Project - Process Costing-mcom -1 (1)

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INTRODUCTION

MEANING

1) Process :A Process means a distinct manufacturing operation or stages.

In Process Industries, the raw material goes through a number of

processes in a sequence before the finished product is finally produced.

For example production of coconut oil involve the following distinct

processes:

(1)COPRA CRUSHING (2) REFINING AND (3) FINISHING.

2) Process Costing: Process costing is method of costing used to find out

the cost of the product in each process. wheldon has defined process

costing as “a method of costing used to ascertain the cost of the product

at each stage or operation of manufacture …..”According to CIMA,

London-“it is that form of operation costing where standardized goods

are produced”

3) Process Cost: According to CAS – 1 when the production process is

such that goods are produced from a sequence of continues or repetitive

operation or processes, the cost incurred during a period is considered as

process cost.

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APPLICABILITY AND NECESSITY

Process Costing is applicable to several mining , manufacturing and public

utility industries, e.g. mines and quarries producing minerals and ores;

industries producing textiles , chemicals, soap, paper, plastics, alcohol,

refined oil, electricity, gas and so on.

It becomes necessary to apply process costing to the Industries belonging to

any of the following categories:

ONE PRODUCT, MANY PROCESSES: A factory may produce a

single item through a number of processes or departments. it

becomes necessary to find out the cost of each process or department

separately to control wastage etc.

MANY PRODUCTS, MANY CYCLES: A bakery can use the same

equipments to produce either bread or cakes. it may produced only

bread in one cycle and change over to production of cakes in the next

cycle. each cycle is treated as a separate process so as to find out the

cost of the item produced in a particular cycle or process.

MANY PRODUCTS, SAME PROCESS: an oil refinery can obtain

many joint products such as refined oil, gas, steam etc. in the same

process. Process Costing is employed to ascertain the individual cost

of each such product.

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[A] ADVANTAGES

(1)PERIODICAL DETERMINATION OF COSTS:Process costs can be

collected and determined for even a short period like a day, a week or a

month. In Job Costing, on the other hand, costs can be collected and

determined only after the job is complete, which may take months or

evens years.

(2)SIMPLE AND CHEAP:Process costing is much simple, easy and less

expensive method of costing as compared to other methods. There is no

need for an elaborate system of identifying the direct costs of a job or a

batch.

(3)MANAGERIAL CONTROL:Being a simple system to establish and

operate, process costing facilitates greater control of the management

over costs, wastage etc.

(4)STANDARD PROCESS AND PRODUCTS:Since the processes and

products are standard, it is easy to make decisions regarding pricing,

quotations, tenders etc.

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[B] DISADANTAGES

(1)NO DETAILED ANALYSIS: Process Costing does not give a details

analysis of the cost as (i) it emphasizes the period rather than the unit or

the product, and (ii) it gives an average cost rather that the specific cost

of the product.

(2)HISTORICAL COSTS: Process Costing gives only historical costs

which are not useful for forecast of future trends etc.

(3)ESTIMATES: The determination of percentages of normal loss,

wastage, distribution of costs over by – products and joint products,

valuation of work in progress involve estimate based on arbitrary

decision of the management.

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PROCESS COSTING V/S JOB COSTING

NO. PROCESS COSTING JOB COSTING

1.

2.

3.

4.

5.

It is period costing i.e. costs of

all processes during a period

are ascertained.

Cost unit is each process.

Direct costs are much more

than indirect.

It normally involves work - in -

process.

Cost of one process is

transferred to next process.

It is specific costing; i.e. cost of

job is ascertained till it ends,

whatever the time it takes.

Cost unit is the job order.

Costs are directs as well as

indirect.

It may not involve work - in –

progress.

Cost of each job is separate.

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Costing PROCUDER – SIMPLE

PROCESS

Accounting Procedure

The accounting prouder in process costing is as follows:

1. Separate Process A/c:the entire manufacturing operation is divided in

to separate stages or process. each process of production is treated as a

distinct cost centre a separate process account is opened to record the cost

incurred in such process.

2. Debit side of Process A/c:each process account is charged with the

expenses directly incurred for that process and plus its share of the

overheads. the process account is debited with the direct and indirect

expenses ( material, wages and overheads) pertain to that process.

a) Material:the raw material, sundry material and stores

required for a process are issued directly from the stores

against a material requisition slip. in addition, the cost of

units transferred from the earlier process, if any , also

appears on the debit side of the process account.

b) Labour :wages paid to workers directly employed in a

process are debited to the process account. like material, the

distinction between direct and indirect labour is not

important in process costing. Indirect labour expenses (e.g.

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manager`s salary) may, if necessary, be debited on the basis

of ratio of direct wages.

c) Expenses:the expenses directly related to the process such

as repairs of machinery, power etc. are debited to the

respective process account. Indirect expenses are

apportioned over and absorbed by various processes on a

suitable basis such as ratio of material costs, labour costs or

prime costs.

3.Credit side of Process A/c :The Process account is credited with tha

sale value of residue etc.

4. Net cost of Process: The net cost of the output of the process (total

cost less sale value of residue) is transferred to the next process. the cost of

each process is thus made up of (i) cost brought forward from previous

process and (ii) net cost of material, labourand overheads added in the

process less sale value of residue. the net cost of the last process is

transferred to finished goods account.

5. Average Unit Cost: The net cost is divided by the number of units

produced to determine the average cost per unit in that Process.

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PRO-FORMA PROCESS ACCOUNT

A PRO-FORMA PROCESS ACCOUNT WOULD APPEAR AS

FOLLO:

Dr. Process Account Cr.

Particulars Units Rate Particulars Units Rate

To Transfer from (1) Earlier Process

To Material

To Wages

To Expenses

To Overheads

By Sale of Residue

By Transfer to next process / finished goods

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WASTE AND LOSSES

MEANING

A manufacturing process is likely to give rise to some waste and losses. let

us first be clear about the exact meaning of these terms – viz waste and

losses.

Waste: It represents the portion of basis raw materials lost in

processing having no recoverable value. Waste may be visible -

remnants of basis raw materials – invisible; e.g. disappearance of

basic raw materials through evaporations, smoke etc. normal waste is

absorbed in the cost of net output , whereas abnormal waste is

transferred to the costing profit and loss account.

Spoilage: It is the term used for materials which are badly damaged

in manufacturing operations, and they cannot be rectified

economically and hence taken out of process to be disposed of in

some manner without further processing. Spoilage may be either

normal or abnormal. Normal spoilage costs are included in costs

either charging the loss due to spoilage to the production order or by

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charging it to production overhead so that it is spread over all

products.

Salvage: It signifies those units or portions of production which can

be rectified and turned out as good units by the application of

additional material,labour or other service. For example, some

mudguards produced in a bicycle factory may have dents; or there

may be duplication of page or omission some pages in a book.

Defectives arise due to sub-standards materials, bad – supervision,

bad – planning, poor workmanship, inadequate – equipment and

careless inspection.

Rectification: In the case of articles that have been spoiled, it is

necessary to take steps to salvage/reclaim as much of the loss as

possible. For this purpose : (i) all defective units should be sent to a

place fixed for the purpose ;(ii) these should be dismantled ;(iii) goods

and serviceable parts should be separated and taken into stock;(iv)

parts which can be made serviceable by further work should separated

and sent to the workshop for the purpose and taken in to stock after

the defects have been removed; and (v) parts which cannot be made

serviceable should be collected in one place for being melted or sold.

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Scrap: It has been defined as the incidental residue from certain

types of manufactures, usually of small amount and low value,

recoverable without further processing. Scarp may be treated in cost

accounts in the following ways:-

I. Where the value of scrap is negligible, it may be excluded from costs.

In other words, the cost of scrap is borne by good units and income

scrap is treated as other income.

II. The sale value of scrap net of selling and distribution cost is deducted

from overhead to reduce the overhead rate. A variation of this method

is to deductedthe net realizable value from material cost. This method

is followed when scraps cannot be aggregated job or process-wise.

III. When scrap is identifiable with a particular job or process and its

value is significant, the scrap account should be charged with full

cost. The credit is given to the job or process concerned. The profit or

loss in the scrap account, on realization, will be transferred to the

costing profit and loss account.

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CAS – 6

The provision of CAS – 6 (Material Cost) relating to scrap, waste, etc. are

as follows –

Scrap : Scrap means discarded material having some value in few

cases and which is usually either disposed of without further treatment

(other than reclamation and handling) or reintroduced into the production

in place of raw material.

Waste:Waste means material los during production or storage due to

various factors such as evaporation, chemical reaction, contamination,

unrecoverable residue, shrinkage, etc., and discarded material which may

or may not have value.

Spoilage:Spoilage means production that does not meet with

dimensional or quality standards in such way that it cannot be rectified

economically and sold for a disposal value.

Marketable scrap:The production process may generate

marketable scrap or waste. Realized or realizable value of scrap pr waste

shall be credited to the cost of production.

Reprocessed scrap:In case, scrap or waste does not have ready

market and it is used for reprocessing, the scrap or waste value is taken at

a rate of input cost depending upon the stage at which such scrap or

waste is recycled. The expenses incurred for making the scrap suitable

for reprocessing shall be deducted from value of scrap or waste.

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ACCOUNTING FOR LOSSES

Actual Basis : -

In this case, the actual sale value of scrap, spoilage or defectives is credited

to the process account. Thus amount of loss ( cost less sale value) relating to

defective units is wholly charged to the process account. This means that the

amount of loss is absorbed by or spread over the good units. However,

losses are of two types, normal loss and abnormal loss. Normal loss denotes

the unavoidable or uncontrollable loss .Abnormal loss on the other hand,

denotes the avoidable or controllable loss.In actual basis , no distinction is

made between normal and abnormal loss. Hence in this method, the cost per

unit may vary from period to period. This vitiates or distorts the unit costs of

process.

Normal Basis : -

The normal basis of scrap accounting seeks to * enable the management

to control avoidable costs by distinguishing between the normal loss and the

abnormal loss, and avoid variations in unit costs due to change in amounts of

scrap. In this method of scrap accounting the figure of normal loss for each

process is fixed on the basis of past experience or technical data. Any loss

above this figure is treated as abnormal loss. Any loss below this figure is

treated as abnormal gains. Normal loss is treated as normal cost of

production. Normal loss is treated as normal cost of production. But cost of

abnormal loss or gain is taken out from the process account. The net

financial loss on account of abnormal loss is debited to the costing profit and

loss account. The account of abnormal Gains is credited to the costing profit

and loss account.

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Worksheet : Calculation For Normal Loss

Etc.

Steps What is to be

calculated

How is it to be calculated

1.

2.

3.

4.

5.

6.

7.

Normal Loss

Normal Output

Unit Cost

Abnormal LossOr Abnormal Gains

Cost of Actual Output

Cost of Abnormal Loss

Cost of Abnormal Gains

= Input x % of Normal Loss

= Input – Normal Loss

Normal Cost= ------------------------Normal Output

Cost of Process – Sale Value of Normal Loss= -------------------------------------------------------------- Input – Normal Loss

= Normal Output – Actual Output

= Unit Cost X Units of Actual Output

= Unit Cost X Units of Abnormal Loss

= Unit Cost X Units of Abnormal Gains

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Proforma Journal Entries

NO. Entry Amount1. Normal Loss Account

Dr. To Process….Account

Sales Value of Normal Loss

2. Next Process Account Dr. To Process….Account

Cost of Good Output

3. Abnormal Loss Account Dr. To Process….Account

Cost of Abnormal Loss

4. Process …….. Account Dr. To Abnormal Gains Account

Cost of Abnormal Gain

5. Actual Sale Dr. To Normal Loss Account

Units of Normal Loss x Sale Price

6. Cash / Debtor To Abnormal Loss Account

Sale Value of Abnormal Loss

7. Abnormal Gain Account Dr. To Normal Loss Account

Sale Value of Abnormal Gain

8. Costing P & L Account Dr. To Abnormal Loss Account

Cost – Sale Value of Abnormal Loss

9. Abnormal Gain Account Dr. To Costing P & L Account

Cost of Abnormal Gains – Sale Value of Abnormal Gains

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Proforma Process Accounts { NORMAL BASIS }

Process A Accounts ( Normal Loss )

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Material b/f

To Direct Material

To Direct Wages

To DirectExpenses

To Overheads

By Normal Loss A/c

By Transfer to next process

Process B Accounts ( Abnormal Loss )

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Material

To DirectMaterial

To Direct Wages

To Direct Expenses

To Overheads

By Normal Loss A/c

By Transfer to next process

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Process C Accounts ( AbnormalGain )

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Transfer from (1) Earlier Process

To Direct Material

To Direct Wages

To Direct Expenses

To Overheads

By Normal Loss A/c

By Transfer to next process

Normal Loss Accounts

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Process A/c A

To Process A/c B

To Process A/c C

By Actual Sale A

By Actual Sale B

By Actual Sale C

By Abnormal Gain A/c

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Abnormal Gain Account

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Normal Loss A/c

To Costing Profit & Loss A/c

By Process A/c C

Abnormal Loss Account

Dr. Cr.

Particulars Units Rate Particulars Units Rate

To Process B ( Cost )By Actual Sale B

By Costing Profit & Loss A/c

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Notes:

1.Quantity Reconciliation

Particulars Process A Process B Process C

Input (i)

Less : Normal Loss

= Normal Production (ii)

Actual Production

Abnormal Loss

Abnormal Gain

Sale of Scrap (i – ii)

xx

xx

xx

xx

Xx

xx

Xx

xx

xx

xx

xx

xx

- xx -

xx

Normal Cost2.Unit Cost = ----------------------Normal Output

Cost of Process – Scrap Value of Normal Loss2.Unit Cost = ------------------------------------------------------------------ Input - Normal Loss

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VALUATION OF WORK –IN-PROCESS

EQUIVALENT UNITS

We have studies earlier how work - in-progress is valued in case of

Units Costing or Contract Costing. Let us now study how work-in-process is

valid in case of process costing. In the process industries there is likely to be

partly competed units at the end of accounting period that will be carried to

the next accounting period. Such units of unfinished work are in different

stages of completion .Hence they cannot be taken as full units for the

purpose of calculation of units costs. Let us consider the following example:

Dr. PROCESS Cr.

Particulars Units Rs. Particular Units Completion Rs.

To Material

To Labour

To Overhead

40,000 50,000

10,000

10,000

By Transferred to Process B

By Closing Work-in-process

30,000

10,000

100%

50%

40,000 70,000 40,000

70,000

The problem now is-how to compute the units cost of the output ? If we

simply divided Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value

both the completed units at the same rate. Therefore , the unfinished units

should be converted into completed units. In the above examples, 10,000

partly finished units on which 50% of the work has been completed are

equivalent to 5,000 fully completed units. on which Such incomplete units

so computed in term of completed units are knows as equivalent units. The

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total output or production in terms of completed units is 30,000 + 5,000 =

35,000. Now we can divided the input cost Rs.70,000 by Produced units

35,000 to get the Units cost of Rs. 2.the output transferred to process B can

be valued at Rs. 60,000 (30,000 x 2). The work-in-process can be valued at

Rs. 10,000 (5,000 x 2).

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STEPS IN CALULATION OF EQUIVALENT UNITS AND UNIT COST

The calculation of the equivalent units and cost of output transferred to

process B will be worked out as follows:

Step 1 : Reconcile Input and Output

We should consider the physical flow of production – the units of input and

output. In the above example, Input is 40,000 units and output is (i) 30,000

units transferred to process B and (ii) 10,000 units of closing work –in –

process. The total output of 40,000units agrees with the total input of 40,000

units. However, the output is not all of fully competed units. To make the

output and input comparable, we must convert the production into

Equivalent Units.

Step 2 : Calculate Equivalent Units.

Completed units = 30,000

Work-in-process units = 10,000 at 50%competion = 5,000

Equivalent Units = 35,000

Step 3 : Calculate Total Cost of Material, Labour and Overhead

50,000 + 10,000 + 10,000 = Rs.70,000

Step 4 : Calculate Cost of each Equivalent Unit

Cost per Equivalent Units Rs.70,000 / 35,000 = Rs. 2.

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Step 5 : Calculate Cost of production and cost of Work –in-process

Cost of production transferred = 30,000 x Rs.2 = Rs.60,000

Cost of work-in-process = 10,000 x 50% x Rs.2 = Rs.10,000

=Rs.70,000

This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).

Illustration 5 : (Work- Sheet Format : Only Closing Stock of WIP)

The above steps can be presented in a more refined format as shows below

which can be used by the students for problem involving only closing work-

in-process.

Solution:

[A] EQUVIVALENT UNITS (EU)

Particular Qty.Reconciliation Equivalent Units [EU]

Input Output Material[M] Labour[L] Overheads[O]% EU % EU % EU

1. Fresh Units Introduced

2. Fresh Units Completed

3. Closing WIP

40,00030,00010,000

100 50

30,000 5,000

100 50

30,000 5,000

100 50

30,000 5,000

Total Units of [A] 40,000 40,000 35,000 35,000 35,000

[B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total1.Cost incurred during the process2.Less: Sale of Normal ScrapTotal Cost [B]Equivalent Units [A]

50,000--

10,000--

10,000--

70,000--

50,000 10,000 10,000 70,00035,000 1.43

35,000 0.29

35,000 0.29 2.00

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Cost Per EU[C =B + A]

[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total (Rs.)

1.Finished Units Tfd.to Next Process2.Closing Work-in-process- Material - Labour- OverheadsTotal Cost [B] Apportioned

30,000

5,0005,0005,000

2.00

1.430.290.29

7,1431,4291,428

60,000

10,00070,000

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FLOW OF COST – AVERAGE OR FIFO

When there are no opening W-I-P units as in the example above, valuation

of closing W-I-P is simple (see Para 6.3 below). In such cases, the entire

closing W-I-P comes out of the current cost and is valued accordingly,

However, when there is opening stock of work -in-process, the production

completed during the period comes out of(i) units completed out of the

opening stock of WIP; and (ii) units started and completed in the process in

the current period. The cost of units completed out of the opening stock of

WIP will include partly the cost carried over from the previous period .Since

the input have different costs, the problem arises of which rate to use for

valuation of the output. The unit cost such situation, may be calculated under

either of the two method, viz, (i) the weighted average cost method or (ii)

the first -in, first out (FIFO) method.

AVERAGE METHOD

Under the Average Method, Total cost in the process is divided by the Total

equivalent units produced by the process to ascertain the cost per equivalent

unit. Total costs of the process mean the total of the current production costs

and the cost of the opening work-in-process. Total Equivalent Units

produced by the process mean the total of the units completed during the

period and Equivalent Units of work performed on the opening and closing

work-in-process. According to the Average Method (or, more accurately, the

Weighted Average Method), the cost of the opening work –in-process is

added to the cost incurred in the current period and average cost worked out.

It should be noted that in the calculating the equivalent units under the

weighted average method, the work done in the past is treated as if done in

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the current period. The closing WIP under this method is made of the

average costs of opening WIP and current production.

FIFO MEHTOD

The method is based on the assumption that the materials in process moves

on a first-in, first-out basis. FIFO method assumes that the work on the

opening stock is before the materials put into the process during the current

period are taken up. The units completed during the process being usually

more than the opening stock, it is assumed that no units from the opening

work-in-process will be left incomplete and so none of them will find place

in the closing work –in-process. Under the FIFO method, the cost of work

completed in a period are worked out in two parts. i.e. separately for (a)

opening work-in-process competed, and (b) units started and completed in

the period. Under the FIFO method, cost of closing WIP is based on the cost

of the current production only. In the FIFO method, the procedure of

calculation of equivalent units is different as the units competed from

opening work-in-process and from current production have to be accounted

for separately.

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ILLUSTRATIONS

Let us consider the following example to understand the procedure of valuation under these two methods.

Illustration 6: (Average)

Process A Period : September, 2003

Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000

Units brought into process- 50,000.

Cost incurred

- Material Rs. 60,000- LabourRs. 25,000- Overheads Rs. 15,000

Transfer to process: 40,000 Competed units (entirely competed production)

Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the value of closing W-I-P.

Solution:

Step 1: Quantity Reconciliation:

Particulars Units Particulars UnitsOpening work-in-process(40%)Units started

10,00050,000

Units completedClosing work-in-process(75%)

40,00020,000

60,000 60,000

Step 2: Computation of equivalent units:

Particulars UnitsUnits competedClosing work-in-process (75%)

40,00015,000

Equivalent Units 55,000

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It should be noted that in calculating the equivalent units under the weighted average method, the work done in the past is taken to have been done in the current period.

Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000.

Step 4: Cost per equivalent unit = Rs. 1,10,000 ÷ 55,000 = Rs. 2

Step 5: Cost competed units transferred to process = 40,000×Rs.2 = Rs. 80,000

Cost of closing work-in-process = 20,000 × 75% × Rs.2 = Rs. 30,000

Rs. 1, 10,000

[Average Method]

[A] EQUVIVALENT UNITS (EU)

Particular Qty.Reconciliation

Equivalent Units [EU]

Input Output Material[M] Labour[L] Overheads[O]% EU % EU % EU

1. Opening Work-in-Process2. Fresh Units Introduced3. Units Tfd. to Next Process4. Closing Work-in-Process

10,00050,000

40,00020,000

10075

40,000 15,000

10075

40,000 15,000

100 75

40,000 15,000

Total Units of [A] 60,000 60,000 55,000 55,000 55,000

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[B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total1.Cost of Opening WIP2.Cost incurred during the processTotal Cost [B]Equivalent Units [A]Cost Per EU[C =B + A]

10,00060,000

--25,000

--15,000

10,0001,00,000

70,000 25,000 15,000 1,10,00055,000 1.27

55,000 0.45

55,000 0.27 2.00

[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total (Rs.)

1.Finished Units Tfd.to Next Process2.Work-in-process Closing Stock- Material - Labour- OverheadsTotal Cost [B] Apportioned

40,000

15,00015,00015,000

2.00

1.270.450.27

19,0916,8184,091

80,000

30,000 1,10,000

The Process Account will be shown as follows:

Dr. Process A Account Cr.

Particulars Units % Rs. Particulars Units % Rs.Work-in-process(b/f) MaterialLabour Overhead

10,00050,000

40% 10,00060,00025,00015,000

Transferred toProcess B Work-in- process(c/f)

40,000

20,000

100%

75%

80,000

30,000

60,000 1,10,000 60,000 1,10,000

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ELEMENT – WISE COST OF WIP

Normally, It may be necessary to work out the unit process cost for each

element of cost separately because material, labour and overhead may be in

different stage of completion in the work-in-process inventory. All materials

are usually you issued input and into the process in the beginning itself.

Therefore, the closing work-in-process in generally taken as 100% compete

in so far as the materials elements is concerned. For materials added at the

end of the process, the percentage of completion will be zero.

EVALUATION OF METHOD

[1] Average Method:

(1) The weighted average method is simpler of the two and is widely used in

practice

(2) But, Average method mixes up the costs in different period and does not

correctly reflect the extent of change of costs from period to period.

[2] FIFO Method:

(1) FIFO method is more suitable from the point of view of control as the

past and current costs are separated.

(2)FIFO method is,however,complicated and tracing out the costs in to two

parts from process to process become tedious, particularly when the number

of processes in many.

(3) FIFO system is neither suitable nor rational when spoiled units are

involved because apportionment of such units between the opening the

inventory and current production is not possible.

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[3] When choice Becomes Unnecessary

The difference in the result obtained by the two method would not be

signification or would disappear all together If :

(1)There is no opinion inventory, and so the question of first –in, first-out

does not arise at all.

(2)Opening inventory very small, compared to the fresh units introduce

in the process.

(3)The stage of completion of opening inventory is not sufficiently

advance so that the previous costs have practically no effect on

current costs.

(4)There is not much difference in costs from period to period.

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PROCESS LOSSES/ GAINS

(1) Meaning: In many process, the physical quantity of output is found to be

less than that of the input, the difference being attributable to wastage,

spoilage, shrinkage, evaporation etc. occurring in course of manufacture. In

order to compute connect cost per unit. The units entering a process must be

reconciled with the output coming out of the process, and the loss units, as

they are called, must be analyzed to determine the factor leading to the loss.

If a product passes through several processes, the lost units will have an

effect not only on the unit cost of the process in which they arise but also on

the cost of the subsequent processed on the cumulative unit cost of the final

output.

(2) Normal Loss: Units may be lost at beginning of a process, during a

process, or at the end of a process. The treatment of normal spoilage costs in

process accounts depends upon the stage at which the spoilage (rejection or

loss) is assumed to occur.

(i) At Beginning: When normal spoilage occurs at the beginning of a

process, it is assumed that the lost units never entered in the process. In the

Computation of equivalent units, the normal spoilage units are ignored with

in the result that the cost of spoilage in charged to the production units

competed and to abnormal spoilage, if any , as well as the to the closing

work-in-process.

(ii) At End:If the normal spoilage occurs at the end of a process, as is

more common, the spoiled units are taken into account for computing

equivalent units so that to cost of normal spoilage in charged only to the

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good units produced as well as to abnormal spoilage, if any, but no amount

is charged to the closing work-in-process. The usual practice is to

determined the cost of normal spoilage separately add it back to the cost of

good units produced. If the spoiled units can be sold scrap, the scrap value is

credited to the process account as the cost of the spoilage or loss.

(3) Abnormal Loss: Abnormal spoilage of defective work may arise in a

process due to unforeseen factors. The cost of such abnormal loss in not

include in the cost of the process but the average cost of the lost units is

charge to an Abnormal Loss Account which is credited with the scrap and

closed by transfer to the Profit and Loss Account. Thus, in computing the

value of abnormal loss, scrap value of the abnormal lost units will be

ignored but in working out the loss for charging to Profit and Loss Account,

this will be taken into consideration.

(4) Abnormal Gains:Sometime, when the actual loss in process is less than

the anticipated loss, the difference between the two is considered to be

abnormal gain. The value of the abnormal gain is calculated in the same way

as described above for abnormal loss and is credited to an Abnormal Gain

Account which is ultimately closed by transfer to the Profit and Loss

Accounts. The scrap value of the normal anticipated loss in the process

where abnormal gain occurs is credited to the process account with the result

that the net debit to the process is the cost of abnormal gains less the value

of scrap for the normal loss.

34

Case study

VOX is a company that assembles camcorders from components bought in

from suppliers. A camcorder component kit is issued from stores to the

assembly line when another camcorder has to be assembled.

There are partially completed camcorders (WIP) at the end of each month.

Incomplete camcorders are assembled in order of completeness, ie the one

closest to completion is finished first, the second closest to completion next,

etc.

The following data was obtained for June:

Opening WIP: 25 component kits - GBP2,000 (100% complete – all

components issued to factory); assembly work done in the previous

month - GBP1,800 (60% complete); total value of opening WIP:

GBP3,800

Costs incurred: 100 components kits - GBP8,200; assembly line -

GBP10,450

Output: 95 camcorders

Closing WIP: 30 component kits - 100% complete; assembly work -

50% complete.

The value of WIP is determined in relation to the components issued to the

factory and the extent to which a camcorder has been assembled. All

components required to make a camcorder are issued to the factory at the

start of the assembly process. So opening and closing WIP are 100%

complete in terms of components.

35

However, opening WIP is only 60% complete in terms of assembly and

closing WIP is 50% complete. The figures relating to the completion

percentages for assembly will be an average since some items may be 40%

complete and others 80% complete.

The cost for component kits is the actual cost (GBP8,200) of the 100

component kits issued to the factory in June. The cost for assembly work is

the actual cost (GBP10,450) of the work undertaken by the factory in June.

The first step is to calculate how many camcorders were started and

completed in June. Table 1 shows that 70 camcorders fall into this category

since 25 of the completed camcorders were started in May.

Table 1: started and completed in current period

Total output

Opening WIP

95

25

Started and completed in June 70

The next step is to calculate the number of equivalent units for components.

The figure for opening WIP is 0, since no more components were issued to

these partially completed products. A figure of 70 is included for the 70

camcorders started and completed in June; 30 is included for closing WIP

since all the components required to assemble these camcorders were issued

in June. The total equivalent units for components is 100 (table 2).

36

The calculation of equivalent units for assembly is not as simple since the

assembly work is not 100% for opening and closing WIP. A figure of 10 is

included for opening WIP since this represents the remaining work (40%)

that had to be done in June ie 25 x (100% - 60%); 70 is included for the

camcorders started and completed in June; 15 (30 x 50%) is included for the

assembly work undertaken in June in relation to the closing WIP. The total

equivalent units for assembly work is 95 (table 2).

Table 2: equivalent units

Components Assembly

Opening WIP

Started and completed in June

0

70

10

70

Output

Closing WIP

70

30

80

15

100 95

The cost of an equivalent unit for components and assembly for June is:

Component kits: GBP8,200 / 100 ie GBP82 per equivalent unit

Assembly: GBP10,450 / 95 ie GBP110 per equivalent unit.

The value of output is obtained by multiplying the equivalent units by the

cost per equivalent unit for components and assembly then adding these

figures to opening WIP:

Output: GBP3,800 + (10 x GBP110) + (70 x GBP82) + (70 x

GBP110) ie GBP18,340 (Table 3).

37

The value of closing WIP is obtained by multiplying the equivalent units by

the cost per equivalent unit for components and assembly:

Closing work: (30 x GBP82) + (15 x GBP110) ie GBP4,110 (Table

3).

Table 3: Valuation of output and closing WIP

Total Component

s

Assembly

Opening WIP

Work to complete opening

WIP

Started and completed in June

GBP3,800

GBP1,100

GBP13,44

0

GBP0

GBP5,740

GBP1,10

0

GBP7,70

0

June output GBP18,34

0

Closing WIP GBP4,110 GBP2,460 GBP1,65

0

The above figures are then used to prepare the process account for June

(Table 4).

Table 4: Process account

June process account

Opening WIP

Components 

Assembly costs

GBP3,800

GBP8,200

GBP10,450

Output

Closing WIP

GBP18,340

GBP4,110

GBP22,450 GBP22,450

38

Process costing uses actual costs to value output and closing WIP. It

consequently provides little information about performance since it doesn’t

compare actual performance against a benchmark, ie standard cost.

An analysis must be undertaken to gain an insight into performance. The

analysis for June revealed:

Average cost of a component kit has increased from GBP80 (Opening WIP:

GBP2,000 / 25) to GBP82

Cost of an equivalent unit of assembly work has decreased from GBP120

(Opening WIP: GBP1,800 / 25 / 0.6) to GBP110.

While this analysis is useful, it only highlights trends since it does not

compare performance against a standard. A company must operate a

standard costing system to obtain control information.