grp-3 process costing

8/8/2019 Grp-3 Process Costing

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Group 3:- SunilBhatia

ArchanaPatnaik

Nitisha


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Process Costing Raw materials move down the production line througha number of processes in a particular sequence andcosts are compiled for each process or department bypreparing a separate account for each process.

Used in mass production industries producingstandard products and having standard procedures.

E.g.

Textile millsChemical worksOil refineriesCement manufacturePaper manufacture etc


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CharacteristicsThe production is continuous and the final product is theresult of a sequence of processes.

Costs are accumulated process wise.

The products are standardized and homogeneous .

The cost per unit produced is the average cost.

The finished product of each but last process becomes theraw material for the next process in sequence and that ofthe last process is transferred to the finished goods stock.

Processing of raw materials may give rise to the productionof several products called joint products or by products.


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Process costing

procedureThe factory is divided into number of processes and an

account is maintained for each process.

Each process account is debited with material cost, labourcost, direct expenses and overheads allocated to the process.

The output of a process is transferred to the next process inthe sequence .

The finished output of the last process is transferred to theFinished Goods Account.


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Process costing

procedure

Dr.

I/P

Dr.

I/P

Cr.

O/P

Cr.

O/P

Cr.

O/P

Cr.Dr.

I/P

Dr.

Process AA/c

Process BA/c

Process CA/c

FinishedGoods A/c


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Process losses and

wastagesIn industries a certain amount of loss occurs

at various stages of production.

It is therefore necessary to keep accuraterecords of both input and output.

When loss occurs at a late stage ofmanufacture, it accounts to a greater financial

loss.Process losses may be classified into:-

Normal losses

Abnormal losses


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Normal LossThat amount of loss which cannot be avoided

because of the nature of material or process isnormal process loss.

It is caused by factors like chemical change,evaporation, withdrawals for tests or

sampling, unavoidable spoiled quantities, etc.Normal loss is determined as a percentage of

input.


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Accounting treatment of

Normal LossWhen normal loss is physically present in the

form of scrap, it may have some value, i.e. itmay be sold at some price.

Whenever scrapped material has any value, itis credited to the Process Account.


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ExampleQ. Material 1000 kg @

Rs.6 per kg

labour Rs. 5000direct expenses Rs. 1000

indirect expenses Rs. 1000

normal wastage 10% of input.

Prepare process account when :-

scrap arising out of normal loss has a salevalue of Re.1 per unit.


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SolutionProcess A Account

Particulars kg Rs. Particulars kg Rs.

To material 1000 6000 By normal loss 100 100

To labour 5000 By transfer to B A/c 90012,900

To direct expense 1000

To indirect expense 1000

1,000 13,0001,000 13,000

Cost per unit = 12900/ 900 = Rs. 14.33


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This type of loss consists of loss due tocarelessness, machine breakdown, accident,

use of defective materials etc.

It represents losses which are over and abovethe normal losses.

Abnormal loss is not absorbed by goodsproduction, rather it is transferred to CostingProfit & Loss Account.

Abnormal Loss


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Accounting treatment of

Abnormal loss Allow for normal loss as before.

Find out the cost per unit in the process by

the formula:- Cost per unit= (Total Cost- Value of Normal loss)/(Units

introduced- Normal loss Units)

Multiply the cost per unit by the number ofunits of abnormal loss.Credit the relevant Process A/c with the

quantity and value of abnormal loss.The balance figure in the Process A/c is the

cost of good units produced in the process.


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Example50 units are introduced into a process at a

cost of Re.1 each.

Total expenses incurred by the process isRs.30.

Of the units introduces, 10% are normallyspoiled and possess a scrap value of Re.0.25

each.Owing to an accident, only 40 units are

produced.

Prepare Process A/c and Abnormal loss A/c.


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SolutionProcess AccountParticulars units Rs. Particulars units Rs.

To materials 50 50 By normal loss 5 1.25

To expenses --- 30 By abnormal loss 5 8.75

By transfer to X a/c 40 70

50 80 50 80

Cost per unit = (80-1.25)/(50-5) = 78.75/45 = Rs.1.75

Cost of abnormal loss = 5 * 1.75 = 8.75


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ContdAbnormal loss a/c

Particulars units Rs. Particulars

units Rs. To Process a/c 5 8.75 By sales

5 1.25

By profit and

loss a/c 7.505 8.75

5 8.75


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Abnormal GainIf the loss is greater than the normal loss it is

called abnormal loss but if it is less than the

normal loss, it is called Abnormal Gain oreffectiveness.

The calculations is same as abnormal loss.

It is debited in the process A/c and credited inthe Abnormal Gain A/c.

Ultimately it is transferred to Costing profit &Loss A/c.


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Example50 units are introduced into a process at a

cost of Re.1 each.

Total expenses incurred by the process isRs.30.

Of the units introduces, 10% are normallyspoiled and possess a scrap value of Re.0.25

each. Only 47 units are produced.

Prepare Process A/c and Abnormal gain A/c.


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SolutionProcess AccountParticulars units Rs. Particulars units Rs.

To materials 50 50 By normal loss 5 1.25

To expenses --- 30 By transfer to X a/c 47 82.25

To abnormal gain 2 3.50

52 83.50 52 83.50

Cost per unit = (80-1.25)/(50-5) = 78.75/45 = Rs.1.75

Cost of abnormal gain = 2 * 1.75 = 3.50


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ContdAbnormal gain a/c

Particulars units Rs. Particulars

units Rs. To normal loss 2 0.50 By process a/c

2 3.50

To profit & loss 3.00

2 3.502 3.50


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Work-in-progress

(equivalent production)Equivalent production represents the production

of a process in terms of completed units.

Work-in-progress at the end of an accounting

period are converted into equivalent completedunits.

Equivalent completed units=no. of units ofwork-in-progress * degree of completion in %.

In each process, an estimate is made of thedegree of completion of work-in-progress in termsof %.


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Evaluation of equivalent

productionFind out the total cost for each element of cost

i.e.material, labour and overhead.

Scrap value of normal loss is deducted from the

material cost.Ascertain the cost per unit of equivalent production

separately for each element of cost. This is done bydividing the total cost of each element by therespective no. of equivalent units.

At this rate of cost per unit, ascertain the value offinished production and work-in-progress.


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ContdStatement of production, cost and

evaluation isprepared which comprises of :-

Statement of equivalent production.Statement of cost (per unit).

Statement of evaluation.

Equivalent production can be classified into :-

When there is no opening stock.

When there is opening as well as closingstock.


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ContdWhen there is no opening stock it means there is only

closing stock of work-in-progress. In such a situation, theremay or may not be process losses.

When there is no opening stock of W-I-P but thereare process losses-

Normal loss equivalent units of normal loss are taken asnil. Net material cost = cost of material scrap value

Abnormal loss it is added to equivalent production with

due consideration to its degree of completion


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Internal process profitsIt is a practice to charge the output of each

process to the next process not at cost but ata price showing profit to the transferor

process.

This transfer price may be either the currentmarket price or cost plus a fixed %.

They have the disadvantage of complicatingthe costing records.

grp-3 process costing

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