Tax Shield Education Pvt. Ltd.

Cost Accounting- 1

Process Costing
1. Compare Process Costing with Job Costing.

Answer: Job costing and process costing are the two methods of cost accounting. Job costing is
applied where production is carried out under specific orders, depending upon customers
requirement. Here each job is considered as a cost unit and to some extent the cost centre also.

Process costing is applied in cases where the identity of individual orders is lost in the general
flow of production. Industries to which process costing is applied produce uniform products
without reference to the specific requirements of customers.

The main points of comparison between job costing and process costing are as follows :

i. Job costing is applicable to goods produced/manufactured to customers specifications.

However, process costing is applicable to production consisting of succession of continuous
operations or processes.

ii. Costs are accumulated by a job or work order irrespective of its time of completion under job
costing. When a job is finished all costs associated with it are charged to it in full. Whereas
under process costing costs are accumulated by processes for a particular period regardless
of the number of units produced.

iii. Each job will be different from the other under job costing whereas in the case of process
costing units of product are homogenous and indistinguishable, because goods are produced
an a mass scale.

iv. Job is normally a single unit, the whole unit is taken as one for costing purposes. Even if job
consists of number of parts, cost of job is calculated only after all the parts, are complete. As
such there is no question of work-in-progress merely because some parts are not yet
completed. In the case of process costing, the unit of production may remain incomplete at
various stages of production. It is therefore necessary to compute at the end of the period
not only the cost of the finished units but of work in progress also.

v. Job costing does not involve transfer of costs from one job to another. Where as in the case
of process costing transfer of output from one process to another involves the transfer of its
costs as well.

vi. Job costs are ascertained only after the completion of job and not at the end of a particular
period. Whereas in the case of process costing costs are ascertained at the end of the
accounting period and not when the process is complete, since production is a continuous
flow constituting itself into cycle.

vii. Since each job may be different from other therefore they will not involved the use of identical
material and labour, costs of jobs cannot be ascertained by averaging. In the case of
process costing since units f production are uniform and are at the same stage of production
therefore, costs are computed by averaging the total cost of each stage of production.

viii. Control becomes difficult in the case of job costing because each job is different from the
other. Whereas control over production and costs is easier in the case of process costing
since production is a standardised one.
Tax Shield Education Pvt. Ltd. Cost Accounting- 2

2. Explain normal wastage, abnormal wastage and abnormal gain and state, how they should
be dealt within process Cost Accounts.

Answer: Normal wastage: It is defined as the loss of material which is inherent in the nature of
work. Such wastage can be estimated in advance on the basis of past experience or technical
specifications. If the wastage is within the specified limit, it is considered as normal. Suppose a
company states that the normal wastage in Process A will be 5% of input. In such a case
wastage up to 5% of input will be considered as normal wastage of the process.

When the wastage fetches no value, the cost of normal wastage is absorbed by good production
units of the process and the cost per unit of good production is increased accordingly. If the
normal wastage realises some value, the value is credited to the process account to arrive at
normal cost of normal output.

Abnormal wastage : It is defined as the wastage which is not inherent to manufacturing

operations. This type of wastage may occur due to the carelessness of workers, a bad plant,
design etc. Such a wastage cannot be estimated in advance.

The units representing abnormal wastage are valued like good units produced and debited to
the separate account which is known as abnormal wastage account. If the abnormal wastage
fetches some value, the same is credited to abnormal wastage account. The balance of
abnormal wastage account i.e. difference between value of units representing abnormal wastage
minus realisation value is transferred to Costing profit and loss account for the year.

Abnormal gains: It is defined as unexpected gain in production under conditions. In other words,
if the actual process waste is less than the estimated normal waste, the difference is considered
as abnormal gain.

Suppose, a Company states that 10% of its input will be normal loss of process A. If input of this
company is 100 units then its normal should be 90 units. If actual output is 95 units, then 5 units
will represent its abnormal gain. These units which represents abnormal gain are valued like
normal output of the process. The concerned process account is debited with the quantity and
value of abnormal gain. The abnormal gain account is credited with the figure of abnormal gain
amount.

Abnormal gain being the result of actual wastage or loss being less than the normal. The scrap
realisation shown against normal wastage gets reduced by the scrap value of abnormal gain.
Consequently, there is an apparent loss by way of reduction in the scrap realisation attributable
to abnormal effective. This loss is set off against abnormal effective by debiting the account.
The balance of this account becomes abnormal gain and is transferred to costing profit and loss
account.

3. “ The value of scrap generated in a process should be credited to the process account. “
Do you agree with this statement ? give reason.

Answer: This statement is not correct. The value of scrap (as normal loss) received from its sale
is credited to the process account. But the value of scrap received from its sale under abnormal
conditions should be credited to Abnormal Loss Account.

4. Equivalent Production :

In arriving at the cost of finished output of each process in a system of process costing, normally
there exists opening work a progress as well as closing work in progress. The degree of
completion of opening work in progress is not the same as the degree of completion of the work
in progress at the end of the period. In order to arrive at the overall cost of production opening
work in progress as well as the work in progress at the end of the period will have to be
expressed in terms of common units.
Tax Shield Education Pvt. Ltd. Cost Accounting- 3

For this purpose the concept of equivalent or effective production comes into picture. Equivalent
or effective production represents production in terms of completed units. For example in a
process where one thousand units are introduced during a month out of which 200 units remain
as work in process at the end of the period which is complete to the extent of 40% only, the
equivalent production at the end of the period would as follows :-

Units fully completed 800

200 units 40% complete 80
Total Equivalent Production 880

If the total cost of the process is 1760 than the per unit cost of completed production will be Rs. 2
and the value of closing stock of 200 units (40% complete) will be Rs. 160.

In a large number of cases the opening and closing work in progress may remain at different
stages of completion as regards material, labour and overheads. In such cases equivalent
production will have to be arrived at for each element of cost separately.

Process costing is a method of costing applicable to those industries where production follows a
continuous flow i.e. goods are transferred from one process to another for e.g. Chemical industry
or oil refinery etc

In each process there are some input and the final product is known as output. Any loss during
the process of manufacturing is known as

Normal loss i.e. within the expected unit and it is generally calculated on total input or throughput
(opening + introduction - closing)

Any loss beyond the expected limit is known as abnormal loss.

Abnormal gain arises when the actual loss is less than the normal expected loss. It appears on
the debit side.

5. What is operation costing ?

It is refinement of process costing. It is concerned with the determination of cost of each

operation. It is used those industries where a process consist of distinct operation. It is
concerned with the determination of cost of each operation rather than process. It offers scope
for computation of unit operation cost at the end of each operation by dividing the total operation
cost by total output of units.
Tax Shield Education Pvt. Ltd. Cost Accounting- 4

Every process A/C is debited with the costs incurred and credited buy the losses, transfer, sale &
closing stock. Both sides will tally unless the transfer is made at a profit (known as inter profit
transfer)

Dr Process ---- A/C Cr.

Units Rate Amt. Units Rate Amt.
To Opening Stock By Normal loss
To Transfer By Transfer
To Introduce By Abnormal Loss
To Conv. Cost By Closing Stock
To Abnormal gain

How to value abnormal gain or abnormal loss or transfer to other process.

Rate per unit

= Total Input cost-Scrap value of normal loss & By product
Total units introduced-Normal loss units.& by-product units

For re-cycle material , the issue rate is the weighted average rate of the virgin materials.

Journals for loss & gains

1. Abnormal gains A/c ---------------------------Dr

To Normal loss A/c
Abnormal gain unit’s are out of normal loss

2. Rest of the normal loss units is sold off at their corresponding scrap value
Cost ledger control A/c (i.e. cash)--------Dr
Or general ledger adjustment A/c---------Dr
To Normal loss A/c

Abnormal units are sold out as scrap & difference of this account is transferred to P& L a\c

Difference of Abnormal Gain a\c is transferred to P&L a\c.

Valuation of Work-in-process:
The valuation of work-in-process can be made in the fo0llowing three ways,
depending upon the assumptions made regarding the flow of costs:

- First-in-first out (FIFO) Method

- Last-in-first out (LIFO) Method
- Average cost method

A brief account of the procedure followed for the valuation of work-in-process under the above
three methods is as follows:

FIFO method: According to this method the units first entering the process are completed first.
Thus the units completed during a period would consist partly of the units which were incomplete
at the beginning of the period and partly of the units introduced during the period.

The cost of completed units is affected by the value of the opening inventory, which is based on
the cost of the previous period., The closing inventory of work-in-;process is valued at its current
cost

LIFO method: According to this method units last entering the process are to be completed first.
The completed units will be shown at their current cost and the closing-work-in-progress along
with current cost of work in progress if any.
Tax Shield Education Pvt. Ltd. Cost Accounting- 5

Average cost method: According to this method opening inventory of work-in-process and Its
costs are merged with the production and cost of the current period, respectively. An average
cost per uniyts is determined by dividing the total cost by the total equivalent units, to ascertain
the value of the units completed and units in process.

GENERAL

1. A product is finally obtained after its passes through three distinct processes the following
information is available from the cost records :

Process I Process II Process III Total

Rs. Rs. Rs. Rs.
Materials 2,600 2,000 1,025 5,625
Direct wages 2,250 3,680 1,400 7,330
Production overheads -- -- -- 7,330

500 units @ Rs. 4 p.u. were introduced in process I. Production overheads are absorbed as a
percentage of direct wages. The actual output and normal loss of the respective processes are
given below :

Output Normal loss Value of scrap

(units) as a percentage of input (per unit)
Process I 450 10% Rs. 2
Process II 340 20% Rs. 4
Process III 270 25% Rs. 5

Prepare the process accounts and the abnormal gain/loss accounts.

2. The input to a purifying process was 16,000 kgs. of basic material purchased @ Rs.4.20 per Kg.
Process wages amounted to Rs.72,000 and overhead was applied @ 240 % of the labour cost.
Indirect materials of negligible weight was introduced into the process at a cost of Rs.3,300. The
actual output from the process weight 15,000 kgs. The normal yield of the process is 92%. Any
difference in weight between the input of basic material and output of purified material (product)
is sold @ Re.0.50 per kg.

The process is operated under a license which provides for the payment of royalty @ Re.0.15
per kg. of the purified material produced.

Prepare :
i. Purifying Process Account ii. Normal Wastage Account
iii. Abnormal Yield Account iv. Royalty Payable Account.

3. The following details are extracted from the costing records of an oil refinery for the week ended
September 30. Purchase of 500 tons co copra Rs. 2,00,000.

Crushing Plant Refining plant Finished

Rs. Rs. Rs.

Cost of labour 2,500 1,000 1,500

Electric Power 600 360 240
Sundry Material 100 2,000 ---
Repairs to Machinery and Plant 280 330 140
Steam 500 450 450
Factory Expenses 1,320 660 220
Cost of Casks --- --- 750
Tax Shield Education Pvt. Ltd. Cost Accounting- 6

300 tons of crude oil was produced. 250 tons of oil was produced by refining process. 248 tons of
refined oil was finished for delivery. Copra sack sold Rs. 400. 175 tons of copra residue sold Rs.
11,000

Loss in weight in crushing 25 tons. 45 tons by- product was obtained from refining process
valued at Rs. 6,750. You are required to show the accounts in respect of each of the following
stages of manufacture for the purpose of arriving at the cost per ton of each process and also the
total cost per ton of finished oil.

1.Copra crushing Process. 2. Refining process. 3. Finished product.

4. A company manufactures a product by passing materials through 3 Processes. Conversion costs

of which are Rs. 50, Rs. 70 and Rs. 80 respectively per tonne of input. The mixture in the
process A consists of :

Material Z 60% at Rs. 70 per tonne

Material Y 15% at Rs. 120 per tonne
And Mixture from process B 25% .

In the process B, entire material (without any loss) is transferred form process A ; in this process
25% of input is substandard and re-transferred to process A for “reprocessing” as mentioned
above and the balance, without any loss in transferred to process C. In the process C, 20% of
input becomes valueless paste. Compile costs at each stage including the finished product.

5. A chemical company produces two fluids jointly in three processes before plunge into the bottle.
The processes are as :

Process 1 : Raw materials X & Y are mixed & filtered. There is an evaporation loss of 10%.

Process 2 : The mixture from the process 1 is boiled and thus its volume is reduced by 20%. The
remaining liquid distills into 50% process product M, 20% process product N and
25% by product C, the balance 5% is normal loss.

Process 3 : The raw material Z, 8,000 litres is boiled with entire transfer of process product M,
and finished product A is obtained Similarly, the raw material Z 1,000 litres, is
blended with entire transfer of process product N and the finished product B is
obtained. There is no weight loss in this process.
The particulars for operating in a particular month -

1. Raw materials Input litters Rates per litter (Rs.)

X 25,000 2
Y 25,000 5
Z 9,000 20

2. Conversion costs per litre of input processed

Fixed overhead
Process Direct Wage Variable overhead per month
Rs. Rs. Rs.
1 0.50 0.20 10,000
2 0.75 1.00 30,000
3 1.00 0.50 15,000

The fixed overhead in the process 3 is apportioned 2 : 1 ratio A and B. There are no
stocks in the process.
3. By product is sold @ Rs. 0.75 per liter.

Tabulate individual process accounts and compute unit costs of products A and B.
Tax Shield Education Pvt. Ltd. Cost Accounting- 7

6. A product passes through three process -- A, B and C 10,000 units at a cost of Rs. 2.30 were
issued to process A. The other direct expenses were as follows :

Process A Process B Process C

Sundry materials Rs. 1,500 Rs. 1,500 Rs.1,500
Direct Labour 4,500 8,000 6,500
Direct expenses 1,000 1,000 1,503

The wastage of process A was 5% and in process B 4%. The wastage of process A was sold at
Re. 0.25 per unit and that of B at Re. 0.50 per unit and that of C at Re. 2 per unit.

The overhead charges were 160% of direct labour. The final product was sold at Rs. 14 per unit
fetching a profit of 20% on cost. Find out the percentage of wastage in process C.

7. Product ZENU is made by three sequential process, I, II and III. In process III a by-product arises
and after further processing in process XY, at a cost of Rs. 2 per unit, by-product ‘XYZ’ is
produced. Selling and distribution expenses of Re.1 per unit are incurred in marketing ‘XYZ’ at a
selling price of Rs. 9 per unit.

Process I Process II Process III

Normal loss 10% 5% 10%
Scrap value p.u Re. 1 Rs. 3 Rs. 5

For the month of April 2003 the following :

Process I Process II Process III Process XY

Output , in units 8,800 8,400 7,000 420 of XYZ

Costs Rs. Rs. Rs. Total Rs.

Direct Materials
Introduced (10,000 units) 20,000 20,000

Direct materials added 6,000 12,640 23,200 41,840

Direct Wages 5,000 6,000 10,000 21,000
Direct Expenses 4,000 6,200 4,080 14,280

Budgeted production overhead for the month was Rs. 84,000. Absorption is based on a
percentage of direct wages. There are no stocks at the beginning or end of the month.

You are required, using the information given, to prepare accounts for :

(a) each of process I, II and III ; (b) process XY.

INPUT-OUTPUT RATIO

8. A product is finished in three stages I, II, III. At the first stage a quantity of 72,000 kg. was
delivered at a cost of Rs. 2.50 per kg. The entire material was consumed. The production
particulars along with the allocated expenses were as indicated in the table below :

State Input Output Direct wages Fixed overhead Varying Overhead

Kg. Kg. Rs. %(on direct wages) %
I 72,000 67,680 7,500 150 200
II 65,000 60,125 12,000 125 150
III 55,600 50,000 14,500 200 250
Tax Shield Education Pvt. Ltd. Cost Accounting- 8

The producer, as was his usual practice assessed his cost at Rs. 6.77 per kg., based on his
output on his input expenditure and the finished output. With a selling price of Rs. 17.50 per kg.
he estimated his profit at Rs. 36,500/-. If you do not approve of his assessment of the end results
of the operation, convince him of the real end results in a tabular form. You should assume the
normal wastage as only 5% on input at each stage and any excess wastage should not be
allowed to inflate the cost of the end product.

9. In a manufacturing company, a product passes through 5 operations. The output of the 5 th

operation becomes the finished product. The input rejection, output and labour and overheads of
each operation for a period are as under :

Operation Input Rejection Output Labour and Overhead

(units) (units) (units) (Rs.)

1 21,600 5,400 16,200 1,94,400

2 20,250 1,350 18,900 1,41,750
3 18,900 1,350 17,550 2,45,700
4 23,400 1,800 21,600 1,40,400
5 17,280 2,880 14,400 86,400

You are required to :

a. Determine the input required in each operation for one unit of final output.
b. Calculate the labour and overhead cost at each operation for one unit of final output and
the total labour and overhead cost of all operations for one unit of final output.

10. A factory uses a particular raw material. There are three process-- I, II and III. The data relating
to inputs, outputs and rejections during the month of April, 2004 are given below :

Process Inputs Rejections Outputs

(in pieces) (in pieces) (in pieces)
[including opening W-I-P]
I 18,000 6,000 12,000
II 19,800 1,800 18,000
III 20,400 3,400 17,000

Determine what should be the inputs in Process I when the final product transferred from
Process III is 1,000 pieces.

Calculate the cost of raw materials to produce one piece of the finished product when (A) the
weight of the finished product is 10 gms. and (b) the price of raw material is Re. 1/- per kg.

Inter Process profit:

11. 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, 2003 :
Process Finished Stock
Particulars I II

Opening Stock Rs.7,500 Rs. 9,000 Rs.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
Tax Shield Education Pvt. Ltd. Cost Accounting- 9

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. Stocks in
process are valued at prime cost . Finished stock is valued at the price at which it is received
from process II. Sales during the period is Rs. 1,40,000. Required -- Process cost accounts and
finished goods account showing the profit element at each stage. Compute the profit in all four
methods.

EQUIVALENT PRODUCTION FIFO BASIS:

12. Process 2 receives units from Process 1 and after carrying out work on the units transfers them
to Process 3. For the accounting period the relevant data were as follows :

Opening WIP 200 units (25% complete) value at Rs.5,000

800 units received from Process 1 value at Rs.8,600
840 units were transferred to Process 3

Closing WIP 160 units (50% complete)

The cost of period were Rs.33,160 and no units were scrapped.

Required : Prepare the Process Account for Process 2 using the FIFO Method.

13. The product manufactured by a light engineering factory undergoes two operations. The
following data are available relating to expenses incurred on production during November, 2003 ;

Machining Finishing

Units as input 90,000 60,000

Expenses incurred in Process Rs. Rs.
Direct Material 2,70,000 Nil

Direct Labour 1,28,000 45,000

Overheads 64,000 1,35,000

At the end of the month there were 30,000 units lying incomplete in Machining Operation. While
the full quantity of materials had been consumed for the total production, the expenditure on
Labour and Overheads was estimated to be 66 2/3% in respect of the incomplete
products.

You are required to prepare a detailed Cost Statement showing the final cost per unit assuming ;

(I) Completed units of Machining Operations are transferred to the Finishing Operation ;
(ii) Finishing Operation has completed all the units received from the earlier operation during
November 2000, leaving no work-in-progress at the end of the month.

14. The following data are available in respect of Process I for February 2004 :

(1) Opening stock of work in process : 800 units at a total cost of Rs. 4,000.

(2) Degree of completion of opening work in process :

Materials 100%
Labour 60%
Overheads 60%

(3) Input of materials at a total cost of Rs. 36,800 for 9,200 units.
Tax Shield Education Pvt. Ltd. Cost Accounting- 10

(4) Direct wages incurred Rs. 16,740.

(5) Production overhead Rs. 8,370.

(6) Units scrapped 1,200 units. The stage of completion of these units was :

Materials 100%
Labour 80%
Overheads 80%

(7) Closing work in process : 900 units. The state of completion of these units was :

Materials 100%
Labour 70%
Overheads 70%

(8) 7,900 units were completed and transferred to the next process.

(9) Normal loss is 8% of the total input (opening stock plus units put in).

(10) Scrap value is Rs. 4 per unit.

You are required to show the Process Account for February, 2004 on FIFO basis.

15. The following data relate to process Q :

(i) Opening work-in-progress 4,000 units

Degree of completion :
Materials 100% Rs.24,000
Labour 60% Rs.14,400
Overheads 60% Rs. 7,200

(ii) Received during the month of April, from Process P :

40,000 units Rs.1,71,000

(iii) Expenses incurred in Process Q during the month :

Materials Rs. 79,000
Labour Rs.1,38,230
Overheads Rs. 69,120

(iv) Closing work-in-progress 3,000 units

Degree of completion :
Materials 100%
Labour & Overheads 50%

(v) Units scrapped 1,500 units

Degree of completion :
Materials 100%
Labour & Overheads 80%

(vi) Normal loss : 5% of current input.

(vii) Spoiled goods realised Rs.1.50 each on sale.

Tax Shield Education Pvt. Ltd. Cost Accounting- 11

(viii) Completed units are transferred to warehouse.

Prepare :

(i) Equivalent units statement (ii) Statement of cost per equivalent unit and total
costs
(iii) Process Q Account (iv) Any other account necessary.

16. In a processing factory the expenditure incurred in a particular month were as follows :-

Rs.
Cost : Transfer from prior process 3,000

Material added in the process :

at the start 2,556
at the middle 2,938
at 75% completion point 1,300 6,794

Labour and overhead uniformly spent 2,750 12,544

Production -- Units

Receipts from prior process 1,000

Transfer to next process 1,200
W.I.P. at the end 200

Notes—1. At 75% completion point material added increases units by 50%

2. W. I. P. , at the end of the period , 60% is 60% complete & 40% is 40% complete

Evaluate (a) Transfers to next process (b) closing W. I. P.

17. RST Ltd. Manufactures plastic moulded chairs. Three models of moulded chairs, all variation of
the same design are Standard, Deluxe and Executive. The company uses an operation-costing
system.

RST Ltd. Has extrusion, form, trim and finish operations. Plastic sheets are moulded into chair
seats and the legs are added. The standard model is sold after this operation. During the trim
operation, the arms are added to the Deluxe and Executive models and the chair edges are
smoothed. Only the Executive model enters the finish operation, in which padding is added. All of
the units produced receive the same steps within each operation. In April.2003 units of
production and direct material cost incurred are as follows:

Units Extrusion Form Trim Finish

Produced Materials Materials Materials Materials
(Rs.) (Rs.) (Rs.) (Rs.)

Standard Model 10,500 1,26,000 42,000 0 0

Deluxe Model 5,250 63,000 21,000 15,750 0
Executive Model 3,500 42,000 14,000 10,500 21,000
19,250 2,31,000 77,000 26,260 21,000
Tax Shield Education Pvt. Ltd. Cost Accounting- 12

The total conversion costs for the month of April, 2003 are:

Extrusion Form Trim Finish

Operation Operation Operation Operations

Total Rs.6,06,375 Rs.2,97,000 Rs.1,55,250 Rs.94,500

Conversion Cost

Required:
a. For each product produced by RST Ltd. During April, 2003, determine the unit cost and the total
cost.
b. Now consider the following information for May. All unit costs in May are identical to the April unit
costs calculated as above in (i). At the end of May, 1,500 units of the Deluxe model remain in work-
in-progress. These units are 100% complete as to materials and 65% complete in the trim operation.
Determine the cost of the Deluxe model work-in-process inventory at the end of May.

Equivalent Production – Average Method:

18. Following information is available regarding process A for the month of February, 2003 :

Production Record
Units in process as on 1/2/ 2003 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/ 2003 6,000
(All materials used, 33 – 1/3% complete for labour and overhead)

Cost Records
Work-in-process as on 1/2/ 2003 Rs.
Materials 6,000
Labour 1,000
Overhead 1,000
8,000
Cost during month
Materials 25,600
Labour 15,000
Overhead 15,000
55,600
Presuming that average method of inventory is used, prepare :
1. Statement of equivalent production. 2. Statement showing cost for each element.
3. Statement of apportionment of cost. 4. Process cost account for process A.

19. The in-process inventory in process No. 2 at the beginning of a period was valued at Rs. 2,950/-
made up of Rs. 1,400/- towards materials, Rs. 1,000/- towards labour and Rs. 550/- towards
overheads for 100 units.

The value added during the period was Rs. 53,600/- towards an introduction of 4,100 units from
the previous process besides Rs. 40,800/- towards labour and Rs. 19,400/- towards overheads.
Out of 3,600 units completed 3,300 units were transferred to the next process leaving the
balance in stock. 400 units were held back in process with half completion towards labour and
overheads while 200 units were loss in processing considered normal and hence should be
borne by the entire inventory.
Prepare a cost of production statement using average cost basis.
Tax Shield Education Pvt. Ltd. Cost Accounting- 13

20. Component X is made by one engineering company on a continuous basis. The following data
are available :

1. Material is put into operation at the start of each unit.

2. Conversion cost is evenly incurred during the manufacturing period.
3. The inspection is carried out at the end of the operation

4. Normal loss is equal to 5% of the goods output & is absorbed in the cost of output,
transferred to finished stock.

5. W.I.P. at the beginning of the month was 240 units, 1/3 completed, material Rs. 2,410,
conversion cost Rs. 1,710.

6. During the month, 10,000 units were introduced . Cost incurred, Material Rs. 89,750,
Conversion cost Rs. 1,08,000 ; 8,000 units were passed by inspection and transferred to
the finished stock warehouse.

7. At the month end, W. I. P. consisted of :- 1,000 units, each 1/2 completed and 300 units
each 1/3 completed.

8. The balance units had been scrapped at no value.

Provide an operating cost statement. The Average method is applied.

EQ - TWO MATERIALS

21. The following data are available in respect of process 3 for the month of April :

Rs(000)
Direct materials added in process 776

Direct labour 386

Production overhead 768

Transfer from Process 2 : 4,200 unit valued at 1,560

Transfer to Process 4 : 3,650 units

Stock at 1st April : 600 units valued at 390

Degree of completion ;
Materials added in process 60% ; Labour30% ; Overhead 40%

Stock at 30th April : 800 units degree of completion :

Materials added in process 80%; Labour 70% ; Overhead 60%

Units scrapped : 400

Degree of completion :
Materials added in process 100% ; Labour 80% ; Overhead 80%

Normal loss is 10% of throughput. All units scrapped can be sold for Rs. 100 per unit,

You are required to show the necessary accounts .

Tax Shield Education Pvt. Ltd. Cost Accounting- 14

22. The data of a specified process accounts in particular month are as follows :-

1. Work-in-process opening. 6,000 units Cost Rs. 19,440. Degree of completion : Direct material
added 60%. Direct wages and overhead 40%.
2. Transfer from earlier process 48,000 units at Rs. 2.30 per unit.

3. Expenditure incurred : Direct material added Rs. 27,180. Direct wages Rs. 18,240,Overheads
Rs. 36,450.
4. Transferred to finished goods 46,500 units.

5. Work-in-process, closing, 4,000 units. Degree of completion, Direct material added 50% ;
direct wages and overhead 30%.
6. Normal loss in process 6% of units in opening stock plus transfers from previous process less
closing stock.

7. The actual loss was 7% when percentage of completion was Direct material added 80% ;
direct wages and overhead 60%. Rejected products were sold for Re. 2 per unit.

Prepare the process Accounts by applying FIFO method.

23. Wye Chemicals p.l.c. manufactures a range of products in a variety of processes and the data
given relate to Process 3 for the month of April.

You are required to prepare ;

(a) a statement showing the cost per unit and the value of the output ;
(b) an account for Process 3 ;
(c) an Abnormal Gain or Loss account.

Transfer from process 2 10,800 units Rs.7,980 ( in 000)

Transfer to process 4 9,650 units

Direct materials added during process 2,019

Direct wages incurred in process 2,889
Production overhead apportioned to process 6,482

There is a normal loss in process of 10% of the output. All units scrapped can be sold at Rs. 200
each.

Opening work-in-progress : 1,200 units Rs.6,00,000

Degree of completion : materials added in process 40%

direct wages 60%
Production overhead 70%

Closing work-in-progress : 1,000 units

Degree of completion : materials added in process 80%

direct wages 60%
production overhead 40%

Units scrapped : 1,350 units

Degree of completion : materials added in process 50%

direct wages 40%
production overhead 20%
Tax Shield Education Pvt. Ltd. Cost Accounting- 15

24. A food preserver has four processing centres for a brand of baby food. From the following
particulars draw a process sheet showing for each centre the total costs by elements; cost per
unit of work-in-progress; the cost per unit transferred and the cost per unit of final output.
Grinding Rs. Cooking Rs. Dehydrating Rs. Packing Rs.

Element of cost:
Materials 85,000 1,500 … 7,800
Wages 30,000 5,400 2,400 3,800
Fixed Charges 40% 30% 17 ½ % 12 ½ %
(Total Rs. 35,000)
Service Charges 15,000 4,500 3,600 1,200

(ii) Quantities kg kg kg kg
Input 1,40,000 1,10,000 90,000 54,000
Output 1,20,000 1,00,000 60,000 53,000
Work-in-progress 10,000 10,000 6,000 1,000

Work-in-progress is assessed to be equivalent to 50% finished units in the grinding centre; 80%
in the cooking centre and 90% in the dehydrating centre. The work-in-progress at the packing
centre is yet to be taken up for packing. {R (o) – 212}

25. A chemical factory processes raw material R and produces three similar products P1, P2 and P3
out of a joint process. The joint costs of processing 5000 kg of R are as under :

Rs.
Labour cost 6,000
Overhead cost 2,000
Total 8,000

The raw material R is purchased at Rs. 2.40 per kg. This rate is after a trade discount of 20% on
list price.

Normal process loss is estimated at 10% of input weight. The scrap generated from processing R
is recovered to the extent of 25% ( by weight) and sold as such in the market at Rs. 4 per kg.
The products- P1, P2 and P3 can be sold at Rs. 5.00, Rs. 6.00 and Rs. 6.50 per kg. respectively,
without any further processing.

However, products P1 and P2 can also be further jointly processed at an additional cost of Rs. 2
per kg. of input to get product J1. The further processing cost of J1 will be Re. 1 per kg. of output
weight.

Similarly, products P2 and P3 can be jointly processed to get product J2 at an additional cost of
Rs.5 per kg. of input. The further processing cost of J2 will be Rs. 2 per kg. of output weight.
The normal loss of processing J1 out of P1 and P2 will be 5% of input weight. No process loss is
expected on processing J2.

The selling prices of J1 and J2 including the input composition is given below.
Input Output
J-1 J-2
P1 40 % -
P2 60 % 50 %
P3 - 50 %
Price per kg. Rs. 10.00 12.00

The output weight of P1, P2 and P3 will be in the proportion of 3:4:2.

Tax Shield Education Pvt. Ltd. Cost Accounting- 16

Required to

a) Show profitability of processing P1, P2 and P3 from 5000 kg. of R assuming the sale at split
up point;

b) Profitability after both J1 and J2 are further processed and marketed using P2 in the ratio of
3:2 for J1 and J2 respectively;

c) Recommend the processing decision among the alternatives i.e. to use whole output of P2 for
processing either J1 or J2 to yield maximum profit and the amount of such maximum profit.

26. A Company is able to obtain 200, 000 kgs. of A and 4,00,000 kgs. of B from the input of
6,00,000 kgs of a raw-material ‘F’. The selling prices of these outputs one A = Rs. 6 per kg. B =
Rs. 4.50 per kg. The processing Costs are .
Rs.
Raw Materials: 6,00,000 x 2 12,00,000
Variable processing costs 6,00,000
Fixed processing costs 2,00,000
Total 20,00,000

The company has three proposals for consideration :-

a) Product A can be further processed by mixing it with other purchased materials. The entire
quantity of the resultant product ‘P’ can be sold at Rs. 13 per kg. Each kg. of ‘P’ requires one
kg. of A and the processing costs amount to Rs. 16,00,000.

b) There is an offer to purchase an additional quantity of 40,000 kgs. of Product ‘B’ at a price of
Rs. 3.50 per kg. The existing market for ‘B’ will not be affected by this proposal. All the
production of Product A can be sold at a uniform price.

c) A new raw material has just become available. The processing costs will remain the same but
the process will now yield 2 kgs. of A for every 3 kgs. of Product B. The total quantity of the
new raw material available is limited to 6,00,000 kgs.

Required :-

i) Find the original profit on sale of A and B.

ii) Evaluate the proposal for further processing of ‘A’ into ‘P’.

iii) In the case of proposal b) the increased quantum of ‘A’ will reduce its selling price. Find the
minimum average price of ‘A’ that will sustain the increased quantum of sales.
iv) Evaluate proposal c) and find the maximum price the company can afford to pay for the new
raw material by retaining the existing profit.