INTRODUCTION:

CHAPTER 1: INTRODUCTIONINTRODUCTION OF PROCESS COSTING:Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in these type of industries also. It is assumed in process costing that the average cost presents the cost per unit. Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit.

Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". MEANING: Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.

DEFINITION: CIMA London defines process costing as that form of operation costing which applies where standardize goods are produced.

WHAT IS PROCESS COSTING?Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced. (Job costing or job order costing is a method used when the units manufactured vary significantly from one another.)To illustrate process costing, lets assume that a product requires several processing operations-each of which occurs in a separate department. The costs of Department One for the month of June amount to $150,000 of direct materials and $225,000 of conversion costs (direct labor and manufacturing overhead). If the number of units processed in June in Department One is the equivalent of 100,000 units, the per unit cost of the products processed in Department One in June will be $1.50 for direct materials and $2.25 for conversion costs. These costs will then be transferred to Department Two and its processing costs will be added to the cost of the units.

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.CHAPTER 2: PROCESS COSTINGPROCESS COSTING:

The process costing is applied to the continuous mass manufacturing system where uniform standard units are produced on large scale. Like job costing, there is no necessity of maintaining the detailed records for each job because the total production consists of identical units. Here the unit cost is ascertained on the basis of average calculations. Under this system, all the costs for a period are accumulated by departments or other cost centers. The unit cost is ascertained dividing the number of units produced during the period by the total accumulated costs for that period. It should be noted that in the denominator, the units which are completed during the year are considered. But in reality there can arise following three types of situations:

Uncompleted units of the prior period completed during the current period. Such units are shown as the work-in-progress or WIP at the beginning of the period.

Units started and completed during the current period.

Units started during the current period but remain un- completed at the end of the current period. Such units are shown as the work-in-progress or WIP at the end of the year or period.

We have noted above that for the purpose of ascertaining the cost per unit, only the completed units are considered. So the beginning work-in-progress (i.e. above 1) and the ending work-in-progress (i.e. above 3) are converted into the equivalent completed units on the basis of their stages of completion. For such calculation, the information about the stage of completion is very important ; e.g. the end of the period say 1,000units are in process and the processing on them have been completed only up to 40%. In this case, 1000 uncompleted units will be treated as 400 completed units for the purpose of ascertaining the cost per unit.

It should be noted that if the units are lost or spoiled during the processing in any department, such loss in borne by the units complete and remained uncompleted in that department. Thus the cost of lost units is spread over the remaining units on some equitable basis.

In case where the products are processed in more than one department, the costs of one department are transferred to the next department and the total cost and the total units are accumulated till the stage of completion.

The ascertainment of various elements of cost is made as under:

DIRECT MATERIAL COST: The cost of materials used for the period is determined by totaling the material requisitions of that period. The total represents the cost of materials consumed which are charged to the producing department as a whole rather than the individual job as in the case of job costing.

DIRECT LABOR COST: Direct labor cost is determined by the total pay bill of the respective departments. Sufficient care should be taken to see that wages considered for these calculations are for those employees whose work can be specifically identified with the actual production the respective departments.

OVERHEADS: The overheads are apportioned to the various production departments on some scientific basis. Generally, it is the practice to apply the predetermined overhead rates in proportion to the direct material, direct labor, labor hour rate, machine hour rate, or some other reasonable basis.

It may be desirable to use different overhead rates for each producing department since the various departments may not incur overheads in the same proportion.

To sum up in process costing there is no necessity of maintaining the detailed records for each job (like job costing) because the total production consists of identical units.

FEATURS: Process costing can be defined as costing method which ascertains the cost of a product at the stage of manufacturing. In simple words under process costing the product of one process becomes the input of next process. Here is the list of the features of process costing

Production under process costing is done through continuous flow of products which are identical or homogeneous.

Costs are computed periodically and also average cost can be easily computed under this method of costing.

Under this cost data is available process as well as departments thus enabling a better control over costs by the management.

In process costing sometimes by-products may emerge which have to be further processed in order to make them marketable and hence accordingly accounting adjustment needs to be made for such by- products.

There is always some work in progress under proves costing both at the beginning and at the end of the accounting period because it is a continuous process.

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.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 departments separately to control wastage etc.

Many Products, Many Cycles: A Bakery can use the same equipments to produce either bread or cakes. It may produce 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.REASONS FOR USE:

Companies need to allocate total product costs to units of product for the following reasons:

A company may manufacture thousands or millions of units of product in a given period of time.

Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies), etc.

Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.

Managers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets.

A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities.

Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this. By determining what cost the part processed material has incurred such as labor or overhead an "equivalent unit" relative to the value of a finished process can be calculated.

ADVANTAGES OF PROCESS COSTING:The methods of process costing are following advantages.

1) Periodical determination of costs:

Process cost can be collected and determined for even a short period like a day, a week or a month. 2) Simple and Cheap:

Process costing is a 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 cost 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 processes and products:

The process and products are standard; it is easy to make decisions regarding pricing, quotations, tenders etc.

5) Process costing helps in preparation of tender, quotations

6) It is easy to allocate the expenses to processes in order to have accurate costs

7) Use of standard costing systems in very effective in process costing situations

DISADVANTAGES OF PROCESS COSTIONG: The method of process costing has the following disadvantages.

1) Cost obtained at each process is only historical cost and are not very useful for effective control.

2) Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.

3) Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.

4) The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.

5) Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.

PROCESS COST PROCEDURES:

There are four basic steps in accounting for Process cost:

Summarize the flow of physical units of output.

Compute output in terms of equivalent units.

Summarize total costs to account for and Compute equivalent unit costs.

Assign total costs to units completed and to units in ending work in process inventory.DISTINCTION BETWEEN JOB COSTING AND PROCESS COSTING: Job order costing and process costing are two different systems. Both the systems are used for cost calculation and attachment of cost to each unit completed, but both the systems are suitable in different situations. The basic difference between job costing and process costing are

No.

Process costing

Production is contentious

Each job many be different.

Product is homogeneous and standardized.

Cost is determined for each job separately.

Costs are complied for each process for department on time basis i.e. for a given accounting period.

Cost is complied when a job is completed.

Cost is calculated at the end of the cost period.

Proper control is comparatively difficult as each product unit is different and the production is not continuous.

Proper control is comparatively easier as the production is standardized and is more suitable.

There is usually not transfer from one job to another unless there is some surplus work.

The output of one process is transferred to another process as input.

There may or may not be work-in-progress.

There is always some work-in-progress because of continuous production.

8.Suitability

Suitable to industries where production is intermittent. Suitable, where goods are made for stock and productions is continuous.

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)

COST OF PROCESS:The cost of the output of the process (Total Cost less Sales value of scrap) is transferred to the next process. The cost of each process is thus made up to cost brought forward from the previous process and net cost of material, labour and overhead added in that process after reducing the sales value of scrap. The net cost of the finished process is transferred to the finished goods account. The net cost is divided by the number of units produced to determine the average cost per unit in that process. Specimen of Process Account when there are normal loss and abnormal losses.

Dr. Process I A/c Cr.ParticularsUnitsRs.ParticularsUnitsRs.

To Basic MaterialxxxxxBy Normal Lossxxxxx

To Direct MaterialxxBy Abnormal Lossxx

To Direct WagesxxBy Process II A/c.xx

To Direct Expensesxx(output transferred to

To Production OverheadsxxNext process)

To Cost of Rectification of Normal DefectsxxBy Process I Stock A/c.xx

To Abnormal Gainsxx

Total xxxxxxTotal xxxxxx

PROCESS LOSSES/GAINS:

In many process, some loss is inevitable. Certain production techniques are of such a nature that some loss is inherent to the production. Wastages of material, evaporation of material is unavoidable in some process. But sometimes the Losses are also occurring due to negligence of Labourer, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Also has some abnormal gains. Normal Loss:

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past

Experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness. It may occur at any time of the process.

No of units of normal loss: Input x Expected Percentage Of Normal loss.

The cost of normal loss is a process. If the normal loss units can be sold as a crap then the sale value is credited with process account. If some rectification is required before the sale of the normal loss, then debit that cost in the process account. After adjusting the normal loss the cost per unit is calculates with the help of the following formula:Cost of good unit:

Total cost increased Sale Value of Scrap

Input Normal Loss unitsDr. Normal Loss A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To process I

To process II

To process IIIxx

xx

xxxx

xx

xxBy actual sale I

By actual sale II

By actual sale III (normal)

By abnormal gain a/c (shortfall)xx

xx

xx

xxxx

xx

xx

xx

TotalxxxxxxTotalxxxxxx

Abnormal Loss:

Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness, accident etc. such losses are in excess of pre-determined normal losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses. The units of abnormal losses in calculated as under:Abnormal Losses = Actual Loss Normal Loss

The value of abnormal loss is done with the help of following Formula:

Value of Abnormal Loss:

Total Cost increase Scrap Value of normal Loss x Units of abnormal loss

Input units Normal Loss Units

Abnormal Process loss should not be allowed to affect the cost of production as it is caused by abnormal (or) unexpected conditions. Such loss representing the cost of materials, labour and overhead charges called abnormal loss account. The sales value of the abnormal loss is credited to Abnormal Loss Account and the balance is written off to costing P & L A/c. Dr. Abnormal Loss A/c Cr.ParticularsUnitsRs.ParticularsUnitsRs.

To Process A/cxxxxBy Bank xxxx

By Costing P & L A/cxxxx

Total xxxxTotal xxxx

Abnormal Gains:

The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal conditions) and slight differences are bound to occur between the actual output of a process and that anticipates. This difference may be positive or negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The value of the

abnormal gain calculated in the similar manner of abnormal loss.

The formula used for abnormal gain is:

Abnormal Gain

Total Cost incurred Scrap Value of Normal Loss x Abnormal Gain Unites

Input units Normal Loss Units

The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real Gain. Dr. Abnormal Gain A/c Cr.Particulars Units Rs.Particulars Units Rs.

To Normal loss A/cxxxxBy Process A/cxxxx

To Casting P & L A/cxxxx

Total xxxxTotal xxxx

CHAPTER 3: INTER PROCESS PROFITS & VALUATION OF WIPINTER PROCESS PROFITS:

Normally the output of one process is transferred to another process at cost but sometimes at a price showing a profit to the transfer process. The transfer price may be made at a price corresponding to current wholesale market price or at cost plus an agreed percentage. The advantage of the method is to find out whether the particular process is making profit (or) loss. This will help the management whether to process the product or to buy the product from the market. If the transfer price is higher than the cost price then the process account will show a profit. The complexity brought into the accounting arises from the fact that the inter process profits introduced remain a part of the prices of process stocks, finished stocks and work-in-progress. The balance cannot show the stock with profit. To avoid the complication a provision must be created to reduce the stock at actual cost prices. This problem arises only in respect of stock on hand at the end of the period because goods sold must have realized the internal profits. The unrealized profit in the closing stock is eliminated by creating a stock reserve. The amount of stock reserve is calculated by the following formula.Stock Reserve = Transfer Value of stock x Profit included in transfer price

Transfer Price

VALUATION OF WORK-IN-PROCESS:Meaning of Work-in-Progress:Since production is a continuous activity, there may be some incomplete production at the end of an accounting period. Incomplete units mean those units on which percentage of completion with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-Progress is valued in terms of equivalent or effective production units.

Meaning of equivalent production units:This represents the production of a process in terms of complete units. In other words, it means converting the incomplete production into its equivalent of complete units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity. The principle applies when operation costs are apportioned between work in progress and completed units.

Equivalent units of = Actual no. of units in progress x Percentage of work work in progress completed

Equivalent unit should be calculated separately for each element of cost (viz. material, labour and overheads) because the percentage of completion of the different cost component may be different.

ACCOUNTING PROCEDURE:

The following procedure is followed when there is Work-in-Progress

1) Find out equivalent production after taking into account of the process losses, degree of completion of opening and / or closing stock.2) Find out net process cost according to elements of costs i.e. material, labour and overheads.3) Ascertain cost per unit of equivalent production of each element of cost separately by dividing each element of costs by respective equivalent production units.4) Evaluate the cost of output finished and transferred work in-progress

The total cost per unit of equivalent units will be equal to the total cost divided by effective units and cost of work-in-progress will be equal to the equivalent units of work-in-progress multiply by the cost per unit of effective production.

In short the following from steps an involved.

Step 1 prepare statement of Equivalent production

Step 2 Prepare statement of cost per Equivalent unit

Step 3 Prepare of Evaluation

Step 4 Prepare process accountThe problem on equivalent production may be divided into four groups.

1) when there is only closing work-in-progress but without process losses

2) When there is only closing work-in-progress but with process losses

3) When there is only opening as well as closing work-in-progress without process losses

4) When there is opening as well as closing work-in-progress with process losses

Situation I :

Only closing work-in-progress without process losses :

In this case, the existence of process loss is ignored. Closing work-in-progress is converted into equivalent units on the basis of estimates on degree of completion of materials, labour and production overhead. Afterwards, the cost pr equivalent unit is calculated and the same is used to value the finished output transferred and the closing work-in-progress

Situation II:

When there is closing work-in-progress with process loss or gain.

If there are process losses the treatment is same as already discussed in this chapter. In case of normal loss nothing should be added to equivalent production. If abnormal loss is there, it should be considered as good units completed during the period. If units scrapped (normal loss) have any reliable value, the amount should be deducted from the cost of materials in the cost statement before dividing by equivalent production units. Abnormal gain will be deducted to obtain equivalent production.

Situation III:

Opening and closing work-in-progress without process losses.

Since the production is a continuous activity there is possibility of opening as well as closing work-in-progress. The procedure of conversion of opening work-in-progress will vary depending on the method of apportionment of cost followed viz, FIFO, Average cost Method and LIFO. Let us discuss the methods of valuation of work-in-progress one by one.

(a) FIFO Method: The FIFO method of costing is based on the assumption of that the opening work-in-progress units are the first to be completed. Equivalent production of opening work-in-progress can be calculated as follows:

Equivalent Production = Units of Opening WIP x Percentage of work needed to

finish the units

(b) Average Cost Method: This method is useful when price fluctuate from period to period. The closing valuation of work-in-progress in the old period is added to the cost of new period and an average rate obtained. In calculating the equivalent production opening units will not be shown separately as units of work-in-progress but included in the units completed and transferred.

(c) Weighted Average Cost Method: In this method no distinction is made between completed units from opening inventory and completed units from new production. All units finished during the current accounting period are treated as if they were started and finished during that period. The weighted average cost per unit is determined by dividing the total cost (opening work-in-progress cost + current cost) by equivalent production.

(d) LIFO Method: In LIFO method the assumption is that the units entering into the process is the last one first to be completed. The cost of opening work-in-progress is charged to the closing work-in-progress and thus the closing work-in-progress appears cost of opening work-in-progress. The completed units are at their current cost.Following are the statements uses in valuation of WIP.

1) Format of statement of Equivalent Production :

InputOutputEquivalent

Production

ParticularsUnitsParticularsUnitsMaterialLabourOverheads

%Units%Units%Units

Opening

StockxxUnits

completedxxxxxxxxxx

Units

IntroducedxxNormal

Lossxx--------

Abnormal

Lossxxxxxxxxxx

xxEquivalent

Unitsxxxxxxxxxxxxxx

2) Statement of cost per Equivalent Units :

Element of costingCost

Rs.Equivalent

UnitsCost per

Equivalent

Units Rs

Material Cost (Net)xxxxxx

Labour Costxxxxxx

Overheads Costxxxxxx

Total xxxx

3) Statement of Evaluation:

ParticularsElement of

costEquivalent

UnitsCost per

equivalent

units

Rs.Cost

Rs.Total

Cost

Rs.

Units completedMaterialxxxxxx

Labourxxxxxx

Overheadsxxxxxxxxx

Closing WIPMaterialxxxxxx

Labourxxxxxx

Overheadsxxxxxxxxx

Abnormal LossMaterialxxxxxx

Labourxxxxxx

Overheadsxxxxxxxxx

CHAPTER 4: ILLUSTRATIONSIllustration 1: Process Costing (normal loss/ abnormal loss/ abnormal gain)

A product passes through two distinct processes A and B and thereafter to finished stock, From the following information you are required to prepare the process accounts, normal loss, abnormal loss and abnormal gain accounts :

ParticularsProcess A (Rs)Process B (Rs)Process C (Rs)

Material consumed

Direct labour

Manufacturing expenses

Input in process A (units)

Input in value

Output (units)

Normal wastage %

Value of normal wastage (per 100 units)12,000

14,000

4,000

10,000

10,000

9,400

5

86,000

8,000

4,000

-

-

8,300

10

1010,000

12,000

6,000

-

-

7,600

10

10

Solution :

Dr. Process A A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To input

To materials consumed

To direct labourTo manufacturing expenses 10,000

10,000

12,000 14,000

4,000By normal loss

By abnormal loss

By process B a/c (@ Rs. 4.21 p.u.)500

100

9,40040

421

39,539

10.00040,00010,00040,000

Dr. Process B A/c Cr.ParticularsUnitsRs.ParticularsUnitsRs.

To input To materials consumed To direct labour

To manufacturing expenses 9,400

39,539

6,000

8,000

4,000By normal loss

By abnormal loss

By process B a/c (@ Rs. 6.79 p.u.)940

160

8,30094

1,086

56,359

9,40057,5399,40057,539

Dr. Process C A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To input To materials consumed To direct labour To manufacturing expenses

To abnormal gain8,300

13056,359

10,000

12,000

6,000

1,467By normal loss

By finished stock a/c

(@ Rs.11.28 p.u.)830

7,60083

85,743

8,43085,8268,43085,826

Dr. Normal Loss A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To process A a/c To process B a/c To process C a/c500 940 830

40 94 83

By abnormal gain a/c

By cash/bank a/c Process A Process B Process C130

500 940 70013

40 94 70

2,2702172,270217

Dr. Abnormal Loss A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To process A a/c

To process B a/c

100

160

421

1,086

By cash/bank a/c Process A Process B

By profit & loss a/c 100 160

8 16

1,483

2601,5072601,507

Dr. Abnormal Gain A/c Cr.

ParticularsUnitsRs.ParticularsUnitsRs.

To Normal Loss a/c

To profit & loss a/c

13013

1,454By process C a/c1301,467

1301,4671301,467

Illustration 2: Inter Process Profits (opening & closing stocks: Two processes)

A ltd. Produces product AXE which passes through two proce3sses before it is completed and transferred to finished stock. The following data relate to October 2003.ParticularsProcess I

(Rs.)Process II

(Rs.)Finished Stock (Rs.)

Opening stock

Direct materials

Direct wages

Factory overheads

Closing stock

Inter-process profit included in opening stock7,500

15,000

11,200

10,500

3,700

-9,000

15,750

11,250

4,500

4,500

1,500

22,500

11,250

8,250

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

Output of process II is transferred to finished stock at 20% profit on the transfer price. Stocks in process are valued at prime cost. Finished stock is valued at the price at which it is received from the process II. Sales during the period are Rs. 1,40,000.

Required: process cost accounts and finished goods account showing the profit element at each state.

Solution :

Dr. Process I A/c Cr.

ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)

To opening stock

To direct materials

To direct wages7,500

15,000

11,2007,500

15,000

11,200-

-

-By transfer to process II a/c54,00040,50013,500

Less: closing stock33,700

3,70033,700

3,700-

-

To prime cost

To overheads30,000

10,50030,000

10,500-

-

To process cost

To profit on total cost(20%)40,500

13,50040,500

--

13,500

Total54,00040,50013,500Total54,00040,50013,500

Dr. Process II a/c Cr.

ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)

To opening stock

To transferred from process I

To direct materials

To direct wages9,000

54,000

15,750

11,2507,500

40,500

15,750

11,2501,500

13,500

-

-

By transfer to finished stock a/c1,12,50075,75036,750

Less: closing stock90,000

4,500

75,000

3,75015,000

750

To prime cost

To overheads85,500

4,50071,250

4,50014,250

-

To process cost

To profit on total cost(25%)90,000

22,50075,750

-14,250

22,500

Total1,12,50075,75036,750Total1,12,50075,75036,750

Dr. Finished Stock a/c Cr.

ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)ParticularsTotal

(Rs.)Cost

(Rs.)Profit

(Rs.)

To opening stock

To transferred from process II22,500

1,12,50014,250

75,7508,250

36,750By sales1,40,00082,50057,500

Less: closing stock1,35,000

11,25090,000

7,50045,000

3,750

To finished stock cost

To profit1,23,750

16,25082,500

-41,250

16,250

Total1,40,00082,50057,500Total1,40,00082,50057,500

Working notes: Let the transfer price be 100, then profit is 25; i.e cost is 75.

1) If cost is Rs. 75, then profit is Rs. 25.

If cost is Rs. 40,500,then profit = 25/75x 40,500 = Rs. 13,500

2) If cost is Rs. 80, then profit is Rs. 20.

If cost is Rs. 90,000,then profit = 20/80x 90,000 = Rs. 22,500

3) If cost is Rs. 90,000, then profit is Rs. 15,000.

If cost is Rs4,500,then profit = 15,000/90,000x 4,500 = Rs. 750. Calculation of actual profit:

ParticularsApporent profitUnrealized profitActual profit

Op.stock (+)Cl. stock (-)

Process I13,500--13,500

Process II22,5001,50075023,250

Finished stock16,2508,2503,75020,750

Total57,500

Valuation of closing stock:

ParticularsClosing stock cost (Rs.)

Process I3,700

Process II3,750

Finished Stock7,500

Total14,950

Illustration 3: Valuation of Work In ProcessABC manufacturing company having process costing system

Opening WIP 2,000 units value at:Material- 4,200; labour & overheads-1,950

Introduced units during year 4,000 unitsCost incurred during period;

Material-9,000; labour & overheads-7,500

WIP units at end 1,500. completing stage of closing WIP;

Material-100%; labour & overheads-50%

Completion stage of opening WIP;

Material-100%; labour & overheads-75%

Prepare following statement by using average & FIFO method:

a) Statement of Equivalent Production b) Statement of cost per Equivalent Units c) Statement of Evaluationd) Process Accountsolution: AVERAGE METHOD

statement of Equivalent Production : InputOutputEquivalent

Production

ParticularsUnitsParticularsUnitsMaterialLabour &

Overheads

%Units%Units

Opening

Stock2,000------

Units

Introduced4,000

Finished stock4,5001004,5001004,500

Closing WIP1,5001001,50050750

Total 6,000Total 6,0006,0006,000

Statement of cost per Equivalent Units :Element of costingCost

Rs.Equivalent

UnitsCost per

Equivalent

Units Rs

Material 13,2006,0002.2

Labour & Overheads9,4505,2501.8

Total 4

Statement of Evaluation:

ParticularsElement of

costEquivalent

UnitsCost per

equivalent

units

Rs.Cost

Rs.Total

Cost

Rs.

Finished stockMaterial4,5002.29,900

Labour & Overheads4,5001.88,10018,000

Closing WIPMaterial1,5002.23,300

Labour & Overheads7501.81,3504,650

Dr. Process A/c Cr.ParticularsUnits Rs.ParticularsUnits Rs.

To opening WIP

To material

To labour & overheads 2,000

4,000

6,150

9,000

7,500

By finished stock

By closing WIP4,500

1,50018,000

4,650

Total 6,00022,650Total 6,00022,650

FIFO METHOD

statement of Equivalent Production :InputOutputEquivalent

Production

ParticularsUnitsParticularsUnitsMaterialLabour &

Overheads

%Units%Units

Opening

Stock2,000Opening Stock2,000--25500

Units

Introduced4,000

Finished stock2,5001002,5001002,500

Closing WIP1,5001001,50050750

Total 6,000Total 6,0004,0003,750

Statement of cost per Equivalent Units :Element of costingCost

Rs.Equivalent

UnitsCost per

Equivalent

Units Rs

Material 9,0004,0002.25

Labour & Overheads7,5003,7502

Total 4.25

Statement of Evaluation:

ParticularsElement of

costEquivalent

UnitsCost per

equivalent

units

Rs.Cost

Rs.Total

Cost

Rs.

Opening WIPMaterial (100%)

Labour & Overheads (75%)6,150

Opening WIPMaterial

Labour & Overheads (25%)50021,0001,000

Finished stockMaterial2,5002.255,625

Labour & Overheads2,50025,00010,625

Total value of finished stock17,775

Closing WIPmaterial1,5002.253,375

Labour & overheads75021,5004,875

Dr. Process A/c Cr.ParticularsUnits Rs.ParticularsUnits Rs.

To opening WIP

To material

To labour & overheads 2,000

4,000

6,150

9,000

7,500

By finished stock

By closing WIP4,500

1,50017,7754,875

Total 6,00022,650Total 6,00022,650

Comments:The only difference between the weighted-average method and the FIFO method is the treatment of the beginning inventory. The FIFO method separates the transferred units into units from the beginning inventory and units started and completed during the current period. The FIFO method is therefore more complex than the weighted-average method; however, it more accurately reflects the production costs incurred during the current period.

CHAPTER 5: FINDINGS, RECOMMENDATION & CONCLUSION

"Process costing is used to ascertain the cost of each stage of manufacture where material is passed through various operation to obtain a final product to result, with by - products in many cases at different stages"

This is adescriptive research as it will clarify thewhat is process costing. It would give us a clear picture on the process costing which is appropriate for companies that produce a continuous mass of like units through series of operations or processDetailed examination of available pieces of information which help us to better understanding of a topic. i.e. we understood what is process costing, when process costing is applied, what is the advantages & disadvantages of process costing, what is process costing procedure, various types of process costing i.e. Simple Process Costing, Inter Process Profit, Valuation of WIP.In case of Inter Process Profit, Normally the output of one process is transferred to another process at cost but sometimes at a price showing a profit to the transfer process. The transfer price may be made at a price corresponding to current wholesale market price or at cost plus an agreed percentage. The advantage of the method is to find out whether the particular process is making profit (or) loss. In case of valuation of WIP, The only difference between the weighted-average method and the FIFO method is the treatment of the beginning inventory. The FIFO method separates the transferred units into units from the beginning inventory and units started and completed during the current period. The FIFO method is therefore more complex than the weighted-average method; however, it more accurately reflects the production costs incurred during the current period. 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 book keeping than does a job-order costing system. So, a lot of companies prefer to use process-costing system.BIBLIOGRAPHY:

M.COM-I Advanced Cost Accounting Text Book www.mu.ac.in/myweb_test/MCOM-Ac-%20Paper%20-%20II.pdf

en.wikipedia.org/wiki/Process_costing www.futureaccountant.com/process-costing/

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