Process costing

from sigh baba

1. Process Costing

2. General principles Production activities are classified by processes or departments Each process account is charged with its DM, DL, DE and proportionate share of overheads Physical output is recorded in each process account Cost per unit at the end of each process is calculated Work in progress is valued using the concept of equivalent production Output of one process becomes input of next process Normal loss is credited to process account at Scrap value and abnormal loss at full cost.

3. EX 1 A manufacturing company produces two types of articles P and Q. Each article goes through two processes factory and finishing. The direct labour cost is recorded seperately . The material cost is allocated in the ratio of output and general expenses are treated similarly. The factory and finishing overheads are allocated in the ratio of direct labour cost of each process. Prepare process accounts showing total cost and cost per unit of each product. Also show percentage of profit assuming Selling prices are P Rs 400 per unit and Q Rs 450 per unit.

4. Ex 1 continued Opening stock-factory material Rs 10,600 Opening stock- finishing material Rs 5,000 Purchases- factory Rs 3,17,400 Purchases-finishing Rs 1,35,000 Closing stock- factory Rs 82,000 Closing stock Rs 44,000 Factory wages for P Rs 1,60,000 Factory wages for Q Rs 1,20,000 Finishing wages for P Rs 90,000 Finishing wages for Q Rs 30,000 Factory overheads Rs 63,000 Finishing overheads 24,000 General expenses 1,44,000 Output units P-2000, Q - 1000

5. Process loss and wastage Meaning of normal loss and abnormal loss. Generally scrap value of normal loss will be credited to process account thereby increasing the average cost per good unit. If the scrap value is very low o r negligible it can be credited to overheads account. Sometimes the units input may have to reprocessed in which case they will be valued at the cost of the raw materials and credited to the process account .

6. Example 2 200 tonnes of raw material are using are used for producing a commodity which passes through two processes. 10% of the material is wasted in the process. This is normal . Scrap realises Rs 50 . Show process 1 account . Process 1 Process 2 materials Rs 2,000 - Labour Rs 1,000 Rs 500 Works expenses Rs 500 Rs 300

7. Ex 3 Assuming in the previous illustration besides 10% wastage that 10% units are reworked show process 1 account.

8. Example 4 Continuing with example 1 show how process accounts will appear if we find at the end of process 2 that 10% of original units are to be reworked in process 1.

9. Example 5 From the following figures show the cost of the three processes of manufacture. Process A Process B Process C Rs Rs Rs Wages and materials 60,800 24,000 58,500 Works overhead 11,200 10,500 12,000 Production units 72,000 75,000 96,000 Op Stock (units from previous process) 8,000 33,000 Cl stock ( units from previous preocess ) 2,000 11,000

10. Example 6 The product X is processsed by passing chemical C through 4 processes. The loss of material as % of input is as follows. Process I -20%, Process II - 10 % ,Process III – 16 2/3 %, Process IV- 8 1/3 %. The material lost in eacxh process has no resale value. Calculate (a) the cost per kg of X if chemical C costs Rs 8/kg. (b) The capacity of plants for process I , II, III and IV to hold the material for process expressed in MT of input if 2 conditions are to be fulfilled-( i )20% reaction space to be allowed. (ii) final output of product X is 5 tonnes .

11. Example 7 (abnormal loss) 1000 units of a raw material were introduced in a process at a cost of Rs 4,000. 10 % wastage is allowed. Each unit of wastage realises Rs 2.50. The actual output was 850 units. The expenses were as follows: Direct wages Rs 6,500 and Indirect expenses Rs 3,250. Prepare the process acount and calculate cost per unit. Also prepare normal loss a/c and abnormal loss a/c.

12. Example 8 (abnormal loss/effectives) A product passes through three processes A, B and C. The normal wastage of each process is 3%, 5% and 8% respectively. Wastage is sold at Re 0.25, Re 0.50 and Re 1.00 respectively. The actual output was 9,500 units, 9,100 units and 8,100 units respectively. Prepare process accounts, abnormal loss account, abnormal effectives account and normal loss account showing cost per unit. 10,000 units of material were issued into Process A @ Re 1 per unit. The other costs were as follows: Process A Process B Process C Materials (others) 1,000 1500 500 Labour 5000 8000 6500 Direct expenses 1050 1188 2009

13. Example 9 The product of a manufacturing concern passes through two processes A and B and then to finished stock account. It is ascertained that in each process normally 5% of the weight is lost and 10% is scrap realising Rs 80/t and Rs 200 per tonne respectively. Prepare process accounts from the following details Process A process B Material in tonnes 1000 70 Rate per tonne 125 200 Wages in rupees 28000 10000 Manufacturing expenses 8000 5250 Output in tonnes 830 780

14. Joint products & by products meaning

15. By products When they are of small value either credit to P&L account or to Process a/c When of considerable value treat like joint product

16. Joint products Main issue is allocation of joint cost to joint products Four ways to allocate joint cost Market price method Unit method Reverse cost method Survey method

17. Ex 1 Calculate the estimated cost of production of by products X and Y at the point of separation from the main product. Selling expenses are 25% of the total works cost. Selling prices are arrived at by adding 20% to total cost. X Y Selling price per unit 12 24 Cost per unit after seperation 3 5 Units produced 500 200

18. Ex 2 A factory producing product P also produces a by product Q which is further processed to get a finished product. The joint cost of manufacture is : material 5,000, labour 3000 and overheads 2000. Estimated profits on SP are 25% for P and 20% for Q. Assume that selling expenses are in proportion to sales prices. Apportion the joint costs assuming subsequent costs are as follows. Also prepare a statement showing cost of each product and production account for each: P Q materials 3000 1500 labour 1400 1000 overheads 600 500

19. Ex 3 Product A yields by products B and C the joint costs of Manufacture are : Materials=5000, labour=4000 and overheads = 4500.the Selling prices are A=21,000, B=10,000 and C= 9000. The profit is 50% of sales for A abd B and 33 1/3 % for C. Show how you would apportion joint expenses and prepare ledger accounts also. Subsequent expenses are as follows: A B C Materials 1000 800 900 Labour 1200 700 850 Overheads 1300 500 750 Total 3500 2000 2500