Management Information (ICAI)
Management Information (ICAI)
Management Information (ICAI)
Meaning
Process Costing
Methods
Valuation of WIP
Equivalent Units
Inter-process Profit
Operation Costing
Raw Finished
Process-I Process-II Process-III
Material Goods
Apportionment to:
`85,000
Process- I = ×`80,000 = ` 20,000;
`3, 40,000
`85,000
Process- II = ×`2,00,000 = `50,000 and
`3, 40,000
`85,000
Process- III = ×`60,000 = `15,000
`3, 40,000
Solution
Process- I Account
`97,000 − 0
= ×4,750 units = 97,000
5,000 units − 250 units
`97,000 − `500
= ×4,750units = 96,500
5,000units − 250units
` 97,000- `500
= ×200units = `4,063
5,000units-250units
`97,000- `500
= ×4,550units = ` 92,437
5,000units-250units
Solution
Process- I Account
`97,000 − `500
= ×100 units = `2,032
5,000 units − 250 units
`97,000 − `500
= ×4,850units = ` 98,532
5,000units − 250units
(Process A/c is debited with the value of abnormal gain as calculated above but
the Costing Profit & Loss Account will only be credited with actual amount of
abnormal gain only considering the actual realisable value through Abnormal
Gain A/c, as shown below)
Abnormal Gain A/c
(The Costing P&L Account is credited only for actual gain amount)
ILLUSTRATION 2
A product passes through three processes. The output of each process is treated as
the raw material of the next process to which it is transferred and output of the
third process is transferred to finished stock.
10,000 units have been issued to the Process-I and after processing, the output of
each process is as under:
No stock of materials or of work-in-process was left at the end. CALCULATE the cost
of the finished articles.
SOLUTION
Dr. Process-I Account Cr.
Particulars Units Total Particulars Units Total
(`) (`)
To Material 10,000 40,000 By Normal Loss A/c 200 --
(2% of 10,000 units)
” Labour -- 6,000 ” Abnormal Loss A/c 50 286
(` 5.7142 × 50 units)
” Manufacturing -- 10,000 ” Process-II A/c 9,750 55,714
OH (` 5.7142 × 9,750 units)
10,000 56,000 10,000 56,000
ILLUSTRATION 3
RST Limited processes Product Z through two distinct processes – Process- I and Process-
II. On completion, it is transferred to finished stock. From the following information for
the current year, PREPARE Process- I, Process- II and Finished Stock A/c:
(`96. 7947
× 75 units)
To 27,150
Manufacturing
overhead
7,500 6,94,350 7,500 6,94,350
units)
By Balance c/d 525 73,526
6,525 9,13,824 6,525 9,13,824
Income Statement
Particulars (`) Particulars (`)
To Cost of sales 8,40,298 By Abnormal gain 18,459
(`140.0496 × 6,000 units) {180 units × (`140.0496 – `37.50)}
To Abnormal loss 6,322 By Sales (`8,40,298 × 115%) 9,66,343
{75 units × (`96.7947 – `12.50)}
To Net Profit 1,38,182
9,84,802 9,84,802
separately. The cost of opening WIP is added to cost incurred on completing the
incomplete (WIP) units into complete one. The total cost of units completed and
transferred is calculated by adding opening WIP cost to cost on freshly
introduced inputs. In this method the closing stock of work in process is
valued at current cost.
ILLUSTRATION 4
Opening work-in-process 1,000 units (60% complete); Cost ` 1,10,000. Units
introduced during the period 10,000 units; Cost ` 19,30,000. Transferred to next
process - 9,000 units.
Closing work-in-process - 800 units (75% complete). Normal loss is estimated at
10% of total input including units in process at the beginning. Scraps realise ` 10
per unit. Scraps are 100% complete.
Using FIFO method, COMPUTE equivalent production and cost per equivalent unit.
Also evaluate the output.
SOLUTION
Statement of Equivalent Production Units (Under FIFO Method)
Particulars Input Particulars Output Equivalent
units units Production
(%) Equivalent
units
Opening W-I-P 1,000 From opening W-I-P 1,000 40 400
Units introduced 10,000 From fresh inputs 8,000 100 8,000
Units completed 9,000
(Transferred to next
process)
Normal Loss 1,100 -- --
{10% (1,000 + 10,000
units)}
Closing W-I-P 800 75 600
Abnormal loss 100 100 100
(Balancing figure)
11,000 11,000 9,100
`19,19,000
Cost per equivalent unit = = ` 210.88
9,100units
Statement of Evaluation
Particulars Equivalent Cost per Amount
Units (EU) EU (`) (`)
(i) Opening W-I-P completed 400 210.88 84,352
during the period
Add: Cost of W-I-P at beginning -- -- 1,10,000
Complete cost of 1,000 units of 1,000 194.35 1,94,352
opening W-I-P
(ii) Completely processed units 8,000 210.88 16,87,040
(iii) Abnormal Loss 100 210.88 21,088
(iv) Closing W-I-P 600 210.88 1,26,528
(The difference in total amount may arise due to rounding off error)
Process Explained:
(i) Total Units completed and Transferred is 9,000 units. Out of these 9,000 units,
1,000 units has been taken from opening WIP and the rest is from the fresh
units introduced.
(ii) The opening WIP is 60% complete in respect of costs, hence, 40% more work
is to be done during the period.
(iii) Total cost for cost elements for the period (current period only) is
accumulated.
(iv) The realisable value of scrap (i.e. normal loss) is deducted from the total cost
as accumulated above.
(v) Total cost less realisable value is divided by equivalent units to get cost per
equivalent unit.
(vi) The equivalent cost as calculated above is multiplied by the equivalent units of
completely processed goods, abnormal loss and closing WIP to get the value.
(vii) Cost of units completed and transferred is calculated separately for Opening
WIP and fresh inputs.
`20,29,000
Cost per equivalent unit = = ` 209.18
9,700units
Statement of Evaluation
Particulars Equivalent Cost per Amount
Units (EU) EU (`) (`)
(i) Units Completed and 9,000 209.18 18,82,620
transferred to next process
(ii) Abnormal Loss 100 209.18 20,918
(iii) Closing W-I-P 600 209.18 1,25,508
(The difference in total amount may arise due to rounding off error)
Process Explained:
(i) Total Units completed and Transferred is 9,000 units. All the 9,000 units has
been considered as equally complete in respected of cost.
(ii) Total cost for cost elements for the period and opening WIP is accumulated.
(iii) The realisable value of scrap (i.e. normal loss) is deducted from the total cost
as accumulated above.
(iv) Total cost less realisable value is divided by equivalent units to get cost per
equivalent unit.
(v) The equivalent cost as calculated above is multiplied by the equivalent units of
completely processed goods, abnormal loss and closing WIP to get the value.
SOLUTION
Process- I Account
Process- II Account
Particulars Total (`) Cost Profit Particulars Total (`) Cost Profit
(`) (`) (`) (`)
Opening 9,000 7,500 1,500 Finished 1,12,500 75,750 36,750
stock Stock A/c**
Transferred 54,000 40,500 13,500 Closing 4,500 3,750 750
from stock*
Process- I
Direct 15,750 15,750 --
materials
Direct wages 11,250 11,250 --
Prime cost 90,000 75,000 15,000
Overheads 4,500 4,500 --
Total cost 94,500 79,500 15,000
`75,000
* Cost of Closing Stock = ×` 4,500 = `3,750
`90,000
SUMMARY
♦ Process Costing: Used in industries where the material has to pass through
two or more processes for being converted into a final product.
♦ Operation Costing: It is the refinement of process costing. It is concerned with
the determination of the cost of each operation rather than the process.
♦ Treatment of Losses in process costing: -
(i) Normal process loss - The cost of normal process loss is absorbed by
good units produced under the process. The amount realised by the sale
of normal process loss units should be credited to the process account.
(ii) Abnormal process loss - The total cost of abnormal process loss is
credited to the process account from which it arises. The total cost of
abnormal process loss is debited to costing profit and loss account.
♦ Abnormal gain - The process account under which abnormal gain arises is
debited with the abnormal gain and credited to Abnormal gain account
which will be closed by transferring to the Costing Profit and loss account.
♦ Equivalent production units: This concept is used in the industries where
manufacturing is a continuous activity. Converting partly finished units into
equivalent finished units.
Equivalent production means converting the incomplete production units
into their equivalent completed units.
Equivalent completed units ={Actual number of units in the process of
manufacture} × {Percentage of work completed}
♦ Valuation of work-in-process: two main methods:
(1) First-in-First Out (FIFO) method.
(b) The cost to complete the opening WIP and other completed units are
calculated separately.
(c) The cost of opening work-in-process and cost of the current period
are aggregated and the aggregate cost is divided by output in terms
of completed units.
(d) Closing stock of work in process is valued at current cost.
10. A process account is debited by abnormal gain, the value is determined as:
(a) Equal to the value of normal loss
(b) Cost of good units less realizable value of normal loss
(c) Cost of good units less realizable value of actual loss
(d) Equal to the value of good units less closing stock
11. Lean Labs develops 55mm film using a four-step process that moves
progressively through four departments. The company specializes in overnight
service and has the largest drug store chain as its primary customer. Currently,
direct labor, direct materials, and overhead are accumulated by departments.
The cost accumulation system that best describes the system Lean Labs is
using is:
(a) Operation costing.
(b) Activity-based costing.
(c) Job-order costing.
(d) Process costing.
12. When compared with normal spoilage, abnormal spoilage:
(a) Arises more frequently from factors that are inherent in the
manufacturing process.
(b) Is given the same accounting treatment as normal spoilage.
(c) Is generally thought to be more controllable by purchase department
than production department.
(d) Is not typically influenced by the "tightness" of production standards.
13. Assume 550 units were worked on during a period in which a total of 500 good
units were completed. Normal spoilage consisted of 30 units; abnormal
spoilage, 20 units. Total production costs were ` 2,200. The company accounts
Unit costs were: Material ` 2.50 and conversion costs (Labour & overheads)
` 6.00. The number of units that company would transfer to its finished goods
stock and the related cost of these units are:
(a) 15,000 units transferred at a cost of ` 127,500
(b) 15,000 units transferred at a cost of ` 130,050
(c) 15,000 units transferred at a cost of ` 135,000
(d) 15,300 units transferred at a cost of ` 130,050
Theoretical Questions
1. EXPLAIN briefly the procedure for the valuation of Work-in-process.
2. EXPLAIN equivalent units.
3. “Operation costing is defined as refinement of Process costing.” EXPLAIN it.
4. What is inter-process profit? STATE its advantages and disadvantages.
Practical Questions
1. An English willow company who manufactures cricket bat buys wood as its
direct material. The Forming department processes the cricket bats and the
cricket bats are then transferred to the Finishing department where stickers
are applied. The Forming department began manufacturing 10,000 initial
bats during the month of December for the first time and their cost is as
follows:
Direct material: ` 33,000
Conversion costs: ` 17,000
Total ` 50,000
A total of 8,000 cricket bats were completed and transferred to the Finishing
department, the rest 2,000 were still in the Forming process at the end of the
month. All of the forming departments direct material were placed, but, on
average, only 25% of the conversion costs was applied to the ending work in
progress inventory.
CALCULATE:
(i) Equivalent units of production for each cost.
(ii) The Conversion cost per Equivalent units.
(iii) Cost of closing work in process (WIP) and finished products.
2. Hill manufacturing Ltd uses process costing to manufacture Water density
sensors for hydro sector. The following information pertains to operations
for the month of May.
Particulars Units
Beginning WIP, May 1 16,000
Started in production during May 1,00,000
Completed production during May 92,000
Ending work in progress, May 31 24,000
The beginning work in progress was 60% complete for materials and 20%
complete for conversion costs. The ending inventory was 90% complete for
material and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are material `27,670, direct labour `30,120 and
factory overhead ` 12,720
Cost incurred during May are material used, ` 4,79,000, direct labour `1,82,880,
factory overheads ` 3,91,160.
CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost.
3. Following information is available regarding Process-I for the month of
February:
Production Record:
Units in process as on 1st February 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28th February 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 1st February (`)
Materials 6,000
Labour 1,000
Overhead 1,000
8,000
Cost during the month:
Materials 25,600
Labour 15,000
Overhead 15,000
55,600
Presuming that average method of inventory is used, PREPARE:
(i) Statement of equivalent production.
(ii) Statement showing cost for each element.
(iii) Statement of apportionment of cost.
(iv) Process cost account for Process-I.
4. Following details are related to the work done in Process-I by XYZ Company
during the month of March:
(`)
Opening work-in process (2,000 units)
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process-I (38,000 units) 14,80,000
Direct Labour 3,59,000
Overheads 10,77,000
Units scrapped: 3,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%
Closing work-in process: 2,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%
Units finished and transferred to Process-II: 35,000 units
Normal Loss:
5% of total input including opening work-in-process.
Scrapped units fetch ` 20 per piece.
You are required to PREPARE using average method:
(i) Statement of equivalent production
(ii) Statement of cost
(iii) Statement of distribution cost, and
(iv) Process-I Account, Normal Loss Account and Abnormal Loss Account.
5. A company produces a component, which passes through two processes.
During the month of April, materials for 40,000 components were put into
Process I of which 30,000 were completed and transferred to Process II.
Those not transferred to Process II were 100% complete as to materials cost
and 50% complete as to labour and overheads cost. The Process I costs
incurred were as follows:
(`)
Opening work-in process (4,500 litre)
Sugarcane 50,000
Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000
Direct Labour 2,00,000
Overheads 6,00,000
Abnormal Loss: 1,000 kg
Degree of completion:
Sugarcane 100%
Labour and overheads 80%
Closing work-in process: 9,000 litre
Degree of completion:
Sugarcane 100%
Labour and overheads 80%
Extracted juice transferred for filtering and boiling: 39,500 litre
(Consider mass of 1 litre of juice equivalent to 1 kg)
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iii) Statement of distribution cost, and
(iv) Process-I Account.
ANSWERS/ SOLUTIONS
Answers to the MCQs based Questions
1. (a) 2. (c) 3. (c) 4. (b) 5. (b) 6. (c)
7. (d) 8. (c) 9. (c) 10. (b) 11. (d) 12. (d)
13. (b) 14. (b)
Equivalent Units
Input Output Material Conversion
Units Units
Details Particulars cost
% Units % Units
Unit 10,000 Finished 8,000 100 8,000 100 8,000
Introduced output
Closing W-I-P 2,000 100 2,000 25 500
Total 10,000 Total 10,000 10,000 8,500
Equivalent Units
Output Material Conversion
Input Details Units Units
Particulars cost
% Units % Units
Beginning WIP 16,000 From 16,000 40 6,400 80 12,800
beginning
WIP
Unit Introduced 1,00,000 Completed 76,000 100 76,000 100 76,000
output
Closing W-I-P 24,000 90 21,600 40 9,600
Total 1,16,000 Total 1,16,000 1,04,000 98,400
Process II
Particulars Process Equivalent Process WIP stock Cost of Transfer
Cost Production Cost Equivalent WIP to
(`) (units) p.u. units Stock Finished
(2)/(3) (`) Stock
(4) x (5) (2)-(6)
(1) (2) (3) (4) (5) (6) (7)
Material 36,965 29,800 1.240 1,800 2,232 34,733
Wages 3,500 28,450 0.123 450 55 3,445
Overhead 4,500 28,450 0.158 450 71 4,429
44,965 2,358 42,607
Add: Packing Material Cost 4,000
Cost of Finished Stock 46,607
Process II A/c
% Units % Units
Amount Amount
(`) (`)
1. Value of units completed and transferred 11,54,032
(39,500 units × ` 29.216)
2. Value of Abnormal Loss:
- Sugarcane (1,000 units × ` 11.111) 11,111
- Labour (800 units × ` 4.526) 3,621
- Overheads (800 units × ` 13.579) 10,863 25,595
3. Value of Closing W-I-P:
- Sugarcane (9,000 units × ` 11.111) 99,999
- Labour (7,200 units × ` 4.526) 32,587
- Overheads (7,200 units × ` 13.579) 97,769 2,30,355
(iv) Process-I A/c
Particulars Units (`) Particulars Units (`)
To Opening W.I.P: By Normal Loss 55,000 --
- Sugarcane 4,500 50,000 By Abnormal 1,000 25,613
loss [` 25,595 +
` 18 (difference
due to
approximation)]
- Labour -- 15,000 By Process-II 39,500 11,54,032
A/c
- Overheads -- 45,000 By Closing WIP 9,000 2,30,355
To Sugarcane 100,000 5,00,000
introduced
To Direct Labour 2,00,000
To Overheads 6,00,000
104,500 14,10,000 104,500 14,10,000