fulfilled: (1) 25% of the space is to be allowed for chemical reactions and (2) the output of product XX′ from the final process IV is expected to be 10 metric tonnes

Solution

Let the input be taken as 100 (assumption)

  1. Process I – if input is 100 – loss is 20% (given).

    Then output will be = 100 – 20 = 80.

    As per the direction given in the problem, the output of the earlier process becomes the input of the subsequent process.

  2. ∴ in Process II – Input is 80 (output of Process I)

    In this stage of process loss is 10% (given)

    80 – 8 (10% of 80) = 72

                   ∴ Output = 72.

  3. In Process III – Input is 72 (output of Process II)

    In Process III, loss is

    ∴ Output

  4. Process IV – Input is 60 (output of Process III)

    In process IV, loss is

    ∴ Output

    100 Units of input in Process I

    Produce

    55 Units of output in Process IV:

    To produce 55 units of output, the input required = 100 units

    ∴ To produce 1 kg of (output) product XX′

    the input of required chemical CC′

                 = 1.82 kg.
    Cost of 1.82 kg @ Rs. per kg = Rs. 18.20.

(b) To produce 10 m. tonnes of product XX’, the capacities of different processes are determined as follows:

Space to be allowed for chemical reactions = 25%.

To start with, take process IV & go in the descending order to Process I.

Process IV: (space) = 13.64 tonnes.

Process III:

Process II:

Process I:

Illustration 10.7

Model: Normal loss with realized value + selling price determination

At the end of Process A, which was carried on in a factory during the week that ended on 30 June 2009, the number of units produced was 1,750 excluding 50 units damaged at the very end of the process. The damaged units realized Rs. 5 per unit as the scrap. Generally, a normal wastage of 10% occurs during the process and so the wastage realized was Rs. 3 per unit.

A unit of raw material costs Rs. 6. The other expenses of the week were:

  Rs.

Wages

1,000

Power

500

General expenses

900

50% of the output is sold so as to show a profit of on the selling price. The rest of the output is transferred to Process “B”. Prepare Process “A” Account.

 

[B.Com (Hons) – Delhi – Modified]

Solution

Basic calculations:

 

1.

Material introduced

= Units produced + damaged units

 

 

= 1,750 + 50 = 1,800 units

 

 

(normal wastage of 10% is adjusted)

 

 

= 2,000 units.

 

Cost of 2,000 units of Materials

= 2,000 × Rs. 6

 

 

= Rs. 12,000.

2.

Normal loss

= 10% of 2,000 units

 

 

= 200 units.

 

Cost

= 200 × Rs. 3 = Rs. 600.

3.

Damaged units:

= 50 units.

 

Cost

= 50 × Rs. 5 = Rs. 250.

4.

Total cost of 1750 units

= Rs. 12,000 (materials)

 

 

Rs. 1,000 (wages)

 

 

Rs. 900 (general expenses)

 

 

Rs. 500 (power)

 

 

Rs. 14,400

 

 

Less: 600 (Normal loss realized)

 

 

Less: 250 (Damaged units realized)

 

 

Rs. 13,550

5. Cost of 50% of output sold

50% of 1,750 units after damage

Sale price of 875 units

6. Profit                    = Selling Price – Total Cost

[*Profit of on selling price: Rs. (8,130 – 6675) = 1,455

Selling price = of cost

∴ Selling price = of cost.]

PROCESS ACCOUNT

Illustration 10.8

Model: Normal loss and Abnormal loss

In the manufacture of product “X”, 1000 kg of material at Rs. 2.00 per kg were supplied to the firm’s Process I. Labour costs amounted to Rs. 500 and production overheads of Rs. 250 were incurred. The normal process loss has been estimated at 10% of which half can be sold as scrap at Re 1. per kg. The actual production realized was 850 kg.

Draw up necessary process accounts.

Solution

STAGE I: Computation of normal loss and abnormal loss

    Kg

Step 1:

Input (given)

1,000

Step 2:

Less: Normal Loss @ 10% (10% of 1,000 kg)

100

Step 3:

Expected normal output (1–2)

=   900

Step 4:

Actual output (given)

= 850

Step 5:

Abnormal loss (Step 4–5)

= 50

STAGE II: Calculation of unit cost of finished output and abnormal loss:

 

 

 

Rs.

Step 1:

Total costs incurred (Materials + Labour + Overhead) Rs. (2,000 + 500 + 250)

= 2,750

Step 2:

Less: Scrap value of normal loss (50 kg × Re 1) (given) Normal loss = 100 kg, half of which is 50 kg)

= 50

Step 3:

Effective cost of normal production: (Step 1 – Step 2)

Step 4:

Unit cost of finished output and abnormal loss

 

Hence, the finished output and abnormal loss will be valued at Rs. 3 per kg.

STAGE III: Preparation of Process Account.

 

Process Account I

Illustration 10.9

Model: Computation wastage in proces

The following data are available pertaining to a product after passing through two processes A and B: Output transferred to Process C from B:

 

Units: 18,240,

Rs. 98,526

Expenses incurred in Process C:

 

Sundry materials

  Rs. 2,960

Direct labour

Rs. 13,000

Direct expenses

  Rs. 3,210

The wastage of Process C is sold @ Rs. 2.00 per unit. The overhead charges were 150% of direct labour. The final was sold at Rs. 20 per unit fetching a profit of 20% on sales.

You are required to compute the percentage of wastage in Process C and prepare the Process C account.

 

[B.Com. – Hons-Delhi – Modified]

Solution

Total finished output of Process C is not given in the problem.

  1. So, let the total finished output of process be x units (assumed)
  2. Then total sales = Rs. 20 × x
  3. Wastage in units = (18,240 units – x)
  4. Profit = 20% on sales (given)
  5. Sales value = Rs. 2 × (wastage in units)

                  = Rs. 2 × (18,240 – x).

  6. Total sales = Total cost + profit

     

    20 x

    =

    1,37,196 – 2 × 18,240 – 2 x + 4 x

    20 x

    =

    1,37,196 – 36,480 + 6 x

    20 x

    =

    1,00,716 + 6 x

    20 x– 6 x

    =

    1,00,716

    14 x

    =

    1,00,716

*1 Wastage = 18,240 – 7,194 = 11,046.

          Units = 59.97 % or 60% (approx)

 

PROCESS “C” ACCOUNT

Illustration 10.10

Model: Abnormal Loss

2,000 units of raw material were introduced in a process at a cost of Rs. 8,000. 10% wastage is allowed and each unit of wastage realizes Rs. 2.50. The actual production was 1,700 units (with abnormal wastage of 100 units). The expenses being as follows:

Direct wages Rs. 13,000

Indirect expenses Rs. 6,500

You are required to prepare the process account to bring out the effect of wastage.

Solution

Step 1:   Per unit cost of normal output is prepared as follows:

 

 

     Rs.

(i)

Raw materials introduced: 2000 units: Total cost: Rs. 8,000 + Rs. 13,000 + Rs. 6,500

= 27,500.

(ii)

Less: Normal wastage: 10% of 2,000 units: 200 units 200 units × Rs. 2.50

= 500

 

(2000–200): 1800 units

(iii)

Per unit cost of normal output

 

 

= Rs. 15

 

Step 2:

Cost of abnormal wastage

=

No. of units of abnormal wastage × per unit cost of normal output

 

 

=

100 units × Rs. 15 = Rs. 1,500.

Step 3: Preparation of abnormal wastage account:

 

Abnormal Wastage Account

Step 4: Preparation of Process Account:

 

Process Account

Illustration 10.11

Model: Abnormal effectives (gain)

A product passes through three processes A, B and C. The normal wastage of each process is as follows:

Process A – 3%

Process B – 5%

Process C – 8%

Wastage of Process A was sold at Re 0.50 per unit, that of Process B at Re 1 per unit and that of Process C at Rs. 2 per unit. 10,000 units were issued to Process A in the beginning of November 2009 at a cost of Rs. 2 per unit. The other expenses were as follows:

Actual output was:

Process A – 9,500 units

Process B – 9,100 units

Process C – 8,100 units

You are required to prepare the process accounts assuming that there were no opening and closing stocks. Also give the abnormal wastage and abnormal effectives accounts.

 

[B.Com. (H) – Delhi – Modified]

Solution

 

Process A Account

*A Cost of abnormal wastage is calculated as follows:

Process B Account

*B Abnormal effectives: In this process, instead of abnormal loss, there is abnormal gain. (Credit side: 475, + 9,100 = 9,575 units; Debit side: 9,500 units. So, that 75 units are treated as abnormal gain). Its value is calculated as follows:

∴ Cost for 75 units = 75 × Rs. 6 = Rs. 450.

 

Process C Account

*C Cost of abnormal wastage is calculated as follows:

Cost of abnormal wastage per unit = Rs. 8.50 per unit

  For 272 units = Rs. 8.50 × 272 = Rs. 2,312.

 

Abnormal Wastage Account
Normal Wastage Account
Abnormal Effectives Account

Illustration 10.12

Model: Process Accounts – P&L A/c

A product passes through three processes A, B and C. The details of expenses incurred on the three processes during the year 2009 were as follows:

Units introduced in process (Cost per unit Rs. 100) = 10,000 units

Management expenses during the year were Rs. 72,500 and selling expenses were Rs. 57,500. These are not allocable to the processes.

Actual output of the three processes was:

     A: 9,300 units; B: 5,400 units; and C: 2,100 units.

About 2/3rd of the output of Process A and one-half of the output of Process-B was passed on to the next process and the balance was sold. The entire output of Process-C was also sold.

The normal loss of three processes, calculated on the input of every process was:

    Process A: 5%, B: 15% and C: 20%.

The loss of Process A was sold at Rs. 2 per unit; that of B at Rs. 5 per unit and that of Process C at Rs. 10 per unit.

You are required to prepare the Three Processes Accounts and the P&L A/c.

 

[C.A.(Inter); C.S. (Inter); B.com (Hon) Delhi; I.C.W.A. (Inter) – Adapted and modified a little]

Solution

 

Process “A” Account

*1 Per unit of cost of normal production under Process A:

For Process “B”:

Basic calculations:

*1(1) Per unit cost of normal production under Process B is calculated as follows:

*2(2) Amount of abnormal effectives is calculated as follows:

 

(i) Abnormal effective units

=

Normal loss –Actual loss

 

=

930 – 800 = 130 units.

(ii) Abnormal effective units × per unit cost of normal production

 

=

130 units × Rs. 150 = Rs. 19,500.

Now Process “B” is prepared as follows:

 

PROCESS “B” ACCOUNT

For Process “C”:

Basic calculations:

  1. Per unit cost of normal production under process “C”:
  2. Amount of abnormal loss under Process “C”:

     

    Abnormal loss

    =

    Normal output – Actual output

     

    =

    2,160 units – 2,100 units given

     

    =

    60 units.

    Amount

    =

    60 units × Rs. 230 = Rs. 13,800.

Now, Process “C” account is to be prepared as follows:

 

PROCESS “C” ACCOUNT
P&L A/c

WORKING NOTES:

 

1: Abnormal Loss Account
2: Abnormal Effectives (Gain) Account
10.6 EQUIVALENT PRODUCTION

Meaning of Equivalent Production—Illustrated

In process costing, the unit product cost is ascertained for each process. If all the units started are completed within the period, this can be calculated easily. However, in process industries, there are opening and closing WIP (i.e., incompleted units) in each process. So, the unit product cost will not reflect the correct figure. As the costs incurred must cover all the work of the process-that is, both completed as well as incompleted units. Hence the necessity arises to convert such incomplete units into their equivalent of completed units. This procedure is referred to as “equivalent production”.

Equivalent production represents “the production of a process in terms of complete units”.

How are incomplete units converted into “equivalent of completed” units? Normally, an estimate as to the degree of completion is made, after inspecting WIP, and percentage basis is used for this. To illustrate,

So, for 5,000 units of input, the equivalent production is only 4,600 units.

10.6.1 Procedure for the Determination of “Equivalent Production”

Determination of Equivalent Production—Steps Discussed

Step 1: Consider

  1. Process loss (normal or abnormal, if any)
  2. Opening and closing stock of WIP
  3. Stage of completion and then calculate the equivalent production.

Step 2:

Find out the net process costs and they are split into materials, labour and overheads.

Step 3:

Cost per unit of equivalent production for each elements of cost are to be determined. (This is done by dividing each element of costs by the respective equivalent production units.)

Step 4:

Evaluate the output finished, transferred and WIP.

The above mentioned steps are to be presented in the following accounts (statements), which means three separate accounts have to be prepared.

  1. Statement of Equivalent Production
  2. Statement of Cost
  3. Statement of Evaluation (Apportionment of Process Costs)

Illustration 10.13

Method: (i) Only Closing WIP and ii) No Process loss

 

Input

5,000 units

Output

4,000 units

Closing WIP

1,000 units

Degree of Completion:

 

Materials

100%

Labour

80%

Overhead

50%

Process Costs

 

Materials:

Rs. 50,000

Labour:

Rs. 30,000

Overhead:

Rs. 20,000

Yor are required to ascertain (i) Equivalent Production, (ii) Cost per unit of Equivalent Production and prepare (iii) Process Account assuming that there is no opening WIP and no process loss.

STAGE I:

Statement of Equivalent Production

STAGE II:

Statement of Cost

STAGE III: Statement of Evaluation

  1. Finished Goods:

     

     

     

    Rs.

    (i) Materials: 4,000 units @ Rs. 10

    =

    40,000

    (ii) Labour: 4,000 units @ 6.25

    =

    25,000

    (iii) Overhead: 4,000 units @ 4.44

    =

    17,780

     

     

    82,780

     

  2. WIP:

     

    (i) Materials (Ref: Stage I): 1,000 units @ Rs. 10

    =

    10,000

    (ii) Labour (Ref: Stage I): 800 units @ Rs. 6.25

    =

    5,000

    (iii) Overhead (Ref: Stage I): 500 units @ Rs. 4.44

    =

    2,220

     

     

    17,220

STAGE IV: Preparation of Process Account

 

Process Account

Illustration 10.14

Model: Only closing WIP and Process losses

During November 2009, 20,000 units were introduced into Process “A” at a cost of Rs. 1,00,000. The other process costs were:

  Rs.

Direct materials

51,000

Direct wages

1,03,500

Factory overhead

50% of direct wages

The normal loss was estimated at 10% on the input. At the end of the month, 16,000 units have been produced and transferred to Process “B”. About 2500 units had been scrapped and the scrapped units had been completely processed and realized at Rs. 5.00 per unit. About 1500 units were incomplete. The stage of completion in respect of these units was estimated to be:

  Materials = 80%

     Labour = 60%

Overheads = 50%

You are required to calculate

  1. Equivalent production
  2. Cost per unit
  3. Value of stocks to be transferred to the next process and
  4. Process “A” and Process “B” Accounts

Solution

STAGE I: Preparation of Statement of Equivalent Production.

 

Statement of Equivalent Production

STAGE II:

Statement of Cost

STAGE III:

Statement of Evaluation

Value to be transferred to

Process “B” (Ref: Stage III (ii)) = Rs. 2,70,623

STAGE IV:

 

Process “A” Account

STAGE V:

 

Process “B” Account

Illustration 10.15

Model: Opening as well as Closing WIP: Average cost method (No process loss)

Opening WIP: 3,000 units
Completed as to

  Materials 80%

  Labour 75%

  Overhead 60%

  Units introduced: 7,000 units

  Closing WIP: 4,000 units

Degrees of completion:

  Materials: 80%;

  Labour: 75%

  Overhead: 60%

You are required to find out the equivalent production assuming that there is no process loss.

Solution

Important Note

The procedure for conversion of opening WIP will vary according to the method of apportionment of the process costs (Average Cost Method or First-in-First-out method). Under average cost method, opening units (WIP) are not shown separately while determining the equivalent production. Opening WIP units are to be included in the units completed and transferred. That is, opening WIP (brought forward from the previous period) should be added to the current process units. The units completed and transferred and closing WIP are valued at the average unit cost.

First, do this basic calculation to find the units completed and transferred:

  Units

Opening WIP

3,000

Add: Additional input

7,000

Total input

10,000

Less: Closing WIP

4,000

Units completed and transferred

6,000

It is to be observed here that the opening WIP units 3,000 are included in these 6000 units that are completed and transferred units.

Now, the statement of equivalent production is to be drafted as follows:

 

Statement of Equivalent Production

Illustration 10.16

Model: Average cost method statement of cost preparation

Opening WIP: 5000 units

 

Rs.

Materials:100% of degree of completion

= 12,500

Labour: 60% ”

= 7,500

Overhead: 60% ”

= 3,750

 

  

Units introduced into this process: 20,000 units.

There are 5,000 units in this process, and the stage of completion is estimated to be:

 

 

Materials:

100%

 

Labour:

50%

 

Overhead:

50%

20,000 units are transferred to the next process.

The process costs for the period are:

  Rs.

Materials

2,37,500

Labour

1,50,000

Overhead

75,000

You are required to find the value of:

(v) Output transferred and

(vi) Closing WIP.

Solution

As the units transferred are given in the question, the statement of equivalent production can be prepared straight away as follows:

 

Statement of Equivalent Production

Next, the statement of cost has to be prepared as follows

 

Statement of Cost

Total cost per unit = Rs. 10 + Rs. 7.00 + Rs. 3.50 = Rs. 20.50.

  1.  

    Value of output transferred

    =

    No. of units × cost/unit

     

    =

    20,000 units × Rs. 20.50

     

    =

    Rs. 4,10,000.

  2. Value of closing WIP:

     

     

     

    Rs.

    (a) Materials: 5000 units × Rs. 10

    =

    50,000

    (b) Labour: 2500 units × Rs. 7

    =

    17,500

    (c) Overhead: 2500 units × Rs. 3.50

    =

    8,750

     

    =

    76,250

     

  3. Total value of the output transferred and value if Closing WIP = Rs. 4,10,000 + Rs. 76,250
    = Rs. 4,86,250.

Illustration 10.17

Model: FIFO Method

Data: Same as in Illustration No. 15:

Solution

Important Note

Under FIFO method, the Opening WIP units are to be converted to equivalent production after taking into account the percentage of work to be done and shown separately in the statement of equivalent production. That means, the opening WIP units to be shown separately.

 

Statement of Equivalent Production

Illustration 10.18

Model: FIFO Method—Statement of Cost

Data same as in Illustration No. 16:

Solution

Important Note

Under FIFO method, the closing WIP is valued at the current cost. Hence, in order to determine the average unit cost, the values of opening WIP are not added to the current process costs.

 

I: Statement of Equivalent Production
II: Statement of Cost
III: Statement of Evaluation
IV: Total Value of Output Transferred
    Rs.

Step 1:

Last period’s cost

23,750

 

(Add: Opening figures given in the question Rs. 12,500 + Rs. 7,500 + Rs. 3,750 = Rs. 23,750)

 

Step 2:

ADD: Total current period’s cost (Ref Stage III – A)

3,73,125

 

 

3,96,875

Step 3:

Less: Value of Closing WIP (Ref Stage III – 2)

25,000

Step 4:

Value of output transferred

3,71,875

Illustration 10.19

Model: Equivalent production abnormal loss

During the month of September, 5000 units were introduced into Process I. The cost of 5000 units was Rs. 29,000. At the end of the month, 3,750 units had been produced and transferred to Process II. About 900 units were still in process and 350 units had been scrapped. A normal loss of 5% on input is allowed. It was estimated that the WIP units had reached a stage in the production as follows:

Material: 75% completed

Labour: 50% completed

Overhead: 50% completed

The total cost incurred, in addition to 5,000 units were:

  Rs.

Direct materials introduced during the process

7,700

Direct wages

17,200

Overheads

8,600

Units scrapped realized (each)

2.00

The units scrapped have passed through the process and so were 100% completed in respect of material, labour and overhead.

You are required to prepare all the necessary accounts.

Solution

STAGE I:

Statement of Equivalent Production

STAGE II:

Statement of Cost
For Process I:

STAGE III:

Statement of Evaluation
For Process I:

STAGE IV:

Process Account

STAGE V:

Abnormal Loss Account

Illustration 10.20

Model: Statement of cost–Normal loss–Average cost method

Product X passes through three processes. On 20 March, the following information is obtained in respect of Process 2: 1,400 units valued at Rs. 2,400 were made up of

Rs. 1400 for material

Rs. 300 for labour

Rs. 700 for overheads

Degree of completion: Material – 60%

                  Labour – 40%

                  Overheads – 40%

Transfer from Process 1: 7,000 units Re. 0.40 each.

Transfer to Process 3: 6,000 units.

  Rs.

Direct material added in Process 2

3,120

Direct labour

4000

Production overhead incurred

8,800

Units scrapped on completion of Process 2: 1,000 units

Closing stock = 1,400 units.

Degree of completion: Materials – 80%

                  Labour – 60%

                  Overheads – 60%

10% of loss during production was considered normal. Units scrapped realized Re. 0.80 each.

You are required to prepare a statement of cost of Process 2 and show the unit cost of units transferred to Process 3 by using Average Method.

 

[I.C.W.A. – Modified]

Solution

 

Equivalent Production
Statement of Cost

Unit Cost transferred to Process 3 is Rs. 2.71.

Illustration 10.21

Equivalent Production – FIFO Method – Abnormal Loss

Opening Work-in-Process: 3,000 units (60% complete) – Cost Rs. 3,300. Units introduced during the period 30,000 units: Cost – Rs. 57,900. Transferred to next process 27,000 units.

Closing Work-in-Process – 2,400 units (75% complete). Normal loss estimated at 10% of the total input including the units in the process at the beginning. Scrap realized at Re. 1 per unit. Scrapped units are 100% complete. You are required to compute equivalent production and cost per equivalent unit. Also evaluate the output.

Solution

 

Statement of Equivalent Production and Cost Per Unit (FIFO Method)

Cost of the Process:

Rs. 57,300

Less: Scrap value of Normal loss:

 

3,300 units × Re 1.

Rs. 3,300

Total cost

Rs. 54,600

∴ Cost per equivalent unit

Statement of Evaluation

Illustration 10.22

Model: Equivalent production abnormal loss – Average cost method

Data same as in Illustration: 21

Solution

 

Statement of Equivalent Production and Cost Per Unit (Average Cost Method)
Costs Rs.
Opening WIP 3,300
Cost of units produced 57,900
  61,200
Less: Scrap value realized on normal loss 3,300
  57,900
∴ Cost per equivalent unit
Statement of Evaluation
10.7 JOINT PRODUCTS AND BY-PRODUCTS

In some industrial concerns two or more products are produced simultaneously. Chemical companies, refineries, flour mills, coal mines, dairies, canners and meat packers produce in their manufacturing or conversion process more than one product having equal importance. In such concerns, apportionment of costs for all the products has to be carried out. Those products which are produced are classified as (i) Joint Products and (ii) By-Products.

10.7.1 Joint Products

Meaning and features of joint products.

Joint products may be defined as, “Two or more products separated in the course of processing, each having a sufficiently high saleable value to merit recognition as a main product”. When two or more products of equal importance are simultaneously produced, they are called “joint products”. Example: In petroleum-refining industry, petrol, naptha, kerosene and fuel oil are obtained simultaneously. The products are not identifiable as separate products until a certain stage of production known as “split-off point”.

10.7.1.1 Features of Joint Products

  1. All the products possess equal importance.
  2. All joint products are treated as main products.
  3. It is not possible to identify or separate a product until the split-off point is reached.
  4. In the manufacturing process, no control over the relative qualities of products can be possible.
  5. In a process, all the products are produced. No single product can be produced individually.
  6. They are produced in huge quantities.

10.7.2 By-Products

Meaning and features of by-products

By-products may be defined as,

A product which is recovered incidentally from the materials used in the manufacture of recognised main products, such by-product having either a net realisable value or usable value which is relatively low in comparison with saleable value of main products. By-Products may be further processed to increase their realisable value.

The term “by-product” is generally used to denote one or more products of a relatively small value that are produced simultaneously with a product of higher value. Such a product which has a higher value is known as the main product.

10.7.2.1 Features of By-Products

  1. Manufacture of by-products is incidental to the production of main products.
  2. It is not possible to avoid such products by any manufacturing control.
  3. Its net-realizable value or usable value is less.
  4. By-products can be sold in the original form or after further processing.
  5. Accounting of by-products needs knowledge of technology.
  6. By-products are produced in lesser quantities when compared with the main product.

10.7.3 Co-Products

Co-products represent the products that are produced in a number of varieties. The manufacture of each co-product requires different raw materials and a different processing operation altogether. Co-products differ from joint products. It is possible to produce co-products in the desired quantities, whereas it is not possible in case of joint products. The process of one co-product differs from that of another co-product. Whereas joint products are produced from common raw materials and common processes. Co-products can be identified at each and every stage of the manufacturing process. Whereas the joint products can be identified at split-off point only. In the manufacture of co-products, the manufacturer has control over the quality and quantity of the products whereas in the case of joint products it is not possible.

10.7.4 Differences Between Joint Products and By-Products

Basis of Distinction Joint Products By-Products

1. Nature of production

Joint products are produced simultaneously

By-products are produced incidentally

2. Economic value

Joint products have equal economic value (more or less)

By-products have small economic value

3. Sales value

Sales value of joint products have a significant relationship with the total revenue

Relative sales value of by-products is less significant

4. Business objectives and policies

In case of joint products a company’ objective to produce a particular product is expressed explicitly in clear terms

By-products are produced simultaneously. Due to this, no objectives and policies can be expressed explicitly

5. Certainty of markets

Sales can be predicted

Sales cannot be predicted

6. Profit pattern

Joint products will fulfil the profit pattern of the management

By-products may not be able to fulfil the profit pattern

7. Further processing

Joint products are produced from the same raw materials and processes

When processed or reprocessed further by-products are obtained

10.8 ACCOUNTING FOR JOINT PRODUCT COSTS

Allocation of Joint Costs Methods

A portion of the total joint costs has to be apportioned to each joint product properly in order to ascertain the unit product cost and P&L A/c. For such allocation of joint costs the following methods may be used:

  1. Average unit cost method (simple average method)
  2. Weighted average method
  3. Physical measure method (physical unit method or quantitative unit method)
  4. Standard cost method
  5. Market value method
  6. Realizable value method

10.8.1 Average Unit Cost Method

Joint costs are apportioned to various products based on the average cost unit. This is calculated by dividing the total manufacturing cost by total number of units produced. The logic behind the method is that since all products are turned out by the same process, it is impossible to say that one costs more to produce per unit than the other.

10.8.1.1 Advantages

  1. This method is simple to understand and easy to operate.
  2. This is a suitable method where processes are common and inseparable from the joint products and where all the end products can be expressed in some common unit.
  3. All joint products will have same uniform cost per unit. The customers will be greatly benefited due to the price advantage in the products of high quality.

10.8.1.2 Disadvantages

  1. This method cannot be used where the end products cannot be expressed in terms of the same unit.

Illustration 10.23

From the following particulars find out the cost of joint products X, Y and Z using the average unit cost method:

  1. Pre-separation-point (split-off point) costs: Rs. 90,000.
  2. Other production data:
Product Units Produced Raw Materials Used Units
X
2,000
25,000
Y
1,000
10,000
Z
1,500
10,000
 
4500
45,000

Solution

  1. Total joint costs (given)       = Rs. 90,000
  2. Total units produced (given) = 4,500 units
  3. Average cost per unit
  4. Joint costs are to be apportioned at this rate – Rs. 20/unit as follows:

10.8.2 Method 2: Physical Measure Method

Under this method, a physical base is used (volume or weight of raw materials, labour hours) in allocation of pre-separation-point (split-off point) costs to joint products. This method can be used when physical units are similar. That is, the output of all joint products is measured using the same unit of measurement, for example, kilograms or litres.

10.8.2.1 Advantages

  1. It is relatively easy.
  2. It avoids cost allocations being influenced by highly volatile market prices.
  3. It is technically a correct procedure to allocation of joint costs.

10.8.2.2 Disadvantages

  1. The assumption that all the joint products are equally valuable may not be true.
  2. When products are expressed in different units, this method cannot be used.

Illustration 10.24

Same data as in the previous Illustration 23.

Solution

First, the cost per unit of raw materials used is determined as follows:

  1. Total [(pre-separation-point (split-off point)] costs: Rs. 90,000.
  2. Total units (raw materials): 45,000
  3. Cost per unit of raw material
  4. Joint costs are to be apportioned at this rate as follows:

10.8.3 Method 3: Weighted Output Method

This method is also known as “points value method”. Joint costs are allocated on the basis of assigning weight factors. Factors relating to production, selling and distribution are given due consideration. The weight factors may include the amount of material used, the manufacturing process, the time involved, the type of labour used, and so on. These factors and their relative weights are combined in a single value, called the factor of conversion. This method is suitable where products produced are not homogeneous.

Illustration 10.25

P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 4,00,000 and in the following quantities:

P – 40,000 units

Q – 30,000 units

R – 20,000 units

S – 30,000 units

The weight factors assigned to them are:

P – 10 points

Q – 8 points

R – 5 points

S – 2 points

You are required to allocate joint costs to the products using the weighted output method.

Solution

Allocation of Joint Costs

Method: Weighted Output

Joint Cost: Rs. 4,00,000

The average cost per unit is computed after filling the Column (4) and then adding for all the four products, that is, 8,00,000 units in this problem. Joint Cost = Rs. 4,00,000.

10.8.4 Method 4: Standard Cost Method

Under this method, joint costs are apportioned to products on the basis of predetermined standards. Sales values are estimated after adjusting profit margin, selling and distribution expenses, and conversion costs. The price of raw materials is determined which forms the basis for the apportionment of costs to the joint products.

10.8.4.1 Advantages

  1. This method is suitable for all types of industries especially where standard costing is in operation.
  2. It enables the organization to measure the efficiency of production operations.

Illustration 10.26

P, Q, R and S are four joint products produced in the following quantities:

P – 40,000 units

Q – 40,000 units

R – 20,000 units

S – 30,000 units

The following details apply:

The joint costs of manufacturing amount to Rs. 7,20,000. You are required to allocate the joint costs on the standard cost method.

Solution

NOTE:

  1. The estimated sales value is taken as the base for the products.
  2. From this profit margin, selling and distribution overhead and cost of conversion are to be deducted.
  3. Cost of raw materials are found out for the products.
  4. Cost allocation is to be made on the basis of the value of raw materials.

These are shown in the tabular as follows:

 

Allocation of Joint Costs Based on Standard Cost Method

On the basis of total raw materials cost, that is, Rs. 3,60,000, joint cost allocation to joint products are to be

10.8.5 Method 5: Market Value Method (Sales Value Method)

In this method, joint costs are apportioned to products based on the ratio of the sales value of joint products. This results in uniform gross profit percentage for each product. This method is based on the principle that products which have the highest market value should bear the largest share of the joint costs production.

10.8.5.1 Advantages

  1. Apportionment of costs on the basis of sales value will be more accurate.
  2. It is easy to operate.

10.8.5.2 Disadvantages

  1. High-value products need not necessarily be high-cost items.
  2. In case of fluctuating market prices, the results may not be accurate
  3. Determination of relative selling price will be difficult.

Illustration 10.27

P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 6,00,000. The following details apply:

Product Units Processed Ultimate Sales Value Rs.
P

1,00,000

0.50
Q

75,000

4.00
R

50,000

4.00
S

75,000

6.00

These prices are market prices or sales prices for products at split-off-point, that is, it is assumed that they can be sold in their present state. You are required to allocate joint costs to the products on a market-value basis.

Solution

 

Allocation of Joint Costs by Market Value Method

10.8.6 Method 6: Realizable Value Method

Market value less cost to complete individual product method:

This is a variation of the market value method. It is used where one or more products require an additional processing from the split-off point. This is due to the following reasons:

  1. There may not be any ready market (or)
  2. It may be more profitable to process further

Illustration 10.28

P, Q, R and S are four joint products produced at a total manufacturing cost of Rs. 6,00,000. Further details are as follows:

You are required to allocate the joint costs by Realizable Value Method.

Solution

 

Allocation of Joint Costs

Column (7) is filled up after completing all the 6 columns and cost allocation is calculated as follows and then values are to be transferred to Column 7. Computation of joint costs apportioned to joint products are as follows:

10.9 ACCOUNTING FOR BY-PRODUCTS

The various methods used for valuing and costing by-products may be grouped as follows:

  1. Cost methods and
  2. Non-cost methods

10.9.1 Cost Methods: The Following are the Cost Methods

  1. Replacement Cost Method: This method is used by the firms whose by-products are consumed within the factory as raw materials. Production costs of the main product receive credit for providing the materials. The cost assigned to the product is the purchase cost or the replacement cost (that is in vogue in market price). This method is mostly used in steel-manufacturing industry
  2. Standard Cost Method (or) Total Cost less By-Product valued at Standard: In this methods, WIP is credited with by-products’ value at a standard price. The standard may be at a past average price
  3. Joint Cost Proration Method: Under this method, the accounting treatment is to change each product for costs after the split-off point and to apportion the joint costs between the major products and the byproducts. To put in other words, joint costs are apportioned to major products and by-products on some acceptable basis

10.9.2 Non-Cost Methods

The following are the non-cost methods of accounting for by-products:

  1. Other Income Method: (Miscellaneous Income Method)

In this method, the revenue arising from the sale of a by-product is credited to P&L A/c, as an other income.

This method is suitable where the value of a by-product is small or negligible when compared with the main product. But this method suffers from a serious limitation as no value is given to the by-product stock which leads to the overvaluation of major product stock.

Illustration 10.29

Sale of product “A” during a period amounted to Rs. 80,000. The total production costs amounted to Re 1 per unit and the quantity produced was 48,000 units. Sale was to the tune of 40,000 units. The selling and distribution costs amounted to Rs. 8000. Sale of the by-product “B” was to the extent of Rs. 10,000. Some customers returned goods amounting to Rs. 4,000. Using other income method cost the by-Product.

Solution

Particulars   Amount Rs.

Step 1: Sales of Product “A” (40,000 units) (given)

 

80,000

Step 2: LESS: Cost of goods sold:

 

 

 

Rs.

 

Total production costs: (48,000 × Re 1) =

 

48,000

Less: Closing stock: (8,000 × Re 1) =

8,000

40,000

Step 3: GROSS PROFIT (Step 1 – Step 2)

 

40,000

Step 4: Selling & distribution expenses (given)

 

8,000

Step 5: Profit from operations (Step 3 – Step 4)

 

32,000

 

Rs.

 

Step 6: Sale of by-product “B”:

10,000

 

Less: Returns from customers:

4,000

6,000

Step 7: Net profit (Add Step 5 + Step 6)

 

38,000

Method (ii): Total Cost LESS Revenue from the Sale of By-Products.

Under this method, the net sales value of by-products produced is treated as a reduction in the cost of the major product and the WIP account is credited.

Illustration 10.30

Sale of product “A” during the year amounted to 1,000 units at Rs. 20 each. The total number of units produced was 1,200 units and the production costs were Rs. 16 per unit. The sale of by-product “B” amounted to Rs. 2,400 out of which goods worth Rs. 1,200 were returned by customers.

The selling and distribution costs amounted to Rs. 1,000. Using total cost less revenue from the sale of byproduct, cost the by-products.

Particulars   Amount

Step 1: Sales value of product “A”

 

20,000

Step 2: LESS: Cost sales:

Rs.

 

(i) Total production costs – 1,200 units × Rs. 16

19,200

 

(ii) Less: By-product sales

1,200

 

Step 3: Net cost by-product “A”

18,000

 

Step 4: LESS: Closing stock of Product A:

 

 

 

 

of Net cost of Product

3000

15,000

Step 5: GROSS PROFIT (Step 1 – Step 4)

 

5,000

Step 6: Add: Other income:

 

 

(i) Sales of by-product “B”

5,000

 

(ii) Less: Sales returns

2,000

3,000

Step7: Net profit

 

8,000

Method (iii): Total Costs LESS value of By-Products (including Subsequent Costs and Distribution Expenses)

This is an improvement over the previous methods. Here selling and administrative expenses are charged only against the by-products sold.

Illustration 10.31

Sale of Product “A” during the period was 200 units at Rs. 20 each. The total number of units produced were 2,400 units and the joint production cost amounted to Rs. 30.000. Subsequent costs on account of the main product “A” amounted to Rs. 1,000. By-product “B” sales (2000 units at Re 1) yielded Rs. 2,000 while unsold stock of the same by-product amounted to 3,000 units. Subsequent costs incurred on account of the by-product “B” amounted to Rs. 1,000. (i.e., for 5,000 units). The total selling and administrative expenses amounted to Rs. 1,000 of which Rs. 100 can be attributable to the sale of the by-product. Using the total cost less value of the by-products (including subsequent costs and distribution expenses), cost by-Product “B”.

Solution

Method (iv): Total cost less value of by-products (including selling and administration expenses).

In this method, the selling and administrative expenses with respect to by-products has to be deducted from its sales value. The net amount is credited to the cost of the main product.

Illustration 10.32

Sale of product “A” during the period was 2,000 units at Rs. 10 each. The total number of units produced were 2,400 units and the unit cost production was Rs. 7.50. The sale of by-product “B” amounted to Rs. 2,400 out of which goods worth Rs. 800 were returned to customers. The total selling and administrative expenses connected with main product A was Rs. 500 out of which the cost incurred for the sale of by-product “B” was Rs. 100. Using the total cost less value of by-products (including selling and administrative expenses) method, cost the by-product.

Solution

Decision to sell or further process the joint products:

Many manufacturing organizations are often confronted with the decision whether to sell or further process the joint products. Decision is based on the profitability of further processing. The incremental revenue expected is compared with the costs expected to be incurred on further processing of joint products. The incremental revenue is the difference between the sales value after further processing and sales value at the split-off point. If the incremental revenue exceeds the additional costs of further processing, then further processing may be recommended

Illustration 10.33

In a factory producing joint products of two varieties, the following data are extracted from the books:

  Total Rs.

Sales of products A&B

15,00,000

Direct material

4,50,000

Direct labour

2,20,000

Variable overhead (150% a labour)

3,30,000

Fixed overhead

4,00,000

The analysis of sales reveals that the percentage of sale of Product A is .

The management contemplates to process further the joint products so that they could be sold at higher rates. Facilities for this are available. The additional expenditure for the further processes and total sales expected at higher selling prices are given as follows. Make your recommendations presenting the effect of the proposal.

Solution

Recommendations: (1) Based on the result, Product “B” will yield an additional profit of Rs. 20,000 due to further processing. So it can be recommended that Product “b” can be processed further.

(2) As the product “A” does not show any additional profit on further processing, the decision to process further or not to process further may be taken by considering other factors—other non-cost factors, for example, increasing price in future, utilizing the existing capacity in a suitable way, eliminating the competitor, and so on.

10.10 TRANSFER PRICES-INTER-PROCESS PROFITS

In the process costing, the finished product of one process is the raw material for the subsequent process. For such transfers, the normal cost is generally taken as a base. Some other methods are also available to determine transfer prices. Transfer prices may be defined as, “A price related to goods or other services transferred from one process or department to another or from one member of a group to another. The extent to which costs and profit are covered by the price is a matter of policy.”

For fixation of transfer prices, the following methods are widely used:

  1. Absorption Cost Method
  2. Cost-Plus-Profit Method
  3. Marginal Cost Method
  4. Standard Cost Method

10.10.1 Inter-Process Profits

Transfer prices may be determined by any of the above methods. The most widely used practice is “cost-plus-profit method”. Under this method, the output of one process is transferred to the next process on the basis of cost plus a percentage of profit. The difference between the cost and the transfer price is referred to as the “inter-process profits.” These are profits made by the transfer of output from one process to the subsequent process.

10.10.2 Advantages

  1. Comparison between the cost of output and its market price at the stage of completion is made easy.
  2. Each process is made to stand by itself leading to profitability.

10.10.3 Disadvantages

  1. This system leads to unnecessary complication of accounts.
  2. Profits include stocks not sold during the period.
  3. Hence, the inter-process profits included in the stocks should be eliminated.

Illustration 10.34

The following are the details in respect of two processes “A” and “B” of a process industry:

  Process A Rs. Process B Rs.

Materials

20,000

Labour

24,000

40,000

Overheads

12,000

20,000

Closing Stock

8,000

16,000

The output of Process A is transferred to Process B at a price calculated to give a profit of 20% on the transfer price and the output of Process B is charged to finished stock on a similar basis.

Of the output transferred to finished stock, the stock costing Rs. 20,000 remained unsold at the end of the accounting period and the balance realized was Rs. 2,00,000. There was no opening stock and no closing WIP. Show:

  1. Process accounts and total profits
  2. Value of closing stocks for balance-sheet purpose

Solution

 

PROCESS “A” ACCOUNT

Note: 20% on transfer price = 25% on cost.

 

PROCESS “B” ACCOUNT
Finished Stock Account
P&L A/c

(b) Value of Closing Stock for Balance Sheet Purposes:

Unrealized profits are to be segregated from the value of stocks at the end, in order to show the closing stocks as cost for balance-sheet purposes.

Step 1:

  1. For Process A: Closing stock = Rs. 8,000
  2. No profit need be added to these stocks because these are output of this process.

Step 2:

 

(i) For Process B: Closing stock

=

Rs. 16,000

(ii) Total cost incurred

=

Rs. 1,20,000

(iii) Cost from Process A

=

Rs. 60,000


(iv) Cost flow


=


(v) For closing stock amount that came from process A


=

(vi) Unrealized profit

=

20% of Rs. 8,000 = Rs. 1,600

Step 3:

 

(i) Finished stock: Closing stock

=

Rs. 20,000

(ii) Here, the entire stock came from Process “B”

 

 

(iii) Profits made by B = 20% of Rs. 20,000

=

Rs. 4,000

(iv) Cost to Process B = (Rs. 20,000 – Rs. 4,000)

=

Rs. 16,000

(v) Amount that came from Process A

=

 

=

8,000

(vi) Profit made by A

=

Rs. 8,000 × 20%

 

=

Rs. 1,600

(vii) Total unrealized profits:

 

 

 

A =

1,600

 

B =

4,000

 

 

5,600

Results are shown in the following table:

The provision to be made may be straight away calculated by using the following formula:

Percentage profit added by transfer or process × × Closing stock of transferee process

NOTE: This formula will not be applicable in finding out the profits made by a process which transfers the output to finished stores.

Important Note

 

20% on transfer price How it comes?

=

25% on cost

Let transfer price be

=

Rs. 100 (assumed)

Profit 20% on transfer price

=

Rs. 20 (profit %)

Then cost

=

Rs. 80


∴ percentage of profit on cost


=

Take another example:

 

Profit 25% on transfer price

=

? % on cost

Let transfer price

=

Rs. 100

Profit 25% on transfer price

=

Rs. 25 (profit %)

Then cost

=

Rs. 75

 


Percentage of profit on cost


∴ 25% on transfer price

Formula:

Percentage of profit on cost =

where P = Percentage of profit on transfer price

PROFESSIONAL COURSE LEVEL ADVANCED PROBLEMS

Illustration 10.35

Model: Quantity of raw material fed into Process I

In a manufacturing unit, raw material passes through processes 1, 2, 3, and 4 and the output of each process is the input of the subsequent processes. The loss in four processes 1, 2, 3 and 4 are, respectively, 25%, 20%, 20% and of the input. If the end product at the end of process is 20,000 kg, what is the quantity of raw material to be fed at the beginning of Process I and the cost of the same at Rs. 2 per kg?

 

[C.A. – (Inter) – Modified]

Solution

Let the input in Process 1 be taken as 100 kg (assumption) Then, the input into and output from different processes are worked as follows:

When output is 40 kg → input is 100 kg

 


When output is 20,000 kg → then the input will be


=

 

=

50,000 kg

∴ Material cost of the raw material (input)

=

Rs. 2.00 × 50,000 kg

 

=

Rs. 1,00,000.

Illustration 10.36

Model: Computation of raw material cost

An article passes through three successive operations from the raw material stage to the finished product stage. The following data are available from the production records of a particular month:

  1. Determine the input required to be introduced in the first operation in number of pieces in order to obtain the finished output of 100 pieces after the last operation.
  2. Calculate the cost of raw material required to produce on pieces of finished product, given the following: weight of the finished piece is 0.25 kg and the price of raw material is Rs. 50 per kg

[C.A. – (Inter)]

Solution

(a) Statement showing input, rejection and output in operations

(i)

Finished output after last operation

=

100 (given)

 

Add: Rejected quantity in last operation 20% of 100

=

20

(ii)

Output from Operation 2 or input into Operation 3

=

120

 

Add: Rejected quantity in Operation 2, 10% of 20

=

12

 

 

 

132

(iii)

Output from Operation 1 or

 

 

 

Input into Operation 2

=

132 Nos

 

Add: Rejected quantity in Operation 1 50% of 132 = 66

=

66

 

∴ Input required in Operation 1

=

198

(b) Calculation of raw material cost (1 piece of finished product)

 

(i)

198 pieces are required to produce 100 pieces of finished product

(ii)

Weight of 198 pieces of raw materials

=

198 Nos × 0.25 kg

 

 

=

49.5 kg

(iii)

Raw material cost of 100 pieces of finished products

=

Rs. 50 × 49.5 kg

 

 

=

Rs. 2,475


(iv)


Raw material cost of 1 piece of finished product


=

 

 

=

Rs. 24.75

Illustration 10.37

Model: Equivalent production – Average cost method

The process inventory in Process No. 2 at the beginning of the period was valued at Rs. 5,900 made up of Rs. 2,800 towards materials; Rs. 2,000 towards labour; and Rs. 1,100 towards overhead for 100 units. The value added during the period was Rs. 1,07,200 towards an introduction of 4,100 units from the previous process besides Rs. 81,600 towards labour and Rs. 38,800 towards overheads. Out of 3,600 units completed, 3,300 units were transferred to the next process leaving the balance in stock. About 400 units were held back in the process with half completion towards labour and overheads while 200 units were lost in the processing considered normal and hence should be borne by the entire inventory. Prepare a cost of production statement using average cost basis.

 

[I.C.W.A. – (Inter)]

Solution

 

Statement of Equivalent Production
Statement of Cost
Statement of Evaluation

Illustration 10.38

Model: Equivalent Production – FIFO Method

From the following details, prepare statement of equivalent production, statement of cost and compute the value of
(1) Output transferred and (2) Closing WIP:

Opening of WIP Costs: 2,000 units

 

 

   Rs.

Materials (100% complete)

37,500

Labour (60% complete)

15,000

Overhead (60% complete)

7,500

Units introduced into this process are 8,000 units

There are 2,000 units in the process and the stage of completion is estimated to be:

Materials = 100%

Labour     = 50%

Overhead = 50%

8,000 units are transferred to the next process.

The Process Costs for the Period Are Rs.

Materials

5,00,000

Labour

3,90,000

Overhead

1,95,000

[C.A. – (Inter)]

Solution

 

Statement of Equivalent Production
Statement of Cost
Statement of Apportionment of Cost

Cost of Output Transferred

 

1.

Opening stock of WIP:

Rs.

 

(Opening cost + Current cost)

 

 

Rs. 60,000 + Rs. 60,000:

1,20,000

2.

Add: Cost of units introduced and completed

 

 

(Ref: Statement of apportionment of cost):

8,25,000

 

Total:

9,45,000

Illustration 10.39

Model: Cost sheet and Normal loss

A product which uses 100 tonnes as input per month passes through two processes. The details of cost in Process 1 for November 2009 are as follows:

Process I Cost Per Tonne Rs.

Direct material cost

13,050

Direct labour cost

3,900

Overhead

6,750

The total loss in Process I is 2% of input and the Scrap is 8% of input with a value of Rs. 6,000 per tonne.

The material to Process II is transferred at cost. The process of direct labour cost at Process II is Rs. 4,500 per tonne of input. The overhead is 60% of direct labour cost. The scrap at Process II is 20% of input with a value of Rs. 6,000 per tonne. Draw up a cost sheet to present the manufacturing cost of the product showing clearly the cost of scrap and waste at each stage of manufacturing.

 

[C.A. – (Inter)]

Solution

 

Process Cost Sheet
Process I

* Cost per unit

 

Process Cost Sheet
Process II

Illustration 10.40

Model: Abnormal loss and Abnormal gain and By-products

Product Zenu is made by three sequential processes I, II and III. In Process III, a by-product arises and after further processing in process XY at a cost of Rs. 2 per unit, by-product XYZ is produced. Selling and distribution expenses of Re. 1 per unit are incurred in marketing XYZ at a selling price of Rs. 9 per unit.

Budgeted production overhead for the month was Rs. 84,000 output of product XYZ in 420 units.

Absorption is based on a percentage of direct wages.

There are no stocks at the beginning or at the end of the month. You are required, using the information given, to prepare for:

  1. Each of Processes I, II and III
  2. Process XYZ

[I.C.W.A. – (Inter)]

Solution

 

Process Account No. I
Process Account No. II
Process Account No. III
XYZ Process Account

WORKING NOTES:

NOTE 1: Calculation of overhead absorption rate

Direct wages method of overhead absorption

Process I

1. Calculation of normal loss:

10% of 10,000 units (Input in Process I) = 1,000 units

NOTE 2: Calculation of Abnormal Loss:

 

 

Units

Input

10,000

Less: 10% Normal Loss

1,000

Expected Normal Output

9,000

Actual Output

8,800

∴ Abnormal Loss

  200

NOTE 3: Valuation of finished output and abnormal loss:

 

 

 

Rs.

Total cost incurred in Process I: (Rs. 20,000 + Rs. 6,000 + Rs. 5,000 + Rs. 4,000 + 20,000)

=

55,000

Less: Scrap value of normal loss 1000 unit × Re 1

=

1,000

Effective cost of normal production

=

54,000


Unit cost of finished output and abnormal loss


=

 


=

Process II

NOTE 1: Calculation of normal loss:

5% of 8,800 units (Input of finished output from Process I = 440 units)

NOTE 2: Calculation of abnormal gain:

 

 

 

Units

Input (finished output from Process I)

= 8,800

 

Less: 5% Normal loss (5% of 8,800)

= 440

 

Expected normal output

= 8,360

 

Actual output

= 8,400

 

∴ Abnormal gain

=  40

 

NOTE 3: Valuation of finished output and abnormal gain:

 

 

 

Rs.

Total costs incurred in this Process II

 

 

(Rs. 52,800 + Rs. 12,640 + Rs. 6,000 + 6,200 + Rs. 24,000)

=

1,01,640

Less: Scrap value of normal loss (440 × Rs. 3)

=

1,320

Effective cost of normal production

 

1,00,320

Unit cost of finished output and abnormal gain

=

Rs. 1,00,320

 

 

8,360 units

 

=

Rs. 12 per unit

Process III

NOTE 1: Calculation of normal loss: 10% of 8,400 (Input from Process II) = 840 units.

NOTE 2: Calculation of abnormal loss:

 

 

Units

Input (from Process II)

8,400

Less: 10% normal loss

  840

 

7,560

Less: By-products

  420

Expected output

7,140

Actual output

  7,000

∴ Abnormal Loss

140 units

NOTE 3: Valuation of finished output and abnormal loss:

 

 

Rs.

Rs.

Total cost incurred in this Process III =

 

1,78,080

(Rs. 1,00,800 + Rs. 23,200 + Rs. 10,000 + 4,080 + Rs. 40,000)

 

 

Less: (i) Scrap value of normal loss (840 × 5)

= 4,200

 

(ii) *By-product transferred to Process XY at opportunity cost

= 2,520

6,720

    (420 units x Rs. 6)

 

 


Effective cost of normal production

 


Unit cost of finished output and abnormal loss

 

By-Product

*For valuation of by-product opportunity cost method is used as worked out in the following manner:

 

Sale price of by-product

=

Rs. 9 per unit

Less: (i) Processing cost Rs. 2/unit

 

 

   (ii) Selling and distribution cost Re 1/unit

=

Rs. 3 per unit

      ∴ Opportunity cost

=

Rs. 6 per unit

Illustration 10.41

Model: Joint Products

X Ltd produced four joint products A, B, C and D, all of which emerged from the processing of one raw-material. The following are the relevant data:

Production for the Period:

Joint Product No. of Units Selling Price Per Unit Rs.
A
500
16.00
C
400
8.00
D
200
22.00

While the company budgets for a profit of 10% of sales value, the other estimated costs are as follows:

  Rs.

Carriage inwards

2,000

Direct wages

6,000

Manufacturing Overheads

4,000

Administration overhead is 10% of sales value. You are required to

  1. Calculate the maximum price that may be paid for the raw material
  2. Prepare a comprehensive cost statement for each of the products allocating the materials and other things based upon
    1. Number of units
    2. Sales value

[C.A. – (Inter)]

Solution

Computation of Maximum Price that may be paid for the raw material

Particulars Rs. Rs.

Cost of joint products (Working Note 2)

 

36,000

Less: Other costs:

 

 

Carriage inwards

2,000

 

Direct wages

6,000

 

Manufacturing overhead

4,000

 

Administration overhead

4,000
16,000

Maximum price to be paid for raw materials

 

20,000

WORKING NOTES:

1: Calculation of Total Sales Value:

2: Total cost of joint products:

   = Total sales value – Budgeted profit (10% of sales value)

   = Rs. 40,000 – (10% of 40,000) Rs. 4,000

   = Rs. 36,000.

B (i). Comprehensive Statement (Based on Units)

B (ii). Comprehensive Statement (Based on Sales Value)

Illustration 10.42

Model: Joint cost determination

Two Products A and B are obtained in a crude form and require further processing at a cost of Rs. 10 for A and Rs. 7 for B per unit before sale. Assuming a net margin of 25% on cost, their sale prices are fixed at Rs. 20.00 and Rs. 12.00 per unit, respectively. During the period, the joint cost was Rs. 1,20,000 and the output were

A 8,000 units

B 5,000 units

Ascertain the joint cost per unit.

 

[C.A. – (Inter) – Modified]

Solution

 

Statement Ascertaining Joint Cost Per Unit
Particulars Product A Product B

Output (in units)

8,000
5,000
 
Rs.
Rs.

Step 1: Selling price per unit

20.00
12.00

Step 2: Less: Margin at 25% on sales

5.00
3.00

Step 3: Cost of sales

15.00
9.00

Step 4: Post-split-off cost

10.00
7.00

Step 5: Joint cost per unit

5.00
2.00

Step 6: Share in joint cost - (Apportion in the ratio of 4:1 Rs. 1,20,000)

96,000
24,000

Step 7: Joint cost/unit ascertained

(96,000 ÷ 8000)
(24,000 ÷ 5000)
 
12.00
4.80

* Calculation of total joint cost ratio between two products:

Output = 8,000 5,000

 

Total pre-split-off cost = (8,000 × Rs. 5)

=

Rs. 40,000; (5,000 × 2) Rs. 10,000

Total joint cost between two products

=

40,000:10,000

 

=

4 : 1

Illustration 10.43

Model: Inter-Process: Profits

Product “x” passes through three processes before it is completed and transferred to the finished stock. The following data are available for the month of April.

Output of Process 1 is transferred to Process 2 at 25% on the transfer price.

Output of Process 2 is transferred to Process 3 at 20% on the transfer price.

Output of Process 3 is transferred to Finished Stock at 10% on the transfer price.

Stocks in progress have been valued at Prime Cost. Finished Stock has been valued at the price at which it was received from Process 3. Sales amounted to Rs. 8,00,000

*Provision for internal process profits as on April 1 were:

  Rs.

Included in Process 2

2,790

Included in Process 3

5,380

Included in Finished Stock

13,068

*NOTE:

These provisions would be created in the previous month in respect of closing stock. Consequently, they are brought into account for April as provisions in respect of internal process profits in the opening stock.

Prepare and Compute

  1. Process accounts showing the profit element at each stage
  2. Actual realised profit
  3. Stock valuation for balance-sheet purposes
  4. Provision for profit account

[I.C.W.A. – Modified]

Solution

 

I: Process Account No. 1

*Note 1: Calculation of profit on output transferred:

25% profit on transfer price % on cost
II: Process Account No. 2
Calculation of the Cost of Opening Stock

 

Value of opening stock

=

Rs. 16,000

Less: Provision for internal process profit as on April 1

=

Rs.2,790

∴ Cost of opening stock

=

Rs.13,210

 

Process Account 2

NOTE 1: Calculation of profit element in closing stock

NOTE 2: Calculation of profit on the output transferred

20% Profit on transfer price = 25% on cost

∴ 25% on cost

Process 3

1. Calculation of cost of opening stock =

 

Value of opening stock

=

Rs. 20,000

Less: Provision for internal process profit on April 1

=

5,380

Cost of opening stock:

=

Rs. 14,620

 

Process Account No. 3

NOTE 1: Calculation of profit element in closing stock.

Profit element = Value of stock – Cost of stock

    = Rs. 30,000 – Rs. 21,930

    = Rs. 8,070.

NOTE 2: Calculation of profit on output transferred.

10% profit on transfer price on cost

the profit on cost           = × Rs. 6,30,000

= Rs. 70,000

4. Finished Stock Account:

 

 

Rs.

Calculation on the cost of opening stock:

 

Value of opening stock:

40,000

Less: Provision for internal process Profit as on April 1

13,068

 

26,932

 

Finished Stock A/c

NOTE 1: Calculation of profit element in the closing stock

Profit element

=

Value of stock – Cost of stock

 

=

Rs. 60,000 – Rs. 40,396

 

=

Rs. 19,604.

(5) Gross profit or actual realized profit is presented as follows:

  Rs. Rs.

(i): Process I

 

60,000

(ii): Process 2

1,00,000

 

Add: Opening Provision

2,790

 

 

1,02,790

 

Less: Closing Provision

1,396

1,01,394

(iii): Process 3

70,000

 

Add: Opening Provision

5,380

 

 

75,380

 

Less: Closing Provision

8,070

66,210

(iv): Finished Goods

1,20,000

 

Add: Opening Provision

13,068

 

 

1,33,068

 

Less: Closing Provision

19,604

1,13,464

(v) Total gross profit (or) actual realized profit

 

3,42,168

6. Balance Sheet Presentation

 

Closing stock will appear at cost in the balance sheet as:

  Rs.

Stock in Process 1

20,000

Stock in Process 2

6,604

Stock in Process 3

21,930

Finished stock

40,396

 

88,930

7. Provision for Profit Account

Summary

Process costing is a method of costing in which cost of operating each process and cost of transfer from one process to another are ascertained. It is suitable for firms manufacturing products in a continuous flow, without reference to specific orders or jobs. For example, iron and steel, textiles, glass, cement, rubber, paper, mining industries such as oil, coal, chemical industries, electricity generation, water supply and so on.

Salient Features: (i) Costs Flow from Process to Another. (ii) Average Unit Cost Consumption (iii) Products not Distinguishable in Processing Stage (iv) Inclusion of Normal Spoilage in the Cost of Total Units (v) Equivalent Production Consumption (vi) Emergence of More Than one Product.

Process Losses and Gains: Normal loss is inevitable. Abnormal loss—any loss in excess of normal loss. Abnormal gain occurs when the actual output from the process is more than normal output. Items of various expenses and suitable bases to apportion their are explained in illustrations 1 and 2. Accounting treatment of normal loss, abnormal loss and abnormal gain is shown in illustrations 10.3 to 10.11.

Equivalent Production: It represents the production of a process in terms of complete units. Procedure to convert incomplete units into equivalent of completed units is explained in illustrations 10.12 to 10.20.

Joint Products are produced (separated) in the course of processing. Such products have a significant saleable value. These products are not identifiable as separate products until a certain stage called “split-off” point.

Features of Joint Products: (i) All products have equal importance (ii) All are main products (iii) Not identifiable till split off point (iv) No control over relative products (v) No single product can be produced individually.

By products are recovered incidentally in course of processing. They are of relatively small sallable value. By products may be sold in original form or after further processing Co-products represent products produced from different raw materials and from different processing operations.

Accounting for Joint Product Costs: The methods of allocation of joint costs are: (i) Average Unit Cost Method (ii) Weighted Average Method (iii) Physical Units Method (iv) Stand and Cost Method (v) Market Value Method and (vi) Realisable Value Method. Each one is explained through illustrations Nos 10.22 to 10.28

Accounting for By-products is illustrated in illustrations Nos 10.29 to 10.33.

Transfer prices represent prices related to goods or other services transferred from one process to another. Methods used to fix transfer prices are (i) Absorption Cost Method (ii) Cost Plus profit (iii) Marginal Cost and (iv) Standard Cost Method.

Key Terms

Process Costing: A costing method applied where goods are produced or services rendered from a sequence of continuous or repetitive operations or processes.

Equivalent Units: A notional quality of completed units substituted for an actual quantity of incomplete physical units in progress.

Transfer Price: A price related to goods or other services transferred from one process or department to another.

Joint Products: Two or more products separated in the course of processing.

By-Products: Products produced incidentally in the course of processing.

Joint Cost: The cost of a basic raw material till separation.

QUESTION BANK

Objective Type Questions

 

I: State whether the following statements are true or false

  1. The process costing is used by the firms engaged in the manufacture of products on a continuous basis.
  2. The units of product should be identical in nature in the process-costing method.
  3. In process costing, the costs will not flow from one process to another.
  4. The units which are incomplete at each stage of production are to be converted into equivalent production.
  5. At the end of different operations or processes, more than one product may be produced.
  6. Joint products are produced in the beginning of operations or the process itself.
  7. Under process costing, each job is taken as a cost unit.
  8. In process costing, the costs are collected or accumulated in respect of each process.
  9. In process costing, no transfer takes place from one process to another.
  10. Average cost per unit has to be determined in the process costing.
  11. Abnormal loss that arises in process accounts is treated as product cost.
  12. Abnormal gain in process costing is to be debited to costing P&L A/c.
  13. Cost of normal loss of input is borne by the output of the process.
  14. The total work of a department or a process is stated in terms of fully completed units called equivalent units.
  15. Fixing of transfer price is always done on the basis of the market cost of materials.
  16. Joint products are produced at the end of the process.
  17. Sales value of joint products is insignificant.
  18. Joint product is identifiable at the beginning stage of the manufacturing itself.
  19. A by-product is a product which is recovered incidentally in the manufacturing process.
  20. The accounting treatment of by-products necessitates knowledge of technological factors.
  21. Manufacture of by-products can be avoided by a proper managerial action.
  22. It is not possible to produce co-products in desired quantities.
  23. Joint costs and common costs denote the same meaning.
  24. Joint products are produced from the same raw materials.
  25. Joint cost represents the costs of a basic material till the split-off point.

Answers:

 

1. True

2. True

3. False

4. True

5. True

6. False

7. False

8. True

9. False

10. True

11. False

12. False

13. True

14. True

15. False

16. True

17. False

18. False

19. True

20. True

21. False

22. False

23. False

24. True

25. True

 

 

 

 

II: Fill in the blanks with apt word(s)

  1. In a process, costs ___ from one process to another.
  2. The units which are incomplete at each stage of production are converted into ___ based on the degree of incompleteness.
  3. An important feature of process costing is ___ cost per unit is computed.
  4. At the end of different operations or processes, more than one product are produced, and they are called ___ and ___.
  5. In case of process costing, the manufacturing process is ___.
  6. At the end of each accounting period, there will be a stock of ___.
  7. In process costing, each ___ is a cost unit.
  8. In process costing, costs are collected for ___.
  9. Costs are collected at the end of an ___.
  10. In process costing, the production from one process is ___ to another.
  11. Abnormal loss should be valued based on the average unit cost of good production and is treated as ___ cost.
  12. Abnormal gain should be ___ to the costing P&L A/c.
  13. In process costing, it is impossible to ___ costs incurred with specific units of production.
  14. The costs collected in a particular period are divided by total ___ and WIP.
  15. Under process costing, the valuation of WIP is a combined task of ___ and accounts personnel.
  16. Organizations using transfer-price method have to eliminate ___ profit from the unsold stock at the end of the period.
  17. Joint products are not identifiable as separate products till the stage of ___.
  18. All joint products are treated as ___ products.
  19. A by-product may be defined as anything of recoverable value, produced ___ to the main product.
  20. By-products are of relatively low ___ value.
  21. Co-products are identifiable at ___ stage of production.
  22. Joint costs represent the costs of a basic ___ from which two or more products are produced.

Answers:

  1. flow
  2. equivalent production
  3. an average
  4. joint product; by-product
  5. continuous
  6. WIP
  7. unit of product
  8. each process
  9. accounting period
  10. transferred
  11. period
  12. credited
  13. identify
  14. equivalent units
  15. technical
  16. inter-process
  17. split-off-point
  18. main
  19. incidental
  20. net-realizable or useable
  21. each
  22. material

III: Multiple choice questions choose the correct answer

  1. Process method is suitable for
    1. continuous or mass production industries
    2. organizations rendering services alone
    3. where the job is of a long duration
    4. production is as per customer’s specific requirements
  2. Which one of the following is not a feature of process costing?
    1. equivalent production
    2. classification of costs into fixed and variable
    3. duration of work in long
    4. emergence of more than one product
  3. Finished product of a preceding process is
    1. value of a unit cost of a product
    2. credited to process account
    3. the raw material of subsequent process
    4. all of these
  4. In oil refineries, which of the methods of costing is used
    1. job costing
    2. batch costing
    3. contract costing
    4. process costing
  5. Equivalent unit means
    1. total work expressed in terms of fully completed units
    2. partly completed units
    3. WIP
    4. none of these
  6. WIP is valued using
    1. LIFO method
    2. FIFO method
    3. base stock method
    4. weighted average method
  7. Scrap value of normal loss is
    1. debited to process account
    2. credited to process account
    3. debited to P&L A/c
    4. credited to P&L A/c
  8. Scrap value of abnormal loss and gain are
    1. shown in balance sheet
    2. debited to P&L A/c
    3. credited to P&L A/c
    4. respective accounts in the ledger
  9. The disadvantage of FIFO method is
    1. units are to be kept separately
    2. some units are not taken into account
    3. several unit costs are to be calculated and used
    4. none of these
  10. Process cost is ascertained and recorded in
    1. a separate account in a ledger
    2. P&L A/c
    3. balance sheet
    4. cost statement
  11. Inter-process profits are
    1. shown in WIP alone
    2. shown in balance sheet alone
    3. debited to respective process accounts
    4. none of these
  12. Joint products are products
    1. produced jointly
    2. produced in a number of varieties
    3. produced simultaneously from the same raw materials
    4. all of these
  13. Joint-product cost accounting involves
    1. allocation of joint costs to various products
    2. apportioning of costs jointly
    3. distribution of costs to by-products
    4. none of these
  14. Which of the following is not a feature of joint products
    1. not distinguishable till the split-off point
    2. can be identified at each stage of manufacture
    3. cannot be identified at each stage of manufacture
    4. possible to avoid by a managerial decision
  15. By-products are products
    1. produced simultaneously from the same raw materials
    2. produced along with co-products
    3. anything of recoverable value produced incidental to the main product
    4. produced in a number of varieties of high value
  16. Which one of the following is not a feature of byproducts?
    1. sold by further processing
    2. produced incidental to the main product
    3. accounting treatment requires technical knowledge
    4. no control over relative quantities
  17. Which of the following method is used for joint-product cost accounting:
    1. market value method
    2. FIFO
    3. LIFO
    4. base stock
  18. Which of the following method is used for by-product cost accounting?
    1. weighted output method
    2. other income method
    3. FIFO
    4. LIFO
  19. Joint products are produced in the
    1. switch gear-producing industry
    2. transformer industry
    3. bi-cycle manufacturing
    4. brick-making industry
  20. Which method of joint-product cost accounting will yield the same rate of gross profit for all products?
    1. average unit cost method
    2. standard cost method
    3. physical measure method
    4. market value method

Answers:

 

1. (a)

2. (b)

3. (c)

4. (d)

5. (a)

6. (b)

7. (b)

8. (d)

9. (c)

10. (a)

11. (c)

12. (c)

13. (a)

14. (b)

15. (c)

16. (d)

17. (a)

18. (b)

19. (c)

20. (d)

Short Answer Questions

  1. Define process costing?
  2. Enumerate any four distinctive features of process costing.
  3. Mention some industries that are suitable for applying process costing.
  4. What are the advantages of process costing?
  5. What are the limitations of process costing?
  6. Distinguish between job costing and process costing?
  7. Explain the term: equivalent production.
  8. What is inter-process profit? Why is it needed?
  9. What motivational criteria are applicable for transfer pricing?
  10. Explain: “normal loss” in process costing
  11. How would you treat normal loss?
  12. What is meant by abnormal loss and abnormal gain in process costing?
  13. How will you treat abnormal loss and abnormal gain in process-cost accounting?
  14. What is normal scrap? How will you treat it?
  15. What is the accounting treatment for scrap realized from abnormal loss?
  16. What is a joint product? Give few examples.
  17. What is a by-product? Give few examples.
  18. Compare and contrast joint product and by-product.
  19. Name the methods employed in costing join products.
  20. Name the methods of accounting for by-products?
  21. Name the most common methods of allocating joint cost of production to joint products.
  22. Name the methods of treating joint cost in cost accounts

Essay Type Questions

  1. Define and explain process costing. Discuss its main features with suitable examples.
  2. What do you mean by equivalent production? In computing equivalent production, the opening and closing balance of WIP are given different treatment. Explain how? Why is this so?
  3. Discuss briefly the procedure involved in accumulation of costs under process costing.
  4. In what type of industries is process costing applied? What would influence a cost accountant in deciding whether to apply process or job-cost system?
  5. How would you treat the following in cost accounts?
    1. Scrap materials in process costing
    2. Normal and abnormal waste of materials
    3. Abnormal gain
  6. In a manufacturing concern having several departments, the finished product of one department becomes the raw material of another department. Would you advocate inclusion of profit in the transfer price of material? What would be the effect of this in the P&L A/c of the manufacturing concern as a whole?
  7. Explain the methods of calculating equivalent production with an example.
  8. Explain the methods employed in costing joint products?
  9. Discuss the methods of accounting for by-products?
  10. Discuss the most common methods of allocating joint cost of production to joint products?
  11. Explain the methods of treating joint costs in cost accounts.
  12. Distinguish between joint products and by-products and explain various methods of accounting for them.
  13. Explain the distinction between co-products, byproducts and waste. The methods of accounting of by-products can be grouped under two broad types: non-cost methods which do not attempt to cost the by-products and cost methods which allocate costs to the by-products. Outline four methods of valuing and costing by-products selecting two methods each from each of the types mentioned above.

     

    [I.C.W.A. – (Inter)]

  14. Enumerate the problems involved in accounting for joint product costs?
  15. “The distinction between joint products and byproducts is a matter of judgement only”—Comment. How can you distinguish between joint products and by-products with reference to:
    1. The method of accounting
    2. The method of valuation

[C.A. – (Final)]

Exercises

 

Part I: For B.com Students

[Model: No losses: No units]

1. Sai & Co. produces a product through two processes “A” and “B”. Prepare the process accounts from the following details relating to March 2010.

  Process A
Rs.
Process B
Rs.

Material

1,35,000

45,000

Labour

1,80,000

75,000

Chargeable expenses

15,000

30,000

The overheads amounting to Rs. 51,000 are to be apportioned on the basis of labour.

[Ans: Cost of Process A: Rs. 3,66,000 Process B: 5,31,000]

[Model: No losses – Units given]

2. In course of a manufacture, a product passes through three processes A, B and C till its completion. During December 2009, 5,000 units of the finished product were produced and the following expenses were incurred:

Indirect expenses amounted to Rs. 60,000 which is to be apportioned to the processes on the basis of direct wages. Raw materials worth Rs. 60,000 were issued to Process A. Ignore the question of process stocks and prepare the process accounts and the cost per unit in each process.

[Ans: Cost of process: A: Rs. 1,50,000; B: 2,36,000;

        C: Rs. 3,01,000 Cost per unit: A: Rs. 30; B: 47.20;

        C: Rs. 60.20]

[Model: No losses, stock of materials given]

3. From the following figures, show the cost sheet of the three processes of manufacture. The production of each process is passed on to the next till completion:

[Madras 2007, 1994 and Bangalore 1988 – Modified]

[Ans: Cost of manufacture : Process A: Rs. 72,000 &

         Re 1 per unit

         Process B: Rs. 1,12,200 & Rs. 1.50/unit

         Process C: Rs. 2,16,000 & Rs. 2.25/unit

         Wastage in each process, assumed as normal: A:

         Nil; B: 3,000 units; C: 1,000 units]

[Model: Normal loss – No scrap value]

4. 750 units were introduced into a process at a cost of Rs. 50,000. Cost of labour and overheads amounted to Rs. 30,000 and Rs. 20,000, respectively. The normal loss in the process is 6% of input, which has no recovery value. Show the process account.

[Ans: Normal loss: 45 units; Cost of out put (705 units): Rs. 1,00,000]

[Model: Normal loss – with the scrap value]

5. From the following information prepare process account and normal loss account.

Input of raw material 1,000 units @ Rs. 6/unit

Direct materials – Rs. 5,200

Direct wages – Rs. 4,000

Production overheads – Rs. 4,000

Actual output transferred to Process II – 950 units

Normal loss – 5%

Value of scrap per unit Rs. 4 per unit

 

[Madras 2007]

[Ans: Output at Rs. 20 per unit – Rs. 19,000; Normal Loss – Rs. 200]

[Model: Normal loss in weight and scrap]

6. A particular brand of scent passed through three important processes. During the weakened on 15 January 2010, 600 bottles were produced. The cost books show the following information:

The indirect expenses for the period were Rs. 1,600 (indirect expenses are charged on labour basis).

The by-products were sold for Rs. 240 (Process B)

The residue was sold for Rs. 125.50 (Process C)

Prepare the accounts in respect of each of the processes, showing its cost and cost of production of the finished product per bottle.

 

[Madras University, Periyar University]

[Ans:

[Model: Loss in weight, Scrap, and so on-Vegetable oil refining]

7. The following are the extracts from the costing books of an oil manufacturing company, in which three processes are used:

Coconut purchased 600 quintals worth Rs. 60,000.

Casks (drums) costing

Rs. 20,000

Crude oil purchased

400 Quintals

Refined oil purchased

300 Quintals

Finished oil

280 Quintals

Coconut sacks sold for Rs. 10,000; Copra residue 170 quintals sold for Rs. 5,000; By-products of refining process being 75 quintals sold for Rs. 400.

Prepare crushing, refining, finishing (including casking) process accounts.

[Ans: Crushing process: Output 400 quintals @ Rs. 205 = Rs. 82,000

      Refining process: Output 300 quintals @ Rs. 358.67 = Rs. 1,07,600

      Finishing process: Output 280 quintals @ Rs. 511.07 = Rs. 1,43,100]

[Model: Loss in weight – Partial transfer to next process]

8. A chemical company produced three chemicals during the month of December 2009, by three consecutive processes. In each process, 2% of the total weight put in is lost and 10% is scrap which from Process I and II realizes Rs. 100 per tonne and from Process III Rs. 20 per tonne. The products of the three processes are dealt with as follows:

Prepare process cost accounts, showing cost per tonne of each product.

 

[Delhi B.Com – Modified]

[Ans:

[Model: Abnormal Loss alone]

9. In process A, 100 units of raw materials were introduced at a total cost of Rs. 1,000. The other expenditure, incurred by the process was Rs. 602. Of the units introduced, 10% are normally lost in the course of manufacture and they posses a scrap value of Rs. 3 each. The output of Process A was only 75 units.

[Ans: Abnormal loss – 15 units – value Rs. 262

        Cost of output – 75 units at Rs. 17.467 = Rs. 1,310

        Abnormal loss transferred to P&L A/c = Rs. 217]

[Model: Abnormal gain only]

10. Product A is obtained after it passes through three distinct processes. About 2,000 kg of material at Rs. 5 per kg were issued to Process I. Direct wages amounted to Rs. 900 and production overhead incurred was Rs. 500. Normal loss is estimated at 10% of input. The wastage is sold at Rs. 3 per kg. The actual output is 1,850 kg. Prepare Process I account.

 

[Bharathiar University
Calicut University
Madras University]

[Ans: Abnormal gain 50 kg value = Rs. 300;

         Cost of output = 1,850 kg@ Rs. 6 = Rs. 11,100]

[Model: Abnormal loss and gain]

11. A product passes through two distinct processes A and B and then to finished stock. The output of A passes direct to “B” and that of “B” passes to the finished stock. From the following information, you are required to prepare the process accounts:

  Process A Process B

Materials consumed (Rs.)

12,000
6,000

Direct labour (Rs.)

14,000
8,000

Manufacturing expenses (Rs.)

4,000
4,000

Input in Process A (units)

10,000

Input in Process A (value)

10,000

Output (units)

9,400
8,300

Normal wastage (% of output)

5%
10%

Value of normal wastage

8
10

per 100 units (Rs.)

   

No opening or closing stock is held in process.

 

[Madurai University
Bharathiar University
Periyar University
Madras University
C.S. (Inter)]

[Ans: Process A: Abnormal wastage (loss) 100 units

        value = Rs. 421.

        Cost of Process “A” output – 9,400 units at

        Rs. 4.206 per unit = Rs. 39,539.

        Process B: Abnormal wastage – 160 units value =

        Rs. 1,086

        Cost of Process “B” output: 8,300 units at Rs. 6.79

        per unit = Rs. 56,359.]

12. The product of a manufacturing concern passes through two processes A and B and then to the finished stock. It is ascertained that in each process normally 5% of the total weight is lost and 10% is scrap which from Process A and B realized Rs. 80 per tonne and Rs. 200 per tonne, respectively.

The following figures relate to both processes:

  Process A Process B

Materials (in tonnes)

1,000

 

Cost of materials (Rs. per tonne)

125

70

Wages (Rs.)

28,000

200

Manufacturing expenses (Rs.)

8,000

10,000

Output (in tonnes)

830

5,250

 

 

780

Prepare process cost accounts showing cost per tonne of each process. There was no stock or WIP in any process.

 

[Sri Venkateswara University
Mysore University
Calcutta University
Madras University
Delhi University]

[Ans: Process A: Abnormal loss: 20 tonnes

        Value Rs. 3,600; Cost of output 830

        Tonnes Rs. 180 per tonne = Rs. 1,49,400

        Process B: Abnormal gain = 15 tonnes

        Value = Rs. 3,150; Cost of output = 780 tonnes @ 210 per tonne = Rs. 1,63,800]

13. A product passes through three processes I, II & III. From the following information prepare the process accounts assuming that there were no opening or closing stocks.

The wastage of Process I was sold at 25 paise per unit, that of Process II at 50 paise per unit and that of Process III at Re 1 per unit.

Raw materials of 10,000 units were introduced into Process I in the beginning at a cost of Re 1 per unit.

 

[Periyar University
Madras University
Madurai Kamaraj University]

[Ans: Process I: Abnormal loss – 200 units value Rs. 350;

        Transfer to Process II – 9,500 units at Rs. 1.75

        each = Rs. 16,625.

        Process II: Abnormal gain – 75 units, Value –

        Rs. 225; Transfer to Process III – 9,100 units at

        Rs. 3 each = Rs. 27,300.

        Process III: Abnormal loss – 272 units; Value –

        Rs. 1,156; Transfer to finished stocks = 8,100 units

        at Rs. 4.25 each = Rs. 34,425.]

14. Product B is obtained after it passes through three district processes. The following information is obtained from the accounts for the ending on 31 December 2009:

1,000 units at Rs. 3 each were introduced to Process I. There was no stock of materials or work-in-process at the beginning or at the end of each process. The output of each process passes to the next process and finally to the finished stores. Production overheads recovered on 100% of direct wages. The following additional data are obtained:

Prepare process cost accounts and abnormal loss or gain account.

 

[Mysore University
Bharathidasan University
Madras University
C.S. (Inter) – Modified]

[Ans:

[Model: Partial sale of output from each process – Abnormal loss – Abnormal gain]

15. A product is produced in three consecutive processes. The details are shown as follows:

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

Prepare the three process accounts and a statement of profit.

 

[Bharathidasan University
Madurai Kamaraj University
Andhra University
Madras University]

[Ans:

[Model: Equivalent Production] (When there is only closing WIP without process loss)

16. Prepare a statement of equivalent production and a statement of cost and process account from the following information:

 

 

Units introduced:

7,600

 

Output (units)

6,000

 

Process cost:

Rs.

Materials

14,560

Labour

21,360

Overhead

14,240

Degree of completion of WIP:

 

 

Material

80%

 

Labour

70%

 

Overhead

70%

 

[Madras]

[Ans: Closing WIP – 1,600 units

        Equivalent units: Material – 7,280;

        Labour – 7,120; Overheads – 7,120

        Cost per unit: Material – Rs. 2; Labour – Rs. 3;

        Overhead – Rs. 2

        Value of finished units: Rs. 42,000

        Value of closing WIP – Rs. 8,160; Total process

        A/c – Rs. 50,160]

[Model: Only closing WIP with normal loss in process]

17. From the following data of a processing industry, calculate 1) Equivalent Production 2) Cost per unit of equivalent production 3) Cost of units completed and awaiting completion:

 

No. of units introduced in the process

4,000

No. of units completed and transferred to the next process

3,000

No. of units in the process at the end of the period

800

Stage of completion:

 

Materials

80%

Labour

70%

Overheads

70%

Normal process loss at the end of the process 200 units

Value of scrap – Re 1 per unit

Value of raw materials – Rs. 7,480

Wages – Rs. 10,680

Overheads – Rs. 7,120

 

[Madras]

[Ans:

  1. Equivalent units: Materials – 3,640; Wages – 3,560; Overheads – 3,560.
  2. Cost per unit: Material – Rs. 2; Wages – Rs. 3; Overheads – Rs. 2.
  3. Value of finished units – Rs. 21,000.
  4. Value of closing WIP – Rs. 4,080.
  5. Total of process A/c: Rs. 25,280.]

[Model: When there is only closing WIP with normal and abnormal losses in process]

18. VRV Ltd. furnishes you the following information relating to Process “C” for the month of December 2009:

  1. Opening WIP – Nil.
  2. Units introduced – 10,000 units @ Rs. 3 per unit.
  3. Expenses debited to the process: Direct material – Rs. 14,650; Labour – Rs. 21,373; Over-heads – Rs. 41,775.
  4. Normal loss in process – 1% of input.
  5. Closing WIP – 350 units Degree of completion: Materials – 100%; Labour & Overheads – 50%.
  6. Finished output – 9,500 units. Degree of completion of abnormal loss: Materials – 100%; Labour & Overheads: 80%.
  7. Units scrapped as normal loss were sold at Re 1 per unit.
  8. All the units of abnormal loss were sold at Re 2.50 per unit.
    Prepare
  1. Statement of equivalent production
  2. Statement of cost of finished goods; Abnormal loss and closing WIP
  3. Process C Account
  4. Abnormal loss account

[Madras – Modified]

[Ans: Equivalent units: Material – 9,900; Labour – 9,715;

        Overheads – 9,715.

        Cost per unit: Material – Rs. 4.50; Labour –

        Rs. 2.20; Overheads – 4.30.

        Abnormal loss = Rs. 485.

        Total of process A/c: Rs. 1,07,798

        Abnormal loss transferred to P&L A/c Rs. 360]

[Model: When there are opening and closing WIP without any process losses – FIFO method]

19. From the following details prepare a statement of equivalent production, a statement of cost and a statement of evaluation:

 

Opening WIP

2,000 units

Materials (100% complete)

Rs. 15,000

Labour (60% complete)

Rs. 6,000

Overhead (60% complete)

Rs. 3,000

Units introduced into the process

8,000

There are 2,000 units in the process and the start of completion is estimated to be:

Material 100%; Labour & overheads 50% 8,000 units are transferred to the next process The process costs for the period are:

 

Materials

Rs. 2,00,000

Labour

Rs. 1,56,000

Overheads

Rs. 78,000

 

[Madras]

[Ans: Equivalent units: Material – 8,000; Labour & Overheads – 7,800.

        Cost per unit: Material – Rs. 25; Labour – Rs. 20;

        Overhead – Rs. 10.

        Value of closing WIP: Rs. 80,000.

        Cost of units completely processed in the period:

        Rs. 3,30,000.

        Value of work done on opening WIP: Rs. 24,000.

        Value of units transferred to next process:

        Rs. 3,78,000.]

[Model: Average cost method]

20. From the following details, prepare a statement of equivalent production, a statement of cost and find the value of:

  1. Output transferred
  2. Closing WIP by following average cost method:

    Opening WIP – 2,000 units

    Materials 100% complete – Rs. 7,500

    Labour 60% complete – Rs. 3,000

    Overheads 60% complete – Rs. 1,500

    Units introduced into the process – 8,000

There are 2,000 units in the process and the stage of completion is expected to be:

Materials – 100%; Labour – 50%; Overheads – 50% and 8,000 units are transferred to the next process. The process costs for the period are:

Materials – Rs. 1,00,000; Labour – Rs. 78,000; Overheads: Rs. 39,000.

[Ans: Equivalent units: Materials – 10,000; Labour and

        Overheads – 9,000.

        Cost per unit: Material – Rs. 10.75; Labour – Rs. 9;

        Overheads – Rs. 4.50.

        Value of finished units transferred to next process

        Rs. 1,94,000.

        Value of closing WIP – Rs. 35,000.]

[Model: Inter–process profits]

When there are no stocks in the processes

21. The following are details in respect of Process X and Process Y of a processing factory:

  Process × Rs. Process Y Rs.

Materials

10,000

Labour

10,000
14,000

Overheads

4,000
10,000

The output of Process X is transferred to Process Y at a price calculated to give a profit of 20% on the transfer price and the output of Process Y is charged to the finished stock at a profit of 25% on the transfer price. Finished goods from Process Y were sold for Rs. 1,00,000 from the finished stock.

You are asked to show the process accounts and ascertain the total profit assuming there was no opening or closing WIP.

 

[Bharthiar & Madras]

[Ans:

  1. Transfer from Process X: Rs. 30,000 Transfer from Process Y: Rs. 72,000
  2. profit in Process X: Rs. 6,000; Process Y: Rs. 18,000
  3. profit in the finished stock A/c – Rs. 28,000
  4. Total profit – Rs. 52,000]

[Model: Joint products and By–products]

I: Methods of apportioning cost to joint products Average Unit Cost Method

22. Bhamini Industries produces three products X, Y and Z from a joint process. The joint processing cost before separation amounted to Rs. 1,25,000. The output of X, Y and Z was 10,000, 12,000 and 3,000 units, respectively. Apportion the joint cost among the products using the average unit cost method.

[Ans: Average unit cost: Rs. 5; Apportioned joint cost:

        X: Rs. 50,000; Y: Rs. 60,000; Z: Rs.15,000]

[Model: Physical units method]

23. A coke-manufacturing company produces the following products by putting 5,000 tonnes of coal @ Rs. 25 per tonne into the common process.

 

Coke

3,500 tonnes

Tar

1,200 tonnes

Sulphate

52 tonnes

Benzol

48 tonnes

Apportion the joint cost among the products on the basis of the physical units method

 

[Madras]

[Ans: Coke: Rs. 91,46; Tar: Rs. 31,250; Sulphur: Rs.

        1,354; Benzol: Rs. 1,250]

[Model: Survey method]

24. Two products X and Y are produced from a joint process at a total cost of Rs. 1,52,000 till the split-off point. The output was X – 1,400 tonnes and Y– 600 tonnes. A technical survey assigns a weightage of 2 and 8, respectively, for the products. You are required to apportion the joint cost of the process to the products on the basis of survey.

 

 

X
Y

 

Rs.
Rs.

[Ans: (i) Share of joint cost

56,000
96,000

      (ii) Cost per unit

40
160

[Model: Market value at separation point method]

25. The joint cost of making 50 units of Product A, 100 units of Product B and 150 units of Product C is Rs. 900. The selling prices of products A, B and C are Rs. 2, Rs. 3 and Rs. 4, respectively. The products did not require any further processing costs after the split-off point. You are required to apportion the joint cost

  1. On selling-price basis and
  2. On sales-value basis

[Madras]

[Ans:

  1. A – Rs. 200, B – Rs. 300; C – Rs. 400
  2. A – Rs. 90, B – Rs. 270; C – Rs. 540]

[Model: Market value after further processing cost method]

26. The following particulars have been obtained about three joint products manufactured from the same raw materials:

The joint product of manufacture before the products are separated is Rs. 120. Allocate the cost of joint products.

 

[Bangalore University]

[Ans:

[Model: Apportionment of joint costs among main product and by-products]

27. Calculate the estimated cost of production of byproducts X and Y at the point of separation from the main product.

  By-Products
  X Y

Selling price per unit

Rs. 12
Rs. 24

Cost per unit after separation from the main product

Rs. 3
Rs. 5

Units produced

500
200

Selling expenses amount to 25% of total works cost, that is, including both pre-separation and post-separation works cost. Selling prices are arrived at by adding 20% of the total cost, that is, the sum of works cost and selling expenses.

 

[Sri Sathya Sai University
Rohtak University
Madras University]

[Ans : Cost of production at the point of separation:

        X: Rs. 2,500; Y: 2,200.

        Net profit – X: Rs. 1,000; Y: Rs. 800

        Selling expenses – X: Rs. 1,000; Y: Rs. 800]

28. A company produces a main chemical product M and in the process a by-product “B” is also produced. The costs up to the point of separation are Rs. 1,20,000.

The separate additional costs incurred after separation are Rs. 33,000 and Rs. 3,000, respectively. The quantities emerging at the separation point are 1,50,000 kg and 30,000 kg, respectively. All the production is sold at the following prices:

   M at Rs. 1.96 per kg

   B at Re 0.20 per kg.

Selling and distribution overheads applicable to the above quantities are Rs. 1,900 and Rs. 365, respectively.

Prepare a statement of profit or loss for both “M” and “B” on each of the following basis:

  1. Value of B nil at separation point
  2. Apportion costs up to separation on quantity basis
  3. Apportion costs up to separation on the basis of sales

[Madras]

[Ans:

  1. profit – M: Rs. 1,39,100; B: Rs. 2,635

    Joint cost – M: Rs. 1,20,000; B: Nil

     

  2. profit – M: Rs. 1,59,100; Loss – B: Rs. 17,365

    Joint cost – M: Rs. 1,00,000; B: Rs. 20,000

     

  3. profit – M: Rs. 1,41,500; B: Rs. 235

    Joint cost – M: Rs. 1,17,600; B: Rs. 2,400]

 

Part II: For Professional Courses & B.Com (Hons); M.Com Courses

[Model: Normal loss]

29. The following data are available performing to a product after passing through two processes A and B.

Output transferred to Process C from B–9,120 units for Rs. 49,263.

Expenses incurred in Process C:

 

 

   Rs.

Sundry materials

1,480

Direct labour

6,500

Direct expenses

1,605

The wastage of Process C is sold at Re 1 per unit. The overhead charges were 168% of direct labour. The finial product was sold at Rs. 10 per unit fetching a profit of 20% on sales.

Find the percentage of wastage in Process C and prepare Process C account

 

[B.Com (Hons) – Delhi]

[Model: Normal loss]

30. Zap is produced refining chemicals through a process which involves a process loss of 15%. During a period, 8,000 grams of chemicals which cost 80 paise per gram were introduced into the process which yielded 6,000 gms of Zap. The wages looked to the process amounted to Rs. 1,200 and overheads apportioned there amounted to Rs. 1,140. The waste from process was sold for 20 paise per gram.

  1. Prepare a process account (and also if necessary any other relevant account) to show the result of producing Zap during the period.
  2. If the Zap produced was 7,000 gms (instead of 6,000 grams), what would be the process account?

[M.Com – Madras]

[Ans:

  1. Value of abnormal loss: Rs. 1,000; Cost of output: Rs. 7,500.
  2. Value of abnormal gain: Rs. 8,750]

31. Production in a manufacturing company passes through three distinct processes I, II and III. The output of each process is transferred to the next process and the output of Process III is transferred to the finished goods stock. The normal wastage in each process and the realizable value of the same are given as follows:

Process % of Normal Waste Related to Input Realizable Value Per Unit
I
5
Re 0.70
II
7
Re 0.80
III
10
Re 1.00

The details of cost data and output for a month are as follows:

Process I was fed with 40,000 units of input costing Rs. 3,20,000. There was no opening or closing WIP.

Prepare the process accounts for the month.

 

[I.C.W.A. Inter]

[Ans: Total: Process I: Rs. 5,60,000; Process II:

        Rs. 6,98,600; Process III: Rs. 8,32,160

        Abnormal wastage in Process II – Rs. 14,584

        Abnormal gain in Process III – Rs. 22,272]

[Model: Equivalent production: loss and WIP]

32. AB Ltd. is engaged in the process engineering industry. During a particular month, 2,000 units were introduced in Process X. The normal loss is estimated at 5% of the input. At the end of the month, 1,400 units had been produced and transferred to Process Y: 460 were incomplete units and 140 units had to be scrapped at the end of the process. The incomplete units reached the following degree of completion:

 

 

Materials:

75%

 

Labour:

50%

 

Overheads:

50%

Following are the further details regarding Process X:

 

Cost of 2,000 units introduced:

Rs. 58,000

Additional materials consumed:

Rs. 14,400

Direct labour:

Rs. 33,400

Allocated overheads:

Rs. 16,700

Note: The scrapped units fetched Rs. 10 each.

Required:

  1. Statement of equivalent production
  2. Statement of cost
  3. Statement of evaluation
  4. Process X account

[I.C.W.A. – Inter]

[Ans:

  1. Materials – 1,785; Labour – 1,670; Overheads – 1,670 (all units)
  2. Cost per equivalent unit: Material–Rs. 40; Labour–Rs. 20; Overheads – Rs. 10
  3. Abnormal loss – Rs. 280; Finished production – Rs. 9,800; WIP – Rs. 2,070.
  4. Finished output transferred from Process X to Process Y: 1,400 units of Rs. 98,000; Normal loss: 100 units of Rs. 1,000; Abnormal loss: 40 units of Rs. 2,800; Closing WIP: 460 units of Rs. 20,700]

[Model: Equivalent Production : WIP and Loss]

33. Roy & Johnson (P) Ltd gives the following particulars relating to Process A in its plant for the month of December 2009:

WIP (opening balance) on 1 December 2009 – 500 units

 

 

Cost

   Rs.

 

Material

4,800

 

Labour

3,200

 

Overheads

6,400

 

 

14,400

Units introduced during the month – 19,500 units Processing costs incurred during the month:

 

 

 

   Rs.

 

Materials

1,86,200

 

Labour

72,000

 

Overheads

1,06,400

 

 

3,64,600

Output: Units transferred to Process B: 18,200 units

Units scrapped (completely processed): 1,400 units

WIP (closing balance) = 400 units

Degree of completion: Materials – 100%; Labour and overhead 50%

Normal loss in processing is 5% of the total input and the normal scrapped units fetch Re 1 each.

Prepare the following statements for Process A for December 2009

  1. Statement of equivalent production
  2. Statement of cost
  3. Statement of evaluation and
  4. Process “A” account.

[I.C.W.A. – Inter]

[Ans:

  1. Equivalent production: Materials – 19,000 units; Labour and overheads – 18,800 units
  2. Cost per equivalent unit: Materials – Rs. 10; Labour – Rs. 4; Overheads – Rs. 6.
  3. Cost of finished output transferred – Rs. 3,66,400
  4. Abnormal loss: Rs. 8,000
  5. WIP = Rs. 6,000]

[Model WIP – Equivalent units]

34. During the month of January, Rs. 22,500 worth of materials, Rs. 11,250 of labour and Rs. 6,750 of factory overheads were introduced into Process I. At the end of the month, 40,000 units had been produced and transferred to the next process and 10,000 units were incomplete. It was estimated that the incomplete units had reached a stage in the production as follows:

Materials 100% and Labour and Overheads 50% each. In the next Process II, Rs. 22,475 worth of materials, Rs. 15,225 of labour, Rs. 14,500 of factory overheads were added. The units produced and transferred to the finished stock amounted to 35,000 and 5,000 units were left in the process, with 25% complete as to material, labour and overhead.

Prepare a statement of production, statement of cost, a statement of evaluation and the necessary process accounts

 

[I.C.W.A. – Inter]

[Ans:

  1. Equivalent units:

    Process I: Materials – 50,000; Labour & Overhead – 45,000 each

    Process II: Materials – 36,250; Labour – 36,250 and Overhead – 36,250

     

  2. Cost per equivalent:

    Process I: Material – Re 0.45; Labour – Re 0.25; Overhead – Re 0.15

    Process II: Material – Re 0.62; Labour – Re 0.42; Overhead – Re 0.40

     

  3. Process A/c total: Process A/c I – Rs. 40,500; Process A/c II: Rs. 86,200]

[Model WIP (Opening and Closing WIP) – Weighted Average Method]

35. The following information is obtained in respect of Process I for the month of February:

 

  Opening stock: 10,000 units    

Rs. 6,500

Degree of completion:

  Material – 100% –

Rs. 4,500

  Labour – 50% –

Rs. 1,250

  Overhead – 50% –

Rs. 750

 

30,000 units

Transfer to Process II

  Direct material added in

Rs. 18,400

  process–

 

  Direct labour amounted to –

Rs. 9,180

  Production overhead incurred –

Rs. 6,180

 

20,000 units

Closing stock

Degree of completion:

Material 100%

Labour 25%

Overhead 25%

Prepare process accounts.

 

[I.C.W.A. (Inter)]

[Ans: Equivalent Production: Materials – 50,000;

        Labour – 35,000; Overheads – 35,000

        Cost per equivalent units: Materials – Re 0.458;

        Labour – Re 0.298 Overheads – Re 0.198

        Total cost: Rs. 40,260; Completed units – Rs.

        28,620; Closing Stock – Rs. 11,640]

36. Model: WIP (Both opening and closing) FIFO method (Figures same as in Q. No. 35)

[Ans: Equivalent production (units): Materials – 40,000;

        Labour – 30,000 and overhead – 30,000 (Opening +

        Processed + Closing)

        Cost per equivalent unit: Material – Re 0.460;

        Labour – Re 0.306; Overhead – Re 0.206.

        Cost total in process A/c: Rs. 40,260.]

[Model WIP (both opening and closing) abnormal gain]

37. The following information is obtained in respect of Process 2 accounts for the month of July:

Opening stock: 1,600 units – Rs. 276

 

Degree of completion: Materials

–70%

Labour  

– 60%

Overhead

– 60%

Transfer from Process 1

– 10,200 units at

 

   Rs. 19,400

Transfer to Process 3

– 9,200 units

Direct material added in Process 2

– Rs. 8,960

Direct labour amounted to

– Rs. 4,380

Production overhead incurred

– Rs. 4,380

Units scrapped

– 800 units

Degree of completion: Material

–60%

Labour

–40%

Overhead

–40%

There was a normal loss in the process of 10% of production. Units scrap realized Re 1 each.

Prepare:

  1. Equivalent production
  2. Statement of cost
  3. Process A/c (2)
  4. Abnormal gain A/c

[Ans: Equivalent units: Material I– 9,200; Material II –

        8,960; Labour 8,760; Overhead 8,760.

        Cost per equivalent unit: Material transferred from

        Process I: Rs. 2 and materials added in process:

        Re 1; Labour and Overhead: Re 0.50 each

        Process A/c (2) Total: Rs. 37,196

        Abnormal Gain: 200 units; Value: Rs. 800]

[Model: Inter-process profit]

38. Product A passes through three processes before it is completed and transferred to the finished stock. There were no stocks in hand and no WIP too on 1June. The following data were available in respect of Processes 1,2 and 3 for the month of June

Stocks of finished goods amounted to Rs. 1,11,000 and the stock was valued at Rs. 5000. The output of each process is transferred to the next process at an amount which will yield 20% of profit on the transfer price. The transfer from Process 3 to the finished stock is to be similarly treated.

Prepare (a) Necessary process accounts and finished stock account showing the profit element at each stage and (b) Ascertain the value of closing stock for the purpose of balance sheet.

 

 

Total

Profit

 

Rs.

Rs.

[Ans: Process account No. 1:

42,500

7,500

Process account No. 2:

64,000

11,500

Process account No. 3:

99,500

18,000

Closing stock A/c: Total Rs. 1,15,000]

Closing stock will appear in the balance sheet at cost

 

 

   Rs.

Stock in Process 1

5,000

Stock in Process 2

5,571

Stock in Process 3

7,394

Finished Stock

  3,113

 

21,078

[Model: Inter–process profit]

39. Product “X” passes through three processes before it is completed and transferred to the finished stock.

The following data are available for the month of June

Output of Process I is transferred to Process II at 25% on the transfer price.

Output of Process II is transferred to Process III at 20% on the transfer price.

Output of Process III is transferred to the finished stock at 10% on the transfer price.

Stocks in progress have been valued at prime cost. Finished stock has been valued at the price at which it was received from Process III. Sales amounted to Rs. 4,00,000. [Provision for internal process profits as on 1 June were

 

 

   Rs.

Included in Process II

1,395

Included in Process III

2,690

Included in finished stock

  6,534

 

10,619

These provisions would be created in the previous month in respect of closing stock. Consequently, they are brought into the account of June month as provisions in respect of internal process profits in the opening stock.]

Prepare and compute (a) Process accounts showing profit element at each stage (b) Actual realized profit (c) Stock valuation for balance-sheet purposes (d) Provision for profit A/c.

[Ans:

40. A product passes through three processes before it is completed. The output of each process is charged to the next process at a price calculated to give a profit of 20% on the transfer price. The output of Process III is charged to the finished stock account on a similar basis. There was no WIP at the beginning of the year and the overheads have been ignored. Stocks in each process have been valued at prime cost of the process. The following data are obtained at the end on 31 March 2010:

From the above information, prepare:

  1. Process accounts showing profit element at each stage
  2. A statement showing the actual realized profit
  3. A statement showing stock valuation for balance-sheet purpose.

[M.Com; Madras – Modified]

[Ans: profit: Process I – Rs. 10,000; Process II -

        Rs. 20,000; Process III – Rs. 30,000; Finished stock - Rs. 45,000.

        Unrealized profit in closing stock: Process I: Nil;

        Process II: Rs. 2,000; Process III: Rs. 5,600.

        Finished stock – Rs. 5,240.

        Actual realized profit – Rs. 92,160

        Closing stock for balance–sheet purpose -

        Rs. 62,160]

[Model: Joint products and By-products]

41. A company operates a chemical process which produces four products K, L, M and N from a basic raw material. The company’s budget for a month is as follows:

 

 

   Rs.

Raw materials consumption

17,520

Initial processing wages

16,240

Initial processing overheads

16,240

The company presently intends to sell Product L at the point of split-off without any further processing. The remaining products K, M and N are to be further processed and sold. However, the management has been advised that it would be possible to sell all the four products at the split-off point without further processing and if this course was adopted the selling prices would be as follows:

The joint costs are to be apportioned on the basis of the sales value realization at the point of split-off.

Required:

  1. Prepare the statement showing the apportionment of joint costs.
  2. Present the statement showing the product-wise and total budgeted profit or loss based on the proposal to sell product L at the split-off point and products K, M and N after further processing.
  3. Prepare a statement to show the product-wise and total profit or loss if the alternative strategy to sell all the products at the split-off stage was adopted.

[C.A. & I.C.W.A. – Inter]

[Ans:

42. In a process line of XY company, three joint products are produced. For the month of March 2010, the following data are available.

Pre-separation point costs amounted to Rs. 20,000. The joint products are manufactured in one common process, after which they are separated and may undergo further individual processing. The pre-separation costs are apportioned to joint products accordingly to weight.

You are required to prepare a statement showing the estimated profit or loss for each product and in total.

 

[I.C.W.A. Inter – Modified]

[Ans: L – Rs. 7,500 (loss); M – Rs. 1,000 (profit); N – Rs. 9,000 (profit)]

43. In a manufacturing company 10,000 kl of “A” is processed to produce 6,000 kl of “B” and 4,000 kl of “C”. The joint cost before the separation point came to an amount of Rs. 24,000. From the following particulars, calculate the apportionment of joint cost and the profit of each product under (a) physical measurement (b) market value at separation point and (c) market value after further processing.

  B
Rs.
C
Rs.

Unit selling price at separation point

5

3–75

Unit selling price after further processing

7

7–50

Further processing costs after separation

5,000

7,500

[Ans:

  1. Rs. 14,400; Rs. 9,600; profit – Rs. 15,600; Rs. 5,400
  2. Rs. 16,000; Rs. 8,000; profit – Rs. 14,000; Rs. 7,000
  3. Rs. 14,000; Rs. 10,000; profit – Rs. 23,000; Rs. 12,500]

44. In a concern engaged in the process industry, four products emerge from a particular process of operation. The total cost of input for the period ended on 30 September is Rs.. 2,53,500. The details of output, additional cost after split-off point and sales value of the products are appended as follows:

If the products are sold at a split-off point, without further processing, the sales value would have been:

 

 

 

   Rs.

 

A

1,15,000

 

B

90,000

 

C

55,000

 

D

80,000

You are required to prepare a statement of profitability based on the product being sold:

  1. after further processing
  2. at the split-off point

[I.C.W.A. – Inter]

[Ans:

  1. A – Rs. 27,000; B–Rs. 25,000; C–Rs. 1,500; D–Rs. 17,500
  2. A – Rs. 29,257; B–Rs. 22,897; C–Rs. 13,993; D–Rs. 20,353]

[Model: Joint producer and By–product costing]

45. A manufacturing unit imports raw material and the process is to produce three different products, namely, bright, light and white. The raw material has an FOB value of Rs. 5 per kg and freight and insurance are charged at 10% of FOB price. Customs duty as 120% of CIF is levied at the time of import. Auxiliary duty at 20% is also charged on CIF price. Countervailing duty is charged on CIF plus duty at 10%. The landed cost includes 5% for clearing charges.

Bright and light are joint products while white emerges as a by-product. The value of by-product after deducting 30% (10% being notional profit and 20% for selling expenses) from sales value is credited to process account. The unit consumed 4,000 kg of raw materials during a year. The relevant data are as follows:

Assuming additional cost other than material at Rs. 15,800 for all products (includes Rs. 800 for white), prepare a statement showing:

  1. Credit to process account for by-product sale
  2. Allocation of joint costs on relative sales value basis
  3. profit on each product.

[I.C.W.A. – Inter]

[Ans:

  1. Rs. 7,600
  2. Bright: Rs. 34,356; Light: Rs. 34,028.
  3. profit: Bright: Rs. 6,144; Light: Rs. 6,572; White: Rs. 1,200]