Chapter 10 Process & Operation Costing

CHAPTER 10
PROCESS & OPERATION COSTING
CONCEPT 1: MEANING OF PROCESS COSTING

Process Costing is a method of costing used in industries where the material has to pass through
two or more processes for being converted into a final product.
It is defined as “a method of Cost Accounting whereby costs are charged to processes or
operations and averaged over units produced”.
Such type of costing method is useful in the manufacturing of products like steel, paper,
medicines, soaps, chemicals, rubber, vegetable oil, paints, varnish etc. where the production
process is continuous and the output of one process becomes the input of the following process
till completion.
This can be understood with the help of the following diagram:
Raw Finished
Material Process-I Process-II Process-III Goods
Basic Features
Industries, where process costing can be applied, have normally one or more of the following
features:
1. Each plant or factory is divided into a number of processes, cost centres or departments,
and each such division is a stage of production or a process.
2. Manufacturing activity is carried on continuously by means of one or more process run
sequentially, selectively or simultaneously.
3. The output of one process becomes the input of another process.
4. The end product usually is of like units not distinguishable from one another.
5. It is not possible to trace the identity of any particular lot of output to any lot of input
materials. For example, in the sugar industry, it is impossible to trace any lot of sugar bags
to a particular lot of sugarcane fed or vice versa.
6. Production of a product may give rise to Joint and/or By-Products.

Topper’s Classes Process & Operation Costing | 10.2
CONCEPT 2: COSTING PROCEDURE IN PROCESS COSTING
The Cost of each process comprises the cost of:
(i) Materials (ii) Employee Cost (Labour)
(iii) Direct expenses, and (iv) Overheads of production.
Materials: Materials and supplies which are required for each process are drawn against Material
Requisitions Notes from the stores. Each process for which the materials are used, are debited
with the cost of materials consumed on the basis of the information received from the Cost
Accounting department.
The finished product of first process generally become the raw materials of second process;
under such a situation the account of second process is debited with the cost of transfer from
the first process and also with the cost of any additional material used in process.
Employee Cost (Labour): Each process account should be debited with the labour cost or wages
paid to labour for carrying out the processing activities.
Sometimes the wages paid are apportioned over the different processes after selecting
appropriate basis.
Direct expenses: Each process account should be debited with direct expenses like depreciation,
repairs, maintenance, insurance etc. associated with it.
Production Overheads: Expenses like rent, power expenses, lighting bills, gas and water bills etc.
are known as production overheads. These expenses cannot be allocated to a process.
The suitable way out to recover them is to apportion them over different processes by using
suitable basis.
Usually, these expenses are estimated in advance and the processes debited with these expenses
on a predetermined basis.
CONCEPT 3: STEPS OF PROCESS COSTING
1. Open a process A/c for every process and debit all the expenses.
2. Normal Loss % is estimated and accounted.
3. Calculate the Normal Cost / unit.

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝐿𝑜𝑠𝑠 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑒𝑑
= 𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 – 𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠
4. Value the actual production units at Normal Cost.
5. Balancing figure of Process A/c will be Abnormal loss or Gain Valued at Normal cost.
Process I A/c
Unit Rupees Unit Rupees
To Direct Material xxx xxx By Normal Loss xxx xxx
To Direct Labour xxx By units
To Overhead xxx completed and
To Abnormal Gain xxx xxx transferred to
next process xxx xxx
By Abnormal Loss xxx xxx
xxx xxx
Problem.3.1
From the following data, prepare process accounts indicating the cost of each process and the
total cost. The total units that pass through each process were 240 for the period.
Process I (₹) Process II (₹) Process III (₹)

Material 1,50,000 50,000 20,000
Labour 80,000 2,00,000 60,000
Other expenses 26,000 72,000 25,000
Indirect expenses amounting to ₹ 85,000 may be apportioned on the basis of wages. There was
no opening or closing stock. [S.M.1]
Solution
Dr. Process- I Account Cr.
Particulars Per unit Total Particulars Per unit Total
(₹) (₹) (₹) (₹)
To Material 625 1,50,000 By Process -II A/c 1,150 2,76,000
” Labour 334 80,000 (Transfer to
Process-II)
” Other expenses 108 26,000
” Indirect expenses* 83 20,000
1,150 2,76,000 1,150 2,76,000

Dr. Process- II Account Cr.
Particulars Per unit Total Particulars Per unit Total (₹)

(₹) (₹) (₹)
To Process-I A/c 1,150 2,76,000 By Process-III A/c 2,700 6,48,000
” Material 208 50,000 (Transfer to Process-

III)
” Labour 834 2,00,000
” Indirect 208 50,000

expenses*
2,700 6,48,000 2,700 6,48,000
Dr. Process- III Account Cr.
Particulars Per unit Total Particulars Per unit Total (₹)

(₹) (₹) (₹)
To Process-II A/c 2,700 6,48,000 By Finished Stock 3,200 7,68,000
A/c
Material 83 20,000 (Transferred)
” Labour 250 60,000
” Indirect 63 15,000
expenses*
3,200 7,68,000 3,200 7,68,000
* Apportionment of Indirect expenses among Process-I, Process-II and Process-III Total Wages
to processes (I + II +III) = ₹ 80,000 + ₹ 2,00,000 + ₹ 60,000 = ₹ 3,40,000.
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
CONCEPT 4: TREATMENT OF NORMAL, ABNORMAL LOSS AND ABNORMAL GAIN
Normal and Abnormal Loss
Loss of material is inherent during processing operation. The loss of material under different
processes arises due to reasons like evaporation or a change in the moisture content etc.
Process loss is defined as the loss of material arising during the course of a processing operation
and is equal to the difference between the input quantity of the material and its output.
There are two types of material losses viz.
(i) Normal loss and
(ii) Abnormal loss.
Normal Process Loss: It is also known as normal wastage. It is defined as the loss of material
which is inherent in the nature of work. Such a loss can be reasonably anticipated from the nature
of the material, nature of operation, the experience and technical data.
It is unavoidable because of nature of the material or the process. It also includes units
withdrawn from the process for test or sampling.
Treatment in Cost Accounts: The cost of normal process loss in practice 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.
Problem.4.1: (Normal loss with no realisable value)

A product passes through Process- I and Process- II. Materials issued to Process- I amounted to
₹ 40,000, Wages ₹30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated
was 5% of input. 4,750 units of output were produced and transferred-out from Process-I. There
were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap has no
realisable value.
You are required to PREPARE Process- I account, value of normal loss and units transferred to
Process-II.
Solution Process- I Account
Particulars Units (₹) Particulars Units (₹)
To Material 5,000 40,000 By Normal loss 250 0
To Wages - 30,000
To Overhead - 27,000 By Process II 4,750 97,000
5,000 97,000 5,000 97,000

Value of units transferred to Process-II:
Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Units transferred
₹ 97,000−0
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠
× 4,750 units = 97,000
Problem.4.2 (Normal loss with realisable value)

was 5% of input. 4,750 units of output were produced and transferred-out from Process-I.
There were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap
has realisable value of ₹ 2 per unit.
You are required to PREPARE Process- I account, value of normal loss and units transferred to
Process-II.
To Wages - 30,000
5,000 97,000 5,000 97,000
Value of Normal loss = Scrap realisable value less cost to sale
= 250 units × ₹2 = ₹500

₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 4,750 units = ₹ 96,500
CONCEPT 5: ABNORMAL PROCESS LOSS

It is also known as abnormal wastage. It is defined as the loss in excess of the pre-determined
loss (Normal process loss). This type of loss may occur due to the carelessness of workers, a bad
plant design or operation, sabotage etc.
Such a loss cannot obviously be estimated in advance. But it can be kept under control by taking
suitable measures.
Treatment in Cost Accounts: The cost of an abnormal process loss unit is equal to the cost of a
good unit. The total cost of abnormal process loss is credited to the process account from which
it arises. Cost of abnormal process loss is not treated as a part of the cost of the product. In
fact, the total cost of abnormal process loss is debited to costing profit and loss account.
Abnormal Loss A/c
Unit Rupees Unit Rupees
To Process I xx xx By Bank xx xx
To Process II xx xx By P/L A/c xx xx
xx xx xx xx
It is transferred to P/L A/c after adjusting recovery from sale of scrap
Problem.5.1 (Abnormal loss with realisable value)

You are required to PREPARE Process- I account, value of normal loss, abnormal loss and units
transferred to Process-II.
To Wages - 30,000 By Abnormal Loss 200 4,063
5,000 97,000 5,000 97,000
Value of Normal loss = Scrap realisable value less cost to sale
= 250 units × ₹2 = ₹500
Value of Abnormal loss:

× Abnormal loss units
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 200 units = ₹ 4,063
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 4,550 units = ₹ 92,437
CONCEPT 6: ABNORMAL PROCESS GAIN/ YIELD

Sometimes, loss under a process is less than the anticipated normal figure. In other words, the
actual production exceeds the expected figures.
So, abnormal gain may be defined as an unexpected gain in production under the normal conditions.
This arises due to over- estimation of process loss, improvements in work efficiency of workers,
use od better technology in production etc.
Treatment in Cost Accounts: 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. The cost of abnormal gain is computed on the basis of
normal production.
Abnormal Gain A/c
Particulars Units Rupees Particulars Units Rupees
To Normal Loss xx xx By Process II A/c xx xx
To P/L A/c xx
xx xx xx xx
It is transferred to P/L A/c as profit but after adjusting Loss of Non – realisation of Normal
Loss Unit due to abnormal gain.
Problem.6.1 (Abnormal gain/ yield with realisable value)

₹ 40,000, Wages ₹ 30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated
You are required to PREPARE Process- I account, value of normal loss, abnormal loss/ gain and
units transferred to Process-II.

To Wages - 30,000
To Abnormal Gain A/c 100 2,032
5,100 99,032 5,100 99,032
Value of Normal loss = Scrap realisable value less cost to sale = 250 units × ₹2 = ₹500
(Even though the actual loss is less than the expected loss (Normal loss), value of the normal loss
is calculated on the estimated figure)
Value of Abnormal Gain:

× Abnormal Gain units
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 100 units = ₹ 2,032

₹ 97,000−₹ 500
= × 4,850 units = ₹ 98,532
5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠
Abnormal Gain A/c
To Normal Loss A/c 100 200 By Process-I A/c 100 2,032
(100 units × ₹2)
To Costing P&L A/c - 1,832
100 2,032 100 2,032
(The Costing P&L Account is credited only for actual gain amount)
Problem.6.2
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.
Process I (₹) Process II (₹) Process III (₹)
Material issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing overhead 10,000 10,000 15,000
10,000 units have been issued to the Process-I and after processing, the output of each process
is as under:
Process Output Normal Loss
Process-I 9,750 units 2%
Process-II 9,400 units 5%
Process-III 8,000 units 10%
No stock of materials or of work-in-process was left at the end. CALCULATE the cost of the
finished articles. [S.M.2]
Solution
Dr. Process-I Account Cr.
Particulars Units Total Particulars Units Total
(₹) (₹)
To Material 10,000 40,000 By Normal Loss A/c 200 -
” Labour - 6,000 (2% of 10,000 units) 50 286

” Abnormal Loss A/c
” Manufacturing - 10,000 9,750 55,714
(₹5.7142 × 50 units)
OH
” Process-II A/c
(₹ 5.7142 × 9,750 units)

10,000 56,000 10,000 56,000
Cost per unit of completed units and abnormal loss:

Total Cost 56,000
= = 5.7142
Inputs − Normal loss 10,000units − 200units
Dr. Process-II Account Cr.
Particulars Units Total (₹) Particulars Units Total (₹)

To Process-I A/c 9,750 55,714 By Normal Loss A/c 488 -
(5% of 9,750 units)
” Material - 20,000 ” Process-III A/c 9,400 91,051
(₹ 9.6862 × 9,400
” Labour - 4,000 units)
” Manufacturing OH - 10,000
” Abnormal Gain A/c 138 1,337
(₹ 9.6862 × 138
units)
9,888 91,051 9,888 91,051

Cost per unit of completed units and abnormal gain:
Total Cost 89,714
= = 9.6862
Dr. Process - III Account Cr.

Particulars Units Total Particulars Units Total
(₹) (₹)
To Process-II A/c 9,400 91,051 By Normal Loss A/c (10% of 940 -
9,400 units)
” Material - 10,000 ” Abnormal Loss A/c (₹ 460 6,364
13.8358 × 460 units)
” Labour - 1,000 ” Finished Stock A/c (₹ 8,000 1,10,687
13.8358 × 8,000
units)
” Manufacturing OH - 15,000
9,400 1,17,051 9,400 1,17,051

Total Cost 1,17,051
= = 13.8358
Problem.6.3
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:
Particulars Process- I Process -II
Raw materials used 7,500 units -
Raw materials cost per units ₹ 60 -
Transfer to next process/ Finished stock 7,050 units 6,525 units
Normal Loss (on inputs) 5% 10%
Directs wages ₹ 1,35,750 ₹ 1,29,250
Directs Expenses 60% of Direct wages 65% of Direct wages
Manufacturing overheads 20% of Direct wages 15% of Direct wages
Realisable value of scrap per unit ₹ 12.50 ₹ 37.50
6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no
opening or closing stock of work of work-in-process. [S.M.3]

Solution Process- I A/c

To Raw material used 7,500 4,50,000 By Normal loss 375 4,688
(₹ 60 × 7,500 units) (5% of 7,500
units) × ₹ 12.5
To Direct wages - 1,35,750 By Process- II A/c 7,050 6,82,403
(₹ 96.7947 × 7,050
units)
To Direct expenses - 81,450 By Abnormal loss 75 7,259
(₹ 96. 7947 × 75
units)
To Manufacturing 27,150
overhead
7,500 6,94,350 7,500 6,94,350
Total Cost Realisable value from normal loss
Inputs units - Normal loss units
= 6,94,350 - 4,688
=
6,89,662
= 96.7947
7,500 units - 375 units 7,125units
Process- II A/c

To Process- I A/c 7,050 6,82,403 By Normal loss 705 26,438
(10% of 7,050 units)
× ₹ 37.5
To Direct wages - 1,29,250 By Finished Stock A/c 6,525 9,13,824
( ₹ 140.0496 × 6,525
units)
To Direct expenses - 84,013
To Manufacturing - 19,387
overhead
To Abnormal gain 180 25,209
(₹ 140.0496 × 180)
7,230 9,40,262 7,230 9,40,262

Total Cost - Realisable value from normal loss

=
Inputs units - Normal loss units
9,15,053- 26,438 8,88,615
= = = 1,40.0496
7,050 units - 705units 6,345units
Finished Goods Stock A/c
To Process II A/c 6,525 9,13,824 By Cost of Sales 6,000 8,40,298
(₹140.0496 × 6,000 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
Problem.6.4
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process
- Process P, Process Q and Process R. The following data relating to cost and output is obtained
from the books of accounts for the month of April 2017:
Particulars Process P Process Q Process R
Direct Material 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000
Production overheads of ₹ 90,000 were recovered as percentage of direct labour.
10,000 kg of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of material
or work in process. The entire output of each process passes directly to the next process and
finally to warehouse.
There is normal wastage, in processing, of 10%. The scrap value of wastage is ₹ 1 per kg.
The output of each process transferred to next process and finally to warehouse are as under:
Process P = 9,000 kg
Process Q = 8,200 kg
Process R = 7,300 kg
The company fixes selling price of the end product in such a way so as to yield a profit of 25% on
selling price. Prepare Process P, Q and R accounts. Also calculate selling price per unit of end
product. [May 2018, 10 Marks]
Solution Process- P A/c

Particulars Units (Kg) (₹) Particulars Units (Kg) (₹)
To Raw Material 10,000 50,000 By Normal loss A/c 1,000 1,000
(₹ 5 × 10,000 Kg) (10% of 10,000) × ₹ 1
To Direct Material - 38,000 By Process – Q A/c 9,000 1,39,500
To Direct Labour - 30,000 (₹ 15.50 × 9,000 kgs)
To Production OH 22,500
(90,000 × 3/12)
10,000 1,40,500 10,000 1,40,500
Cost Per unit of completed units
Total Cost − Re alisableValue from normal loss `1,40,500 −`1,000

= =
Input units − Normal loss units 10000kgs − 1000kgs
`1,39,500
= = ₹ 15.50
9000kgs
Process- Q A/c
To Process –Q A/c 9,000 1,39,500 By Normal loss 900 900
To Direct Material 42,500 (10% of 9,000)Kg× ₹ 1
To Direct Labour - 40,000
To Production OH - 30,000 By Process – R A/c 8,200 2,54,200
(90,000 × 4/12) (₹ 31 × 8,200 kg.)
To Abnormal Gain 100 3,100
(₹ 31 × 100 kgs)
9,100 2,55,100 9,100 2,55,100

Cost Per unit of Completed units and abnormal Gain
Total Cost − Re alisableValue from normal loss ` 2,52,000 −`900

= =
` 2,51,100
= = ₹ 31
8100kgs
Process- R A/c
To Process –Q A/c 8,200 2,54,200 By Normal loss 820 820
To Direct Material 42,880 (10% of 8,200)Kg× ₹1
To Direct Labour - 50,000 By Finished Goods 7,300 3,79,600
To Production OH - 37,500 (₹ 52× 7,300 kg.)
(9,000 × 5/12) By Abnormal Loss 80 4,160
(₹ 52 ×80kg)
8,200 3,84,580 8,200 3,84,580
Cost Per unit of Completed units and abnormal Gain
Total Cost − Re alisableValue from normal loss `3,84,580 −`820

= = = ₹ 52
Calculation of Selling Price
Cost of Product = ₹ 3,79,600
(52 × 7,300 kg)
+ Profit = ₹ 1,26,533.33
Sales = 5,06,133.33
÷ No. of kg. = 7,300 kg
Selling Price p.u. = ₹ 69.33
Problem.6.5
A product passes through two distinct processes before completion.
Following information are available in this respect:
Process – 1 Process – 2
Raw materials used 10000 units -
Raw material cost (per unit) ₹ 75 -
Transfer to next process/ Finished good 9000 units 8200 units

Normal loss (on inputs) 5% 10%
Direct wages ₹ 3,00,000 ₹ 5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) ₹ 13.50 ₹ 145
8000 units of finished goods were sold at a profit of 15% on cost.
There was no opening and closing stock of work-in-progress.
Prepare:
(i) Process-1 and Process-2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account [Nov. 2019, 10 Marks]
Solution.
(i) Dr. Process – 1 Account Cr.
To Raw Material By Normal Loss A/c @ 13.5 500 6,750
consumed 10,000 7,50,000 By Process 2 @ 133.5 9,000 12,01,500
To Direct wages - 3,00,000 By Abnormal Loss @ 133.5 500 66,750
To Direct Expenses - 1,50,000
To Manufacturing 75,000
overheads
10,000 12,75,000 10,000 12,75,000
12,75,000 − 6,750
= = 133.5
10,000 units − 500 units
(ii) Dr. Process – 2 Account Cr.
To Process – I A/c 9,000 12,01,500 Normal Loss A/c @ 145 900 1,30,500
To Direct Wages - 5,60,000 By Finished Stock A/c 8,200 21,04,667
To Direct Expenses - 3,64,000 (bal. fig)

To Manufacturing
overheads - 84,000
To Abnormal gain
(₹ 256.67×100 units) 100 25,667
9,100 22,35,167 9,100 22,35,167
Cost per unit of completed units and abnormal gain:
22,09,500 − 1,30,500
= = 256.67
8,100 units
Dr. Finished Goods A/c Cr.
8,200 21,04,667 8,200 21,04,667
(iii) Dr. Normal Loss A/c Cr.

To Process – I 500 6,750 By abnormal Gain II 100 14,500
To Process II 900 1,30,500 By Cash 500 6,750
By Cash 800 1,16,000
1,400 1,37,250 1,400 1,37,250
(iv) Dr. Abnormal Loss A/c Cr.
To Process – I 500 66,750 By Cost Ledger Control A/c 500 6,750
By Costing P & L A/c - 60,000
(Abnormal loss)
66,750 66,750
(v) Dr. Abnormal Gain A/c Cr.
To Normal Loss 100 14,500 By Process II 100 25,667
To Costing P & L A/c 11,167
100 25,667 100 25,667

Problem.6.6
A product passes through Process-I and Process-II.
Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing
overheads were ₹ 52,500. Normal Loss anticipated was 5% of input. 9,650 units of output were
produced and transferred out from Process-I to Process II. Input raw materials issued to
Process I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit.
You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account [Dec. 2021, 5 Marks]
Solution (i) Process-I Account
To Materials 10,000 80,000 By Normal Loss A/c 500 2,500
(5% of 10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(₹ 20* × 9,650 units)
To Manufacturing OH - 52,500
To Abnormal Gain A/c 150 3,000
(₹ 20* × 150 units)
10,150 1,95,500 10,150 1,95,500
* (80,000 + 60,000 + 52,500) – 2,500/10,000 – 500 = ₹ 20
(ii) Abnormal Gain – Account
To Normal Loss A/c 150 750 By Process I – A/c 150 3,000
To Costing P & L A/c - 2,250
150 3,000 150 3,000

Problem.6.7
N Ltd. produces a product which passes through two processes – Process I and Process – II. The
company has provided following – information related to the Financial Year 2021-22:
Process I Process II
Raw Material @ ₹ 65 per unit 6,500 units -
Direct Wages ₹ 1,40,000 ₹ 1,30,000
Direct Expenses 30% of Direct Wages 35% of Direct Wages
Manufacturing Overheads ₹ 21,500 ₹ 24,500
Realisable value of scrap per unit ₹ 4.00 ₹ 16.00
Normal Loss 250 units 500 units
Unit transferred to Process II/Finished stock 6,000 units 5,500 units
Sales - 5,000 units
There was no opening or closing stock of work-in-progress.
You are required to prepare:
(i) Process – I Account
(ii) Process – II Account
(iii) Finished Stock Account
[Nov. 2022, 10 Marks]
Solution Process-I A/c
To Raw material used 6,500 4,22,500 By Normal loss 250 1,000
(₹ 65 × 6,500 units) (250 units × ₹ 4)
To Direct wages - 1,40,000 By Process- II A/c 6,000 6,00,000
(₹ 100 × 6,000 units)
To Direct expenses - 42,000 By Abnormal loss 250 25,000
(30% of ₹ 1,40,000) (₹ 100 × 250 units)
To Manufacturing overhead 21,500
6,500 6,26,000 6,500 6,26,000

Inputs Units - Normal loss units
6,26,000 - 1,000 6,25,000
= = = 100
6,500 units - 250 units 6,250 units
Process- II A/c
To Process - I A/c 6,000 6,00,000 By Normal loss 500 8,000
(500 units × ₹ 16)
To Direct wages - 1,30,000 By Finished Stock A/c 5,500 7,92,000
(₹ 144 × 5,500 units)
To Direct expenses - 45,500
(35% of ₹ 1,30,000)
To Manufacturing overhead - 24,500
6,000 8,00,000 6,000 8,00,000

=
Inputs Units - Normal loss units
8,00,000 - 8,000 7,92,000
= = = 144
6,000 units - 500 units 5,500 units
Finished Goods Stock A/c
(₹ 144 × 5,000 units)
5,500 7,92,000 5,500 7,92,000
Problem.6.8
A product passes through two processes; Process A and Process B. The output of Process A is
treated as input of Process B. The following information has been furnished:
Process A Process B
Input Material
78,000 kg. @ ₹ 5 ₹ 3,90,000 -
Indirect Material - ₹ 34,320

Wages ₹ 2,85,000 ₹ 3,30,000
Overhead ₹ 1,67,400 ₹ 1,11,600
Output transferred to Process B 68,640 kgs
Transfer to Finished Stock - 69,000 kgs
Normal loss of input material (weight in kgs.) 7,800 kgs 240 kgs
There is no realisable value for normal loss. No stock of raw materials on work-in-process was
left at the end.
Yon are required to prepare the Process account for each Process. [Nov. 2023, 5 Marks]
CONCEPT 7: MISSING FIGURE

Problem.7.1
A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct
Processes – X, Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in ₹) 2,600 2,250 2,000
Direct wages (in ₹) 4,000 3,500 3,000
• The total Production Overhead of ₹ 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ₹ 2 each were introduced to Process ‘X’.
• The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process ‘Z’.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit (₹)

X 6% 1.10
Y ? 2.00
Z 5% 1.00
You are required to:
(i) Find out the percentage of wastage in process ‘Y’, given that the output of Process ‘Y’ is
transferred to Process ‘Z’ at ₹ 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z. [July 2021, 10 Marks]
Solution
Dr. Process-X Account Cr.
To Material introduced 15,000 30,000 By Normal Loss A/c 900 990
[(6% of 15,000 units) x ₹1.1]
” Additional material - 2,600 ” Process-Y A/c 14,100 41,610
” Direct wages - 4,000 (₹ 2.951* × 14,100 units)
” Production OH - 6,000
15,000 42,600 15,000 42,600

*Cost per unit of completed units
= Total Cost - Realisable value from normal loss/Input units – Normal loss units
= ₹ 42,600 - ₹ 990/15,000 units – 900 units = ₹ 2.951
Dr. Process-Y Account Cr.

To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of 14,100
units) x ₹ 2]
” Additional material - 2,250 ” Process-Z A/c 12,205 48,820
” Direct wages - 3,500 (₹ 4 × 12,205 units)
14,100 52,610 14,100 52,610

#Calculation for % of wastage in process ‘Y’:
Let’s consider number of units lost under process ‘Y’ = A
Now, Total Cost - Realisable value from normal loss/Input units – Normal loss units = 4
= ₹ 52,610 - ₹ 2A/14,100 units – A = ₹ 4 => = ₹ 52,610 - ₹ 2A = ₹ 56,400 - ₹ 4A
2A = ₹ 3,790 = > A = 1,895 units
% of wastage = 1,895 units/14,100 units = 13.44%
Dr. Process-Z Account Cr.
To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610
[(5% of 12,205 units) x ₹ 1]
” Additional material - 2,000 ” Finished Stock A/c 12,000 59,726
(₹ 4.9771$ × 12,000 units)

” Direct wages - 3,000
” Abnormal gain 405 2,016
(₹ 4.9771$ × 405 units)
12,610 60,336 12,610 60,336
CONCEPT 8: VALUATION OF WORK-IN-PROCESS

The cost incurred in such industries represents the cost of work carried on opening work-in-
process, closing work-in-process and completed units.
Thus to ascertain the cost of each completed unit, it is necessary to ascertain the cost of work-
in-process in the beginning and at the end of the process.
Equivalent Units
Equivalent units or equivalent production units, means converting the incomplete production units
into their equivalent completed units.
Under each process, an estimate is made of the percentage completion of work-in-process with
regard to different elements of costs, viz., material, labour and overheads.
The formula for computing equivalent completed units is:
𝑨𝒄𝒕𝒖𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒖𝒏𝒊𝒕𝒔 𝒊𝒏 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒐𝒇

Equivalent completed units = ( ) × ( )
𝒕𝒉𝒆 𝒑𝒓𝒐𝒄𝒆𝒔𝒔 𝒐𝒇 𝒎𝒂𝒏𝒖𝒇𝒂𝒄𝒕𝒖𝒓𝒆 𝑾𝒐𝒓𝒌 𝑪𝒐𝒎𝒑𝒍𝒆𝒕𝒆𝒅
CONCEPT 9: EQUIVALENT PRODUCTION

Step 1: Statement of Equivalents Units
Particulars Physical Equivalent Production

Unit Material Labour Overhead
% of Units % of Units % of Units
Completion Completion Completion
Opening WIP xxx xxx xxx xxx xxx xxx xxx
Finished Stock xxx xxx xxx xxx xxx xxx xxx
[Units completed]
Normal Loss - - - - - - -
Abnormal loss xxx xxx xxx xxx xxx xxx xxx
Closing WIP 1 xxx xxx xxx xxx xxx xxx xxx
Closing WIP 2 xxx xxx xxx xxx xxx xxx xxx
xxx xxx xxx xxx
For Equivalent units calculation:
1. Normal Loss Units are treated as NIL (0%) Completion Units
2. Abnormal loss units are treated as equal to 100% completed units unless specified otherwise.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 – 𝑁𝑜𝑟𝑚𝑎𝑙 𝐿𝑜𝑠𝑠
Step 2: Cost per unit = 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
Step 3: Prepare Statement of Evaluation.
Particular Material Labour Overheads Total
Opening WIP EU x Rate EU x Rate EU x Rate xx
Units Introduced & Completed EU x Rate EU x Rate EU x Rate xx
Abnormal Loss EU x Rate EU x Rate EU x Rate xx
Closing WIP EU x Rate EU x Rate EU x Rate xx
Problem.9.1
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. [T.1]
Solution
(i) Calculation of equivalent units of production:
Equivalent Units
Output Particulars Units Material Conversion cost
% Units % Units
Finished output 8,000 100 8,000 100 8,000
Closing W-I-P 2,000 100 2,000 25 500
Total 10,000 10,000 8,500
(ii) Calculation of cost per equivalent unit
Direct Material Conversion costs
Total cost (₹) 33,000 17,000
Equivalent units 10,000 8,500
Cost per equivalent unit (₹) 3.30 2.00
Statement of Evaluation
Particular Material Conversion Cost Total
Units Introduced & Completed 8,000 x 3.3 8,000 x 2 42,400
Closing WIP 2,000 x 3.3 500 x 2 7,600
Problem.9.2
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:
Direct Materials ₹ 15,000
Direct Wages ₹ 18,000
Factory Overheads ₹ 12,000
Of those transferred to Process II, 28,000 units were completed and transferred to
finished goods stores. There was a normal loss with no salvage value of 200 units in Process
II. There were 1,800 units, remained unfinished in the process with 100% complete as to
material and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the
end of the second process, when protective packing is applied to the completed components.
The process and packing costs incurred at the end of the Process II were:
Packing Materials ₹ 4,000
Direct Wages ₹ 3,500
Factory Overheads ₹ 4,500
Required
(i) Prepare Statement of Equivalent Production, Cost Per unit and Process I A/c
(ii) Prepare State of Equivalent Production. Cost per Unit and Process II A/c. [T.5]
Solution
Step 1: Process I A/c
Particulars Unit (₹) Particulars Units (₹)
To Direct material 40,000 15,000 By Process II A/c 30,000 36,965
To Direct wages - 18,000 By Closing W-I-P 10,000 8,035
To Factory overhead - 12,000 - -
40,000 45,000 40,000 45,000
Statement of Equivalent Production
Equivalent Units
Output Particulars Units Material Labour & Overheads
% Units % Units
Finished output 30,000 100 30,000 100 30,000
Closing W-I-P 10,000 100 10,000 50% 5,000
Total 40,000 40,000 35,000
Statement of Cost Per Unit
Direct Material Labour & Overheads
Total cost (₹) 15,000 30,000
Equivalent units 40,000 35,000
Cost per equivalent unit (₹) 0.375 0.8571
Particular Material Labour & Overheads Total
Units Introduced & Completed 30,000 x 0.375 30,000 x 0.8571 36,965
Closing WIP 10,000 x 0.375 5,000 x 0.8571 8,035

Step 2: Process II A/c
To Process I 30,000 36,965 By Finished Stock 28,000 46,607
To Direct wages - 3,500 By Normal loss 200 -
To Factory overhead - 4,500 By WIP stock 1,800 2,358
To Packing charges - 4,000
30,000 48,965 30,000 48,965
Statement of Equivalent Production
Equivalent Units
Output Particulars Units Material Labour & Overheads
% Units % Units
Finished output 28,000 100 28,000 100 28,000
Closing W-I-P 1,800 100 1,800 25% 450
Total 29,800 29,800 28,450
Statement of Cost Per Unit
Direct Material Labour & OH Packing Material
Total cost (₹) 36,965 8,000 4,000
Equivalent units 29,800 28,450 28,000
Cost per equivalent unit (₹) 1.24 0.28119 0.14286
Particular Material Labour & OH Packing Material Total
Units Introduced 28,000 x 1.24 28,000 x 0.28119 28,000 x 0.14286 46,607
& Completed
Closing WIP 1800 x 1.24 450 x 0.28119 - 2358
CONCEPT 10: PROCESS COSTING METHODS

Mainly two methods for valuation of work-in-process are followed:
1. First-in-First Out (FIFO) method.
2. Weighted Average (Average) method

CONCEPT 11: FIFO METHOD
Under this method the units completed and transferred are taken from both opening work-in-
process (WIP) and freshly introduced materials/inputs. The cost to complete the opening WIP
and other completed units are calculated 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.
Method of Cost Formula:
FIFO
 Opening WIP will be completed firstly in current period
 then work on new Raw Material will start.
Working Notes:
- Cost / Unit
= Total Current period cost – Normal Loss real / Total Equivalent units
- Working Note
Cost of unit completed will include
(i) Opening WIP pre period cost
(ii) Opening Work in Progress current period cost
(iii) Units Introduced and Completed during the period cost
Note: Normal Loss % can be
1. Of current period units introduced = Input × %
2. Of units Introduced × Opening WIP = (Opening WIP + Introduced) × %
3. Of units produced = (Opening WIP + Input) – Closing WIP × %
Problem.11.1
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.
Scrap realise ₹ 10 per unit. Scraps are 100% complete.
Using FIFO method, compute equivalent production and cost per equivalent unit. Also,
evaluate the output. [S.M.4]
Solution Statement of Equivalent Production Units (Under FIFO Method)

Particulars Input Particulars Output Equivalent Production
units units (%) Equivalent units
Opening W-I-P 1,000 From opening WIP 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 WIP 800 75 600
Abnormal loss 100 100 100
(Balancing figure)
11,000 11,000 9,100
Computation of cost per equivalent production unit:
Cost of the Process (for the period) ₹ 19,30,000
Less: Scrap value of normal loss (₹ 10 × 1,100 units) (₹ 11,000)
Total process cost ₹ 19,19,000
Cost per equivalent unit = ₹19,19,000/9,100 units = ₹ 210.88
Particulars Equivalent Cost per EU Amount
Units (EU) (₹) (₹)
(i) Opening W-I-P completed during the 400 210.88 84,352
period
Add: Cost of W-I-P at beginning - - 1,10,000

Complete cost of 1,000 units of opening W-I-P 1,000 194.35 1,94,352
(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)
Problem.11.2
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. [T.2]
Solution
(i) Calculation of equivalent units of production:
Equivalent Units
Input Details Units Output Units Material Conversion cost
Particulars % Units % Units
Beginning WIP 16,000 From beginning 16,000 40 6,400 80 12,800
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

(ii) Calculation of cost per equivalent unit for conversion costs
Particulars Amount (₹)
Direct labour 1,82,880

Factory overheads 3,91,160
5,74,040
Equivalent units 98,400
Cost per equivalent unit (₹) 5.83
Problem.11.3
Following details have been provided by M/S AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)
(ii) Units introduced during the year - 17000 units
(iii) Cost of the process (for the period) - ₹ 33,12,720
(iv) Transferred to next process - 15000 units
(v) Closing works-in-progress - 2200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the
beginning).
Scraps realise ₹ 50 per unit. Scraps are 100% complete. Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit [Nov. 2018, 5 Marks]
Solution. Statement of Equivalent Production Units (Under FIFO Method)

Units Units (%) EU
Opening WIP 3000 From opening WIP 3000 30 900
Units Introduction 17,000 From fresh Inputs 12,000 100 12,000
Units Completed 15,000
(Transferred to next
process)
Normal loss [12% 2,400 - -
(3000 + 17000 units)]
Closing WIP 2,200 80 1,760
Abnormal loss 400 100 400
(Balancing figure)
20,000 20,000 15,060

Computation of Cost per equivalent Production unit:
Cost of the process (for the period) ₹ 33,12,720
Less:
Scrap value of normal loss (₹ 1,20,000)
(₹ 50 × 2400 units)
Total Process Cost ₹ 31,92,720
` 31,92,720
Cost per Equivalent unit = = ₹ 212
15060units
So, (i) Equivalent Production = 15060 units
(ii) Cost per equivalent unit = ₹ 212
CONCEPT 12: AVERAGE COST METHOD

Under this method, 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.
The equivalent production in this case consists of work-load already contained in opening work-
in-process and work-load of current period.
The main difference between FIFO method and average method is that units of opening work in
process and their cost are taken in full under average method while under FIFO method only the
remaining work done now is considered.
(i) Add opening WIP in current year Units Introduced.
(ii) Add opening WIP previous year cost in current year cost element wise.
Cost / unit: Opening WIP previous year + Current Year WIP / Eq. units
Note:
 In WIP, M1 (coming from previous process) is generally assumed 100% Completed, % of
Material given is used for M2.
 Packing Material Cost will only be added on Finished stock.

Problem.12.1
Refer to information provided in Problem 11.1 above and solve this by Weighted Average Method.
[S.M.5]
Solution Statement of Equivalent Units (Under Weighted Average Method)

units units
(%) Equivalent
units
Opening W-I-P 1,000 Units completed 9,000 100 9,000
Units introduced 10,000 (Transferred to next
process)
Normal Loss {10% 1,100 - -
(1,000 + 10,000 units)}
Closing W-I-P 800 75 600
Abnormal loss (Bal. fig.) 100 100 100
11,000 11,000 9,700
Computation of cost per equivalent production unit :
Cost of Opening W-I-P ₹ 1,10,000
Cost of the Process (for the period) ₹ 19,30,000
Less: Scrap value of normal loss (₹ 10 x 1,000 units) (₹ 11,000)
Total process cost ₹ 20,29,000

₹ 20,29,000
Cost per equivalent unit = 9,700 𝑢𝑛𝑖𝑡𝑠 = ₹ 209.18
Particulars Equivalent Cost per Amount
Units (EU) EU (₹) (₹)
(i) Units Completed and transferred to next process 9,000 209.18 18,82,620
(ii) Abnormal Loss 100 209.18 20,918
(iii) Closing W-I-P 600 209.18 1,25,508

Problem.12.3
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 28.2.2020 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. [T.3]
Solution
Process-I Cost Account
To Opening W-I-P 4,000 8,000 By Completed units 14,000 50,120
To Materials 16,000 25,600 By Closing W-I-P 6,000 13,480
To Labour - 15,000
To Overhead - 15,000
20,000 63,600 20,000 63,600

(i) Statement of equivalent production (Average cost method)

Units Units Material Labour & O.H.
% Units % Units
Opening WIP 4,000 Completed and 14,000 100 14,000 100 14,000
transferred
Units 16,000 Closing WIP 6,000 100 6,000 33-1/3 2,000
introduced
20,000 20,000 20,000 16,000

Statement showing cost for each element
Particulars Materials Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in- process 6,000 1,000 1,000 8,000
Cost incurred during the month 25,600 15,000 15,000 55,600
Total cost: (A) 31,600 16,000 16,000 63,600
Equivalent units: (B) 20,000 16,000 16,000
Cost per equivalent unit: (C) = (A ÷ B) 1.58 1 1 3.58
Statement of apportionment of cost

Amount Amount
(₹) (₹)
1. Value of units completed and transferred 50,120
(14,000 units × ₹ 3.58)
2. Value of Closing W-I-P:
- Materials (6,000 units × ₹ 1.58) 9,480
- Labour (2,000 units × ₹ 1) 2,000
- Overheads (2,000 units × ₹ 1) 2,000 13,480
Problem.12.4
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
Materials 100%
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. [T.4]
Solution Process-I A/c

To Opening W.I.P: By Normal Loss 2,000 40,000
(₹20 × 2,000 units)
- Materials 2,000 80,000 By Abnormal loss 1,000 72,000
- Labour -- 15,000 By Process-I A/c 35,000 28,00,000
- Overheads -- 45,000 By Closing WIP 2,000 1,44,000
To Materials 38,000 14,80,000
introduced
To Direct Labour 3,59,000
To Overheads 10,77,000
40,000 30,56,000 40,000 30,56,000

(i) Statement of Equivalent Production

Units Units Material Labour & O.H.
% Units % Units
transferred to
Process-II
Units 38,000 Normal Loss 2,000 - - - -
introduced (5% of 40,000)
Abnormal loss 1,000 100 1,000 80 800
(Balancing figure)
Closing WIP 2,000 100 2,000 80 1,600
40,000 40,000 38,000 37,400
Statement showing cost for each element
Particulars Materials Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in-process 80,000 15,000 45,000 1,40,000
Cost incurred during the month 14,80,000 3,59,000 10,77,000 29,16,000
Less: Realisable Value of normal (40,000) - - (40,000)
scrap (₹ 20 × 2,000 units)
Total cost: (A) 15,20,000 3,74,000 11,22,000 30,16,000
Cost per equivalent unit: 40.00 10.00 30.00 80.00
(C) = (A ÷ B)
Statement of Distribution of cost
Amount (₹) Amount (₹)
1. Value of units completed and transferred 28,00,000
(35,000 units × ₹ 80)
2. Value of Abnormal Loss:
- Materials (1,000 units × ₹ 40) 40,000
- Labour (800 units × ₹ 10) 8,000
- Overheads (800 units × ₹ 30) 24,000 72,000

- Materials (2,000 units × ₹ 40) 80,000
- Labour (1,600 units × ₹ 10) 16,000
- Overheads (1,600 units × ₹ 30) 48,000 1,44,000
Normal Loss A/c
To Process-I A/c 2,000 40,000 By Cost Ledger Control A/c 2,000 40,000
2,000 40,000 2,000 40,000
Abnormal Loss A/c

By Costing Profit & Loss A/c 52,000
1,000 72,000 1,000 72,000
Problem.12.5
‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane
crushing for juice extraction, then filtration and boiling of juice along with some chemicals and
then letting it cool to cut solidified jaggery blocks.
The main process of juice extraction (Process – I) is done in conventional crusher, which is then
filtered and boiled (Process – II) in iron pots. The solidified jaggery blocks are then cut, packed
and dispatched. For manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which
extracts only 45 litre of juice. Following information regarding Process – I has been obtained
from the manufacturing department of Healthy Sweets for the month of January:
(₹)
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
Sugarcane 100%
Closing work-in process: 9,000 litre
Sugarcane 100%
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. [T.6]
Solution (i) Statement of Equivalent Production
Units Units Sugarcane Labour & O.H.
% Units % Units
transferred to
Process - II
Units 1,00,000 Normal Loss 55,000 - - - -
introduced (55%* of
1,00,000)
Abnormal loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200
1,04,500 1,04,500 49,500 47,500
* 100 kg of sugarcane extracts only 45 litre of juice.
Thus, normal loss = 100 – 45 = 55%

(ii) Statement showing cost for each element
Particulars Sugarcane Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in- process 50,000 15,000 45,000 1,10,000
Total cost: (A) 5,50,000 2,15,000 6,45,000 14,10,000
Cost per equivalent unit: (C) = (A ÷ B) 11.111 4.526 13.579 29.216
(iii) Statement of Distribution of cost
(₹) (₹)
1. Value of units completed and transferred 11,54,032
(39,500 units × ₹ 29.216)

- Sugarcane (1,000 units × ₹ 11.111) 11,111
- Labour (800 units × ₹ 4.526) 3,621
- Overheads (800 units × ₹ 13.579) 10,863 25,595

- 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
To Opening W.I.P: By Normal Loss 55,000 -
- Sugarcane 4,500 50,000 By Abnormal loss 1,000 25,613
[₹ 25,595 + ₹ 18
(difference due to
approximation)]
- Labour - 15,000 By Process-II A/c 39,500 11,54,032
- Overheads - 45,000 By Closing WIP 9,000 2,30,355

To Sugarcane introduced 100,000 5,00,000
To Direct Labour 2,00,000
To Overheads 6,00,000
1,04,500 14,10,000 1,04,500 14,10,000

Problem.12.6
Following details are related to the work done in Process-I by ABC Ltd. during the month of May
2019:
(₹)
Opening work in process (3,000 units)
Materials 1,80,500
Labour 32,400
Overheads 90,000
Materials introduced in Process-I (42,000 units) 36,04,000
Labour 4,50,000
Overheads 15,18,000
Units Scrapped : 4,800 units
Degree of completion
Materials : 100%
Labour & Overhead : 70%
Closing Work-in-process : 4,200 units
Degree of completion
Materials : 100%
Labour & Overhead : 50%
Units finished and transferred to Process-II : 36,000 units
Normal Loss:
4% of total input including opening work-in-process
Scrapped units fetch ₹ 62.50 per piece.
Prepare:
(i) Statement of equivalent production.
(ii) Statement of cost per equivalent unit.
(iii) Process-I A/c
(iv) Normal Loss Account and
(v) Abnormal Loss Account. [Nov. 2020, 10 Marks]

Solution
(i) Statement of Equivalent Production (Weighted Average method)

Units Units Material L & O.H.
% Units % Units
transferred to
Process-II
Units introduced 42,000 Normal Loss 1,800 - - - -
(4% of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200
(ii) Statement showing cost for each element
Particulars Materials (₹) Labour (₹) Overhead (₹) Total (₹)
Cost of opening work- in-process 1,80,500 32,400 90,000 3,02,900
Less: Realisable Value of normal (1,12,500) - - (1,12,500)
scrap (₹ 62.50 × 1,800 units)
Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400
Cost per equivalent unit: 85.00 12.00 40.00 137.00
(C) = (A ÷ B)
Statement of Distribution of cost

Particulars Amount (₹) Amount (₹)
1. Value of units completed and transferred: (36,000 units × ₹ 137) 49,32,000
- Materials (3,000 units × ₹ 85) 2,55,000
- Labour (2,100 units × ₹ 12) 25,200
- Overheads (2,100 units × ₹ 40) 84,000 3,64,200

- Materials (4,200 units × ₹ 85) 3,57,000
- Labour (2,100 units × ₹ 12) 25,200
- Overheads (2,100 units × ₹ 40) 84,000 4,66,200
(iii) Process-I A/c

To Opening W.I.P:
Materials 3,000 1,80,500 By Normal Loss 1,800 1,12,500
Labour - 32,400 (₹ 62.5 × 1,800 units)
Overheads - 90,000
To Materials introduced 42,000 36,04,000 By Abnormal loss 3,000 3,64,200
To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900
(iv) Normal Loss A/c

To Process-I A/c 1,800 1,12,500 By Cost Ledger Control A/c 1,800 1,12,500
1,800 1,12,500 1,800 1,12,500
(v) Abnormal Loss A/c

To Process-I A/c 3,000 3,64,200 By Cost Ledger Control A/c 3,000 1,87,500
(₹ 62.5 × 3,000 units)
By Costing Profit & Loss A/c 1,76,700
(Bal. Figure)
3,000 3,64,200 3,000 3,64,200
Problem.12.7
STG Limited is a manufacturer of Chemical ‘GK’, which is required for industrial use. The
complete production operation requires two processes. The raw material first passes
through Process I, where Chemical ‘G’ is produced.

Following data is furnished for the month April 2022:
Particulars (In kgs.)
Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed Quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)
You are further provided that:
Particulars (in ₹)
Opening work-in-progress cost
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100

Normal process loss may be estimated to be 10% of material input. It has no realizable value. Any
loss over and above normal loss is considered to be 100% complete in material and processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for
producing Chemical ‘GK’. Further materials are added in Process II which yield 1.20 kg. of Chemical
‘GK’ for every kg. of Chemical ‘G’ introduced.
The chemicals transferred to Process II for further processing are then sold as Chemical ‘GK’
for ₹ 10 per kg. Any quantity of output completed in Process I, are sold as Chemical ‘G’ @ ₹ 9 per
kg. The monthly costs incurred in Process II (other than the cost of Chemical ‘G’) are:
Input 60,000 kg. of Chemical ‘G’
Materials Cost ₹ 85,000
Processing Costs ₹ 50,000
You are required:
(i) Prepare Statement of Equivalent production and determine the cost per kg. of Chemical,
‘G’ in Process I using the weighted average cost method.
(ii) Prepare a statement showing cost of Chemical ‘G’ transferred to Process II, cost of
abnormal loss and cost of closing work-in-progress.

(iii) STG is considering the option to sell 60,000 kg. of Chemical ‘G’ of Process I without
processing it further in Process-II. Will it be beneficial for the company over the current
pattern of processing 60,000 kg in process-II?
(Note: You are not required to prepare Process Accounts) [May 2022, 10 Marks]
Solution
(i) Statement of Equivalent Production
Particulars Input Particulars Total Material Processing
quantity Cost
% Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material Input 1,05,000 Normal loss 10,500 - - - -
(10% of 1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)
Closing WIP 16,500 100% 16,500 60% 9,900
1,14,500 1,14,500 1,04,000 97,400
Statement of Cost for each element

Particulars Material (₹) Processing (₹) Total cost (₹)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal
loss and cost of closing work-in-progress
(₹)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975
(iii) Calculation of Incremental Profit / Loss after further processing
Particulars (₹) (₹)

Sales if further processed (A) (60,000 × 1.20 × ₹ 10) 7,20,000
Calculation of cost in Process II
Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 × ₹ 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.
CONCEPT 13: INTER PROCESS PROFIT

To control cost and to measure performance, different processes within an organization are
designated as separate profit centres.
In this type of organizational structure, the output of one process is transferred to the next
process not at cost but at market value or cost plus a percentage of profit.
The difference between cost and the transfer price is known as inter-process profits.
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is
facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out.
Problem.13.1
A Ltd. produces product AXE which passes through two processes before it is completed and
transferred to finished stock. The following data relate to October:
Particulars Process I Process II Finished Stock

₹ ₹ ₹
Opening stock 7,500 9,000 22,500
Direct materials 15,000 15,750 -
Direct wages 11,200 11,250 -
Factory overheads 10,500 4,500 -
Closing stock 3,700 4,500 11,250
Inter-process profit included in opening stock - 1,500 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. Stock in process
is valued at prime cost. Finished stock is valued at the price at which it is received from process
II. Sales during the period are ₹ 1,40,000. Prepare Process accounts and finished goods account
showing the profit element at each stage. [S.M.6]
Particulars Total Cost Profit Particulars Total Cost Profit

(₹) (₹) (₹) (₹) (₹) (₹)
Opening stock 7,500 7,500 - Process-II A/c* 54,000 40,500 13,500
Direct 15,000 15,000 - Closing Stock 3,700 3,700 -
materials
Direct wages 11,200 11,200 -
Prime Cost 33,700 33,700

Overheads 10,500 10,500 -
Total Cost 44,200 44,200
Profit** 13,500 - 13,500
57,700 44,200 13,500 57,700 44,200 13,500
Total cost - Closing stock 44,200 - 3,700

*Transfer price = =
75% 75%
= ₹ 54,000
**Profit on transfer = 54,000 × 25%
= ₹ 13,500
Process- II Account
Particulars Total (₹) Cost Profit Particulars Total (₹) Cost Profit
(₹) (₹) (₹) (₹)
Opening stock 9,000 7,500 1,500 Finished Stock 1,12,500 75,750 36,750
A/c**
Transferred 54,000 40,500 13,500 Closing stock* 4,500 3,750 750
from 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
Profit*** 22,500 - 22,500
1,17,000 79,500 37,500 1,17,000 79,500 37,500
75,000
* Cost of Closing Stock = × 4,500 = ₹ 3,750
90,000
Total cost - Closing stock 94,500 - 4,500
**Transfer price = = = ₹ 1,12,500
80% 80%
***Profit on transfer = 1,12,500 × 20% = ₹ 22,500
Finished Stock Account

Particulars Total (₹) Cost (₹) Profit Particulars Total Cost Profit
(₹) (₹) (₹) (₹)
Opening stock 22,500 14,250 8,250 Costing P&L 1,40,000 82,425 57,575
A/c
Process- II 1,12,500 75,750 36,750 Closing 11,250 7,575 3,675
stock*
Profit 16,250 -- 16,250
1,51,250 90,000 61,250 1,51,250 90,000 61,250
Cost of transfer from Process- II

* Cost of Closing Stock = ×Value of closing stock
Transfer price from Process- II
(As per instruction given in the question)
75,750
=  11,250 = ₹ 7,575
1,12,500
Problem.13.2
KT Ltd. produces a product EMM which passes through two processes before it is completed and
transferred to finished stock. The following data relate to May 2019:
Particulars Process Finished Stock
A (₹) B (₹) (₹)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in operating stock 1,000 4,000
Output of Process A is transferred to Process B at 25% profit on the transfer price and output
of Process B is transferred to finished stock at 20% on profit on the transfer price. Stock in
process is valued at prime cost. Finished stock is valued at the price at which it is received from
Process B. Sales during the period are ₹ 75,000. Prepare the Process cost accounts and Finished
stock account showing the profit element at each stage. [May 2019, 10 Marks]
Solution. Process – A A/c

(₹) (₹) (₹) (₹) (₹) (₹)
Opening Stock 5,000 5,000 - Process B A/c 28,800 21,600 7,200
Direct wages 5,000 5,000 -
19,000 19,000 -
Less: Closing stock (2,000) (2,000) -
Prime Cost 17,000 17,000 -
Overheads 4,600 4,600 -
Process Cost 21,600 21,600 -
Profit 7,200 - 7,200
(33.33% of total cost)
28,800 21,600 7,200 28,800 21,600 7,200

Process – B A/c
(₹) (₹) (₹) (₹) (₹) (₹)
Opening Stock 5,500 4,500 1,000 Finished 61,675 41,550 20,125
Process A A/c 28,800 21,600 7,200 stock A/c
Direct wages 6,000 6,000 -
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 -
Process Cost 49,340 41,550 7,790
Profit 12,335 - 12,335
(33.33% of total cost)

61,675 41,550 20,125 61,675 41,550 20,125
Finished Stock A/c
(₹) (₹) (₹) (₹) (₹) (₹)
Opening Stock 10,000 6,000 4,000 Costing P&L 75,000 44,181 30,819
Process B A/c 61,675 41,550 20,125 A/c
71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494

Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819
Problem.13.3
MNO Ltd has provided following details:
• Opening work in progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and overheads
70% complete).
• Input of materials is 55,000 units at ₹ 2, 20,000. Amount spent on Labour and Overheads is
₹ 26,500 and ₹ 61,500 respectively.

• 9,500 units were scrapped; degree of completion for material 100% and for labour &
overheads 60%.
• Closing work in progress is 12,000 units; degree of completion for material 100% and for
labour & overheads 90%.
• Finished units transferred to next process are 43,500 units. Normal loss is 5% of total input
including opening work in progress. Scrapped units would fetch ₹ 8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account [Jan. 2021, 5 Marks]
Solution
(i) Statement of Equivalent Production (Using FIFO method)

Units Units
Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
- From opening WIP 10,000 - - 30 3,000
- From fresh inputs 33,500 100 33,500 100 33,500
Units introduced 55,000 43,500 33,500 36,500
Normal Loss 3,250 - -
(5% of 10,000 +
55,000 units)
Abnormal loss 6,250 100 6,250 60 3,750
(9,500 – 3,250)
Closing WIP 12,000 100 12,000 90 10,800
65,000 65,000 51,750 51,050

(ii) Abnormal Loss A/c
(Refer Working Note – 2) (3,000 units x ₹ 8.5)
To Costing P&L A/c - 23,427
6,250 53,125 6,250 53,125
Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(₹) (₹) (₹)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal scrap (27,625) - -
(3,250 units x ₹ 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ₹ (3.7174 + 0.5191 + 1.2047) = ₹ 5.4412
2. Valuation of Abnormal Loss

(₹)
Materials (6,250 units × ₹ 3.7174) 23,233.75
Labour (3,750 units × ₹ 0.5191) 1,946.63
Overheads (3,750 units × ₹ 1.2047) 4,517.62
29,698
CONCEPT 14: OPERATION COSTING

This product costing system is used when an entity produces more than one variant of final
product using different materials but with similar conversion activities. Which means conversion
activities are similar for all the product variants but materials differ significantly.
Operation Costing method is also known as Hybrid product costing system as materials costs are
accumulated by job order or batch wise but conversion costs i.e. labour and overheads costs are
accumulated by department, and process costing methods are used to assign these costs to
products.
Moreover, under operation costing, conversion costs are applied to products using a
predetermined application rate. This predetermined rate is based on budgeted conversion costs.
For example, a company is manufacturing two grades of products, Product- Deluxe and Product-
Regular.
Both the products pass through a similar production process but require different quality and
quantities of raw materials. The cost of raw material is accumulated on the basis of job or batches
or units of two variants of products. But the costs for the conversion activities need not to be
identified with the product variants as both the Products requires similar activities for
conversion.
Hence, conversion activity costs are accumulated on the basis of departments or processes only.
Example of industries are ready made garments, Shoe making, jewelry etc.
CONCEPT 15: THEORY

Problem.15.1
Distinguish between Job costing and Process Costing. (Any five points of differences)
[May 2022, 5 Marks]
Solution
Job Costing Process Costing
A Job is carried out or a product is produced by The process of producing the product has a
specific orders. continuous flow and the product produced is
homogeneous.
Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period for
each process or department.
Each job is separate and independent of other Products lose their individual identity as they
jobs. are manufactured in a continuous flow.
Each job or order has a number and costs are The unit cost of process is an average cost for
collected against the same job number. the period.
Costs are computed when a job is completed. Costs are calculated at the end of the cost
The cost of a job may be determined by adding period. The unit cost of a process may be
all costs against the job. computed by dividing the total cost for the
period by the output of the process during
that period.
Problem.15.2
How will you treat normal loss, abnormal loss and abnormal gain in process costing? Explain.
[May 2023, 4 Marks]
CONCEPT 16: MULTIPLE CHOICE QUESTIONS

1. The type of process loss that should not be allowed to affect the cost of good units is:
[ICAI Module]
(a) Abnormal loss (b) Normal loss
(c) Seasonal loss (d) Standard loss
2. 200 units were introduced in a process in which 20 units is the normal loss. If the actual
output is 150 units, then there is: [ICAI Module]
(a) No abnormal loss (b) No abnormal gain
(c) Abnormal loss of 30 units (d) Abnormal gain of 30 units
3. 100 units are processed at a total cost of ₹ 160, normal loss is 10%, & scrap units are
sold @ ₹ 0.25 each. If the output is 80 units, then the value of abnormal loss is:
[ICAI Module]
(a) ₹ 2.50 (b) ₹ 16 (c) ₹ 17.50 (d) ₹ 17.75
4. The cost of normal process loss is: [ICAI Module]
(a) Absorbed by good units produced and amount realised by the sale of loss units
should be debited to the process account.
(b) Debited to costing profit and loss account.
(c) Absorbed by good units produced.
(d) Debited to costing profit and loss account and amount realised by the sale of loss
units should be credited to the process account.
5. When average method is used in process costing, the opening inventory costs are:
(a) Subtracted from the new costs
(b) Added to the new costs
(c) Kept separate from the costs of the new period
(d) Averaged with other costs to arrive at total cost [ICAI Module]
6. Spoilage that occurs under inefficient operating conditions and is ordinarily controllable
is called: [ICAI Module]
(a) Normal spoilage (b) Abnormal spoilage
(c) Normal defectives (d) None of the above

7. The value of abnormal loss is equal to: [ICAI Module]
(a) Total cost of materials
(b) Total process cost less realizable value of normal loss
(c) Total process cost less cost of scrap
(d) Total process cost less realizable value of normal loss less value of transferred out
goods.
8. Abnormal Process Gain/Yield arises due to:
(a) Over-estimation of process loss
(b) Improvements in work efficiency of workers
(c) Use better technology in production
(d) All of the above.
9. Operation Costing is also known as ............................:
(a) Process Costing (b) Operating Costing
(c) Hybrid Product Costing (d) None of the above.
10. In which of the following situations an abnormal gain in a process occurs:
(a) When normal loss is equal to actual loss
(b) When the actual output is greater than the planned output
(c) When actual loss is more than the expected loss
(d) When actual loss is less than the expected loss
11. Inter-process profit is calculated, because: [ICAI Module]
(a) a process is a cost centres
(b) each process has to report profit
(c) the efficiency of the process is measured
(d) the wages of employees are linked to the process profitability.
12. Under Weighted Average (Average) Method: [ICAI Module]
(a) The cost to complete the opening WIP is ignored.
(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.

13. A process account is debited by abnormal gain, the value is determined as: [ICAI Module]
(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
14. When compared with normal spoilage, abnormal spoilage: [ICAI Module]
(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.
15. 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: [ICAI Module]
(a) Operation costing (b) Activity-based costing
(c) Job-order costing (d) Process costing
16. 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 for abnormal spoilage separately on
the income statement as loss due to abnormal spoilage. Normal spoilage is not accounted
for separately. What is the cost of the good units produced? [ICAI Module]
(a) ₹ 2,080 (b) ₹ 2,115 (c) ₹ 2,200 (d) ₹ 2,332

17. IC Limited uses process costing systems and inspects its goods post manufacturing. An
engineer noticed on May 31st the following:
Good units completed 15,000
Normal spoilage (units) 300
Abnormal spoilage (units) 100
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: [ICAI Module]

(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
18. In a process 8,000 units are introduced during a period. 5% of input is normal loss. Closing
work in progress 60% complete is 1,000 units. 6,600 completed units are transferred to
next process. Equivalent production for the period is:
(a) 9,000 units (b) 7,440 units (c) 5,400 units (d) 7,200 units.
19. Which of the following statement is not true?
(a) Operation Costing is the refinement of process costing, and concerned with the
determination of the cost of each operation rather than the process.
(b) Process Costing is used in industries where the material has to pass through two or
more processes for being converted into final product.
(c) In calculation of Inter-Process Profit, the output of one process is transferred to
the next process at effective/average cost per unit.
(d) All of the above.
20. Which of the following Statement is not true about the Normal Loss/wastage of
Materials?
(a) Normal loss is the loss of material which is inherent in the nature of work.
(b) Normal loss can be reasonably anticipated from the nature of the material, nature
of operation.
(c) Normal loss does not include units withdrawn from the process for test or sampling.
(d) None of the above.
21. A product passes through Process I and Process II.
Materials issued to Process I amounted to ₹40,000, wages ₹30,000 and manufacturing
overheads were ₹27,000. Normal loss anticipated was 5% of input. 4,750 units of output
were produced and transferred out from Process I.
There were no opening stocks. Input of raw material issued to Process I were 5,000 units.
Scrap has realisable value of ₹2 per unit.
You are required to compute the cost of the output transferred to Process II.
(a) ₹ 97,000 (b) ₹ 96,000 (c) ₹ 96,500 (d) None of the above.
22. 10,000 units of raw materials are introduced into a process at a cost of ₹17,000. Labour
cost and overheads for the process are ₹5,100 and ₹3,400 respectively. 7,500 units were
completed, of the remaining 2,500 units, on an average 40% work has been done.
Ascertain the cost of one complete unit.
(a) ₹4 (b) ₹2 (c) ₹5 (d) ₹3
23. Equivalent production of 1,000 units, 60% complete in all respects, is:
(a) 1,000 units (b) 1,600 units
(c) 600 units (d) 1,060 units.
24. When Actual Loss is .......................... than the estimated loss, the difference between the
two is considered to be Abnormal Loss:
(a) More (b) Less
(c) Both (a) and (b) (d) None of these.
25. The value of abnormal loss is equal to:
(a) Total cost of materials
(b) Total process cost less cost of scrap
(c) Total process cost less realisable value of normal loss less value of transferred out
goods
(d) Total process cost less realisable value of normal loss.
26. The Process Costing is not used in one of the following:
(a) Chemical (b) Textiles (c) Cement (d) Oil refining.
27. In Process X of a manufacturing concern, 10,000 units are introduced during May, 2023.
The normal loss is estimated to be 4% of the input. At the end of the month 1,200 units
were lying as incomplete. The stage-wise completion of the inventory was given as under:
Material 80% complete; Labour 60% complete, and Overheads 50% complete.
You are required to prepare Statement of Equivalent production assuming that 8,300 units
were transferred to finished goods stores.
(a) Equivalent Production – Material 9,000, Labour 9,170, and Overhead 9,360.
(b) Equivalent Production – Material 9,360, Labour 9,360, and Overhead 9,000.
(c) Equivalent Production – Material 9,360, Labour 9,170, and Overhead 9,000.
(d) Equivalent Production – Material 9,360, Labour 9,000, and Overhead 9,000.
28. When Actual Loss is .......................... than the estimated loss, the difference between the
two is considered to be Abnormal Gain:
(a) More (b) Less (c) Higher (d) None of these.
29. Abnormal Process Loss arises due to:
(a) The carelessness of workers (b) A bad Plant design
(c) Bad Operation, sabotage (d) All of the above.
30. Process Costing is also known as ..............................:
(a) Continuous Costing (b) Batch Costing
(c) Multiple Costing (d) Job Costing.
31. The Method of Costing applied in Biscuit Industries is ................... Costing and in Steel
Industries ................. Costing:
(a) Job, Contract (b) Job, Process
(c) Batch, Multiple (d) Process, Operation.
32. Equivalent units represent the production of a process in terms of .................... units.
(a) Completed (b) Total Production
(c) Semi-finished (d) Both (a) and (c).
33. When 1,000 units are 60% complete in a process, it is equivalent to ............ completed units:
(a) 60 (b) 600 (c) 6,000 (d) 1,000.
34. In Inter Process Profits, the output of one process is transferred from one process to
another not at ................. but at ...................:
(a) Market Price, Actual Cost (b) Actual Cost, Market Price
(c) Both (a) and (b) (d) None of these.
35. In Process Costing, the abnormal loss is treated as .................... cost and written off to
Costing Profit and Loss Account:
(a) Unit (b) Period
(c) Future (d) Process.
36. An Input of 5,000 kgs of material introduced into the process and the expected loss is
8% and if the actual output from the process is 4,300, the abnormal loss is .................... kg:
(a) 400 (b) 300 (c) 500 (d) 600.

ANSWERS
1 2 3 4 5 6 7 8 9 10
a c c c b b d d c b
11 12 13 14 15 16 17 18 19 20
c c b d d b b b c c
21 22 23 24 25 26 27 28 29 30
b d c a c c c b d a
31 32 33 34 35 36
b a b b b b

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CHAPTER 10

PROCESS & OPERATION COSTING

CONCEPT 1: MEANING OF PROCESS COSTING

two or more processes for being converted into a final product.

It is defined as “a method of Cost Accounting whereby costs are charged to processes or

operations and averaged over units produced”.

This can be understood with the help of the following diagram:

and each such division is a stage of production or a process.

2. Manufacturing activity is carried on continuously by means of one or more process run

sequentially, selectively or simultaneously.

3. The output of one process becomes the input of another process.

to a particular lot of sugarcane fed or vice versa.

6. Production of a product may give rise to Joint and/or By-Products.

(i) Materials (ii) Employee Cost (Labour)

(iii) Direct expenses, and (iv) Overheads of production.

paid to labour for carrying out the processing activities.

repairs, maintenance, insurance etc. associated with it.

are known as production overheads. These expenses cannot be allocated to a process.

on a pre- determined basis.

CONCEPT 3: STEPS OF PROCESS COSTING

2. Normal Loss % is estimated and accounted.

3. Calculate the Normal Cost / unit.

4. Value the actual production units at Normal Cost.

Unit Rupees Unit Rupees

To Direct Material xxx xxx By Normal Loss xxx xxx

To Direct Labour xxx By units

To Overhead xxx completed and

To Abnormal Gain xxx xxx transferred to

next process xxx xxx

By Abnormal Loss xxx xxx

Process I (₹) Process II (₹) Process III (₹)

Labour 80,000 2,00,000 60,000

Other expenses 26,000 72,000 25,000

no opening or closing stock. [S.M.1]

Particulars Per unit Total Particulars Per unit Total

(₹) (₹) (₹) (₹)

To Material 625 1,50,000 By Process -II A/c 1,150 2,76,000

” Labour 334 80,000 (Transfer to

” Other expenses 108 26,000

” Indirect expenses* 83 20,000

1,150 2,76,000 1,150 2,76,000

Particulars Per unit Total Particulars Per unit Total (₹)

” Material 208 50,000 (Transfer to Process-

” Other expenses 300 72,000

” Indirect 208 50,000

Dr. Process- III Account Cr.

Particulars Per unit Total Particulars Per unit Total (₹)

to processes (I + II +III) = ₹ 80,000 + ₹ 2,00,000 + ₹ 60,000 = ₹ 3,40,000.

There are two types of material losses viz.

(i) Normal loss and

(ii) Abnormal loss.

of the material, nature of operation, the experience and technical data.

withdrawn from the process for test or sampling.

should be credited to the process account.

Problem.4.1: (Normal loss with no realisable value)

To Material 5,000 40,000 By Normal loss 250 0

To Overhead - 27,000 By Process II 4,750 97,000

5,000 97,000 5,000 97,000

Problem.4.2 (Normal loss with realisable value)