Final Project Process-Costing
Final Project Process-Costing
Final Project Process-Costing
PROJECT REPORT
ON
THE CONCEPT OF process
costing
K.M.AGRAWAL COLLEGE
OF
ARTS , COMMERCE & SCIENCE
KALYAN (WEST).
UNIVERSITY OF MUMBAI
2013-14
PROCESS COSTING
CERTIFICATE
costing
For
MCOM (SEM I) IN THE
ACADEMIC YEAR 2013-14.
_______________
SIGNATURE OF CO-ORDINATOR: -
_______________
(MCOM COURSE)
SIGNATURE OF EXTERNAL EXAMINER: -
_______________
PROCESS COSTING
DECLARATION
I, PRATIK KHOLE THE STUDENT OF K.M.AGRAWAL COLLEGE OF MCOM
(SEM-I) HERE BY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON- T
THE CONCEPT OF process
costing
PLACE: KALYAN
DATE: ___/___/_____
________________________
PRATIK KHOLE
PROCESS COSTING
ACKNOWLEDGEMENT
I EXPRESS MY GRATEFUL THANKS TO PROJECT GUIDE
PROF.
PRATIK KHOLE
(RESERCHER)
PROCESS COSTING
Table Of Contents
SR.
NO.
1.
2.
3.
4.
5.
6.
TITLE
PAGE
NO.
INTRODUCTION
MEANING
8-9
10
11
12
STEPS
13-14
15-20
PRODUCT FLOW
21-23
EQUIVALENT UNITS
24-26
27
TRANSFERRED IN
28-29
COST STATEMENT
SIGN.
30
31-36
37
38
39-42
CONCLUSION
43
REFERENCE
44
PROCESS COSTING
1. INTRODUCTION
Process costing is a method of costing used mainly in manufacturing where units are
continuously mass-produced through one or more processes. Examples of this include the
manufacture of erasers, chemicals or processed food.
In process costing it is the process that is costed (unlike job costing where each job is
costed separately). The method used is to take the total cost of the process and average it over the
units of production.
Process costing is a method used in a situation where production follows a series of
sequential processes. The method is used to ascertain the cost of a product or service at each
stage of production, manufacture or process. It is generally applied in particular industries where
continuous mass production is possible. In view of the continuous nature of the process and the
uniformity of the output, it is not possible or necessary to identify a particular unit of output with
a time of manufacture. The cost of any particular unit must be taken as the average cost of
manufacture over a period. This can be complicated because of the need to apportion costs
between completed output and unfinished production at the end of the period. Wastage must also
be accounted for. In process costing, it is the average cost incurred that concerns management.
Process costing is used in a variety of industries, including food processing, paper
milling, chemical and drug manufacturing, oil refining, soap making, textiles, box-making, paint
and ink manufacturing, brewery, flour milling, bottling and canning, biscuits products, meat
products, sugar making, etc. It is probably the most widely used cost accounting system in the
world.
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 the assembly 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.
1. MEANING
6
PROCESS COSTING
Process Costing is a method of costing. It is employed where each similar units of
production involved in different series of process from conversion of raw materials into finished
output. Thus, .unit cost is determined on the basis of accumulated costs of each operation or at
each stage of manufacturing A product. Charles T. Horngren defines process costing as "a
method of costing deals with the mass production of the like units that usually pass the
continuous fashion through a number of operations called process costing." The application of
process costing where industries adopting costing procedure for continuous or mass production.
Textiles, chemical works, cement industries, food processing industries etc. are the few examples
of industries where process costing is applied.
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
PROCESS COSTING
Although, details will vary from one business concern to another, there are common
features in most process costing systems that should be taken note of.
These are:
I. Clearly defined process cost centers will normally be set up for each operational stage,
which can be identified. Expenditure for each cost centre is collected and, at the end of the
accounting period, the cost of the completed units are then transferred into a stock account
or to a further process cost centre. Accurate records are, therefore, required of units
produced and part produced units and the total cost incurred by the cost centers.
II. The cost unit chosen should be relevant to the organisation.
III. The cost of the output of one process is the raw material input cost of the following
process. The cost incurred in a process cost centre could include, therefore, costs
transferred from a previous process plus the raw materials, Labour and overhead costs
relevant to the cost centre.
IV. Wastage due to scrap, chemical reaction or evaporation is unavoidable. The operation or
manufacturing should, however, be in such a way that wastage can be reduced to the barest
minimum.
V. Either the main product or by-product of the production process may require further
processing before reaching a marketable state.
VI. Continuous or mass production where products which passes through distinct process or
operations.
VII. Each process is deemed as a separate operations or production centres.
VIII. Products produced are completely homogenous and standardized.
IX. Output and cost of one process are transferred to the next process till the finished product
completed.
X. Cost of raw materials, labour and overheads are collected for each process.
XI. The cost of a finished unit is determined by accumulated of all costs incurred in all the
process divided by the number of units produced.
PROCESS COSTING
XII. The cost of normal and abnormal losses usually incurred at different stages of production is
added to finished goods.
XIII. The interconnected processes make the final output of by-product or joint products
possible.
XIV. The production is continuous. The product is homogeneous, The process is standardized.
Output of one process become raw material of another process. The output of the last
process is transferred to finished stock
XV. Costs are collected process-wise, Both direct and indirect costs are accumulated in each
process. If there is a stock of semi-finished goods, it is expressed in terms of equivalent
units. The total cost of each process is divided by the normal output of that process to find
out cost per unit of that process.
PROCESS COSTING
10
PROCESS COSTING
11
PROCESS COSTING
12
PROCESS COSTING
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.
13
PROCESS COSTING
STEP 1:- Draw up a T account for the process account. (There may be more than one process,
but start with the first one initially.) Fill in the information given in the question.
PROCESS ACCOUNT
Particulars
Opening WIP
Materials
Labour
Overheads
Abnormal gain
Units
XXX
Rs.
Particulars
Units
Rs.
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
STEP 2:- Calculate the normal loss in units and enter on to the Process account. (The value will
be zero unless there is a scrap value see Step 4).
STEP 3:- Calculate the abnormal loss or gain (there wont be both). Enter the figure on to the
Process account and open a T account for the abnormal loss or gain.
STEP 4:- Calculate the scrap value (if any) and enter it on to the Process account. Open a T
account for the scrap and debit it with the scrap value.
STEP 5 :-Calculate the equivalent units and cost per unit.
STEP 6:- Repeat the above if there is a second process.
Note: Although this proforma includes both losses and WIP, the Paper F2/FMA syllabus
specifically excludes situations where both occur in the same process. Therefore, dont expect to
have to complete all of the steps in the questions.
14
PROCESS COSTING
Total cost increase Scrap value of normal loss x Units of abnormal loss
Input units Normal loss units
15
PROCESS COSTING
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.
CR.
PATICULARS
UNITS
TO PROCESS A/C.
XXX
RS.
PARTICULERS
XXX BY BANK
BY COSTING P &
UNITS
RS.
XXX
XXX
XXX
XXX
XXX
XXX
L A/C.
XXX
XXX
3. 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.
PROCESS COSTING
DR.
CR.
PARTICULARS
UNITS
RS.
PARTICULARS
TO NORMAL
LOSS A/C.
XXX
TO COSTING
P & L A/C.
XXX
XXX
XXX
XXX
UNITS
RS.
XXX
XXX
XXX
XXX
ILLUSTRATION:
Product A is obtained after it passes through three distinct processes. You are required to
prepare Process accounts from the following information:
PARTICULARS
PROCESS
X
RS.
Y
RS.
Z
RS.
TOTAL
RS.
MATERIAL
5,200
3,960
5,924
15,084
DIRECT WAGES
4,000
6,000
8,000
18,000
PRODUCTION
OVERHEADS
18,000
1,000 Units @ Rs. 6 Per Unit were introduced in Process X. Production overhead to be
distributed as 100% on Direct Wages.
ACTUAL OUTPUT
UNIT
NORMAL LOSS
PERCENTAGE
VALUE OF
17
PROCESS COSTING
PROCESS X
PROCESS Y
PROCESS Z
RS.
950
840
750
5%
10%
15%
SCRAP PER
UNIT
4
8
10
SOLUTION :
PROCESS X A/C.
DR.
PARTICULAR
MATERIAL
INTRODUCED @ RS. 6
PER UNIT
UNITS
RS.
UNITS
CR.
RS.
50
200
950
19,000
1,000
19,200
UNITS
CR.
RS.
NORMAL LOSS
95
760
ABNORMAL LOSS
15
600
840
19,000
950
34,960
UNITS
CR.
RS.
PARTICULAR
NORMAL LOSS
1,000
6,000
MATERIAL
TRANSFERRED TO
PROCESS Y @ RS. 20
5,200 PER UNIT
DIRECT WAGES
4,000
PRODUCTION
OVERHEADS
1,000
4,000
19,200
PROCESS Y A/C.
DR.
PARTICULAR
TRANSFERRED FROM
PROCESS X
UNITS
950
RS.
PARTICULAR
19,000
MATERIAL
3,960
DIRECT WAGES
TRANSFERRED TO
6,000 PROCESS Z @ RS. 40
PER UNIT
PRODUCTION
OVERHEADS
950
6,000
34,960
PROCESS Z A/C.
DR.
PARTICULAR
UNITS
RS.
PARTICULAR
18
PROCESS COSTING
TRANSFERRED FROM
PROCESS Y
NORMAL LOSS
840
MATERIAL
DIRECT WAGES
8,000
PRODUCTION
OVERHEADS
8,000
36
876
1,260
750
57,000
876
58,260
33,600
FINISHED GOODS
5,924 (@ RS. 76)
ABNORMAL GAIN @
RS. 76 PER UNIT
126
2,736
58,260
CR.
PARTICULAR
RS.
To Process Y
PARTICULAR
RS.
120
480
600
CR.
PARTICULAR
TO PROCESS Z A/C.
TO COSTING P&L A/C.
RS.
PARTICULAR
RS.
2,736
2,736
2,736
950 X 10
100
== 95 Units
19
PROCESS COSTING
Units
855
840
15
40 X 15 = 600
Abnormal Loss has been credited with Rs.120 being the amount realized from the sale of
scrap and Abnormal Loss.
PROCESS Z:
(A) Normal Process. 15% of 840 units = 840 X 15 = 126 Units
100
Sale of scrap = 126 X Rs. 10 = Rs. 1,260
(B) Abnormal gain
Actual production
Estimated production
Units
750
714
36
The Cost of Abnormal Gain has been calculated in the usual way
Abnormal Gain A/C has been debited with Rs.360 being less amount, recovered on the
sale of loss of units which were 90 units instead of normal 126 units. i.e., 36 x 10 = Rs. 360.
8. PRODUCT FLOW
As a product passes from one cost centre to another, per unit cost and total cost should be
determined. As shown in figure 2, the total cost incurred at the lower level of processing is to be
20
PROCESS COSTING
seen as the transferred in cost of the higher level to which cost of additional material and
conversion cost must be added before arriving at its total costs. That total cost may be a
transferred in cost, if the production process is not complete, or the final total cost of production,
if finished products have been arrived at. Product flows have to be accompanied by their total
costs at each level of processing.
ILLUSTRATION :A product passes through three distinct processes (A, B, and C) to completion. During the
period 15th May, 2009, 1000 liters were produced. The following information is obtained:
PARTICULARS
PROCESS A
MATERIAL COST
PROCESS B
40,000
20,000
5,000
LABOUR COST
PROCESS C
15,000
25,000
3,000
5,000
15,000
3,000
SOLUTION:PROCESS A A/C.
PARTICULAR
COST/LITER TOTAL
PARTICULAR
COST/LITER TOTAL
21
PROCESS COSTING
MATERIALS
40
40,000 TRANSFERRED
LABOUR
20
20,000 TO PROCESS B
DIR. EXPENSES
5,000
INDIRECT EXP.
10
10,000
75
75,000
75
75,000
75
75,000
PROCESS B A/C.
PARTICULAR
PROCESS A
MATERIALS
15
15,000 TO PROCESS C
LABOUR
25
25,000
DIR. EXPENSES
3,000
INDIRECT EXP.
12.5
130.50
12,500
1,30,500
130.50
1,30,500
130.50
1,30,500
PROCESS C A/C.
PARTICULAR
PROCESS B
MATERIALS
LABOUR
COST/LITER TOTAL
5,000 FINISHED
15
DIR. EXPENSES
3,000
INDIRECT EXP.
7.50
161
7,500
1,61,000
161
1,61,000
161
1,61,000
Note:
(A) Indirect expenses were apportioned as follows:
Process A = 20,000 x 30,000 =
60,000
10,000
12,500
22
PROCESS COSTING
7,500
30,000.
(B) The cost per liter of the product is N161 and, so, the selling price must be higher than that
amount if the business is to make any profit
(C) Indirect expenses include all expenses that cannot be directly traced to the productive
process and, so, they include general administrative, selling and distributive cost.
9. EQUIVALENT UNITS
At the end of a given period, in the course of the production process, it is virtually certain
that some items will only be partly completed (working- process). Some of the costs of the
period, therefore, are attributable to these partly completed units as well as to those that are fully
completed. In order to spread the costs equitably over part-finished and fully completed units, the
concept of equivalent units is used.
23
PROCESS COSTING
For the calculation of costs, the number of equivalent units is the number of equivalent
fully completed units which the partly completed units represent. For example, in a given period
production was 3,000 completed units, and 1,600 partly completed were deemed to be 60%
complete.
Total equivalent production = completed units plus equivalent units produced in work in
progress.
= 3,000 + (60% of 1,600)
= 3,000 + 960
= 3,960 units
The total costs for the period would be spread over the total equivalent production as follows:
Cost per unit =
Total Cost
Total equivalent production (units)
ILLUSTRATION :The production and cost data of Elsemco Shoemakers for the month of January, 2005
were as follows:
Materials
4,22,400
Labour
3,95,600
Overhead
2,25,000
Total cost
10,43,000
24
PROCESS COSTING
Production was 8,000 fully completed units and 2,000 partly completed. The percentage
completion of the 2,000 units work-in process was:
Material
80%
Labour
60%
Overhead
50%
Required:
Find the value of completed production and the value of work-in process (WIP).
Cost /
unit
44
10,43,000
112
43
25
= 112 x 8,000
= 8,96,0000
To check the value of WIP, the cost per each cost element is to be multiplied by the
number of equivalent units of production in WIP related to each cost element.
25
PROCESS COSTING
No.
equiv.
WIP
of Cost / unit
1,600
1,200
1,000
Material
Labour
Overhead
Value
44
43
25
Total
70.400
51,600
5,000
1,47,000
PROCESS ACCOUNT
Elements
Material
Labour
Overhead
WIP b/d
Units
10,000
10,000
2,000
Total cost
Elements
4,22,400 Goods transferred
3,95,600 to next stage
2,25,000 WIP c/d
10,43,000
1,47,000
Units
Total cost
8,000
2,000
8,96,000
1,47,000
10,000
10,43,000
10. ACCOUNTING TREATMENT OF SPOILAGES :In many industries, the amount of the process output will be less than the amount of the
materials input. Such shortages are known as process losses or spoilages, which may arise due to
a variety of factors such as evaporation, scrap, shrinkage, unavoidable handling, breakages, etc.
If the losses are in accordance with normal practice they are known as normal process
losses. But where losses are above expectation, they are known as abnormal losses, and as such
they should be charged to an appropriate account pending investigation.
Normal process spoilages are unavoidable losses arising from the nature of the
production process and, so, it is logical and equitable that the cost of such losses is included as
26
PROCESS COSTING
part of the cost of good production. This is because in the production of good units normal
spoilage occur. Since the spoilage arises under efficient operating conditions, it can be estimated
with some degree of accuracy.
Abnormal process spoilages are those above the level deemed normal in the production
process. Abnormal spoilage cannot be predicted and may be due to special circumstances such as
plant breakdown, inefficient working, or unexpected defects in materials. Abnormal spoilage is
the difference between actual spoilage in the period and the normal (estimated) spoilage.
Abnormal gain is where the actual spoilage is less than the normal spoilage.
The cost of abnormal spoilage is to be charged to the profit and loss account unlike the
cost of normal spoilage which is to be part of the good products total cost. Process account is to
be credited as abnormal loss account is debited. The abnormal loss account is then to be closed to
the profit and loss account.
Abnormal gain realized is to be credited to the abnormal gain account as process account
is debited. The abnormal gain account is to be closed to the credit of profit and loss account.
11.TRANSFERRED IN :It is important to remind the reader that the output of one process level forms the input
material to the next process level. The full cost of the completed units transferred forms the input
material cost of the subsequent process and, by its nature, must be 100% complete. Material
introduced is an extra material required by the process and should always be shown separately. If
there are partly completed units at the end of one period, there will be opening WIP at the
beginning of the next period. The values of the cost elements of the brought forward WIP are
normally known and they are to be added to the costs incurred during the period.
ILLUSTRATION :27
PROCESS COSTING
A process has a normal spoilage of 5% which has a resale value of N150 per kg. Find the
cost per kg of good production, if material cost is 27,000 and conversion cost is 13,000 of
producing 100 kg.
Find the abnormal spoilage and its value if good production was 91 kg and cost per kg of
good production is the same (that is 413.16 per kg).
SUGGESTED SOLUTION :Abnormal spoilage = 9 kg - 5 kg = 4 kg
PROCESS ACCOUNT
Particulars
Material
(kg.)
100
conversion
Value
Particulars
27,000 Good
13,000 production
Normal
Kg.
Value
91
37,598
750
1,652
100
40,000
spoilage
Abnormal
spoilage
100
40,000
Note:
Abnormal Spoilage Cost Was Determined As Follows:
Total Cost - (Cost Of Good Prod. + Cost Of Normal Spoilage)
40,000 - (91 X 413.16 + 5 X 150)
40,000 - (37,598 + 750)
40,000 - 38,348 = 1,652
Value
Particulars
value
28
PROCESS COSTING
Process a/c.
1,652
1,652
1,652
12.VALUATION PROCESS
FOR
COST STATEMENT
A number of stages are passed through in the valuation process for cost statement.
First,
The physical flow of the units of production must be calculated having regards to the
total number of units to be accounted for, regardless of the degree of completion.
Secondly,
The equivalent units involved in the physical flow are to be calculated. In this respect, it
is often necessary to divide the flow into its material cost element and conversion cost element as
the degree of Completion may vary between them.
Thirdly,
Having already established the physical units to be accounted for by means of the first
two stages, the total equivalent units and the current equivalent units involved are to be
29
PROCESS COSTING
calculated. These are to be accounted for in respect of the cost elements (transferred in cost,
material cost and conversion cost).
Fourthly,
The unit costs are to be calculated, paying attention to the stock valuation method
assumed (FIFO, WAP, LIFO, etc.).
ILLUSTRATION :Within the production department of Savannah Sugar Company Limited, there are two
processes which produce the finished product. Raw materials are introduced initially at the
commencement of Process 1 and further raw materials are added at the end of process 2.
Conversion costs accrue uniformly throughout both processes. The flow of the product is
continuous, the completed output of process 1 passes immediately into process 2 and the
completed output of process 2 passes immediately into the finished goods warehouse.
The following information is available for the month of June:
Process 1
Particulars
Unit / Rs.
30
PROCESS COSTING
unit 35,000
Opening WIP
2,10,000
Materials
Conversion (2/5 complete)
52,500
unit 1,68,000
unit 1,40,000
Closing WIP
( complete as to conversion)
Material introduced in June
Conversion cost added in June
unit 7,000
7,70,000
6,30,000
Process 2
Particulars
Opening WIP
Unit / Rs.
unit 42,000
3,43,000
3,92,500
unit 1,54,000
unit 56,000
4,62,000
22,0,5,000
Required:
Give the cost of production report of Theresa Alice Sugar Company Limited for the
month of June, using each of the WAP and FIFO methods, and showing clearly the cost of
finished production and WIP at end of the period.
31
PROCESS COSTING
The units to be accounted for, total equivalent units and current equivalent units are to be
determined before going to the cost statement, using each of the two stock valuation methods.
The heading of the report should be well expressed.
Cost of Production Report of Theresa Alice Sugar Company Limited for the month of
June, using Weighted Average Price (WAP) Method.
Process 1
Physical flow of units of material :WIP (beginning)
35,000
Material introduced
1,40,000
1,75,000
Particulars
Equivalent Units
Material
1,68,000
7,000
1,75,000
Conversion
1,68,000
7,000(100%)
1,68,000
3,500(50%)
1,75,000
35,000
1,40,000
1,71,500
14,000
1,57,500
COST STATEMENT
Cost Elements
Material
Conversion
Cost of
WIP
(beginning)
Current
Cost
Total Cost
2,10,000
52,500
7,70,000
6,30,000
9,80,000
6,82,500
2,62,500
14,00,000
16,62,500
T. E. U.
1,75,000
1,71,500
Cost
/Unit
5.60
3.98
9.58
32
PROCESS COSTING
7,000 x 1 x 5.6
7,000 x x 3.98
= 39,200
= 13,930
53,130
Another way (which is easier) of determining the cost of WIP ending is to find the
difference between total cost and cost of the completed units.
Cost of WIP (end)
Note:
The difference of N70 is due to the approximation made to two decimal places.
Cost of Production Report Using First-In-First-Out (FIFO) Method.
Process 1
Particulars
Material
Conversion
Current cost
7,70,000
C. E. Units
1,40,000
Units Cost
5.50
6,30,000
1,57,500
4.00
38,500
14,000
52,500
= 168,000 units
PROCESS COSTING
= 1,610,000.
42,000
Units transferred in
1,68,000
2,10,000
Particulars
Equivalent Units
Transferred in.
Material
conversion
1,54,000
1,54,000
1,54,000
1,54,000
56,000
56,000
000
21,000
2,10,000
1,54,000
1,75,000
42,000
1,68,000
000
1,54,000
28,000
1,47,000
WIP (Ending)
Total Units Accounted For
2,10,000
COST STATEMENT
Cost Elements
Transferred In
Material
Conversion
Cost of
WIP
(beginning)
3,43,000
0
3,92,000
7,35,000
Current
Cost
Total Cost
T. E. U.
Cost
/Unit
16,09,440
4,62,000
22,05,000
19,52,440
4,62,000
25,97,000
2,10,000
1,54,000
1,75,000
9.2973
3.0000
14.8400
42,76,440
50,11,440
TC/UNITS
27.1373
34
PROCESS COSTING
Transferred in
56,000 x 1 x 9.2973
520,648.80
Material
56,000 x 0 x 3
0.00
Conversion
311,640.00
832,288.80
Another Way
Cost of Ending WIP
Note that the difference of 7 is due to the approximation made to four decimal places.
Process 2:
Using FIFO Method
PARTICULARS
CURRENT
COST
TRANSFERRED IN
MATERIALS
CONVERSION
CURRENT
EQUIV. UNITS
UNIT
COST
16,09,440
1,68,000
9.58
4,62,000
1,54,000
3.00
22,05,000
1,47,000
15.00
27.58
56,000 x 1 x 9.58
= 5,36,480
Material
56,000 x 0 x 3
= 0
Conversion
56,000 x 3/8 x 15
= 3,15,000
851,480
= 154,000 units
35
PROCESS COSTING
36
PROCESS COSTING
37
PROCESS COSTING
38
PROCESS COSTING
S = 3,00,000 = 100/unit
3,000
T = 2,00,000 = 100/unit
2,000
SALES VALUE (AT THE POINT OF SEPARATION)
Under this method, the joint cost is shared among the joint products on the basis of their
sales value before further processing. At the split off point, market value can be estimated per
unit of each of the joint products. The ratios of the sales value of the joint products are to be used
as basis of apportioning the joint cost.
The problems with this method are two-fold: One, a product may have zero value at the
point of separation but significant value with little processing cost after the split-off point.
Secondly, a product may have high selling price at the split-off point and hence high sales value
but may involve large selling and distribution cost (advert, carriage, etc) so that its value is much
less than its selling cost.
ILLUSTRATION
`Assuming that Anadariya Company Ltd has estimated the following selling prices for its
three products at the point of separation:
K
400/unit
440/unit
340/unit
Use the Sales Value method to apportion the joint cost and determine the per unit cost of each of
the three products.
SUGGESTED SOLUTION :(A)
PRODUCT
UNIT
SP/UNITS
SALES VALUE
RATIO
SHARE OF JC
5,000
400
20,00,000
50%
5,00,000
3,000
440
13,20,000
33%
3,30,000
2,000
340
6,80,000
17%
1,70,000
40,00,000
10,00,000
S = 3,30,000 = 110/Unit.
39
PROCESS COSTING
5,000
3,000
T = 1,70,000 = 85/Unit.
2,000
ILLUSTRATION
Assuming that the sales values in illustration are market prices after further processing
and that separate processing and marketing costs are as follows:
K = 2,00,000
S = 3,00,000
T = 1,60,000
Determine the share of the joint cost to the three (3) products. Show also the per unit cost
of each of the three products.
SUGGESTED SOLUTION:(1)
PRODUCT
UNIT
SP/UNITS
SALES VALUE
SPC
NRV
SHARE OF JC
VALUE
K
5,000
400
20,00,000
2,00,000
18,00,000
5,00,000
3,000
440
13,20,000
3,00,000
10,20,000
3,30,000
2,000
340
6,80,000
1,60,000
5,20,000
1,70,000
33,40,000
10,00,000
40,00,000
Note:
(A) Net Realizable Value (NRV) = Sales Value Less separate processing costs (SPC).
(B) The total of the NRV of all the joint products is obtained and the joint cost is shared in
proportion to the NRV of each product.
(C) This method is the best as it considers the quantity (units) produced of all the joint
products, their sales values and their further processing costs.
(2) Unit cost based on the share of joint cost:
K = 538,922 = 108/unit
5,000
S = 305,389 = 102/unit
3,000
T = 155,689 = 78/unit
2,000
40
PROCESS COSTING
538,922 + 200,000
5,000
738,922
5,000
147.78
S=
305,389 + 300,000
3,000
605,389
3,000
201.80
T=
155,689 + 160,000
2,000
315,689
2,000
157.84
If there are closing inventory of Product K (900 units), S (500 units) and T (400 units),
the value of closing stock for reflection in the balance sheet could be determined as follows:
K=
900 x 147.78 =
133,002
S=
500 x 201.80 =
100,900
T=
400 x 157.84 =
63,136
297,038
Note:
It should be understood that profit is always the difference between total revenue (sales
value) and total cost. That economics principle is very much applicable in joint-product costing.
41
PROCESS COSTING
18. CONCLUSION
This chapter has introduced the meaning of process costing, its application areas, and how
it can be put to use for proper accountability. The characteristics of process costing, how
products flow in the course of processing, the equivalent units of production to be transferred to
the next stage of production, accounting for spoilages/losses and the valuation process for cost of
production report have all been treated. Finally, cost of production and report write-ups have
been adequately illustrated, using highly standardized exercises. Process costing, which is
arguably the most widely used costing in the world, has been given adequate coverage it
deserves.
The chapter has also put the readers through joint products costing, where three different
methods of apportioning joint cost to joint products were discussed. By-product, and its
accounting treatment, has also been discussed.
42
PROCESS COSTING
19.REFERENCE:LOTS OF BOOKS AND WEBSITES ARE AVAILABLE FOR THIS PROJECT BUT THE
ABOVE MATERIAL OR INFORMATION ABOUT THE PROCESS COSTING IS
COLLECTED FROM THE FOLLOWING SOURCES:1. INTERNET
2. COST ACCOUNTING TEXTBOOKS
3. COST ACCOUNTING REFERENCE BOOKS
COST ACCOUNTING S P GUPTA, AJAY SHARMA, SATISH AHUJA FK
PUBLICATIONS.
43