A PROJECT ON “Study of Process Accounting potato chips manufacturing Industry” In the subject Advanced Cost Accounting SUBMITTED TO UNIVERSITY OF MUMBAI FOR SEMESTER-I OF MASTER OF COMMERCE BY SUNITA KUMARI YADAV MCOM PART-I AND ROLL NO- 1890 UNDER THE GUIDANCE OF Mr. GAJANAN WADER YEAR 2012-2013
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Study of Process Accounting potato chips manufacturing Industry
1 2 Feature of process costing 5 3 Advantage of process costing 6 4 disadvantage of process costing 7 5 Concept of work in process in process accounting 8 6 Methods of process costing in work in process. 9 • Weighted average method 10 • FIFO method 11 7 Comparison between FIFO and weighted average method 13 of process costing
8 Practical aspect of process costing in potato’s chips 16 manufacturing industry
9 Conclusion 20 10 Comment
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A
PROJECT
ON
“Study of Process Accounting potato chips manufacturing Industry”
In the subject Advanced Cost Accounting
SUBMITTED TO
UNIVERSITY OF MUMBAI
FOR SEMESTER-I OF
MASTER OF COMMERCE
BY
SUNITA KUMARI YADAV
MCOM PART-I AND ROLL NO- 1890
UNDER THE GUIDANCE OF
Mr. GAJANAN WADER
YEAR 2012-2013
DECLARATION BY THE STUDENT
I, SUNITA KUMARI YADAV student of M COM PART-I Roll Number 1890 hereby
declare that the project for the paper Advanced Cost Accounting titled
“Study of Process Accounting potato chips manufacturing Industry”
Submitted by me for semester-I during the academic year 2012-2013, is based on actual work
carried out by me under the guidance and supervision of Mr. Gajanan Wader
I further state that this work is original and not submitted anywhere else for any examination.
Signature of Student
EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on
“Study of Process Accounting potato chips manufacturing Industry”
Submitted by SUNITA KUMARI YADAV student of M COM Part-I.
This project is original to the best of our knowledge and has been accepted for internal
assessment.
Internal Examiner External Examiner Vice Principal
Mr. Gajanan Wader Prof. A.N. Kutty
PILLAI’S COLLEGE OF ARTS, COMMERCE & SCIENCE
Internal assessment: Project 40 Marks
Name of Student Class Division Roll
Number.
First Name: SUNITA KUMARI
M COM
Father’s Name: B.B.S
PART I 1890
Surname: YADAV
Subject: Advanced Cost Accounting
Topic for the Project: “Study of Process Accounting potato chips
manufacturing Industry”
Mark Awarded
Signature
DOCUMENTATION
Internal Examiner
(Out of 10 Marks)
External Examiner
(Out of 10 Marks)
Presentation
(Out of 10 Marks)
Viva and Interaction
(Out of 10 Marks)
TOTAL MARKS (Out of 40)
CONTENTS
SL.NO. PARTICULAR PAGE
NO.
1
Concept of process costing
1
2 Feature of process costing 5
3 Advantage of process costing 6
4 disadvantage of process costing 7
5 Concept of work in process in process accounting 8
6 Methods of process costing in work in process. 9
• Weighted average method 10
• FIFO method 11
7 Comparison between FIFO and weighted average method
of process costing
13
8 Practical aspect of process costing in potato’s chips
manufacturing industry
16
9 Conclusion 20
10 Comment 21
Job order costing - work is broken into
jobs; each job is tracked separately
auto mechanics, carpenters, painters, print
shops, computer repair
Process costing - a large quantity of
identical or similar products are mass
produced
auto assembly plants, hot dog manufacturing,
any large mechanized production facility
Each cost accounting system gathers and reports on the same information. The method used
depends on the needs of the business.
Process Costing traces and accumulates direct costs, and allocates indirect costs, through
a manufacturing process. Costs are assigned to products, usually in a large batch, which
might include an entire month's production. Eventually, costs have to be allocated to
individual units of product.
� The importance of process costing
Costing is an important process that many companies engage in to keep track of where their
money is being spent in the production and distribution processes. Understanding these costs
is the first step in being able to control them. It is very important that a company chooses the
appropriate type of costing system for their product type and industry. One type of costing
system that is used in certain industries is process costing that varies from other types of
costing (such as job costing) in some ways. In Process costing unit costs are more like
averages, the process-costing system requires less bookkeeping than does a job-order costing
system. So, a lot of companies prefer to use process-costing system.
1
� When process costing is applied?
Process costing is appropriate for companies that produce a continuous mass of like units
through series of operations or process. Also, when one order does not affect the production
process and a standardization of the process and product exists. However, if there are
significant differences among the costs of various products, a process costing system would
not provide adequate product-cost information. Costing is generally used in
such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, and
food.
� Costing procedure
For each process an individual process account is prepared. Each process of production is
treated as a distinct cost centre.
• Items on the Debit side of Process A/c.
Each process account is debited with –
a) Cost of materials used in that process.
b) Cost of labour incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some pre determined.
e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process)
• Items on the Credit side:
Each process account is credited with
a) Scrap value of Normal Loss (if any) occurs in that process.
b) Cost of Abnormal Loss (if any occurs in that process)
2
� Format of process costing
3
� Flow of cost in process costing system
4
Process Costing Method is applicable where the output results from a sequence of continuous
or repetitive operations or processes and products are identical and cannot be segregated.
Process Costing enables the ascertainment of cost of the product at each process or stage of
manufacture.
The following features may be identified with process costing:
1. The output consists of products which are homogenous.
2. Production is carried on in different stages (each of which is called a process) having a
continuous flow.
3. Production takes place continuously except in cases where the plant arid machinery is shut
down for maintenance etc. Output is uniform and all units are Identical during each process.
It would not be possible to trace the identity of any particular lot of output to any lot of input.
4. The input will pass through two or more processes before it takes the shape of the output.
The output of each process becomes the input for the next process until the final product is
obtained, with the last process giving the final product.
5. The output of a process (except the last) may also be saleable in which case the process
may generate some profit.
6. The input of a process (except the first) may be capable of being acquired from the outside
sources.
7. The output of a process is transferred to the next process generally at cost to the process. It
may also be transferred at market price to enable checking efficiency of operations in
comparison to the market conditions.
8. Normal and abnormal losses may arise in the processes.
5
The primary advantage of process costing is the ease and simplicity of accounting.
Process Costing is a simple and direct method of cost ascertainment that collects the
overall costs from each department and ignores costs related to specific jobs within a
department. This reduces the volume of data, and makes data collection easy and quick.
The analysis is likewise simple and straightforward, and does not require any specialized
skills other than normal accounting skills.
The uses of process costing extend to help establish effective control over the production
process.
Process costing:
• Allows budgeting of uniform output and usage costs as standard costs, making it
possible to track deviations from such standard costs with ease. It becomes possible
to track the inefficiency or discrepancy to a specific process or department without
checking each department or process.
• Facilitates easy and accurate tracking of inventory.
Process costing makes it easy to obtain and predict the average cost of a product, allowing
accurate estimates to customers.
Compared to other costing methods, such as activity based costing, process costing is
inexpensive and does not drain the organization's time and resources.
6
Process costing is ideally suited for homogeneous products, and fails to provide an
accurate estimate of product costs when a single process produces many items or different
versions of a same item. It also remains suitable only for bulk process works and not for
customized orders. Apportionment of joint costs to diverse products may lead to irrational
pricing decisions in such cases.
While process costing enables budgeting standard costs, the costs obtained are historic
and not current, and their use for managerial decision-making remains limited.
Process costing makes it easy to offer estimates or quotations; it deviates from the
standard product, or allowing options for any value-added service. Process costing also
helps to fix standard costs of production, the accumulation of all costs and transferring
them to units as average costs raise the possibility of concealment of inefficiencies in
process. Process costing makes evaluation of the efficiency of individual processes or
productivity of an individual worker difficult.
7
What is Work in Progress?
In accounting, a work in progress (WIP) account is an inventory account that includes goods
that are in the process of being produced but are not yet finished. This account represents the
costs of resources that have been used but not yet turned into completed products. The work
in progress account, also referred to as work in process, is one of the inventory accounts
commonly used to track the flow of costs in a production process. Other common inventory
accounts include raw materials and finished goods. Inventory accounts are reported as current
assets on the company’s balance sheet. These accounts are used for internal analysis as well
as external financial reporting.
Cost of Goods Manufactured Calculation
The cost of goods manufactured in a fiscal period can be computed using cost data relating to
the work in progress account. Simply start with the beginning balance of the work in progress
account, add the costs of resources transferred into the account during the relevant period,
subtract the ending balance of the work in progress account for that period, and you will get
the cost of goods manufactured for that period.
Cost of Goods Manufactured = Beginning Balance + Transfers In – Ending Balance
Flow of Costs
Costs that are represented in the work in progress account include direct materials, direct
labor, and manufacturing overhead. As work proceeds in a production process, costs flow
from the raw materials inventory account, into the work in progress inventory account, and
then into the finished goods account. All of these costs are represented as current assets in
inventory accounts on the balance sheet. Once the finished goods are sold, the associated
costs are transferred to the cost of goods sold account on the income statement.
8
Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold
Just-in-Time and WIP
The work in progress account represents a cost to the company. These costs are storage costs
and obsolescence costs. Holding inventory is costly – it takes up storage space and requires
supervisory monitoring. The longer goods are held in storage, the higher the risk of these
goods becoming obsolete and therefore decreasing in value. Just-in-time inventory system
strives to minimize the amount of inventory held in the work in progress account, thereby
reducing the costs associated with holding inventory.
Equivalent Units of Production:
Definition and Explanation of Equivalent Units of Production:
After materials, labor and overhead costs have been accumulated in a department, the
department's output must be determined so that unit cost can be computed. A department
usually has some partially completed units in its ending inventory. It does not seem
reasonable to count these partially completed units as equivalent to fully completed units
when counting the department's output. These partially converted units are mathematically
converted into an equivalent number of fully completed units. In process costing this is done
by using the following formula:
Equivalent Units = Number of partially Completed Units × Percentage of Completion
Equivalent units of production for a period can be calculated in two different ways
1. Weighted Average method
2. First in First Out (FIFO) method
9
Equivalent Units―Weighted Average Method:
Weighted Average method blends together units and costs from the current period with units
and costs from the prior period. In a weighted average method the equivalent units of
production for a department are the number of units transferred to the next department of
finished goods plus the equivalent units in the department's ending work in process inventory.
Example:
Following is the data from Shaping and Milling department, one of the departments at Five
Star Company
Shaping and Milling Department Percent Complete
Units Materials Conversion
Work in process, May 1
Units started in production during May
Units completed in May and transferred to the next
department
Work in Process, May31
200
5,000
4,800
400
55%
100%*
40%
30%
100%*
25%
*It is always assumed that units transferred out of a department are 100% complete with
respect to the processing done in that department.
Note that the May1 beginning Work in Process is 55% complete with respect to materials
costs, and 30% complete with respect to conversion costs. This means that 55% of the
materials costs required to complete the units in the department has already been incurred.
Likewise, 30% of the conversion cost required to complete the units has already been
incurred.
Since Five Star's work in process inventories are at different stages of completion in terms of
amounts of materials cost and conversion cost that have been added in the department, two
equivalent unit figure must be completed. The equivalent units computations are shown on
next page.
10
Shaping and Milling Department Materials Conversion
Units transferred to the next department
Work in Process, May 31
400 units × 40%
400 units × 25%
Equivalent units of production
4,800
160
--------
4,960
=====
4,800
100
--------
4,900
=====
Note from above computations that units in the beginning work in process inventory are
ignored. The weighted average method is concerned only with the fact that there are 4,900
equivalent units for conversion cost in ending inventories and in units transferred to the next
department―the method is not concerned with the additional fact that some of this work was