Cost Accounting - Process Costing

 Cost Accounting

PROCESS COSTING

 

Part A: Discussion of basic theories including Tables, Formats and different Formulae

Part  B: 10 Illustrations with Solutions

Part A

Definition

Process costing is a method of cost accounting whereby costs are charged to processes or operations and averaged over units produced. In an industry where production of similar units is carried on continuously through a series of processes or operations, the most appropriate method of cost accounting will be process costing. Process costing is that form of operation costing which is applicable in a production system where standardized goods are produced.

 

Examples of industries employing process costing are industries producing steam, gas, electricity, ice, steel, paper, cement, rubber, medicine, sugar, bread, etc. Petroleum and fertilizer industries also employ process costing as a method of cost accounting.

 

Types of Problems

Basically, three types of problems are required to be solved in process costing as follows:

1. Problems requiring preparation of Process Accounts involving Normal Loss, Abnormal Loss and Abnormal Gain;
2. Problems requiring preparation of Process Accounts involving Valuation of Work-in-progress with the help of Equivalent Production Units; and
3. Problems requiring preparation of Process Accounts involving Inter-Process Profit.

 

Process accounts are prepared for each of the processes. If there are three processes A, B and C, three process accounts will be prepared: Process ‘A a/c’, Process ‘B a/c’ and Process ‘C a/c’. Moreover, process accounts are prepared for a particular period which may be a month or a year, etc. Normally, output of one process (if not sold in the market) is the input of the next process. Output of the last process is transferred to the Finished Goods Store from where these are finally sold in the market. Accordingly, a Finished Goods a/c is also prepared for keeping accounting control on all the finished goods.

 

Normal Loss, Abnormal Loss and Abnormal Gain

The amount of loss which is unavoidable owing to the nature of raw materials used, nature of production techniques applied, etc is considered as normal loss. For example, in the manufacture of certain product the components of which are made out of a sheet of metal, some waste of the same metal is unavoidable. Similarly, there are instances of evaporation, shrinkage, loss in melting, etc which also cannot be avoided. These are the types of losses termed as normal loss.

 

But practically, quantity of normal loss out of a process is calculated by applying some estimated percentage on the quantity of total input of the process. The estimated percentage is actually an industry standard which is calculated and fixed by the concerned technical experts belonging to the same industry.

 

If the total output of a process is less than the difference between total input and normal loss, the quantity of shortage in output is called abnormal loss.

 

Abnormal Loss = (Total Input − Normal Loss) − Total Output.

 

On the other hand, if the total output of a process is more than the difference between total input and normal loss, the quantity of excess output is called abnormal gain.

 

Abnormal Gain = Total Output − (Total Input − Normal Loss).

 

Valuation of Normal Loss

Valuation of normal loss as such is not done because normal loss is borne by the good units produced. If normal loss has any realizable scrap value, such value is credited to the Process a/c in which the said normal loss has occurred.

 

Valuation of Abnormal Loss, Abnormal Gain and Process Output

For valuation of abnormal loss and abnormal gain, first of all the process cost per unit is calculated and then the value of abnormal loss and value of abnormal gain are determined as follows:

 

Process cost per unit      =   (cost of total input − realizable value of normal loss) ÷ (quantity of total input − quantity of normal loss).

                                                [Assuming no opening or closing work-in-progress]

 

Value of abnormal loss   =   process cost per unit x quantity of abnormal loss.

 

Value of abnormal gain   =   process cost per unit x quantity of abnormal gain.

 

Similarly, the value of total output of a process which is normally transferred to the next process is   also calculated as follows:

 

Value of total output of a process

= Process cost per unit x Quantity of total output of the process.

 

PREPARATION OF ACCOUNTS

− Process a/c, Normal Loss a/c, Abnormal Loss a/c and Abnormal Gain a/c

PROCESS A/C

Debit side of a Process a/c may have ―

i.          Opening work-in-progress,

ii.         Cost of different inputs (e.g. material cost, labour cost and other overhead costs), and

iii.        Abnormal gain.

Credit side of a Process a/c may have ―

i.          Normal loss,

ii.         Abnormal loss,

iii.        Transfer to next process or transfer to finished goods store, and

iv.       Closing work-in-progress.

 

Format of a Process A/c

Particulars	Units	Rs	Particulars	Units	Rs
To Opening WIP			By Normal loss
To Materials			By Abnormal loss
To Labour			By Transfer to next process     (or finished goods store)
To Direct expenses			By Closing WIP
To Overhead
To Abnormal gain
TOTAL			TOTAL

 

In the debit side input units will be put only against Opening WIP, Materials and Abnormal Gain (if any) but input costs will be put against all the items. In the credit side units will be put against all the items but costs will be put against all the items excepting Normal Loss. Against Normal Loss only the realizable value of normal loss (if any) will be put.

 

NORMAL LOSS A/C

Debit side of Normal Loss A/c will have all the transfer entries from the Process A/cs along with corresponding units and realizable values of normal loss. Credit side of Normal Loss A/c will have realization from Normal Loss (by sale of scrap) along with corresponding units. Credit side will also have Abnormal Gains along with corresponding units and values at the rate of corresponding realizable value of normal loss.

 

ABNORMAL LOSS A/C

Debit side of Abnormal Loss A/c will have all the transfer entries from the Process A/cs along with corresponding units and values of abnormal loss. Credit side of Abnormal Loss A/c will have realization from Abnormal Loss (by sale of scrap) along with corresponding units and values either at the rate of corresponding realizable value of normal loss or at any other given rate. The balance of this a/c will be transferred to Costing Profit and Loss A/c by the following journal entry:

 

                   Costing Profit and Loss A/c...................            Dr

                             To Abnormal Loss A/c

 

ABNORMAL GAIN A/C

Debit side of Abnormal Gain A/c will have all the transfer entries from the Normal Loss A/c along with corresponding units and values. Credit side of Abnormal Gain A/c will have all the transfer entries from the Process A/cs along with corresponding units and values. The balance of this a/c will be transferred to Costing Profit and Loss A/c by the following journal entry:

 

                   Abnormal Gain A/c..............................            Dr

                             To Costing Profit and Loss A/c

 

Structure of Normal Loss A/c, Abnormal Loss A/c, and Abnormal Gain A/c

Particulars	Units	Rs	Particulars	Units	Rs
To			By
To			By
To			By
To			By
TOTAL			TOTAL

 

Valuation of Work-in-progress with the help of Equivalent Production Units

In process industries where process costing is applied, it is obvious that at the end of each cost period there may be certain incomplete goods at various stages of completion. For example, certain goods may be 75% completed, certain goods may be 50% completed, certain goods may be only 20% completed, etc. The stage of completion can be determined on the basis of machine-hours or labour-hours. Suppose, 100 machine-hours are required to complete a particular process, but the process has utilized only 70 machine-hours up to the end of the cost period. The process may be said to be 70% completed.

 

For the purpose of valuation of work-in-progress, the actual number of incomplete physical units in progress is substituted by number of notionally completed units taking into consideration the degree of completion. 300 incomplete physical units at the stage of 50% completion shall be substituted by 150 notionally completed units. This is known as the concept of equivalent production.

 

Steps / Formats for Valuation of

Abnormal Loss, Abnormal Gain, Finished Goods and Work-in-progress

The steps for valuation of abnormal loss, finished goods and work-in-progress are as follows:

     (i)       Preparation of Statement Showing Equivalent Production Units,

     (ii)      Preparation of Statement Showing Element-wise Cost per Unit, and

     (iii)     Preparation of Statement Showing Value of Finished Goods, Work-in-progress, etc.

 

VALUATION UNDER FIFO METHOD

Statement Showing Equivalent Production Units

Details	Input units	Output units	Material A		Material B		Labour & OH
			%-age completion	Equiv units	%-age completion	Equiv units	%-age completion	Equiv units
Opening WIP	×××	×××			×××	×××	×××	×××
Introduced	×××
Introduced and Finished		×××	100	×××	100	×××	100	×××
Normal Loss		×××
Abnormal Loss		×××	100	×××	100	×××	×××	×××
Closing WIP		×××	100	×××	×××	×××	×××	×××
Abnormal Gain		(×××)	100	(×××)	100	(×××)	100	(×××)
TOTAL	×××	×××		×××		×××		×××

 

Material A = Transfer from the previous process

Material B = Addition in the current process

Statement Showing Element-wise Cost Per Unit

Cost elements	Period cost (Rs)	Equivalent units	Cost per unit (Rs)
Material A (Transferred from the previous process)	×××
Less: Realisation from normal loss	×××
	×××	×××	×××
Material B (Added in the current process)	×××	×××	×××
Labour (Added in the current process)	×××	×××	×××
Overhead (Added in the current process)	×××	×××	×××
TOTAL	×××		×××

 

Important Note:

It is a convention that the scrap value of normal loss should be deducted from the cost of materials and more specifically from the cost of materials transferred from the previous process, if any.

 

Statement Showing Value of Finished Goods, Work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units	Cost per unit (Rs)	Cost (Rs)	Total (Rs)
Opening WIP (Transferred from previous period)	−	−	−	−	×××
Opening WIP (Finished during the current period)	Material A Material B Labour Overhead	− ××× ××× ×××	− ××× ××× ×××	− ××× ××× ×××	×××
Introduced and finished during the current period	Material A Material B Labour Overhead	××× ××× ××× ×××	××× ××× ××× ×××	××× ××× ××× ×××	×××
Finished goods transferred to the next process or finished goods store					×××
Abnormal loss	Material A Material B Labour Overhead	××× ××× ××× ×××	××× ××× ××× ×××	××× ××× ××× ×××	×××
Closing WIP	Material A Material B Labour Overhead	××× ××× ××× ×××	××× ××× ××× ×××	××× ××× ××× ×××	×××
Abnormal gain	Material A Material B Labour Overhead	××× ××× ××× ×××	××× ××× ××× ×××	××× ××× ××× ×××	(×××)
TOTAL COST					×××

 

VALUATION UNDER AVERAGE METHOD

Statement Showing Equivalent Production Units

Details	Input Units	Output Units	Material		Labour & OH
			%-age Completion	Equivalent Units	%-age   Completion	Equivalent Units
Opening WIP	×××
Introduced	×××
Finished & Transferred		×××	100	×××	100	×××
Normal Loss		×××
Abnormal Loss		×××	100	×××	×××	×××
Closing WIP		×××	100	×××	×××	×××
Abnormal Gain		(×××)	100	(×××)	100	(×××)
TOTAL	×××	×××		×××		×××

 

Statement Showing Element-wise Cost Per Unit

Cost Elements	Opening WIP (Rs)	Period cost (Rs)	Total cost (Rs)	Equivalent units	Cost p.u. (Rs)
Material	×××	×××	×××
Less: Realisation from normal loss		×××	×××
	×××	×××	×××	×××	×××
Labour	×××	×××	×××	×××	×××
Overhead	×××	×××	×××	×××	×××
TOTAL	×××	×××	×××	×××	×××

 

Statement Showing Value of Finished Goods, Work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units	Cost per unit (Rs)	Cost (Rs)	Total (Rs)
Finished goods transferred to the next process or finished goods store	Material Labour Overhead	××× ××× ×××	××× ××× ×××	××× ××× ×××	×××
Abnormal loss	Material Labour Overhead	××× ××× ×××	××× ××× ×××	××× ××× ×××	×××
Closing WIP	Material Labour Overhead	××× ××× ×××	××× ××× ×××	××× ××× ×××	×××
Abnormal gain	Material Labour Overhead	××× ××× ×××	××× ××× ×××	××× ××× ×××	(×××)
TOTAL COST					×××

 

Important Note:

If in the problem %-age completion of opening work-in-progress is given, FIFO method is to be followed. On the other hand, if %-age completion of opening work-in-progress is not given, AVERAGE method is to be followed. If %-age completion of opening work-in-progress is given, then also AVERAGE method can be followed (if it is asked for in the problem), but the only thing is, in that case %-age completion of opening work-in-progress has to be ignored.

 

Inter-Process Profit

Some process industries transfer the finished goods from one process to the next process at a price above cost. The excess of the transfer price over cost represents inter-process profit. The last process also transfers the finished goods to finished goods store at a price higher than cost. So all processes, including the last process, make profit from the transfer of products / outputs to the subsequent process or finished goods store. This profit is called inter-process profit. The profit margin is fixed at certain percent on transfer price or at certain percent on cost.

 

The standard format of Process A/cs when output of one process is transferred to the next process at cost plus profit margin is as follows:

 

Format of a Process A/c (Inter-Process Profit)

Particulars	Total (Rs)	Cost (Rs)	Profit (Rs)	Particulars	Total (Rs)	Cost (Rs)	Profit (Rs)

 

Important Points related to preparation of Process A/cs

Involving Inter-Process Profit

1.   Cost of Closing Stock of the Transferee Process

=   Value of Closing Stock of the Transferee Process x [Cost Column total of the Transferee Process ÷ Total of the Total Column (excluding profit) of the Transferee Process].

 

2.   Unrealized Profit in the Stock of the Transferee Process

      =   Value of Closing Stock of the Transferee Process − Cost of Closing Stock of the     Transferee Process.

 

      =   [Transfer Price to Transferee Process ÷ Total of the Total Column (excluding profit) of the Transferee Process] x Value of Closing Stock of the Transferee Process x %-age of profit made by the Transferor Process on the Transfer Price.

 

3.   If the Closing Stock of the Transferee Process is valued at Prime Cost in spite of the      presence of overhead, then for the purpose of the above formulae,

 

      Total of the Total Column (excluding profit) of the Transferee Process

      =   Transfer Price to Transferee Process + Direct Material Cost of the Transferee Process     + Direct Labour Cost of the Transferee Process + Direct Expenses of the Transferee    Process.

 

Statement showing actually realised profit

Statement showing actually realised profit

	Apparent profit (Rs)	ADD: Unrealised profit in op. Stock (Rs)	LESS: Unrealised profit in cl. Stock (Rs)	Actual profit (Rs)
Process: I	×××	×××	×××	×××
Process: II	×××	×××	×××	×××
Process: III	×××	×××	×××	×××
Finished stock	×××	×××	×××	×××
TOTAL	×××	×××	×××	×××

 

Valuation of closing stock for balance sheet purpose

                       Valuation of closing stock for balance sheet purpose

	Amount from cost column (Rs)
Closing stock of process: I (at cost)	×××
Closing stock of process: II (at cost)	×××
Closing stock of process: III (at cost)	×××
Closing stock of finished stock account (at cost)	×××
TOTAL	×××

 

Part B

Illustration: 1

A product passes through three processes P, Q and R. The details of expenses incurred on the three processes during the year 2019 were as under:

Particulars	P	Q	R
Units issued	10,000
Cost per unit (Rs)	100
Sundry materials (Rs)	10,000	15,000	5,000
Labour (Rs)	30,000	80,000	65,000
Direct expenses (Rs)	6,000	18,150	27,200
Sale price of output per unit (Rs)	120	165	250

Management expenses during the year amounted to Rs 80,000 and selling expenses were Rs 50,000. Both these are not allocable to the processes. Actual outputs of the three processes were as under:

Process P – 9,300 units; Process Q – 5,400 units; Process R – 2,100 units.

2/3^rd of the output of Process P and ½ of the output of Process Q was passed on to the next process and the balances were sold. The entire output of Process R was sold. The normal percentage of wastage of the three processes calculated on the input of every process was:

Process P – 5%; Process Q – 15%; Process R – 20%. The wastage of Process P was sold at Rs 2 per unit, that of Process Q at Rs 5 per unit and that of Process R at Rs 10 per unit.

Prepare the three process accounts and a statement of income for 2019 showing fully the accounting treatment of process wastage.

 

Solution: 1

Process: P Account

Particulars	Units	Rs	Particulars	Units	Rs
To Input (Direct materials)	10,000	10,00,000	By Normal loss     (5% of 10,000 units)	500	1,000
To Sundry materials		10,000	By Abnormal loss     (balance quantity)	200	22,000
To Labour		30,000	By Transfer to Process: Q	6,200	6,82,000
To Direct expenses		6,000	By Transfer to F.G. Stock	3,100	3,41,000
	10,000	10,46,000		10,000	10,46,000

Process cost per unit = (Rs 10, 46,000 – Rs 1,000) ÷ (10,000 units – 500 units) = Rs 110

Process: Q Account

Particulars	Units	Rs	Particulars	Units	Rs
To Transfer from     Process: P	6,200	6,82,000	By Normal loss     (15% of 6,200 units)	930	4,650
To Sundry materials		15,000	By Transfer to Process: R	2,700	4,05,000
To Labour		80,000	By Transfer to F.G. Stock	2,700	4,05,000
To Direct expenses		18,150
To Abnormal gain     (balance quantity)	130	19,500
	6,330	8,14,650		6,330	8,14,650

Process cost per unit = (Rs 7, 95,150 – Rs 4,650) ÷ (6,200 units – 930 units) = Rs 150

Process: R Account

Particulars	Units	Rs	Particulars	Units	Rs
To Transfer from     Process: Q	2,700	4,05,000	By Normal loss     (20% of 2,700 units)	540	5,400
To Sundry materials		5,000	By Abnormal loss     (balance quantity)	60	13,800
To Labour		65,000	By Transfer to F.G. Stock	2,100	4,83,000
To Direct expenses		27,200
	2,700	5,02,200		2,700	5,02,200

Process cost per unit = (Rs 5, 02,200 – Rs 5,400) ÷ (2,700 units – 540 units) = Rs 230

Normal Loss Account

Particulars	Units	Rs	Particulars	Units	Rs
To Process P	500	1,000	By Bank	500	1,000
To Process Q	930	4,650	By Bank	800	4,000
To Process R	540	5,400	By Abnormal gain	130	650
			By Bank	540	5,400
	1,970	11,050		1,970	11,050

Abnormal Loss Account

Particulars	Units	Rs	Particulars	Units	Rs
To Process P	200	22,000	By Bank	200	400
To Process R	60	13,800	By Bank	60	600
			By Costing P/L A/c		34,800
	260	35,800		260	35,800

Abnormal Gain Account

Particulars	Units	Rs	Particulars	Units	Rs
To Normal loss	130	650	By Process Q	130	19,500
To Costing P/L A/c		18,850
	130	19,500		130	19,500

Costing Profit and Loss Account

Particulars	Rs	Rs	Particulars	Rs	Rs
To Cost of sales:			By Sales:
Process P	3,41,000		Process P (3,100 x 120)	3,72,000
Process Q	4,05,000		Process Q (2,700 x 165)	4,45,500
Process R	4,83,000	12,29,000	Process R (2,100 x 250)	5,25,000	13,42,500
To Management exp.		80,000	By Abnormal gain		18,850
To Selling exp.		50,000	By Net loss		32,450
To Abnormal loss		34,800
		13,93,800			13,93,800

 

Illustration: 2

A product passes through three processes— A, B and C. 10,000 units at a cost of Rs 1.10 were issued to Process A. The other direct expenses were as follows:

	PROCESS-A	PROCESS-B	PROCESS-C
Sundry materials (Rs)	1,500	1,500	1,500
Direct labour (Rs)	4,500	8,000	6,500
Direct expenses (Rs)	1,000	1,000	1,503

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

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

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

 

Solution: 2

Process ‘A’ Account

Particulars	Units	Rs	Particulars	Units	Rs
To Direct materials     (10,000 × Rs 1.10)	10,000	11,000	By Normal loss   (5% of 10,000 × Rs 0.25)	500	125
To Other direct materials		1,500	By Transfer to Process ‘B’	9,500	25,075
To Direct labour		4,500
To Direct expenses		1,000
To Overheads     (4,500 × 160%)		7,200
	10,000	25,200		10,000	25,200

Process ‘B’ Account

Particulars	Units	Rs	Particulars	Units	Rs
To Transfer from     Process ‘A’	9,500	25,075	By Normal loss     (4% of 9,500 × Rs 0.50)	380	190
To Other direct materials		1,500	By Transfer to Process ‘C’	9,120	48,185
To Direct labour		8,000
To Direct expenses		1,000
To Overheads     (8,000 × 160%)		12,800
	9,500	48,375		9,500	48,375

Process ‘C’ Account

Particulars	Units	Rs	Particulars	Units	Rs
To Transfer from     Process ‘B’	9,120	48,185	By Normal loss     (7.63% of 9,120 × Rs 1)	696	696
To Other direct materials		1,500	By Transfer to Finished     Stock A/c (@ Rs 8 p.u)	8,424	67,392
To Direct labour		6,500
To Direct expenses		1,503
To Overheads     (6,500 × 160%)		10,400
	9,120	68,088		9,120	68,088

Working note:

	Rs
Selling price per unit	10
LESS: Profit per unit (20% of ` 10)	2
Cost price of finished stock per unit	8

 

Let percentage of normal wastage of Process ‘C’ = w%

∴ According to the problem,

68,088 = (9,120 × w% × Rs 1) + (9,120 – 9,120 × w %) × Rs 8

⇒ 68,088 = 91.2w + (9,120 – 91.2w) × 8

⇒ 68,088 = 91.2w + 72,960 – 729.6w

⇒ 729.6w – 91.2w = 72,960 – 68,088

⇒ 638.4w = 4,872

⇒ w = 7.63 (approx)

 

∴ Percentage of normal wastage of Process ‘C’ = 7.63%

 

Illustration: 3

From the following information compute (i) Equivalent production (ii) statement of apportionment of cost, (iii) prepare Process Account.

Opening WIP	200 units @ Rs 4 per unit
Stages of completion:	Material – 100%; Labour and Overheads – 40%
Units introduced	1,050 units
Units transferred to next process	1,100 units
Closing WIP	150 units
Stages of completion:	Material – 100%; Labour and Overheads – 70%

 

Other information:

Particulars	Rs
Material cost	1,050
Labour	2,250
Production overheads	1,125
Total	4,425

 

Solution: 3

Statement showing equivalent production (Units) under FIFO method

Details	Input (Units)	Output (Units)	Materials		Labour		Overhead
			%	Equiv.	%	Equiv.	%	Equiv.
Opening WIP	200	200			60	120	60	120
Introduced	1,050
Introduced & Finished		900	100	900	100	900	100	900
Closing WIP		150	100	150	70	105	70	105
TOTAL	1,250	1,250		1,050		1,125		1,125

 

Statement showing element-wise cost per unit

Cost elements	Period cost (Rs)	Equiv. Prodn. (Units)	Cost per unit (Rs)
Materials	1,050	1,050	1.00
Labour	2,250	1,125	2.00
Production overheads	1,125	1,125	1.00
TOTAL	4,425		4.00

 

Statement showing value of finished goods, work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units (Units)	Cost per Unit (Rs)	Cost (Rs)	Total (Rs)
Opening WIP (200 units @ Rs 4 p.u) (Transferred from previous period)					800
Opening WIP (Finished during the current period)	Labour Overheads	120 120	2.00 1.00	240 120	360
Introduced and finished during the current period	Material Labour Overheads	900 900 900	1.00 2.00 1.00	900 1,800 900	3,600
Finished goods transferred to the next process					4,760
Closing WIP	Material Labour Overheads	150 105 105	1.00 2.00 1.00	150 210 105	465
TOTAL COST					5,225

 

Process Account

Particulars	Units	Rs	Particulars	Units	Rs
To Opening WIP	200	800	By Transfer to next process	1,100	4,760
To Materials	1,050	1,050	By Closing WIP	150	465
To Labour		2,250
To Overheads		1,125
	1,250	5,225		1,250	5,225

 

Illustration: 4

From the following information prepare process account.

Opening WIP	800 units @ Rs 6 per unit Rs 4,800
Stages of completion:	Material A – 100%; Material B – 60%; Labour and Overheads – 40%.
Units transferred from Process – I	12,000 units costing Rs 16,350
Units transferred to next process	9,700 units
Normal process loss	10% of processed units
Closing WIP	1,800 units
Stages of completion:	Material – 60%; Labour and Overheads – 50%

 

Other information:

1.    Degree of completion for units scrapped: Material 100%, Labour and Overhead 50%.

2.    Scrap (Normal loss units) realised @ Rs 1.00 per unit.

3.    Costs incurred during the current period:

Material Rs 10,500, Labour Rs 20,760, Overhead Rs 16,670.

 

Solution: 4

Statement Showing Equivalent Production (Units) under FIFO method

Details	Input units	Output units	Material A		Material B		Labour & OH
			%-age	Equiv units	%-age	Equiv units	%-age	Equiv units
Opening WIP	800	800			40	320	60	480
Introduced	12,000
Introduced and Finished		8,900	100	8,900	100	8.900	100	8,900
Normal Loss		1,100
Abnormal Loss (b/f)		200	100	200	100	200	50	100
Closing WIP		1,800	100	1,800	60	1,080	50	900
TOTAL	12,800	12,800		10,900		10,500		10,380

Normal loss    = 10% of (Opening WIP + Introduced – Closing WIP)

                   = 10% of (800 + 12,000 – 1,800)

                   = 1,100 units

Statement Showing Element-wise Cost Per Unit

Cost elements	Period cost (Rs)	Equivalent units	Cost per unit (Rs)
Material A (Transferred from the previous process)	16,350
Less: Realisation from normal loss (1,100 × Rs 1)	(1,100)
	15,250	10,900	1.39908
Material B (Added in the current process)	10,500	10,500	1.00000
Labour (Added in the current process)	20,760	10,380	2.00000
Overhead (Added in the current process)	16,670	10,380	1.60597
TOTAL	63,180		6.00505

 

Statement Showing Value of Finished Goods, Work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units	Cost per unit (Rs)	Cost  (Rs)	Total  (Rs)
Opening WIP (800 Units × Rs 6 p.u.) (Transferred from previous period)	−	−	−	−	4,800
Opening WIP (Finished during the current period)	Material A Material B Labour Overhead	− 320 480 480	− 1.00 2.00 1.60597	− 320 960 771	2,051
Introduced and finished during the current period	Material A Material B Labour Overhead	8,900 8,900 8,900 8,900	1.39908 1.00 2.00 1.60597	12,452 8,900 17,800 14,293	53,445
Finished goods transferred to the next process or finished goods store					60,296
Abnormal loss	Material A Material B Labour Overhead	200 200 100 100	1.39908 1.00 2.00 1.60597	280 200 200 161	841
Closing WIP	Material A Material B Labour Overhead	1,800 1,080 900 900	1.39908 1.00 2.00 1.60597	2,518 1,080 1,800 1,445	6,843
TOTAL COST					67,980

 

Process Account

Particulars	Units	Rs	Particulars	Units	Rs
To Opening WIP	800	4,800	By Normal loss	1,100	1,100
To Transfer from previous     Process	12,000	16,350
To Materials (Indirect)		10,500	By Abnormal loss	200	841
To Labour		20,760	By Transfer to next process	9,700	60,296
To Overheads		16,670	By Closing WIP	1,800	6,843
	12,800	69,080		12,800	69,080

 

Illustration: 5

Shrikrishna Limited furnished you the following information relating to process B for the month of October, 2019.                                                                                                                                   

1.    Opening work-in-progress – NIL

2.    Units introduced – 10,000 units @ Rs 3 per unit

3.    Expenses debited to the process;

Direct materials Rs 14,650; Labour Rs 21,148; Overheads Rs 42,000

4.    Finished output – 9,500 units

5.    Closing work-in-progress – 350 units;

6.    Degree of completion : Material 100%; Labour and overheads 50%

7.    Normal loss in process – one percent of input

8.    Degree of completion of abnormal loss: Material 100% ; Labour and Overheads 80%

9.    Units scrapped as normal loss were sold at Rs 1 per unit

10. All the units of abnormal loss were sold at Rs 2.50 per unit.

 

Prepare:

(a)  Statement of Equivalent Production

(b)  Statement of Cost

(c)  Process - B Account

(d)  Abnormal Loss Account

 

Solution: 5

Statement showing equivalent production (Units) under FIFO method

Details	Input (Units)	Output (Units)	Materials		Labour		Overhead
			%	Equiv.	%	Equiv.	%	Equiv.
Opening WIP
Introduced	10,000
Introduced & Finished		9,500	100	9,500	100	9,500	100	9,500
Normal loss (1% of 10,000)		100
Abnormal loss (b/f)		50	100	50	80	40	80	40
Closing WIP		350	100	350	50	175	50	175
TOTAL	10,000	10,000		9,900		9,715		9,715

 

Statement showing element-wise cost per unit

Cost elements	Period cost (Rs)	Equiv. Prodn. (Units)	Cost per unit (Rs)
Materials (30,000 + 14,650 – 100)	44,550	9,900	4.5000
Labour	21,148	9,715	2.1768
Production overheads	42,000	9,715	4.3232
TOTAL	77,798		11.0000

 

Statement showing value of finished goods, work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units (Units)	Cost per Unit (Rs)	Cost (Rs)	Total (Rs)
Introduced and finished during the current period	Material Labour Overheads	9,500 9,500 9,500	4.5000 2.1768 4.3232	42,750 20,680 41,070	1,04,500
Finished goods transferred to the next process					1,04,500
Abnormal loss	Material Labour Overheads	50 40 40	4.5000 2.1768 4.3232	225 87 173	485
Closing WIP	Material Labour Overheads	350 175 175	4.5000 2.1768 4.3232	1,575 381 757	2,713
TOTAL COST					1,07,698

 

Process 'B' Account

Particulars	Units	Rs	Particulars	Units	Rs
To Units introduced	10,000	30,000	By Normal loss	100	100
To Materials		14,650	By Abnormal loss	50	485
To Labour		21,148	By Transfer to next process	9,500	1,04,500
To Overheads		42,000	By Closing WIP	350	2,713
	1,250	1,07,798		1,250	1,07,798

 

Abnormal Loss Account

Particulars	Units	Rs	Particulars	Units	Rs
To Process A/c	50	485	By Bank/Debtors A/c	50	125
			By Costing P and L A/c		360
	50	485		50	485

 

Illustration: 6

AB Ltd. is engaged in process engineering industry. During the month of April, 2019, 2,000 units were introduced in Process ‘X’. The normal loss was estimated at 5% of input. At the end of the month 1,400 units had been produced and transferred to process Y. 460 units incomplete and 40 units after passing through fully the entire process had to be scrapped. The incomplete units had reached the following stage of completion:

Material	75% completed
Labour	50% completed
Overhead	50% completed

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

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

Units scrapped (including normal loss) realised Rs 10 each. Prepare Statement of Equivalent Production, Statement of Cost, Statement of Evaluation and the Process X Account.

Solution: 6

Statement showing equivalent production (Units) under FIFO method

Details	Input (Units)	Output (Units)	Materials		Labour		Overhead
			%	Equiv.	%	Equiv.	%	Equiv.
Opening WIP
Introduced	2,000
Introduced & Finished		1,400	100	1,400	100	1,400	100	1,400
Normal loss (5% of 2,000)		100
Abnormal loss (b/f)		40	100	40	100	40	100	40
Closing WIP		460	75	345	50	230	50	230
TOTAL	2,000	2,000		1,785		1,670		1,670

 

Statement showing element-wise cost per unit

Cost elements	Period cost (Rs)	Equiv. Prodn. (Units)	Cost per unit (Rs)
Materials (58,000 + 14,400 – 1,000)	71,400	1,785	40
Labour	33,400	1,670	20
Production overheads	16,700	1,670	10
TOTAL	1,21,500		70

 

Statement showing value of finished goods, work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units (Units)	Cost per Unit (Rs)	Cost (Rs)	Total (Rs)
Introduced and finished during the current period	Material Labour Overheads	1,400 1,400 1,400	40 20 10	56,000 28,000 14,000	98,000
Finished goods transferred to Process ‘Y’					98,000
Abnormal loss	Material Labour Overheads	40 40 40	40 20 10	1,600 800 400	2,800
Closing WIP	Material Labour Overheads	345 230 230	40 20 10	13,800 4,600 2,300	20,700
TOTAL COST					1,21,500

 

Process ‘X’ Account

Particulars	Units	Rs	Particulars	Units	Rs
To Units introduced	2,000	58,000	By Normal loss	100	1000
To Materials		14,400	By Abnormal loss	40	2,800
To Labour		33,400	By Transfer to Process ‘Y’	1,400	98,000
To Overheads		16,700	By Closing WIP	460	20,700
	2,000	1,22,500		2,000	1,22,500

 

Illustration: 7

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

Opening Stock	1,000 units
Value	Direct Material (I) Rs 390; Direct material (II) Rs 75; Direct Labour Rs 112; Production overhead Rs 118.
Process 2 transfer	6,000 units at Rs 2,360
Process 4 transfer	4,700 units.
Direct material added in process	Rs 520
Direct labour employed	Rs 1,036
Production Overheads	Rs 1,541
Units scrapped (including normal loss)	300
Degree of completion	Direct material 100%, Direct labour 80%, Production overhead 60%
Closing stock	2,000 units
Degree of completion:	Direct material 60%, Direct labour 50%, Production overhead 40%

 

Normal loss: 5% of production (including units scrapped). Scrap realised Rs 0.20 per unit.

Prepare Process Account on weighted Average method.

 

Solution: 7

Statement Showing Equivalent Production (Units) under Average method

Details	Input Units	Output Units	Material		Labour		Overheads
			%	Equiv. Units	%	Equiv. Units	%	Equiv. Units
Opening WIP	1,000
Introduced	6,000
Finished & Transferred		4,700	100	4,700	100	4,700	100	4,700
Normal Loss [(4,700 + 300) × 5%]		250
Abnormal Loss (300 – 250)		50	100	50	80	40	60	30
Closing WIP		2,000	60	1,200	50	1,000	40	800
TOTAL	7,000	7,000		5,950		5,740		5,530

 

Statement Showing Element-wise Cost Per Unit

Cost Elements	Opening WIP Rs	Period cost Rs	Total cost Rs	Equivalent units	Cost p.u. Rs
Material I (Previous process) Material II (Current process)	390 75	2,360 520	2,750 595
Less: Realisation from normal loss		(50)	(50)
	465	2,830	3,295	5,950	0.55378
Labour	112	1,036	1,148	5,740	0.20000
Overhead	118	1,541	1,659	5,530	0.30000
TOTAL	695	5,407	6,102		1.05378

 

Statement Showing Value of Finished Goods, Work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units	Cost per unit (Rs)	Cost (Rs)	Total (Rs)
Finished goods transferred to Process: 4	Material Labour Overhead	4,700 4,700 4,700	0.55378 0.20000 0.30000	2,603 940 1,410	4,953
Abnormal loss	Material Labour Overhead	50 40 30	0.55378 0.20000 0.30000	28 8 9	45
Closing WIP	Material Labour Overhead	1,200 1,000 800	0.55378 0.20000 0.30000	664 200 240	1,104
TOTAL COST					6,102

 

Process: ‘3’ Account

Particulars	Units	Rs	Particulars	Units	Rs
To Opening WIP	1,000	695	By Normal loss (250 × 0.2)	250	50
To Units introduced	6,000	2,360	By Abnormal loss	50	45
To Materials		520	By Transfer to Process: 4	4,700	4,953
To Labour		1,036	By Closing WIP	2,000	1,104
To Overheads		1,541
	7,000	6,152		7,000	6,152

 

Illustration: 8

A chemical is manufactured in two processes, X and Y. Data for process Y for last month is as follows:

1.    Material transferred from process X - 2,000 litres @ Rs 4 per litre;

2.    Conversion costs incurred Rs 12,250;

3.    Output transferred to finished goods 1,600 litres;

4.    Closing work in progress 100 litres;

5.    Normal loss is 10% of input;

6.    All losses are fully processed and have a scrap value of Rs 4 per litre;

7.    Closing work in progress is fully complete for material, but is only 50 per cent processed.

 

Calculate the value of the completed output and the value of the closing work in progress.

 

Solution: 8

Statement showing equivalent production (Litres) under FIFO method

Details	Input (Litres)	Output (Litres)	Materials		Labour & Overheads
			%	Equiv.	%	Equiv.
Opening WIP
Introduced	2,000
Introduced & Finished		1,600	100	1,600	100	1,600
Normal loss (10% of 2,000)		200
Abnormal loss (b/f)		100	100	100	100	100
Closing WIP		100	100	100	50	50
TOTAL	2,000	2,000		1,800		1,750

 

Statement showing element-wise cost per unit

Cost elements	Period cost (`)	Equiv. Prodn. (Units)	Cost per unit (`)
Materials transferred from Process ‘X’       (Rs 4 × 2,000)	8,000
Less: Realisation from Normal         Loss        (Rs 4 × 200)	800
	7,200	1,800	4
Labour and Overheads	12,250	1,750	7
TOTAL	19,050		11

 

Statement showing value of finished goods, work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units (Units)	Cost per unit (`)	Cost (`)	Total (`)
Introduced and finished during the current period	Material Labour & OH	1,600 1,600	4 7	6,400 11,200	17,600
Finished goods transferred to the next process					17,600
Abnormal loss	Material Labour & OH	100 100	4 7	400 700	1,100
Closing WIP	Material Labour & OH	100 50	4 7	400 350	750
TOTAL COST					19,450

 

Process ‘Y’ Account

Particulars	Units	`	Particulars	Units	`
To Units introduced	2,000	8,000	By Normal loss (Rs 4 × 200)	200	800
To Labour & OH		12,250	By Abnormal loss	100	1,100
			By Transfer to next process	1,600	17,600
			By Closing WIP	100	750
	2,000	20,250		2,000	20,250

 

Illustration: 9

Opening work-in-process 1,000 units (60% complete), Cost Rs 1, 10,000. Units introduced during the period 10,000 units, Total Cost Rs 19, 30,000 (Materials + Conversion Cost). Transferred to next process 9,000 units;

 

Closing work-in-process 800 units (75% complete); Normal loss is estimated at 10% of total input including units in process at the beginning. Scraps realise Rs 10 per unit. Scraps are 100% complete.

 

Using FIFO method, compute equivalent production and cost per equivalent unit. Also evaluate the output.

 

Solution: 9

Statement showing equivalent production (Units) under FIFO method

Details	Input (Units)	Output (Units)	Materials		Labour & Overheads
			%	Equiv.	%	Equiv.
Opening WIP	1,000	1,000	40	400	40	400
Introduced	10,000
Introduced & Finished		8,000	100	8,000	100	8,000
Normal loss (10% of 11,000)		1,100
Abnormal loss (b/f)		100	100	100	100	100
Closing WIP		800	75	600	75	600
TOTAL	11,000	11,000		9,100		9,100

 

Statement showing element-wise cost per unit

Cost elements	Period cost (`)	Equiv. Prodn. (Units)	Cost per unit (`)
Units introduced (including all the cost elements – materials, labour and overheads)	19,30,000
Less: Realisation from Normal         Loss (Rs 10 × 1,100)	11,000
	19,19,000	9,100	210.87912

 

Statement showing value of finished goods, work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units (Units)	Cost per unit (`)	Cost (`)	Total (`)
Opening WIP (Transferred from previous period)					1,10,000
Opening WIP (Finished during the current period)	Total cost	400	210.87912		84,352
Introduced and finished	Total cost	8,000	210.87912		16,87,033
Finished goods transferred to the next process					18,81,385
Abnormal loss	Total cost	100	210.87912		21,088
Closing WIP	Total cost	600	210.87912		1,26,527
TOTAL COST					20,29,000

 

Process Account

Particulars	Units	`	Particulars	Units	`
To Opening WIP	1,000	1,10,000	By Normal loss (Rs 4 × 200)	1,100	11,000
To Units introduced	10,000	19,30,000	By Abnormal loss	100	21,088
			By Transfer to next process	9,000	18,81,385
			By Closing WIP	800	1,26,527
	11,000	20,40,000		11,000	20,40,000

 

Illustration: 10

Q Co. makes one product using process costing. Weighted average method is used for valuation of work-in-progress. For the month of September the following information is available:

1.    Opening work-in-progress - 1,000 units;

2.    Value of opening WIP:

i.      Material Rs 122,500,

ii.     Conversion costs Rs 67,000.

 

During the month 2,250 units were added and the following costs were incurred:

i.      Material Rs 4,95,000,

ii.     Conversion costs Rs 5,46,750.

 

Closing work-in-progress was 1,250 units (Material 100% complete and Conversion costs 90% complete).

 

Compute the value of completed output for the period.

 

Solution: 10

Statement Showing Equivalent Production Units

Details	Input Units	Output Units	Material		Labour & OH
			%-age Completion	Equivalent Units	%-age   Completion	Equivalent Units
Opening WIP	1,000
Introduced	2,250
Finished & Transferred		2,000	100	2,000	100	2,000
Closing WIP		1,250	100	1,250	90	1,125
TOTAL	3,250	3,250		3,250		3,125

 

Statement Showing Element-wise Cost Per Unit

Cost Elements	Opening WIP `	Period cost `	Total cost `	Equivalent units	Cost p.u. `
Material	1,22,500	4,95,000	6,17,500	3,250	190.00
Labour and Overhead	67,000	5,46,750	6,13,750	3,125	196.40
TOTAL	1,89,500	10,41,750	12,31,250		386.40

 

Statement Showing Value of Finished Goods, Work-in-progress, etc.

Items to be valued	Cost elements	Equivalent units	Cost p.u. (`)	Cost (`)	Total (`)
Finished goods transferred to the next process or F. G. store	Material Labour + OH	2,000 2,000	190.00 196.40	3,80,000 3,92,600	7,72,800
Closing WIP	Material Labour + OH	1,250 1,125	190.00 196.40	2,37,500 2,20,950	4,58,450
TOTAL COST					12,31,250