COSTING METHOD

CHAPTER- 4
PROCESS COSTING
Process Costing is a method of costing which is used to ascertain the cost of the product
of each process or at carried on in more than one process.
The conversion of raw materials into finished product is done in more than one process
and the output of one process will become the input of next process.
Raw materials are fed in the first process and the finished product of each process will
become the raw materials of next process till the final product is obtained.
Following are the industries where process costing is applied:-
 Paper mills
 Textile
 Oil refining
 Soap Manufacturing
 Chemical Work
For the purpose of cost accounting the process industrial unit is divided into number of
departments each departments represents a process.
A separate account is kept in respect of each process, where the raw materials, labour,
overheads are debited and value of by product and scrap if any is credited to this
account. The balance in this account represents the cost incurred for product partially
and is passed on to the next process till the final product is obtained.
PROCESS LOSSES:-
In industries where process costing is employed to ascertain the cost of the product.
There may be certain amount of losses of wastage resulting in various processes. These
process losses may be unavoidable or avoidable in nature. The unavoidable loss or
normal loss in inherent in the production process and other are avoidable or abnormal
losses.
NORMAL LOSSES:-
They are those losses which occur due to the very nature of the production process it
may be due to evaporation, chemical changes, changes in materials, content etc... But
these losses can be estimated in advance on the basis of past experience.
The normal process loss is recorded only in terms of quantity and the cost per unit of
the usable production is increased accordingly.
The loss is absorbed by good units which increase the cost per unit. If the scarp realises
any value it is credited to process account.

ROOPA K N (VVNDC)
COSTING METHOD

ABNORMAL PROCESS LOSSES:

The losses caused by unexpected or abnormal conditions. Such as carelessness,
substandard materials, accidents etc…. are known as abnormal process losses. In other
words loss in excess of the expected margin of normal loss is called abnormal loss.
Abnormal loss can be calculated by the following formula:-
𝑵𝒐𝒓𝒎𝒂𝒍 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒏𝒐𝒓𝒎𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕
𝑨𝒃𝒏𝒐𝒓𝒎𝒂𝒍 𝑳𝒐𝒔𝒔 = 𝑿𝒂𝒃𝒏𝒐𝒓𝒎𝒂𝒍 𝒍𝒐𝒔𝒔 𝒊𝒏 𝒖𝒏𝒊𝒕𝒔
𝑵𝒐𝒓𝒎𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕
Here:
Normal Output= Input- Normal loss
Normal cost = Total process cost – scrap value / wastage
ABNORMAL GAIN:-
When the output of a process is more than normal output it represents abnormal gain. It
may be due to efficiency of labour or effectiveness of management or due to any other
reasons. Abnormal gain is calculated in same manner as abnormal loss.
𝑵𝒐𝒓𝒎𝒂𝒍 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒏𝒐𝒓𝒎𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕
𝑨𝒃𝒏𝒐𝒓𝒎𝒂𝒍 𝑳𝒐𝒔𝒔 = 𝑿𝑼𝒏𝒊𝒕𝒔 𝒐𝒇 𝑨𝒃𝒏𝒐𝒓𝒎𝒂𝒍 𝑮𝒂𝒊𝒏
𝑵𝒐𝒓𝒎𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕

The abnormal gain is debited to process account and balance in abnormal gain account
is transferred to costing profit and loss account.
PROBLEMS:-
1. Prepare Process account and calculate total cost of production from the data
given below:-

Process X Process Y Process Z

Materials 2250 750 300
Labour 1200 3000 900
Direct expenses:
Fuel 300 200 400
Carriage 200 300 100
Work overheads 1890 2580 1875

Indirect expenses Rs 1275 should be apportioned on the basis of wages.

2. The following information is given in respect of Process A
Materials 1000 KG @ Rs 6 per kg
Labour Rs 5000
Direct Expenses Rs 1000

ROOPA K N (VVNDC)
COSTING METHOD

Indirect Expenses allocated to Process A Rs 1000. Normal wastage 10% of input.

Prepare process A Account when:
 Scrap value of normal loss is nil
 Scrap arising out of normal has a sale vale of Rs 1 per unit.
3. An article passes through three process for its manufacture. From the following
details, show the cost of each of the three process and the cost per article
produced during the month of January 2015.
Particulars Process 1 Process 2 Process 3
Materials 75000 27000 9000
Labour 45000 90000 30000
Direct expenses 12000 36000 12600

The indirect expenses amounted to Rs 42900 and may be apportioned on the

basis of wages. There is no work – in –progress either in the beginning or the
end. The number of articles produced during the month was 1200.
4. A product passes through three processes to completion. During the quarter
ending 31st March 2008 the cost and production were as under:
Processes Total A B C
Direct Material 84820 20,000 30,200 34,620
Direct labour 1,20,000 30,000 40,000 50,000
Direct Expenses 7260 5000 2260 -
Production overhead 60,000 - - -
Normal loss in input 10% 5% 10%
Sale of scrap per unit Rs 30 Rs 50 Rs 60
Production in units 920 units 870 units 800 units

1000 units of Rs 50 per unit were introduced to Process A. There were no stock
of materials or work-in-progress department at the beginning or end of the
period.
Production overhead is allocated to each process on the basis of 50% of direct
labour cost. Prepare process accounts.
5. A company manufactures and sells three chemicals produced by consecutive
processes known as A,B &C. In each process 2% of the total weight is lost and
10% is scrap, which realized from process A & B at Rs 100 per unit and from
process C Rs 200 per unit. The details of three processes are as follows:-
Particulars Process A Process B Process C
Sent to warehouse for sale 20% 50% 100%
Passed on to the next process 80% 50% -
Material used (units) 2000 292 1652
Cost per unit( Rs) 100 200 100
Manufacturing expenses 60000 53600 32000
Prepare process account showing the cost per tonne of each process.
6. Prepare process accounts

ROOPA K N (VVNDC)
COSTING METHOD

Particulars A B C
Materials 1000 2000 1000
Labour 5000 4000 3000
Direct expenses 500 600 1000
Indirect Expenses amount in all to 6000. They are to be allocated on the basis of
direct wages. Main materials issued (besides above) Rs 6000.
1000 units of finished stock was produced. Ignore the question of stock.
7. An article undergoes three processes. Prepare process accounts and find out cost
per article.
Particulars I II III
Materials consumed 37500 12500 5000
Labour 20000 50000 15000
Other direct expenses 6500 18000 16250
Indirect expenses were 21250 to be allocated on the basis of direct wages. Rs
38000 was incurred during process III towards the cost of the articles produced
during the month were 2400 units.
8. Prepare process accounts
Input= 200 units at 20 per unit
Wages = 2000
Direct Expenses = 1500
Overheads= 400
Normal loss is estimated at 10%
9. Prepare process account
Materials = 5000 units at 40 per unit
Direct wages = 20,000
Direct Expenses = 12000
Overheads = 25% of direct wages
Normal loss = 5% which realises 8000
10. A product through 3 process A, B & C normal wastage of each process is as
follows: process A=3%, Process B= 5% and Process C = 8%.
Wastage of process A was sold at 25 paisa per unit that of process B at 50 paisa
per unit and that of process C at Rs 1 per unit.
10000 units were issued to process A in the beginning of October 2015 at a cost
of Rs 1 per unit. The other expenses were as follows:
Particulars Process A Process B Process C
Sundry Materials 1000 1500 500
Labour 5000 8000 6500
Direct Expenses 1050 1188 2009
Actual output 9500 units 9100 units 8100 units
Prepare the process cost account and also give the abnormal loss and abnormal
gain account.
11. In a process 100 units of raw materials were introduced at a total cost Rs 1000
other expenses incurred in the process were 602. Of the units introduced 10%

ROOPA K N (VVNDC)
COSTING METHOD

are normally lost in the course of manufacture and they possess a value of 3 per
unit. Output of process was 75 units. Prepare process accounts.
12. A chemical Co. manufacturers and sells chemicals produces by consecutive
processes. The products of these processes are dealt with us under.
Particulars I II III
Transfer to next process 66 2/3 % 60 % -
Transfer to were house for sale 33 1/3 % 40% 100%
In each process 4% of the weight put in is lost and 6% is scrap which from
process 1 realises 3 per ton from process II 5 per ton and from process III 6 per
ton. The following particulars relate to the month of January 2000.
Particulars I II III
Raw Materials consumed 1400 160 1260
(units)
Rate per tone 10 16 7
Wages and other expenses 5152 3140 2818
Prepare process accounts.
13. The product of a manufacturing concern passes through process A & B and them
to finished stock. It is ascertained that in each process normally 5% of the total
weight put in is lost and 10% is scrap which from process A and B realises 80
per ton and 200 per ton respectively. The following are the figures relating to the
process.
14. A product passes through three process A, B, C. the normal wastage of each
process is 3%, 5%, 8% respectively. The wastage of each process is sold for 75
Rs, 238 Rs and 728 Rs respectively. 10,000 units were issued to process A in the
beginning of the month at Rs 1 per unit. The other expenses were.
Particulars A B C
Materials 1000 3000 500
Labour 8000 13000 5300
Direct Expenses 475 1338 388
The actual output was A=9500, B= 9100 and C= 8100 Units. There was no stock
at the beginning or at the end of month.
15. The following information is extracted from the cost records of X ltd which
produces commodity in the manufacture of which three process are involved.
Prepare process account showing the cost of output and cost per unit at each
stage of manufacture.
a) The operation in each separate process are competed daily.
b) The value at which units are to be charged to process B & C is the cost per
unit of process and A+B respectively.
Particulars A B C
Direct wages 640 1200 2925
Machine Expenses 360 300 360
Factory Overheads 200 225 240
Raw Materials (37000 units ) 2400 - -
Wastage (units) 1000 1500 500

ROOPA K N (VVNDC)
COSTING METHOD

Opening stock( units) - 4000 5500

Closing stock (units) - 1000 5500
16. Following information is extracted from the cost records of as factory producing
a commodity in the manufacture of which three processes are involved. Prepare
process costs account showing cost of output and cost per unit at each process of
manufacture.
a) You may presume the operations in each process are completed daily.
The value at which units are charged to process II and III is the cost per unit
of process I and I + II respectively.
Particulars I II III
Direct Wages 2500 5000 6500
Machine Expenses 1400 1200 1200
Factory Overheads 1100 1550 900
Raw Materials consumed 8000 - -
Production(units) 2750 - -
Wastage( units) 150 210 200
Stock at the beginning( units ) - 250 500
Stock at the end( units) - 440 100
17. A company produces a material used in building, the manufacturing of which
involves 3 processes. The materials produced in 3 consecutive grades, namely –
soft, medium and hard.
The following information is related to production for the period ended 31st
December 2016.
Particulars A B C
Raw materials used (tone) 1000 - -
Cost per ton 200 - -
Manufacturing wages and 72500 40800 10710
Expenses
Loss in weight 5% 10% 20%
Scrap (tons) ( sold @ Rs 50/ t) 50 30 51
2/3 of process A and ½ of process B are passed on to the next process and the
balances are sent to warehouse, for sale. Prepare process accounts and find cost
per ton of each process.
18. A product passes through three processes A, B &C. the details of expenses
incurred on the three processes during the year 2003 were as under:
Particulars A B C
Units introduced 10,000 - -
Cost per unit 100 - -
Sundry materials 10,000 15,000 5,000
Labour 30,000 80,000 65,000
Direct Expenses 6000 18,150 27,200
Selling price per unit of output 120 165 250
Management expenses during the year were Rs 80,000 and selling expenses were
Rs 50,000. These are not allocable to the processes.

ROOPA K N (VVNDC)
COSTING METHOD

Actual output of the three process was A – 9300 units, B- 5400 units and C- 2100
units. Two-thirds of the output of process A and one- half of the output of process
B was passed on to the next process and the balance was sold. The entries output
of process C was sold.
The normal loss of the three processes, calculated on the input of every process
was: Process A-5%, B-15% and C- 20%. The loss of process A was sold at Rs 2
per unit that of B at Rs 5 per unit and of process C at Rs 10 per unit.
Prepare the three process accounts and the profit and loss account.
19. The following details are extracted from the costing records of an oil refinery for
the week ended 30 sept 2004.
Purchase of 500 tonnes of copra Rs 2, 00,000.
Particulars Crushing plant Refinery plant Finishing
Cost of labour 2500 1000 1500
Electric power 600 360 240
Sundry materials 100 2000 -
Repairs to Machinery 280 330 140
and plant
Steam 600 450 450
Factory Expenses 1320 660 220
Cost of casks - - 7500

300 tonnes of crude oil was produced.

250 tonnes of oil was produced by Refining process
248 tonnes of refined oil was finished for delivery
Copra sack sold Rs 400
175 tonnes of copra residue sold Rs 11000
Loss in weight in crushing 25 tonnes
45 tonnes by – product was obtained from refining process valued at Rs 6750
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 tonne of each process
and also the total cost per tonne of finished oil.
a) Copra crushing process b) Refining process c) Finishing process.

ROOPA K N (VVNDC)