MAHATMA EDUCATION SOCIETY’SPILLAI COLLEGE OF ARTS COMMERCE AND

SCIENCENEW PANVEL

RE-ACCREDITED BY NAAC WITH ‘A’ GRADE

A PROJECT ON

“STUDY OF PROCESS COSTING” In the subject Advanced Cost Accounting

SUBMITED TO

UNIVERSITY OF MUMBAI,

FOR SEMISTER-I OF

MASTER OF COMMERCE

BY

PRIYAL SHAH.

1917

UNDER THE GUIDENCE OF

PROF.GAJANAN WADER

YEAR-2012-2013

MAHATMA EDUCATION SOCIETY’S

PILLAI COLLEGE OF ARTS COMMERCE AND SCIENCENEW PANVEL

RE-ACCREDITED BY NAAC WITH ‘A’ GRADE

DECLARATION BY THE STUDENT

I, Miss. Priyal shah. student of M.Com Part-I Roll number 1917 hereby declare that the project for the Advanced Cost Accounting titled,

“Study of Process Costing”

Submitted by Me for Semester-I During The academic year 2012-2013, is based on actual work

carried out by me under the supervision of Prof.Gajanan Wader

I further state that this work is original and not submitted anywhere else for any examination.

Signature of student

MAHATMA EDUCATION SOCIETY’SPILLAI COLLEGE OF ARTS COMMERCE AND SCIENCE

NEW PANVELRE-ACCREDITED BY NAAC WITH ‘A’ GRADE

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on

“Study Of Process Costing”

Submitted by Miss. Priyal Shah. Student of M. Com Part-I.

This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner:- Principal:-Prof. Gajanan Wader Dr.Dephne Pillai

MAHATMA EDUCATION SOCIETY’SPILLAI COLLEGE OF ARTS COMMERCE AND SCIENCE

NEW PANVELRE-ACCREDITED BY NAAC WITH ‘A’ GRADE

ACKNOWLEDGEMENT

The successful completion of project involved the contribution of time and efforts. This project would never have been completed without the valuable help extended to us by the subject teacher and project guide Prof. Gajanan Wader.

Secondly would like to thank our Principal Dr. Daphne Pillai and Vice Principal Mr. A. N. Kutty for providing us such a prestigious institution.

Last but not least I would like to thank our Parents for making us capable in doing this project and giving their continuous support and guidance.

Introduction of process costing:

Process costing is an accounting methodology that traces and accumulates , and allocates  of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of which attempts to measure individual costs of production of each unit. Process costing is usually a significant chapter.

Process costing is a type of operation costing which is used to ascertain the  of a product at each process or stage of manufacture.  Defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. A process can be referred to as the sub-unit of an organization specifically defined for cost collection purpose.

Features of process costing

1. Work In Progress

One of the most unique features of process costing is its work-in-progress nature. Unlike other types of costing, i.e. job order costing; there is no need for a sales order. Due to its continuous nature, process costing is simply divided up among workplace departments. Each portion of the process costing is named according to department, i.e. Work-in-progress: Shipping. The first entry into the work-in-progress system is generally made in the form of direct, raw materials. As the product moves throughout each individual department, more entries are added to the work-in-progress log. Labor costs are added periodically as are indirect costs and spoilage.

2. Cost Control

Another important feature of process costing is its direct relation to cost control. When a manager needs to zone in on a budget and control costs associated with manufacturing, process costing provides relevant feedback on month-to-month comparisons of similar products. It allows managers to monitor and assign value to a product at any given time. For example, a pharmaceutical company manager may want to note value of a drug midway through the production process. He may want to determine the value prior to the addition of certain chemicals. Process costing allows for this and, in turn, gives managers a clear view of the value at the time of completion.

3. Per Unit Costs

Because process costing provides cost information for every step of a company's manufacturing process, it is able to provide managers an account of all direct and indirect costs. As costs are assigned to products and services, which sometimes include a whole month's production, process costing breaks down information to determine average per-unit costs. Once per-unit costs are in play, a manager can pull information from the work-in-progress log to determine cost of a product or service at any given time during the manufacturing process.

4. Controlled

One major characteristic of process costing is the fact that the process is controlled. This is why process costing is used--it is an industry where the process is clear-cut, which makes it possible to assign a price to it. This means that there are a wide range of industries where process costing will not work. For example, a law firm cannot use process costing to determine prices because the process to produce their product (legal expertise and advice) is not the same for every client. Indeed, its selling point is that it is different for every client. Therefore, the process cannot be streamlined and the costs cannot be kept the same for all lawyers.

5. Cumulative

Process costing uses cumulative costs from every stage of production. So, if a factory makes ketchup bottles, the people in charge of process costing would find the cost of the glass, plus the cost of the labels, plus the cost of the workers in each department and maintenance of the necessary machines. By adding up the total cost of producing a set number of ketchup bottles, the accounting team can determine how much it costs to produce each ketchup bottle--and therefore determine what price each bottle should sell for.

6. Continuity

The final characteristic of process costing is that the process has to be continuous. If a factory makes custom equipment for large clients, it is not possible to assign a fixed process cost because the process is not continuous. The factory may be making one kind of equipment for six months and a completely different kind for the next six months; the changing of inputs and outputs will change the process and therefore change its cost. However it is possible to process cost within each of these six-month periods. If a shop is making different things every day, though, then there are too many variables and process costing is not possible.

Advantages of process

1. Easy to UseProcess costing is an easier system to use when costing homogenous products

compared to other cost allocation methods. Business owners allocate business costs according to the number of processes each good travels through in the production system. Each process applies direct materials, labor and manufacturing overhead to the production cost total. Management accountants take the total number of goods leaving the process and divide the total process cost by this number. This creates a simple average cost for each item produced.

2. FlexibleBusiness owners use process costing because it creates a flexible production

process. Companies needing to refine their process can simply add or remove a process as necessary. This also allows companies to lower their production cost for each good. Business owners typically look for ways to refine a production process to increase cost savings. Eliminating redundant processes often achieves this goal. Adding a process allows companies to produce slightly different goods or improve product quality. Management accountants may review the amount of materials and labor used in each process to determine if any costing savings is available in the productions system. This flexibility ensures companies can produce at the most competitive cost in the economic marketplace.

3. Cost ErrorsProcess costing can create cost errors in the production system. Production cost

errors often represent a significant disadvantage for cost accounting systems. Process costing does not use direct allocation to apply business costs to individual goods. Direct allocation costing applies a specific amount of raw materials, production labor and manufacturing overhead to goods or services. Process costing may allow non-production costs to be included in the total process cost. Including non-production costs will arbitrarily increase each item’s cost; this also increases the consumer product price. Management accountants may also leave out production costs and create under-costed products. Under-costed products usually result in lower business profits because goods are actually more expensive than actually reported.

4. Equivalent UnitsManagement accountants must calculate equivalent units in the process costing

system. Equivalent units represent the amount of unfinished goods left in a process at the end of an accounting period. This calculation may only be a best guess or an estimate by management accountants. This information is reported as the work-in-process on a company’s balance sheet. Inaccurate work-in-process accounts may also result in distorted finished good totals. This creates a difficult process for managing inventory and determining how many products the company has to sell in the open marketplace.

Disadvantages of process

1. Process costing is a method of assigning a cost to the products a manufacturer produces. Process costing is one of the main types of costing for a manufacturing firm, and its main alternative is job order costing. According to North Seattle Community College, process costing is most useful when a manufacturer produces items that are very similar to one another, such as batches of chocolate or barrels of gasoline. Disadvantages of process costing apply when a company produces different products or works on dissimilar jobs.

2. Partial Products

Process costs are easier to calculate when the manufacturer completes all products that it starts work on during an accounting period. If all products are not complete, the cost accountant must calculate equivalent units of production. Products are assigned a partial value after each step they go through in the manufacturing process, and the company adds up these partial values to estimate the total units produced during the period. For complicated items, it may be difficult to assign a partial value.

3. Input Price Changes

The costs of materials and labour may change during the period in which the manufacturer creates the product. Process costing requires the cost accountant to use additional methods to calculate the expenses of manufacturing the product. According to the Peralta Colleges, two methods that assign costs to a process are First in First Out, or FIFO, and average cost. Both of these methods are estimates and are inexact.

4. Complete Interchangeability

Methods a cost accountant uses to assign process costs assume that all of the products a manufacturer produces are interchangeable. This not only requires each product to use the same materials; it also means that each department must perform the exact same work on each product. According to the College of San Mateo, units produced during an earlier period are blended with units produced during the current period when using the weighted average method to calculate process cost.

5. Competition

A company that uses job order costing can compete more easily when selling a product. Process costing averages many types of costs together, instead of recording the exact expenses necessary to manufacture a product. If a company produces different types of items and uses process costing, it may assign an average cost that is higher than some products actually cost to manufacture. Competitors who know what the cheaper products cost to manufacture can sell these items for less and capture additional market share.

Introduction of my topic:

Coconut palms are grown widely in the coastal tracts of the country. Copra, the dried kernel is the chief commercial product from coconut, which is mainly used for oil extraction. Copra normally has an oil content varying from 65 to 72 per cent.

Coconut oil is an important cooking medium in Southern parts of the country especially in Kerala State. Besides, the oil has varied industrial applications. It is used in the manufacture of toilet soaps, laundry soaps, surface active agents and detergents, hair tonics, cosmetics, etc. It is used throughout the country as hair oil as it helps growth of the hair. As massage oil it has a cooling effect on the body. Owing to these qualities coconut oil has a potential market in the country. Since the price of coconut oil in the international market is very much lower than the domestic price, the quality and attractiveness of consumer packs are important factors to compete in the world market. While the demand for coconut oil for cooking purpose is elastic, its demand as hair oil is inelastic.

For the extraction of oil from copra the common method still prevailing in our country is by using rotary chucks. But the efficient system of extraction of oil is by the use of expellers.

Process

Well dried copra with a moisture content not exceeding 6 per cent is cleaned well from any foreign matter. It is then cut into small chips in a copra cutter. The chips are fed into steam jacketed kettles and cooked mildly at a temperature of 70oC for 30 minutes. After proper cooking, the cooked material is fed into the expeller continuously and pressed twice. The combined oil from the first and the second pressing is collected in a tank provided separately. This oil is filtered by means of a filter press and stored in MS tanks. Bulk packaging is done in tin containers. HDPE containers and polymeric nylon barrier pouches are used for small consumer packing’s. The quality of copra is related to the quality of coconut oil. 

The oil cake obtained as a by-product will find a ready market as a cattle feed and in the manufacture of mixed cattle feeds or as a raw material for the extraction of remaining oil by solvent 

The coconut tree is called "The Tree of Life" because of the endless list of products and by- products derived from its various parts, making it an ideal product for developing areas.

o Coconut Meat: from coco meat can be obtained coco flour, desiccated

coconut, coconut milk, coconut chips, candies, copra and animal feeds.o Coconut flour: can be used as a wheat extender in baking certain products

without affecting their appearance or acceptability.o The coconut milk is a good protein source. Whole coco milk contains about

22% oil, which accounts for its laxative property.

o Coco chips, which are curved and wrinkled coconut meat, is crisply toasted

and salted. It is very popular in Hawaii.o Coconut Oil: Copra is dried coconut meat that has a high oil content (as much

as 64%). Coconut oil is the most readily digested of all the fats of general use in the world. Its chief competitors are soya bean oil, palm oil and palm kernel oil. Coconut oil is also used in the detergent industry. Other products from coco oil are soap, lard, coco chemicals, crude oil, pomade, shampoo, margarine, butter and cooking oil.

o Coconut Leaves: coconut leaves produce good quality paper pulp, brooms, hats

and mats, fruit trays, waste baskets, fans, lamp shades, placemats, bags and utility roof materials.

o Coconut Water: it is a very rich and healthy drink. A recent breakthrough use

is in coconut water therapy to cure renal disorders.o Coconut Husk: Coconut husks are made of bristle fiber (10%), mattress fiber

(20%) and coir fiber (70%). The abundance of fiber makes it good, stable supply for cottage industries that make brushes, doormats, carpets, bags, ropes, yarn fishing nets, and mattresses, etc. Coir fiber can also be used as substitute for jute in making rice, copra, sugar, coffee bags and sandbags. It is also suitable for making pulp and paper.

o Coconut Pith: Out of its pith can be produced coco pickles, but also helmets,

caps, wooden shoe straps, handbags, fans, picture and house decor like lamp

shades.o Coconut Shell: Coconut shell produces the core of the most saleable

household products and fashion accessories that can be turned into lucrative, wide-selling cottage industries. Among them are shell necklaces, shell bags, cigarette boxes, shell ladles, buttons, lamp shades, fruit and ash trays, guitars, placemats, coffee pots, cups, wind chimes, briquetted charcoal and activated carbon.The most important use of coconut shell is activated carbon produced from its charcoal. It is utilized in air purification systems such as cooker hoods, air conditioning, industrial gas purification systems, and industrial and gas masks.

o Coconut Trunk & Roots: Out of the coconut trunk, hardy and durable

wood is obtained to make benches, tables, carvings, picture frames, tables, tool boxes, and construction materials, among many others. Paper pulp can also be extracted from the coconut trunk and other woody parts of the tree.

Advantages of process

1. Head Lice : Developing research shows that a spray containing coconut oil, anise oil, and ylang ylang oil appears to be effective for treating head lice in children. It seems to work about as well as a spray containing chemical insecticides.2. Psoriasis : Applying coconut oil to the skin before treatment of psoriasis with ultraviolet B (UVB) or psoralen and ultraviolet A (PUVA) light therapy doesn't seem to improve effectiveness of the treatment.

3. Heart disease : A study in India suggested that eating coconut or taking coconut oil doesn’t seem to affect the chances of having or developing some developing research shows that taking coconut oil 10 ml three times daily might reduce waist size after 1-6 weeks of use.

4. High cholesterol : Some research suggests that dietary use of coconut oil is linked to increase high-density lipoprotein (HDL or “good”) cholesterol, but does not increase levels of “bad” cholesterol.

Disadvantages of process

1. Coconut oil is safe for most people if used in amounts commonly found in foods. It also appears to be safe when applied to the scalp in combination with other herbs.

2. Since coconut oil has a high fat content, there is concern that it might increase weight if used in large amounts or that it might increase cholesterol levels. However, these concerns have not been proven in scientific research.

3. High cholesterol: There is concern that coconut oil might increase total cholesterol and “bad cholesterol. But there is contradictory evidence that shows that coconut oil might actually increase levels of “good” cholesterol and have little to no effect on total or “bad” cholesterol levels.

Benefits to Disadvantage

From Curing Constipation (Benefits) to Triggering Diarrhea (Disadvantage)

Some people use coconut oil to help them improve their bowel movement to cure constipation. But some coconut oil eaters get diarrhea-like effect after eating coconut oil, why? That's because when you take an overdose of it, it can be too smooth for your comfort.

From Weight Loss (Benefits) to Weight Gain (Disadvantage)

First, people accused coconut oil of being fattening due to its high saturated fat content (about 90%). But as more and more people become wiser and gain more knowledge about the incredible weight loss benefits of coconut oil, coconut oil has now become the staple in those people's weight loss diets. However, eating too much of the oil can make you gain weight once again,

From Health-Promoting (Benefits) to Health-Damaging (Disadvantage)

Although cooking with coconut oil proves 10 times safer than with most other vegetable oils, coconut oil does have its smoke point — at 350 °F (177 °C). You heat it beyond that level, the oil's saturated fatty acid structure will break down, and quickly and easily react with free radicals in the air to form new structure, which will most likely hold trans fat. Tran’s fat kills your healthy cells and can trigger cancerous and other degenerative diseases.

Work in progress

Work in process (acronym: WIP) or in-process inventory includes the set at large of unfinished items for products in a production process. These items are not yet completed but either just being fabricated or waiting in a queue for further processing or in a buffer storage. The term is used in production and optimal production management aims to minimize work in process. Work in process requires storage space, represents bound capital not available for investment and carries an inherent risk of earlier expiration of shelf life of the products. A queue leading to a production step shows that the step is well buffered for shortage in supplies from preceding steps, but may also indicate insufficient capacity to process the output from these preceding steps.

 (Acronym: JIT) production is a concept to reduce work in process with respect to a continuous configuration of product.  (Acronym: JIS) is a similar concept with respect to a scheduled variety in sequence of configurations for products.

  Identification can be used to identify work items in process flow. For  the products additional requirements must be considered to ensure not only presence of work items, but also knowledge of the whereabouts of these items. This is a mandatory condition in flexible production lines with paralleled work positions for single steps of production.

Sometimes, outside of a production and construction context "Work in process" is used erroneously where the status "Work in Progress" would be correctly used to describe more broadly work that is not yet a final product.

Equivalent Units

The equivalent unit concept is used to estimate the cost of the work-in-process inventory. A large business might have thousands of partially finished goods sitting in inventory. For example, if an inventory item is 10 percent finished -- which means that 10 percent of the raw material and labor inputs have been incurred -- the equivalent unit is 0.1 (1 / 10). Therefore, if the per-unit cost is $100, the cost for a 0.1 equivalent unit is $10.

Valuation

The concept of equivalent units can be used to value work-in-process inventory. For example, if a computer manufacturer starts assembling 100 computers, then sells 90 and completes 75 percent of the work on the remaining 10, the equivalent units completed equal 97.5 [90 + (0.75 x 10) = 90 + 7.5 = 97.5]. If the costs incurred are $100,000, then the per-unit cost is $1,025.64 ($100,000 / 97.5). Therefore, the cost of goods sold is $92,307.69 (90 x $1,025.64) and the work-in-process inventory's value is $7,692.31 (10 x 0.75 x $1,025.64).

Accounting Tools uses the running tallies for production costs and cost of goods sold to value work-in-process inventory. For example, if the beginning work-in-process inventory is $10,000,

the manufacturing cost is $5,000 and the cost of goods sold is $7,000, then the ending work-in-process inventory is $8,000 ($10,000 + $5,000 - $7,000).

Cost partially complete

It depends on the user of the terms. I use the term “work-in-process” to mean a manufacturer’s inventory that is not yet completed. I think of work-in-process as the goods that are on the factory floor of a manufacturer. The amount of Work-in-Process Inventory would be reported along with Raw Materials Inventory and Finished Goods Inventory on the manufacturer’s balance sheet as a current asset.I use the term “Work-in-Progress” to mean construction of long term assets (that will be used in the company’s business) that are not yet completed. For example, if a company is constructing an addition to its building and the work is only partially completed, the amount spent so far would be recorded as Work-in-Progress, Construction in Progress, or Construction Work-in-Progress (CWIP) and the account would be on the balance sheet as a long-term asset in the section entitled Property, Plant and Equipment. When the project is completed and put into service, the amount would be transferred out of CWIP and would be reported in the account Buildings within Property, Plant and Equipment. At that point, the depreciation of the addition will begin. (If a company is constructing an assembly line or a huge machine that will take time to build, the amounts would also be accumulated in CWIP. When the project is completed and is placed into service, the amount will be transferred from CWIP to Equipment and depreciation will begin.)

Cost partially incomplete

Methods of Process Costing

FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes.

FIFO Method:

The FIFO inventory method for inventory valuation assumes that the first goods purchased are the first goods used or sold, regardless of the actual physical flow.  This method most closely parallels the physical flow of the inventory units in most industries.  The strength of this cost flow assumption lies in the inventory amount reported on the .  Because the earliest goods purchased are the first ones removed from the inventory account, the remaining balance is composed of items priced at the most recent .  This yields results similar to those obtained under current cost accounting on the balance sheet.  However, the FIFO method does not necessarily reflect the most accurate income figure as older, historical costs are being charged to and matched against current .

The FIFO inventory method is of particular use from an inventory valuation perspective in periods when costs are increasing, since it flushes the cost of older inventory items from the inventory records, leaving only those inventory items most recently purchased, along with their costs (which most closely approximate current market prices).

The FIFO method is allowed under:-

Advantages of First in First out (FIFO) Costing Method:

Advantages claimed for first in first (FIFO) out costing method are:

1. Materials used are drawn from the cost record in a logical and systematic manner.2. Movement of materials in a continuous, orderly, single file manner represents a condition necessary to and consistent with efficient materials control, particularly for materials subject to deterioration, decay and quality are style changes.

FIFO method is recommended whenever:

1. The size and cost of units are large.2. Materials are easily identified as belonging to a particular purchased lot.3. Not more than two or three different receipts of the materials are on a materials card at one time.

Disadvantages or Limitations of FIFO Method

FIFO method is definitely awkward if frequent purchases are made at different prices and if units from several purchases are on hand at the same time. Added costing difficulties arise when returns to vendors or to the storeroom occur.

Definition and explanation of LIFO Method :

The last in first out (LIFO) method of costing materials issued is based on the premise that materials units issued should carry the cost of the most recent purchase, although the physical flow may actually be different. The method assumes that the most recent cost (the approximate cost to replace the consumed units) is most significant in matching cost with revenue in the income determination procedure.

Under LIFO procedures, the objective is to charge the cost of current purchases to or other operating expenses and to leave the oldest costs in the inventory. Several alternatives can be used to apply the LIFO method. Each procedure results in different costs for materials issued and the ending inventory, and consequently in a different profit. It is mandatory, therefore, to follow the chosen procedure consistently.

Advantages under LIFO Method:

1. The cost of materials issued will be either nearer to and or will reflect the current market price. Thus, the cost of goods produced will be related to the trend of the market price of materials. Such a trend in price of materials enables the matching of cost of production with current sales revenues.

2. The use of the method during the period of rising prices does not reflect undue high profit in the income statement as it was under the first-in-first-out or average method. In fact, the profit

shown here is relatively lower because the cost of production takes into account the rising trend of material prices.

3. In the case of falling prices profit tends to rise due to lower material cost, yet the finished products appear to be more competitive and are at market price.

4. Over a period, the use of LIFO helps to iron out the fluctuations in profits.

5. In the period of inflation LIFO will tend to show the correct profit and thus avoid paying undue taxes to some extent.

Disadvantages under LIFO Method:

1. Calculation under LIFO system becomes complicated and cumbersome when frequent purchases are made at highly fluctuating rates.

2. Costs of different similar batches of production carried on at the same time may differ a great deal.

3. In time of falling prices, there will be need for writing off stock value considerably to stick to the principle of stock valuation, i.e., the cost or the market price whichever is lower.

4. This method of valuation of material is not acceptable to the income tax authorities.

Processing of the Coconut Oil:-

R e c e i vi n g o f t h e w h o l e n u t s

Receiving 50,000 whole nuts requires 4 recorders and 1 cashier.• Around 40 to 50 farmers will deliver their whole nuts to the CPC daily.• Unloaders unload the whole nuts in the presence of the recorders.• The recorder counts, records and issues an acceptance receipt to the farmer.• The farmer presents the acceptance receipt to the cashier for payment.

D e h u s k i n g

Dehusking requires around 30 piece meal workers and 1 supervisor/recorder.

• Around 30 dehuskers dehusk the whole nuts. Work standard is 1,500 to 2,000 nuts per day per dehuskers. The group of dehuskers prepares 4,000 nuts per batch and should finish around 1.5 batch per hour.

D r i e d c o c o n u t m e at p r o d u c t i on

Dried coconut meat production requires around 50 piece meal workers at 8 hours per worker, and two supervisors (2 shifts).

• 8 splitters open 4,000 nuts per hour.

• 4 loaders load one hot air drier with 4,000 nuts per hour

• One drier is loaded every hour, and fired for around 10 hours.

• 1 unloaded unloads 4,000 nuts per hour

• After unloading 16 scoopers remove the dried meat at 4000 nuts per hour.

The above work standards still have to be tested in actual operation. They are based on 10-hour drying time (this might be reduced with modification of the process). The objective is to process 4,000 nuts per hour in batches, maximize the capacity of the driers and achieve constant quality of the meat (in other areas with different nut conversion or larger driers, the batches might actually be 5,000 nuts). Since the dehuskers dehusk in batches of 4,000 pieces, counting has to be done only once. At the end, it will be a matter of weighing the meat, which should not be less than 800 kg per batch.

H us k d e c o r t i c a t i n g a n d f i b e r d r y i n g

Husk decorticating requires 10 piece meal workers and 1 supervisor.

• The husks are conveyed to the decorticator. As per experience, around 10 people are needed to operate the machine. As a starting standard it is assumed that at least 4,000 husks can be processed per hour,

• Drying of the fibers to less than 20% moisture using a new process will cut drying costs

F i b e r b ali n g

Fiber baling requires 6 piece meal workers and a supervisor (same as under 3.4). Twining requires 2 workers per machine.

• The fiber-baling machine is aligned with the decorticator. Assume they can bale an average of 500kg per hour, operated by 6 workers. The work standard here has to be revalidated.

B ioo r ga n ic s o il e nh a n c e r ’s p r o du c t ion

Bio-manure for soil enhancers (fertilizer) production requires 12 piece meal workers and supervisor. The final blending of the bio-manure and coco peat mixture and fermentation process to produce the final soil enhancers will be out-sourced to the families of enrolled farmers.

• The coconut peat is screened (1”), using a simple engine driven screen, 2 people will be needed to operate the screening

• The screened short fibers are brought to the driers and mixed with the coco shell as fuel

• 50% (around 5,000kg) of the coco peat is mixed with copra meal (or equivalent), coconut water and ‘bio-manure’ inoculants in a simple mixer. 3 people load the mixer and unload into bags (without plastic lining). The bags are then stored for 24 hours to produce 8,000 kg of bio-manure.

• Another ingredient consisting of coco peat, coconut water and ‘bio-organic soil enhancers’ inoculants will be pre-mixed to be supplied to the families of farmers who will do the blending of the final soil enhancers. The operations will require the same people as in the bio-manure production.

• This next activity will be out-sourced to the families of enrolled farmers who will be provided with micro-financed loans to buy the ingredients. They will buy the bio-manure and the pre-mixed ingredients, which will be delivered to their households where they will mix the two components manually using shovels then put into bags (without lining), weighed and sewed. Weight per bag should not be less than 55kg (the residual weight of the composted material is around 75% or not less than 40 kg per bag after 4 weeks). The total daily production of bio-organic soil enhancers will be around 16,000kg gross and12,000kg net, equivalent to around 300 bags of 40kg. The ‘bioorganic soil enhancers mix’ bags are stored in the farmers’ families’ households and will be purchased by CPC’s partner for the Farmers’ Program. The purchase price will provide for a profit to the families and will be picked up for delivery to the farmers participating in the fertilization program.

C o c o s h e ll p r o c e s s i n g Coco shell crushing and bagging requires 2 piece meal workers.

• The shells not used in the copra driers (around 50%) are crushed manually and bagged which will be sold to the oil mills

• Any charcoal produced in the copra driers will be bagged and sold to farmer’s families who will become charcoal dealers

C o c o n u t w a t e r • Coconut water saved from the splitting operations are saved and piped to a tank for

blending with soil enhancers production. No labor cost involved in this operation.

L oa d i n g / un loa d i n g/ i n t e r n al t r a n s p o r t of p r o d u c t s • Around 30 people will be needed for loading and unloading whole nuts and finished

products. Payment for loading and possibly internal transport will have to be determined at actual operation. Cost hereof is included in copra making, fiber processing and fertilizer processing cost.

Comparison of Weighted-Average and FIFO Methods

The graph presented in Exhibit 4–E highlights the differences between the weighted- average and FIFO methods of process costing. The graph is based on the same con- tinning illustration; the basic data are presented in Exhibit 4–4 of the text. The graph focuses on conversion activity, but an analogous graph could be prepared for direct material. Groups of physical units are graphed on the horizontal axis, and the per- centage of conversion activity accomplished during March is graphed on the vertical axis. Area I represents the equivalent units of conversion accomplished during February on the March 1 work-in-process inventory. Area II represents the equivalent units of conversion required during March to complete the conversion of the beginning work-in-process inventory. Area III represents the equivalent units of conversion activity accomplished during March on the units that were both started and completed during March. Area IV represents the equivalent units of conversion activity accom- plished during March on the March 31 work-in-process inventory.

The key difference between the weighted-average and FIFO methods lies in the treatment of area I. Under the weighted-average method, the conversion costs asso- ciated with areas I, II, III, and IV are divided by the total equivalent units of conversion activity represented by areas I, II, III, and IV. The resulting conversion cost per equiv- alent unit is a weighted average of some of the conversion costs incurred in February (area I) and the conversion costs incurred during March (areas II, III, and IV).

In contrast, under the FIFO method, the total conversion costs associated only with areas II, III, and IV are divided by the equivalent units of conversion activity repre- sented by areas II, III, and IV. The resulting conversion cost per equivalent unit is a

pure March unit cost, because areas II, III, and IV represent conversion costs and activity of March only.

Evaluation of Weighted-Average and FIFO The weighted-average method of process costing is more widely used than the FIFO method, probably because it is somewhat simpler. Most product costing systems were designed before the wide use of com- puters, when the complexity of the system was an important consideration. Nowadays, most product costing systems are computerized; operating a process costing system is equally simple when using either the weighted-average method or the FIFO method.

Behavioral Implications For purposes of cost control and performance evaluation, FIFO process costing is superior to the weighted-average method. To provide incen- tives for departmental managers to control costs, it is important to evaluate their per- formance on the basis of current-period costs only. When current-period and prior-period costs are averaged, a departmental manager’s current performance is less clear. Moreover, performance evaluation based partially on costs incurred in prior periods is less timely. Behavioral scientists generally agree that for performance evalu- ation to be most effective, it should be done on a timely basis.

Just-in-Time (JIT) Inventory Methods The difference between weighted-average and FIFO process costing becomes much less significant when the firm uses the just-in- time approach to inventory and production management. Under the JIT philosophy, all inventories are kept to an absolute minimum, including work-in-process inventories. The difference that arises between weighted-average and FIFO process costing calcu- lations is due to the different treatment of each period’s beginning work-in-process

inventory under the two methods. (To see this most clearly, you may wish to review Exhibit 4–C.) Since work-in-process inventories are very small or nonexistent under JIT, there will be little or no difference in the process costing calculations under the weighted-average and FIFO methods.

of Completion

Physical Respect to Direct

Percentage

with Equivalent Units

Units Conversion Material Conversion

Work in process, March 1 . . . . . . . . . . . . . . . . . . . . . .

20,000 10%

Units started during March . . . . . . . . . . . . . . . . . . . . .

30,000

Total units to account for . . . . . . . . . . . . . . . . . . . . . . . 50,000

Units completed and transferred out during March . . . . 40,000 100% 40,000 40,000

Work in process, March 31 . . . . . . . . . . . . . . . . . . . . . 10,000 50% 10,0005,000

Total units accounted for . . . . . . . . . . . . . . . . . . . . . . . 50,000

Total equivalent units . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 45,000

Less: equivalent units representedin March 1 work in process . . . . . . . . . . . . . . . . . . . 20,000 2,000

DirectMaterial Conversion Total

Work in process, March 1 (from Exhibit 4–4) . . . . . . . . . . . . These costs were incurred $ 57,200 during February. They are notincluded in the unit-cost calculation for March.

Costs incurred during March (from Exhibit 4–4) . . . . . . . . . . $90,000 $193,500 283,500

Total costs to account for . . . . . . . . . . . . . . . . . . . . . . . . . . $340,700

Equivalent units for March only (from step 2, Exhibit 4–A) . . . 30,000 43,000

Costs per equivalent unit . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.00 $ 4.50 $ 7.50

$90,000 $193,500 $3.00 + $4.50

30,000 43,000

Process Costing: The First-In, First-Out Method

Production Report—CuttingDepartment (FIFO method)

Process Costing: The First-In, First-Out Method

Comparison of Weighted- Average and FIFO Methods

20,000 physical units 20,000 physical units 10,000 physical units in the March 1 started and completed in the March 31

work-in-process inventory during March work-in-process inventory

10% of conversion complete on March 1

90% of conversion yet to be completed during March

50% of

conversion

completed

during

March

50% of conversion to be completed in a future period

Weighted-Average Method:

Total costs for conversion activity

Conversion cost per equivalent unit (weighted-average)= in areas I, II, III, IV

Total equivalent units of conversionactivity in areas I, II, III, IV

Practical Aspect of Process Costing in a Coconut Oil Manufacturing Firm:-

1. Select 35 mature, Seasoned Coconuts.2. Remove the Husks.3. Split them into equal halves, using blunt age of kitchen knife.4. Scrape out the kernel by holding each half cup against the rotating blade of the

grater.5. Collect the scrapings from the 35 coconuts in a plastic bucket.6. Spread the scrapings on the thin metal sheet in the drying area and dry in the

sun.7. Dry the coconut gratings to a moisture level of 11.2%. To confirm that the

correct moisture content has been reached, apply the “Squeeze test”.8. Load the dried material into a woven polypropylene bag and place it in the

cage of the bridge press.9. Position the pressure plate to move within the cage and screw down.10. Gradually increase the pressure on the material until the oil begins to flow.11. Wait a few minutes until the oil flow has ceased and then screw pressure plate

down further to apply additional pressure until oil flow begins again.12. Wait a few minutes for oil flow to cease before applying further pressure.13. Repeat this sequence until maximum pressure is reached.14. Attach extension bar, Supplied with the machine, and repeat all the above

steps 10 to 13.15. Collect the oil that comes out of the spout at the base of cage, into a can.16. When oil flow has finally ceased, unscrew the pressure plate and remove the

press cake.17. Re-Dry the press cake to 11.2% moisture by spreading it on the metal sheet

and exposing to the sun.18. Apply the “Squeeze test”, as before, to confirm the correct moisture content

has been reached.19. After the oil had cooled to room temperature, filter it using funnel plugged

with cotton wool.20. Stored the filter oil in 10 litre cans, Until it is transferred to the 750 ml Bottles

for sale.

Product Recoveries:1. Coconut Oil- 5.5 Bottles 2. Oil Cake - 3.5 KG3. Green Husks- 35 Full Husks4. Coconut shell- 35 Whole Sells.

Product Packaging Store:-Initially store in the oil in 10 litre cans. Subsequently transfer into 750 ml. bottles and store in the wooden crates for delivery/ Transport.

Conclusion & Comments:-

A system is used when heterogeneous products are involved. A capacity measure should be chosen that best suits the company’s planning and performance evaluation objectives. For example, if management wants to establish a more rigid production goal to increase productivity, it would use practical capacity rather than normal capacity. Process costing is a primary approach to assigning manufacturing cost to units produced. It is used by manufacturers whose products are produced on a continuous basis, with units receiving equal attention in each processing center. The four steps in process costing are the computation of equivalent units, calculation of the unit valuation of the ending work-in-progress. If units are spoiled or defective, the per-unit cost of good units will increase.