CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER-11
PROCESS AND
OPERATION COSTING
TABLE OF CONTENTS:
1. Preliminary
2. Characteristics
3. Difference between Job and Process Costing
4. Advantages and Disadvantages
5. Process of Cost Determination
6. Treatment of Normal and Abnormal Loss and Gains
7. Work-In-Process: Concept of Equivalent Production
8. Inter-Process Profits
9. Operation Costing
10. Practical Problem
11. Past Exam Theory Questions

1. PRELIMINARY

There are many industries, whose material has to pass through multiple processes in order to become finished
goods. Now, each process can be dependent or independent i.e. each process department may be a separate
profit centre or they may have liberty to sell their output externally. The output of one process can either be –
(a) Completely transferred to subsequent process
(b) Some part transferred to subsequent process and some sold externally as it is.

Therefore, it becomes necessary for us to understand the concept of process costing. There are many industries
engaged in continuous processing in which the end products are results of number of operations performed in
sequence e.g. Paint Works, Chemical Plants, Textile Mills, Paper Mills, Oil Refinery, Dairy, Food Manufacturing,
Distillery, etc. Process costing is the type of costing applied in industries where there is continuous or mass
production.

Process costing is a method of costing in which the cost of each process is ascertained and the same is
absorbed by the output of that process.

Process costing refers to costing of one or more process involved while converting raw material into finished
output. The aim of process costing is to determine the total cost of each operation and to apply this cost to the
product at each stage of process. It will then be possible to ascertain a cost per unit for each operation or
process and in total. This method is employed where it is not possible to trace the items of prime cost of a
particular order, because its identity is lost in the volume of continuous production. Process costing is suitably
employed where goods made for stock and production is continuous.

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 PROCESS OF MANUFACTURING A MOULDED FIBRE CHAIR (VARIOUS MODELS)

PET/PP Granules Molded Fiber Molded Fiber Chair Molded Fiber Chair Molded Fiber Chair
Stool with Backrest with Backrest & with Backrest,
Armrest Armrest & Padding

2. CHARACTERISTICS

The main characteristics of process costing are -

1. There is a continuous flow of production
2. The finished output of one process will become the raw material of the subsequent process. After
completion of all the processes, it will become the finished product.
3. The products are not distinguishable during processing stage.
4. Number of processes may be conveniently divided depending on the process of manufacture. In addition
to the raw material, additional material or chemicals may be added in each process.
5. Process costing assumes a sequential flow of costs from one process to another as units of output pass
through a number of specified production processes. That is, the unit leaves the first process and take
their costs with them to the second process, the units leave the second process and take their costs with
the to third process and this process continues till the last process, when output is finally completed.
Each process performs part of the total operation and transfers its ‘finished’ output to the next process, in
which it is the input / raw material for further processing. The finished product of the last process is
transferred to the finished goods inventory. Thus, the cost becomes cumulative as production moves
along to, the final process determining the total cost.

3. DIFFERENCE BETWEEN JOB COSTING AND PROCESS COSTING

JOB COSTING PROCESS COSTING

Production is made by specific orders. Uniform production in continuous flow.
Costs are determined by jobs or batches of products. Costs are compiled on time basis or each process.
The various jobs are separate and independent from Being manufactured in continuous flow, products
each other. loose their individual identity.
Job cost is ascertained when job is complete. Process costs are calculated at the end of cost
period.
There are usually no inter-job transfers. In a continuous flow, there is a transfer from one
process to another process.
There may or may not be work-in- progress at the Production being continuous, there is some work-
end of an accounting period. in- progress at the beginning as well as at the end of
the cost period.

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The unit cost of a job is calculated by dividing total The unit cost of a processes computed by dividing
cost of the job by the units produced in the lot or job. the total cost for the period by the total output is an
average cost for the period.
Each job being independent, more managerial Process production is standardised control becomes
attention is required for proper control. comparatively easier.

4. ADVANTAGES AND DISADVANTAGES

ADVANTAGES:
1. Process costs can be determined periodically even at short intervals. This is not possible in job costing,
particularly when jobs run for a longer period.
2. The cost finding method is simple and less expensive than that of job costing.
3. Managerial control is possible by evaluating the performance of each process.
4. Allocation of expenses to process can be easily made and cost becomes accurate.
5. Price quotation may be made without difficulty with the standardisation of process production.

DISADVANTAGES:
1. Costs obtained at the end of accounting period are only historical and are not of much use for effective
cost control.
2. For the purpose of computing unit cost of continuous process work-in-process is required to be
ascertained, which is done mostly on estimated basis may involve further inaccuracies.
3. In case of joint or by-products common costs are pro-rated which are only approximations.
4. Average costs are not always accurate and there is sometimes wide scope for errors.
5. When more than one type of product is manufactured, a division of cost element is necessary and the
computation of average cost is more difficult.

5. PROCESS OF COST DETERMINATION

1. The production process is divided into suitable process centres.

2. Cost of raw materials and other materials added in each process is accumulated at the end of the period
and charged to the process.
3. Direct wages and direct expenses relating to each process are also charged at the end of the period.
4. Production overheads are apportioned to each process on suitable basis.
5. Process cost per unit of output is determined as per the following formula -
=

6. The per unit rate is applied to goods output and abnormal loss / abnormal gain.
7. Normal loss is recovered from customer. However abnormal loss is not recovered from customers.

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 6. TREATMENT OF NORMAL LOSS, ABNORMAL LOSS AND ABNORMAL GAINS

If the loss, scrap or wastage is inevitable and within limit, it is called normal process loss. Normal loss is
inherent in the process and is uncontrollable. It may consists of three varieties -
i. Quantity loss by shrinkage
ii. Wastage with no recovery value i.e. gas, dust, smoke etc.
iii. Scrap with recoverable value.
Where the loss is caused by unexpected abnormal conditions such as sub-standard material, bad design, etc. it
is called abnormal process loss.
The treatment of normal and abnormal losses differ in process accounts. All normal losses are absorbed by
good units and abnormal loss is detected for control purposes and the amount is charged to 'Profit and Loss
Account'.
Where the normal loss represented by scrap has some realisable value, the process account is credited with the
amount realisable / realised from sale of normal scrap. The amount realisable / realised by sale of abnormal
loss represented by scrap is credited to 'Abnormal Loss Account' and the balance loss is transferred to 'Profit
and Loss Account'.
Where, however, the actual loss is less than the normal loss expected there is an abnormal gain. The abnormal
gain is valued in the same manner as abnormal loss. The amount of scrap which would otherwise have been
realised had there been normal loss and no abnormal gain, debited to the Abnormal Gain Account and the
balance is transferred to 'Costing Profit and Loss Account'.

Abnormal Loss = Standard output - Actual output

= (Input - Normal Loss) - Actual output
OR
Actual Loss - Normal Loss

Abnormal Gain = Actual output - Standard output

= Actual output - (Input - Normal Loss)
OR
Normal Loss - Actual Loss

As such, process cost per unit of finished goods is calculated as per the following formula
Total Pr ocess Cost - Re alisable value of Normal Scrap
Cost/Expected Good unit =
Input - Normal Loss

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7. WORK-IN-PROCESS: CONCEPT OF EQUIVALENT PRODUCTION

UNDERSTANDING CONCEPT OF EQUIVALENT PRODUCTION

2 x 50%

4 x 25%

5 x 20%
1 x 100%

In a continuous process invariably there is work in progress at the beginning and/or at the end of the period
and the degree of completion of closing work in progress may be quite different from the degree of completion
of opening work-in-progress, even in respect of different element of costs. The effective production is found
out by calculating ‘Equivalent Production’.
Equivalent or effective production represents the production in terms of completed units. e.g. in the Process-I,
2,000 units are introduced in June. 400 units 60 % complete in all respects remained as closing work-in-
progress at the end of the month and 1600 units are produced.
Equivalent Production = 1600 completed units + 400 units completed to the extent of 60 % i.e. 240 eq. units
= 1600 + 240 = 1840 units.

Work in progress at the end is valued under either of the following methods -
1. First-In-First-Out Method (FIFO): This method is based on the assumption that the material in process
moves on a first in first out basis, so that the work on the opening stock is completed after first, before
the materials put into the process during the current period are taken up. Under this method, cost added
during the current period is pro-rated to the production necessary to complete the opening work in
progress to complete the units introduced and completed during the period and partially completed units
representing as closing work in progress. The costs added in each process during the current period are
divided by equivalent production during the period. The objective of this method is to value the
inventory at current cost.

2. Average Cost Method or Weighted Average Method: Process costs are also computed on weighted
average cost basis. Where degree of completion on opening WIP is not mentioned average cost method
must be employed. The average process cost is obtained by adding the cost of beginning work in progress
to the cost put into process during the current period and dividing this process cost by total equivalent
units.
When average cost method is followed by equivalent completed units are not found for opening work-in-
process units. Thus, there is no distinction made between units which are partially completed at the
beginning and units which are started and completed during the period.

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 Total equivalent units are calculated as -
= Number of units completed + Equivalent production of closing WIP

During rising prices FIFO method shows a lower cost of units completed and higher inventory value.
When the Weighted Average Cost Method is used during periods of increasing or decreasing costs tends
to narrow the extreme prices. The main difference between FIFO method and average cost method, so far
as process cost computation is concerned is that under the average cost method, unlike FIFO method, the
cost of opening WIP is add to costs put in the process and accordingly the total units of opening WIP
(including initial degree of completion) are considered as equivalent production.

8. INTER-PROCESS PROFITS

The output of one process is sometimes charged to the next process at inflated cost. The transfer is usually
effected at the current wholesale price or actual cost inflated at an appropriate percent. The aim of this method
is that each process has to stand on its own leg as a profit producer and to compete with the market price. The
profit of a transferor process is transferred to Profit and Loss Account. The transferee process therefore do not
receive economies effected in prior processes.

Transferee process values the stock at its cost price, which includes unrealised profit of earlier processes. This
method therefore complicates the accounts as the stocks on hand at the end of a period will include a portion of
unrealised profit. While preparing final accounts, such profits can not remain in stocks, because a firm cannot
make a profit by effecting only inter process transfers. Profit is realised on goods sold. Thus, to arrive at actual
profit, it is necessary to provide for unrealised profits on stocks held out of inter process transfers. In order to
compute profit element in closing inventories and to obtain the net realised profit for a period, process account
may be split into three columns viz. cost, profit and total.

From the process account, the unrealised profit on stock held can be obtained by the following formula
=

The cost of stock can be obtained by the formula -

=

9. OPERATION COSTING

Operation costing is a Basic Costing Method applicable where standardised goods or services result from a
sequence of repetitive and more or less continuous operations or processes to which costs are charged before
being averaged over the units produced during the period. It is a method of unit costing by operation
connected with mass and repetitive production.
A manufacturing process may sometimes be sub divided into number of operations. Each operation is
considered as a separate cost centre. In such case cost is to be ascertained for each operation which is similar
to process costing. The cost of all operation will be the cost of process. Cost control may be exercised effectively
in case of operation costing in view of sub division of each process into various operations.
Ascertainment of operation cost becomes difficult owing to losses and rejections occurring at each operations.
The cumulative effect of such losses and rejections on the cost of processed material at the last stage is
determined by computing for each operating Input-Output Ratio or The Ratio per 100 units of final Output.

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10.PRACTICAL PROBLEMS

TYPE-1
“UNDERSTANDING PROCESS A/C AND
TREATMENT OF NORMAL LOSS, ABNORMAL LOSS AND GAINS”
Q1. Basic Problem, Apportionment of Common Expenses (Illu.1) REG. PAGE NO.
From the following data, prepare process accounts indicating the cost of each process and the total cost.
The total units that pass through each process were 240 for the period.
PARTICULARS PROCESS-I PROCESS-II PROCESS-III
Material 1,50,000 50,000 20,000
Labour 80,000 2,00,000 60,000
Other Expenses 26,000 72,000 25,000
Indirect expenses amounting to Rs. 85,000 may be apportioned on the basis of wages. There was no
opening and closing stock.

Q2. Entire Process A/c, NL & Ab.L (Illu.2) REG. PAGE NO.
A product passes through three processes. The output of each process is treated as the raw material of
the next process to which it is transferred and output of the third process is transferred to finished stock.
PARTICULARS PROCESS-I PROCESS-II PROCESS-III
Material Issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing Overheads 10,000 10,000 15,000
10,000 units have been issue to the Process-I and after processing, output of each process is as under –
PROCESS OUTPUT NORMAL LOSS
Process-I 9,750 units 2%
Process-II 9,400 units 5%
Process-III 8,000 units 10%
No stock of material or of work-in-progress was left at the end. Calculate the cost of the finished article.

Q3. Prepare Process A/c, NL A/c, Ab. Loss A/c & Ab. Gain A/c (Illu.3) REG. PAGE NO.
RST Limited processes Product Z through two distinct processes – Process- I and Process- II. On
completion, it is transferred to finished stock. From the following information for the year 2018-19,
prepare Process- I, Process- II and Finished Stock A/c.
PARTICULARS PROCESS-I PROCESS-II
Raw Material Used 7,500 units -
Raw Material Cost Per Unit Rs. 60 -
Transfer to next process / FG 7,050 units 6,525 units
Normal Loss (On Inputs) 5% 10%
Direct Wages Rs. 1,35,750 Rs. 1,29,250

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 Direct Expenses 60% of Direct Wages 65% of Direct Wages
Manufacturing Overheads 20% of Direct Wages 15% of Direct Wages
Realisable Value of Scrap per unit Rs. 12.50 Rs. 37.50
6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no opening or
closing stock of work-in-process.

Q4. Prepare Process A/c, NL A/c, Ab. Loss A/c & Ab. Gain A/c REG. PAGE NO.
Product X is obtained after it passes through three distinct processes. You are required to prepare
Process Accounts and Abnormal Loss and Abnormal Gain A/c from the following information -
PROCESS
Total I II III
Rs. Rs. Rs. Rs.
Material 15,084 5,200 3,960 5,924
Direct Wages 18,000 4,000 6,000 8,000
Production Overheads 18,000
1,000 units @ Rs. 6 per unit were introduced in Process-I. Production Overhead to be distributed as 100
% on direct wages. It is company’s policy to fix the selling price of finished goods so as to yield profit of
20% on selling price. Calculate selling price of finished goods.
Normal Loss Actual Output Value of Scrap per unit
% (units) Rs.
Process-I 5% 950 4
Process-II 10 % 840 8
Process-III 15 % 750 10
Also prepare Finished Goods Account if 700 units are sold at above price.

Q5. Prepare Process A/c REG. PAGE NO.

M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz. Process-A and Process-B.
The details for the year ending 31st March, 2018 are as follows:
Process A Process - B
40,000 Units introduced at a cost of Rs. 3,60,000 -
Material Consumed Rs. 2,42,000 2,25,000
Direct Wages Rs. 2,58,000 1,90,000
Manufacturing Expenses Rs. 1,96,000 1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) Rs. 15 20
Selling Price (per unit) Rs. 37 61
Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The
entire output of Process- B was sold.
(b) Indirect expenses for the year was Rs. 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility center.
Required:
(i) Prepare Process-A and Process-B Account.
(ii) Prepare Profit & Loss Account showing the net profit / net loss for the year.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Q6. Prepare Process A/c REG. PAGE NO.
A product passes through two processes A and B. During the year 2011, the 8 input to process A of basic
raw material was 8,000 units @ Rs. 9 per unit. Other information for the year is as follows:
Process A Process B
Output units 7,500 4,800
Normal loss (% to input) 5% 10%
Scrap value per unit (Rs.) 2 10
Direct Wages (Rs.) 12,000 24,000
Direct expenses (Rs.) 6,000 5,000
Selling price per unit (Rs.) 15 25
Total overheads Rs. 17,400 were recovered as percentage of direct wages. Selling expenses were Rs.
5,000. These are not allocate to the processes. 2/3 of the output of Process A was passed on to the next
process and the balance was sold. The entire output of Process B was sold.
Prepare Process A and B Accounts.

TYPE-2
“TREATMENT OF CLOSING WIP”

Q7. Closing WIP, Process Account (Practical Q5) REG. PAGE NO.
A Company produces a component, which passes through two processes. During the month of April,
2006, materials for 40,000 components were put into Process I of which 30,000 were completed and
transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost
and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:
Direct Materials Rs. 15,000
Direct Wages Rs. 18,000
Factory Overheads Rs. 12,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores.
There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units,
remained unfinished in the process with 100% complete as to materials and 25% complete as regard to
wages and overheads.
No further process material costs occur after introduction at the first process until the end of the second
process, when protective packing is applied to the completed components. The process and packing
costs incurred at the end of the Process II were:
Packing Materials Rs. 4,000
Direct Wages Rs. 3,500
Factory Overheads Rs. 4,500
Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c.

Q8. Closing WIP, Process Account REG. PAGE NO.

A company within the food industry mixes powdered ingredients in two different processes to produce
one product. The output of Process-1 becomes the input of Process-2 and the output of Process - 2 is
transferred to the packing department.

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 From the information given below, you are required to open account for Process-1, Process-2, Abnormal
Loss and Packing Department to record the transactions for the week ended 14th June -
Input: Process-1
Material A 6,000 Kilograms at 50 paise per kilogram
Material B 4,000 Kilograms at Re.1 per Kilogram
Mixing Labour 430 hours at Rs. 2 per hour
Normal Loss 5 % of weight input, disposed off at 16 paise per Kilogram
Output 9,200 Kilograms
Input: Process- 2
Material C 6,600 Kilograms at Rs. 1.25 per kilogram
Material D 4,200 Kilograms at Rs. 0.75 per Kilogram
Flavouring Essence Rs. 300
Mixing Labour 370 hours at Rs. 2 per hour
Normal Loss 5 % of weight input, with no disposal value
Output 18,000 Kilograms
No work-in-progress at the beginning of the week but 1,000 Kilograms in Processes - 2 at the end of the
week and estimated to be only 50 % complete so far as labour and overhead were concerned.
Overhead of Rs. 3,200 incurred by the two process to be absorbed on the basis of mixing labour hours.

Q9. Closing WIP, Process Account & Missing Figures REG. PAGE NO.
Following data are available for a product for the month of July. :
Process I Process II
Rs. Rs.
Opening Work in Progress Nil Nil
Costs Incurred during the month:
Direct materials 60,000
Labour 12,000 16,000
Factory overheads 24,000 20,000
Units of Production Units Units
Received in Process 40,000 36,000
Completed and transferred 36,000 32,000
Closing work in progress 2,000 ?
Normal loss in Process 2,000 1,500
Production remaining in Process has to be valued as Follows:
Materials 100%, Labour 50%, Overheads 50%,
There has been no abnormal loss in Process II.
Prepare process accounts after working out the missing figures and with detail workings.

Q10. Closing WIP REG. PAGE NO.

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 operation Plastic sheets are produced by the extrusion
operation. During the forming operation, the plastic sheets are moulded into chair seats and the legs are

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
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, 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 26,250 21,000

The total conversion costs for the month of April are:

Extrusion Form Trim Finish
Operation Operation Operation Operation
Rs. 6,06,375 Rs. 2,97,000 Rs. 1,55,250 Rs. 94,500
Required:
i) For each product produced by RST Ltd. during April, determine the unit cost and the total cost.
ii) 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.

TYPE-3
“TREATMENT OF OPENING AND CLOSING WIP”

Q11. Opening and Closing WIP (WAM) (Practical Q4) REG. PAGE NO.
Following details are related to the work done in Process-I during the month of March, 2019:
Opening work-in process (2,000 units)
Materials Rs. 80,000
Labour Rs. 15,000
Overheads Rs. 45,000
Materials introduced in Process-I (38,000 units) Rs. 14,80,000
Direct Labour Rs. 3,59,000
Overheads Rs. 10,77,000
Units scrapped: 3,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%
Closing work-in process: 2,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%

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 Units finished and transferred to Process-II: 35,000 units
Normal Loss: 5% of total input including opening work-in-process.
Scrapped units fetch Rs. 20 per piece.
You are required to prepare:
(i) Statement of equivalent production,
(ii) Statement of Cost,
(iii) Statement of distribution of cost; and
(iv) Process-I Account, Normal Loss Account and Abnormal Loss Account.

Q12. Opening and Closing WIP (FIFO & WAM) REG. PAGE NO.
From the following details, prepare statement of equivalent production, statement of cost and find the
value of Output transferred and Closing work-in-progress and Process I Account:
Opening work-in-progress 2,000 units
Materials (100 % complete) Rs. 26,000
Labour (60 % complete) Rs. 9,600
Overheads (60 % complete) Rs. 7,200
Units introduced into this process 8,000 units
There are 2,000 units in process and the stage of completion is estimated to be -
Material - 100 %
Labour - 50 %
Overhead - 50 %
8,000 units are transferred to next process. The cost incurred is -
Material - Rs. 1,00,000
Labour - Rs. 78,000
Overheads - Rs. 39,000
(Solve by FIFO and Average Cost Method)

Q13. Opening and Closing WIP (FIFO & WAM) (Illu.4 & 5) REG. PAGE NO.
Opening work-in-process 1,000 units (60% complete); Cost Rs. 1,10,000. Units introduced during the
period 10,000 units; Cost Rs. 19,30,000. Transferred to next process - 9,000 units. Closing work-in-
process - 800 units (75% complete). Normal loss is estimated at 10% of total input including units in
process at the beginning. Scraps realise Rs. 10 per unit. Scraps are 100% complete. Compute equivalent
production and cost per equivalent unit using FIFO and Weighted Average method,

Q14. Opening and Closing WIP (WAM) REG. PAGE NO.

ABC Limited manufactures a product ‘ZX’ by using the process namely RT. For the month of May, 2007,
the following data is available:
Process RT
Material introduced (units) 16,000
Transfer to next process (units) 14,400
Work in process:
At the beginning of the month (units) 4,000
(4/5 completed)

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
At the end of the month (units) 3,000
(2/3 completed)
Cost records:
Work in process at the beginning of the month
Material Rs. 30,000
Conversion cost Rs. 29,200
Cost during the month : materials Rs. 1,20,000
Conversion cost Rs. 1,60,800
Normal spoiled units are 10% of finished goods output transferred to next process.
Defects in these units are identified in their finished state. Material for the product is put in the process at
the beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over the year.
It has no realizable value for spoiled units.
Required:
(i) Statement of equivalent production (Average cost method);
(ii) Statement of cost and distribution of cost;
(iii) Process accounts.

Q15. Opening and Closing WIP (FIFO) REG. PAGE NO.

From the following information for June prepare Process cost account for Process-III.
Opening stock in Process-III 500 units at Rs. 7,200
Transfer from Process-II 21,300 units at Rs. 1,65,400
Direct Materials added in Process-III Rs. 80,360
Production Overheads Rs. 19,830
Direct Wages Rs. 39,660
Units scrapped during the period 1,100 units
Transferred to Process-IV 18,900 units
Closing stock 1,800 units
Degree of completion -
Opening Stock Closing Stock
Material 70% 80%
Labour 50% 60%
Overhead 50% 60%
There was a normal loss of 5 % of gross production and units scrapped were sold at Rs. 3 each.
Prepare Process III Account, using FIFO method.

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 TYPE-4
“ASCERTAINMENT OF INTER-PROCESS PROFIT”

Q16. Inter-Process Profits, No Opening and Closing WIP (Illu.6) REG. PAGE NO.
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 2018.

PROCESS-I PROCESS-II FINISHED STOCK

PARTICULARS
(Rs.) (Rs.) (Rs.)
Opening Stock 7,500 9,000 22,500
Direct Material 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 profits included in
- 1,500 8,250
Opening Stock
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. Stock in process is valued at prime
cost. Finished stock is valued at the price at which it is received from process II. Sales during the period
are Rs. 1,40,000.
Prepare Process cost accounts and finished goods account showing the profit element at each stage

Q17. Inter-Process Profits, No Opening and Closing WIP REG. PAGE NO.
The following are the details in respect of Process-X and Process-Y of the processing factory.
Process - X Process-Y
Rs. Rs.
Material 10,000 —
Labour 10,000 14,000
Overheads 4,000 10,000
The output of Process-X is transferred to Process - Y at a price calculated to give a profit of 20 % on the
transfer price and the output of Process-Y is charged to Finished Stock at a profit of 25% on the transfer
price. The Finished Goods Department realised Rs. 1,00,000 for the finished goods received from the
process Y.
You are asked to show Process Accounts and total profit assuming there was no opening and no closing
work in progress.

Q18. Inter-Process Profits, No Opening and Closing WIP REG. PAGE NO.
A certain product passes through three processes before it is completed. The output of each process is
charged to the next process at a price calculated to give a profit of 20% on transfer price (i.e. 25 % on
cost price). The output of Process - III is charged to Finished Stock Account on a similar basis. There was
no work - in - progress at the beginning of the year and overheads have been ignored in valuation of
closing stock. Stocks in each process have been valued at prime cost of that process.
The following data is obtained for the year ended on 30th June –

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

Items Process-I Process-II Process-III Finished Stock

Rs. Rs. Rs. Rs.
Direct Material 30,000 20,000 40,000 —
Direct Wages 20,000 30,000 10,000 —
Overheads 15,000 17,000 18,000 —
Stock on 30th June 10,000 20,000 30,000 30,000
Sales during the year — — — 2,00,000

From the above information prepare -

a. Process Cost Accounts showing the profit element at each stage;
b. Actual realised profit; and
c. Stock valuation as would appear in the Balance Sheet

11.PAST EXAM THEORY QUESTIONS

Q1. What is inter-process profit? State its advantages and disadvantages.

Ans. Definition of Inter-Process Profit and Its advantages and disadvantages
In some process industries the output of one process is transferred to the next process not at cost but at
market value or cost plus a percentage of profit. The difference between cost and the transfer price is
known as inter-process profits. The advantages and disadvantages of using inter-process profit, in the
case of process type industries are as follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is
facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out
Q2. Explain the following terms in relation to process costing:
(i) Equivalent Production (ii) Inter-process profit
Ans. (i) Equivalent Production: When opening and closing stocks of work-in-process exist, unit costs
cannot be computed by simply dividing the total cost by total number of units still in process. We
can convert the work-in-process units into finished units called equivalent production units so that
the unit cost of these uncompleted (W-I-P) units can be obtained. Equivalent Production units =
Actual number of units in production × Percentage of work completed. It consists of balance of
work done on opening work-in-process, current production done fully and part of work done on
closing WIP with regard to different elements of costs viz., material, labour and overhead.
(ii) Inter-Process Profit: In some process industries the output of one process is transferred to the
next process not at cost but at market value or cost plus a percentage of profit. The difference
between cost and the transfer price is known as interprocess profits.

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Q3. Distinguish between ‘Scrap’ and ‘Defectives’ in costing.
SCRAP DEFECTIVE
It is loss connected with output. This type of loss connected with the output but it
can be in the input as well.
Scraps are not intended but cannot be eliminated Defectives also are not intended but can be
due to nature of material or process itself. eliminated through proper control.
Generally scraps are not used or rectified. Defectives can be used after rectification.
Scraps have insignificant recoverable value. Defectives are sold at lower value from that of good
one.
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“Demonstrate such a level of Passion for your Desire, that

Your PASSION itself becomes your DESIRE”. -ANSHUL A. AGRAWAL

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