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1
PROCESS COSTING
Unit Structure
1.0 Learning Objectives
1.1 Introduction
1.2 Meaning of process costing
1.3 Distinction between job costing and process costing
1.4 Costing Procedure
1.5 Solved illustrations
1.6 Valuation of Work-in-progress
1.7 Questions
1.8 Exercise

1.0 LEARNING OBJECTIVES

After studying this chapter you should able to understand

• the meaning of Process Costing and its importance
• the distinction between job costing and process costing
• the accounting procedure of process costing including normal
loss abnormal loss (or) gain
• the valuation of work-in-progress, using FIFO, LIFO average
and weighted average methods
• the steps involved in inter process transfer

1.1 INTRODUCTION:

Process costing is a form of operations costing which is used

where standardized homogeneous goods are produced. This
costing method is used in industries like chemicals, textiles, steel,
rubber, sugar, shoes, petrol etc. Process costing is also used in the
assembly type of industries also. It is assumed in process costing
that the average cost presents the cost per unit. Cost of production
during a particular period is divided by the number of units
produced during that period to arrive at the cost per unit.

1.2 MEANING OF PROCESS COSTING

Process costing is a method of costing under which all costs

are accumulated for each stage of production or process, and the
 2

cost per unit of product is ascertained at each stage of production

by dividing the cost of each process by the normal output of that
process.

1.2.1 Definition:
CIMA London defines process costing as “that form of
operation costing which applies where standardize goods are
produced”

1.2.2 Features of Process Costing:

(a) The production is continuous
(b) The product is homogeneous
(c) The process is standardized
(d) Output of one process become raw material of another process
(e) The output of the last process is transferred to finished stock
(f) Costs are collected process-wise
(g) Both direct and indirect costs are accumulated in each process
(h) If there is a stock of semi-finished goods, it is expressed in
terms of equalent units
(i) The total cost of each process is divided by the normal output of
that process to find out cost per unit of that process.

1.2.3 Advantages of process costing:

1. Costs are be computed periodically at the end of a particular
period
2. It is simple and involves less clerical work that job costing
3. It is easy to allocate the expenses to processes in order to have
accurate costs.
4. Use of standard costing systems in very effective in process
costing situations.
5. Process costing helps in preparation of tender, quotations
6. Since cost data is available for each process, operation and
department, good managerial control is possible.

1.2.4 Limitations:
1. Cost obtained at each process is only historical cost and are not
very useful for effective control.
2. Process costing is based on average cost method, which is not
that suitable for performance analysis, evaluation and
managerial control.
3. Work-in-progress is generally done on estimated basis which
leads to inaccuracy in total cost calculations.
4. The computation of average cost is more difficult in those cases
where more than one type of products is manufactured and a
division of the cost element is necessary.
5. Where different products arise in the same process and
common costs are prorated to various costs units. Such
individual products costs may be taken as only approximation
and hence not reliable.
 3

1.3 DISTINCTION BETWEEN JOB COSTING AND

PROCESS COSTING

Job order costing and process costing are two different

systems. Both the systems are used for cost calculation and
attachment of cost to each unit completed, but both the systems
are suitable in different situations. The basic difference between job
costing and process costing are

Basis of Job order costing Process costing

Distinction
1. Specific order Performed against Production is
specific orders contentious
2. Nature Each job many be Product is
different. homogeneous and
standardized.
3. Cost determination Cost is determined for Costs are complied for
each job separately. each process for
department on time
basis i.e. for a given
accounting period.
4. Cost calculations Cost is complied when Cost is calculated at
a job is completed. the end of the cost
period.
5. Control Proper control is Proper control is
comparatively difficult comparatively easier
as each product unit is as the production is
different and the standardized and is
production is not more suitable.
continuous.
6. Transfer There is usually not The output of one
transfer from one job process is transferred
to another unless to another process as
there is some surplus input.
work.
7. Work-in-Progress There may or may not There is always some
be work-in-progress. work-in-progress
because of continuous
production.
8. Suitability Suitable to industries Suitable, where goods
where production is are made for stock and
intermittent and productions is
customer orders can continuous.
be identified in the
value of production.
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1.4 COSTING PROCEDURE

For each process an individual process account is prepared.

Each process of production is treated as a distinct cost centre.

1.4.1 Items on the Debit side of Process A/c.

Each process account is debited with –
a) Cost of materials used in that process.
b) Cost of labour incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some pre determined.
e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process)

1.4.2 Items on the Credit side:

Each process account is credited with
a) Scrap value of Normal Loss (if any) occurs in that process.
b) Cost of Abnormal Loss (if any occurs in that process)

1.4.3 Cost of Process:

The cost of the output of the process (Total Cost less Sales value
of scrap) is transferred to the next process. The cost of each
process is thus made up to cost brought forward from the previous
process and net cost of material, labour and overhead added in that
process after reducing the sales value of scrap. The net cost of the
finished process is transferred to the finished goods account. The
net cost is divided by the number of units produced to determine
the average cost per unit in that process. Specimen of Process
Account when there are normal loss and abnormal losses.

Dr. Process I A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Basic Material xxx xx By Normal Loss xx xx
To Direct Material xx By Abnormal Loss xx xx
To Direct Wages xx By Process II A/c. xx xx
To Direct Expenses xx (output
transferred to
ToProduction xx Next process)
Overheads
ToCost of xx By Process I xx xx
Rectification of Stock A/c.
Normal Defects

To Abnormal Gains xx
xx xxx xx xx
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1.4.4 Process Losses:

In many process, some loss is inevitable. Certain production
techniques are of such a nature that some loss is inherent to the
production. Wastages of material, evaporation of material is un
avoidable in some process. But sometimes the Losses are also
occurring due to negligence of Labourer, poor quality raw material,
poor technology etc. These are normally called as avoidable
losses. Basically process losses are classified into two categories
(a) Normal Loss (b) Abnormal Loss

1. Normal Loss:
Normal loss is an unavoidable loss which occurs due to the
inherent nature of the materials and production process under
normal conditions. It is normally estimated on the basis of past
experience of the industry. It may be in the form of normal wastage,
normal scrap, normal spoilage, and normal defectiveness. It may
occur at any time of the process.

No of units of normal loss: Input x Expected percentage of

Normal Loss.

The cost of normal loss is a process. If the normal loss units

can be sold as a crap then the sale value is credited with process
account. If some rectification is required before the sale of the
normal loss, then debit that cost in the process account. After
adjusting the normal loss the cost per unit is calculates with the
help of the following formula:

Cost of good unit:

Total cost increased – Sale Value of Scrap
Input – Normal Loss units

2. Abnormal Loss:
Any loss caused by unexpected abnormal conditions such
as plant breakdown, substandard material, carelessness, accident
etc. such losses are in excess of pre-determined normal losses.
This loss is basically avoidable. Thus abnormal losses arrive when
actual losses are more than expected losses. The units of abnormal
losses in calculated as under:

Abnormal Losses = Actual Loss – Normal Loss

The value of abnormal loss is done with the help of following

formula:

Value of Abnormal Loss:

Total Cost increase – Scrap Value of normal Loss x Units of abnormal loss
Input units – Normal Loss Units
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Abnormal Process loss should not be allowed to affect the

cost of production as it is caused by abnormal (or) unexpected
conditions. Such loss representing the cost of materials, labour and
overhead charges called abnormal loss account. The sales value of
the abnormal loss is credited to Abnormal Loss Account and the
balance is written off to costing P & L A/c.

Dr. Abnormal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process A/c. xx xx By Bank xx xx
By Costing P & L xx xx
A/c.
xx xxx xx xx

3. Abnormal Gains:
The margin allowed for normal loss is an estimate (i.e. on
the basis of expectation in process industries in normal conditions)
and slight differences are bound to occur between the actual output
of a process and that anticipates. This difference may be positive or
negative. If it is negative it is called ad abnormal Loss and if it is
positive it is Abnormal gain i.e. if the actual loss is less than the
normal loss then it is called as abnormal gain. The value of the
abnormal gain calculated in the similar manner of abnormal loss.
The formula used for abnormal gain is:

Abnormal Gain

Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain Unites
Input units – Normal Loss Units

The sales values of abnormal gain units are transferred to

Normal Loss Account since it arrive out of the savings of Normal
Loss. The difference is transferred to Costing P & L A/c. as a Real
Gain.

Dr. Abnormal Gain A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Normal Loss xx xx By Process A/c. xx xx
A/c.
To Costing P & L xx xx
A/c.
xx xx xx xx
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Check Your Progress:

1. Define the following terms

a. Process costing
b. Normal Loss
c. Abnormal Loss
2. Give the formulas of following
a) Cost of good / normal unit
b) Value of Abnormal Loss

1.5 SOLVED ILLUSTRATIONS

Illustration 1: (Normal / Abnormal Loss)

Prepare a Process Account, Abnormal Loss Account and

Normal Loss Account from the following information.

Input of Raw material 1000 units @ Rs. 20 per

unit
Direct Material Rs. 4,200/-
Direct Wages Rs. 6,000/-
Production Overheads Rs. 6,000/-
Actual output transferred to process II 900 units
Normal Loss 5%
Value of Scrap per unit Rs. 8/-

Solution :

Dr. Process – I A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

ToRawmaterial 1000 20000 By Normal Loss
@ 20
To Direct 4200 (5% on 50 400
Material 1000)
To Direct Wages 6000 By Abnormal 50
Loss A/c.
To Production BY Process – II
A/c.
Overheads 6000 (output 900
1000 36200 transferred) 1000 36200
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Dr. Abnormal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process – I 50 By Bank A/c. 50 400
A/c.
By Costing P & L
A/c.
50 50 400

Dr. Normal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process – I 50 400 BY Bank 50 400
A/c.

Working Notes:

(1) Cost of abnormal Loss :

= Total Cost increased – Sales value of Scrap x abnormal units
Input units – Normal Loss Units

= 36200 – 400 x 50
1000 – 50

(2) It has been assumed that units of abnormal loss have also
been sold at the same rate i.e. of Normal Scrap

Illustration 2: (Normal / Abnormal Loss and Abnormal Gain)

The product of a company passes through 3 distinct

process. The following information is obtained from the accounts for
the month ending January 31, 2008.

Particulars Process – A Process – B Process – C

Direct Material 7800 5940 8886
Direct Wages 6000 9000 12000
Production Overheads 6000 9000 12000

3000 units @ Rs. 3 each were introduced to process – I. There was

no stock of materials or work in progress. The output of each
process passes directly to the next process and finally to finished
stock A/c.
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The following additional data is obtained :

Process Output Percentage of Value of Scrap per

Normal Loss to unit
Input (Rs.)
Process – I 2850 5% 2
Process – II 2520 10 % 4
Process – III 2250 15 % 5

Prepare Process Cost Account, Normal Cost Account and

Abnormal Gain or Loss Account.

Solution:

Dr. Process – A A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Units 3000 9000 By Normal Loss 150 300
introduced A/c.
To Direct 7800 By Process – B 2850 28500
Material A/c.
To Direct Wages 6000 (Units
transferred
To Production @ Rs. 10/-)
Overheads 6000
3000 28800 3000 28800

Dr. Process – B A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process – I 2850 28500 By Normal Loss 285 1140
A/c. A/c.
To Direct 5940 By Abnormal 45 9000
Material Loss A/c.
To Direct Wages 9000 By Process – C 2520 50400
A/c.
To Production
Overheads 9000
2850 52440 2850 52440
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Dr. Process – C A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process – II 2520 50400 By Normal Loss 378 1890
A/c. A/c.
To Direct 8886 By Finished 2250 85500
Material A/c Stock A/c.
To Direct Wages 12000
To Production
Overheads 12000
To Abnormal 108 4104
Gain A/c.
2628 87390 2628 87390

Dr. Abnormal Gain A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Normal Loss 108 540 By Process – C 108 4104
A/c. A/c.
To Costing P&L 3564
A/c.
108 4104 108 4104

Dr. Normal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process – A 150 300 By Bank A/c.
A/c. (Sales)
To Process – B 285 1140 Process – A 150 300
A/c. A/c.
To Process – C 378 1890 Process – B A/c. 285 1140
A/c.
Process – C 270 1350
A/c.
By Abnormal 108 540
Gain A/c.
813 3330 813 3330

1.6 INTER PROCESS PROFITS:

Normally the output of one process is transferred to another

process at cost but sometimes at a price showing a profit to the
transfer process. The transfer price may be made at a price
corresponding to current wholesale market price or at cost plus an
agreed percentage. The advantage of the method is to find out
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whether the particular process is making profit (or) loss. This will
help the management whether to process the product or to buy the
product from the market. If the transfer price is higher than the cost
price then the process account will show a profit. The complexity
brought into the accounting arises from the fact that the inter
process profits introduced remain a part of the prices of process
stocks, finished stocks and work-in-progress. The balance cannot
show the stock with profit. To avoid the complication a provision
must be created to reduce the stock at actual cost prices. This
problem arises only in respect of stock on hand at the end of the
period because goods sold must have realized the internal profits.
The unrealized profit in the closing stock is eliminated by creating a
stock reserve. The amount of stock reserve is calculated by the
following formula.

Stock Reserve = Transfer Value of stock x Profit included in transfer price

Transfer Price

Illustration 3 :

A product passes through three processes before its

completion. The output of each process s charged to the next
process at a price calculated to give a profit of 20% on transfer
price. The output of Process III is transferred to finished stock
account on a similar basis. There was no work-in-progress at the
beginning of the years. Stock in each process has been valued at
prime cost of the process. The following data is available at the end
of 31st March, 2009.

Process Process Process Finished

I II III Stock
Rs.
Direct Material 20000 30000 10000 --
Direct Wages 30000 20000 40000 --
Stock on 31st March 10000 20000 30000 15000
2009
Sale during the year -- -- -- 180000

From above information prepare:

1. Process Cost Account showing the profit at each stage.
2. Actual realized profit and
3. Stock Valuation as would appear in the balance sheet
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Solution:

Dr. Process – I A/c. Cr.

Particulars Total Cost Profit Particulars Total Cost Profit

Rs. Rs. Rs. Rs. Rs. Rs.
To Materials 20000 20000 -- By Process 50000 40000 10000
IIA/c.
(Transfer)
To Wages 30000 30000 --
Total 50000 50000 --
Les Closing
Stock c/d 10000 10000 --
Prime Cost 40000 40000 --
To Gross
Profit 10000 -- 10000
(20% on
Transfer
Price) 50000 40000 10000 50000 40000 10000
ToStockB/d. 10000 10000 --

Dr. Process – II A/c. Cr.

Particulars Total Cost Profit Particulars Total Cost Profit

Rs. Rs. Rs. Rs. Rs. Rs.
To Process 50000 40000 10000 By
– I A/c. Process-III
A/c. 100000 72000 28000
To Material 30000 30000 -- (Transfer)
To Wages 20000 20000 --
100000 90000 10000
Less :
Closing
Stock 20000 18000 2000
C/d.
Prime Cost 80000 72000 8000
To Gross
Profit
(20% on
Transfer 20000 -- 20000
Price)
100000 72000 28000 100000 72000 28000
To Stock 20000 18000 2000
B/d.
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Process III A/c

Particulars Total Cost Profit Particulars Total Cost Profit

Rs. Rs. Rs. Rs. Rs. Rs.
ToprocessII 100000 72000 28000 ByFinished 150000 97600 52400
A/c stock A/c
To Material 10000 10000
To Wages 40000 40000 -------
TOTAL 150000 122000 28000
Less.Closing
stock 30000 24400 5600
To Gross 120000 97600 22400
profit
(20%of 30000 -------- 30000
transfer
price)
150000 97600 52400 150000 97600 52400
To Stock b/d 30000 24000 5600

Finished stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit

Rs. Rs. Rs. Rs. Rs. Rs.
To process 115000 97600 52400 By Sales 180000 87840 92160
III A/c
(-)Stock 15000 9760 5240
To gross 135000 87840 92160
profit
45000 --- 45000
180000 87840 92160 180000 87840 92160
To Stock 15000 9760 5240
A/c

Calculation of profit on closing stock

Profit included in stock = Profit included in transfer price x Value of stock

Transfer price
Process I = No profit
Process Ii =10000x20000=2000
100000

Process Iii =28000x30000=5600

150000

Finished stock= 52400x15000=5240

150000
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Illustration 4 :

A product process through three process A, B and C. The

details of expenses incurred on the three process during the year
2008 were as under :

Process Process Process

A B C
Units introduced 10000
Cost per unit is Rs. 50/-
Rs. Rs. Rs.
Sundry Material 6000 9000 3233
Labour 18000 48000 39000
Direct Expenses 3000 11000 18000
Selling price per unit of output 70 100 200

Management expenses during the year were Rs. 80000 and

selling were Rs. 5000. There are not allocable to the processes.
Actual output of the three process were 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 A and one-half of the output of process B was passed on
to the next process and the balance was sold. The entire output of
process C was sold.

The normal losses of the three process, calculated on the

input of every process was : Process A – 5%, B – 15% and C –
20%. The loss of process A was sold @ Rs. 3 per unit, that of B @
Rs. 5 per unit and of process C @ Rs. 10 per unit.
Prepare process A, B and C account and the Profit and Loss
Account.

Solution :

Dr. Process A A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

ToUnits By Normal Loss 500 1,500
Introduced
@ Rs. 50 10000 5,00,000 By Abnormal 200 11063
ToSundry 6,000 Loss A/c. 6,200 342958
Materials
To Labour 18,000 By Process B 3,100 171479
A/c.
ToDirect 3,000 By P & L A/c.
Expenses
(@ 55.32)
10000 5,27,000 5,27,000
 15

Dr. Process B A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process A 6200 342958 By Normal Loss 930 4650
A/c.
ToSundry 9000 By Process C 2700 2,08,165
Materials A/c.
To Labour 48000 By P & L A/c. 2700 2,08,165
To Direct 11000
Expenses
ToAbnormal 100221
Gains
A/c. (@ 77.19)
6330 420980 6,330 4,20,980

Dr. Process C A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process B 208165 By Normal Loss 540 5400
A/c.
ToSundry 3233 By Abnormal 60 7305
Materials Loss
To Labour 39000 By P & L A/c. 2100 255693
To Direct 18000 ( @ 12.76)
Expenses

2700 268398 2700 268398

Dr. Profit & Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process A 3100 171479 By Sales( @ Rs. 70) 3100 217000
A/c.
To Process B 2700 208165 By Sales(@Rs. 100) 2700 270000
A/c.
To Process C 2700 265693 BySales(@Rs.2000) 2700 420000
A/c.
To 80000 BY Abnormal Gain 9372
Management A/c.
Expenses A/c.

ToSelling 50000
Expenses
To Abnormal 17168
Loss A/c.
To Net Profit 133867
916372 916372
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Dr. Abnormal Loss A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process A A/c. 200 11063 By Bank Sales
To Process B A/c. 60 7305 (@ Rs. 30) 200 600
By Bank
(@ Rs. 10) 60 600
By P & L A/c. 17168
260 18368 260 18368

Dr. Abnormal Gain A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Normal Loss 130 650 By Process B /c. 130 10022
A/c.
To Costing P & L 9372
A/c.
130 10022 130 10022

Illustration 5

Mahesh Ltd process a material which passes through three

processes. Figures relating to production for the first 6 months of
2009 are as follows.

Process Process Process

A B C
Raw material used 1000 tones @
Rs. 200
Manufacturing Wages Rs. 40000 Rs. 30000 Rs. 7000
Expenses Rs. 32500 Rs. 10800 Rs. 3710
Scrap sold @ Rs. 50 per 50 tones 30 tones 51 tones
tone
Selling price per tone Rs. 320 Rs. 450 Rs. 800
Weight Loss 5% 10% 20%

Management expenses were Rs. 10500, selling expenses

Rs. 8000 and interest on borrowed capital Rs. 2000. Two third of
process I and one half of process 2 are passed on to the next
process and the balance are sold.

Prepare Process Account, Process Stock Account and

Costing Profit & Loss A/c.
 17

Solution
Dr. Process No. 1 A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Material @ 1000 200000 By Normal Loss 50 2500
Rs. 200 (sale of Scrap)
To Wages 40000 By Weight Loss 50 --
To Expenses 32500 By Process I Stock 900 270000
A/c.(@300per tone)

1000 272500 1000 272500

Dr. Process No. 1 Stock A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process I A/c. 900 270000 By Bank (@ 320) 300 96000
To Costing Profit 6000 ByProcessNo.2 600 180000
& Loss A/c. A/c.

900 276000 900 276000

Dr. Process No. 2 A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process 1 600 180000 By Normal Loss 30 1500
Stock A/c. (@ Rs. 50)
To wages 30000
To Expenses 10800 By Wight Loss 60 --
By Process 2
Stock
A/c(@ Rs. 430) 510 219300
600 220800 600 220800

Dr. Process No. 2 Stock A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process 2 A/c. 510 219300 By Bank
ToCosting P&L 5100 (sale @ 450) 255 114750
A/c.
By Process 3 255 109650
A/c.

510 244400 510 244400

 18

Dr. Process No. 3 A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process 2 255 109650 By scrap 51 2550
Stock A/c.
To wages 7000 By Weight Loss 51 --
To Expenses 3710 By Process 3 153 117810
stock A/c
255 120360 255 120360

Dr. Process No. 3 Stock A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Process 3 A/c. 153 117810 By Bank
To Costing P & L 4590 (sale @ 800) 153 122400
A/c.
153 122400 153 122400

Dr. Costing Profit & Loss A/c. Cr.

Particulars Rs. Particulars Rs.

To Management Expenses 10500 By Process 1 Stock A/c. 6000
To Selling Expenses 8000 By Process 2 Stock A/c. 5100
To Interest on Capital 2000 By Process 3 Stock A/c. 4590
By Net Loss 4810
20500 20500

1.7 VALUATION OF WORK-IN-PROGRESS

1.7.1 Meaning of Work-in-Progress:

Since production is a continuous activity, there may be some
incomplete production at the end of an accounting period.
Incomplete units mean those units on which percentage of
completion with regular to all elements of cost (i.e. material, labour
and overhead) is not 100%. Such incomplete production units are
known as Work-in-Progress. Such Work-in-Progress is valued in
terms of equivalent or effective production units.

1.7.2 Meaning of equivalent production units :

This represents the production of a process in terms of
complete units. In other words, it means converting the incomplete
production into its equivalent of complete units. The term equivalent
unit means a notional quantity of completed units substituted for an
actual quantity of incomplete physical units in progress, when the
aggregate work content of the incomplete units is deemed to be
equivalent to that of the substituted quantity. The principle applies
when operation costs are apportioned between work in progress
and completed units.
 19

Equivalent units of work in progress = Actual no. of units in progress x

Percentage of work completed

Equivalent unit should be calculated separately for each element of

cost (viz. material, labour and overheads) because the percentage
of completion of the different cost component may be different.

1.7.3 Accounting Procedure:

The following procedure is followed when there is Work-in-
Progress
(1) Find out equivalent production after taking into account of
the process losses, degree of completion of opening and / or
closing stock.

(2) Find out net process cost according to elements of costs i.e.
material, labour and overheads.

(3) Ascertain cost per unit of equivalent production of each

element of cost separately by dividing each element of costs
by respective equivalent production units.

(4) Evaluate the cost of output finished and transferred work in

progress

The total cost per unit of equivalent units will be equal to the
total cost divided by effective units and cost of work-in-
progress will be equal to the equivalent units of work-in-
progress multiply by the cost per unit of effective production.
In short the following from steps an involved.

Step 1 – prepare statement of Equivalent production

Step 2 – Prepare statement of cost per Equivalent unit
Step 3 – Prepare of Evaluation
Step 4 – Prepare process account

The problem on equivalent production may be divided into four

groups.
I. when there is only closing work-in-progress but without
process losses
II. when there is only closing work-in-progress but with
process losses
III. when there is only opening as well as closing work-in-
progress without process losses
IV. when there is opening as well as closing work-in-
progress with process losses
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Situation I :

Only closing work-in-progress without process losses :

In this case, the existence of process loss is ignored. Closing

work-in-progress is converted into equivalent units on the basis of
estimates on degree of completion of materials, labour and
production overhead. Afterwards, the cost pr equivalent unit is
calculated and the same is used to value the finished output
transferred and the closing work-in-progress

Situation II:
When there is closing work-in-progress with process loss or
gain.

If there are process losses the treatment is same as already

discussed in this chapter. In case of normal loss nothing should be
added to equivalent production. If abnormal loss is there, it should
be considered as good units completed during the period. If units
scrapped (normal loss) have any reliable value, the amount should
be deducted from the cost of materials in the cost statement before
dividing by equivalent production units. Abnormal gain will be
deducted to obtain equivalent production.

Situation III:
Opening and closing work-in-progress without process
losses.

Since the production is a continuous activity there is

possibility of opening as well as closing work-in-progress. The
procedure of conversion of opening work-in-progress will vary
depending on the method of apportionment of cost followed viz,
FIFO, Average cost Method and LIFO.

Let us discuss the methods of valuation of work-in-progress one by

one.

(a) FIFO Method: The FIFO method of costing is based on the

assumption of that the opening work-in-progress units are
the first to be completed. Equivalent production of opening
work-in-progress can be calculated as follows:

Equivalent Production = Units of Opening WIP x Percentage of work

needed to finish
the units

(b) Average Cost Method: This method is useful when price

fluctuate from period to period. The closing valuation of
work-in-progress in the old period is added to the cost of
 21

new period and an average rate obtained. In calculating the

equivalent production opening units will not be shown
separately as units of work-in-progress but included in the
units completed and transferred.

(c) Weighted Average Cost Method: In this method no

distinction is made between completed units from opening
inventory and completed units from new production. All units
finished during the current accounting period are treated as if
they were started and finished during that period. The
weighted average cost per unit is determined by dividing the
total cost (opening work-in-progress cost + current cost) by
equivalent production.

(d) LIFO Method: In LIFO method the assumption is that the

units entering into the process is the last one first to be
completed. The cost of opening work-in-progress is charged
to the closing work-in-progress and thus the closing work-in-
progress appears cost of opening work-in-progress. The
completed units are at their current cost.

(1) Format of statement of Equivalent Production :

Input Output Equivalent

Production
Particulars Units Particulars Units Material Labour Overheads
% Units % Units % Units
Opening xx Units xx xx xx xx xx
Stock completed
Units xx Normal xx -- -- -- --
Introduced Loss
Abnormal xx xx xx xx xx
Loss
xx Equivalent xx xx xx xx xx xx Xx
Units

(2) Statement of cost per Equivalent Units :

Element of costing Cost Equivalent Cost per

Rs. Units Equivalent
Units Rs
Material Cost (Net) Xx Xx Xx
Labour Cost Xx Xx Xx
Overheads Cost Xx xx Xx
xx Xx
 22

(3) Statement of Evaluation

Particulars Element of Equivalent Cost per Cost Total

cost Units equivalent Rs. Cost
units Rs.
Rs.
Units completed Material xx xx xx
Labour xx xx xx
Overheads xx xx xx Xx
Closing WIP Material xx xx xx
Labour xx xx xx
Overheads xx xx xx Xx
Abnormal Loss Material xx xx xx
Labour xx xx xx
Overheads xx xx xx Xx

Illustration 6: (Average Costing)

Prepare a statement of equivalent production, statement of
cost, process account from the following information using average
costing method.

Opening Stock 50000 Units

Material Rs. 25000
Labour Rs. 10000
Overheads Rs. 25000
Units Introduced 2000000 Units
Material Rs. 100000
Wages Rs. 75000
Overheads Rs. 70000

During the period 1,50,000 units were completed and transferred to

Process II.

Closing stock 1,00,000 units. Degree of completion.

Material 100 %
Labour 50 %
Overheads 40 %

Solution :

Input Output Equivalent Production

Particulars Units Particula Units Material Labour Overheads
rs % Units % Units % Units
Opening Units
Stock 50,000 Produced 150000 100 150000 100 150000 100 150000
Introduced 200,000 Closing
Stock 100000 100 100000 50 50000 40 40000

250000 250000 250000 200000 190000

 23

Statement of Cost :

Element Opening Current Total Equivalent Cost

cost cost Cost units per
Rs. Rs. Rs. unit
Material 25,000 1,00,000 1,25,000 2,50,000 0.500
Labour 10,000 75,000 85,000 2,00,000 0.425
Overheads 25,000 70,000 95,000 1,90,000 0.500
60,000 2,45,000 3,05,000 1.425

Statement of Apportionment of Cost

Particulars Units Cost per Cost Total

unit cost
1. Units introduced & 1,50,000 1.425 213750
transferred
2. Closing work-in-progress
Material 1,00,000 0.500 50,000
Labour 50,000 0.425 21,250
Overheads 40,000 0.500 20,000 91,250
3,05,000

Dr. Process I A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Opening 50,000 60,000 By Units
Stock completed
To Materials 2,00,000 1,00,000 & transfer 50,000 2,13,750
To Labour 75,000 By Closing Stock 50,000 91,250
To 70,000
Overheads
2,50,000 3,05,000 2,50,000 3,05,000

Illustration 7: (FIFO Method)

From the following information relating to KKN Company Ltd.

Prepare Process Cost Account for Process III for the year 2008.

Opening Stock IN Process III 5000 units of

Rs. 36,000
Transfer from Process II 2,13,000 units of
Rs. 8,27,000
Direct Material added in Process III Rs. 4,01,800
Direct Wages Rs. 1,98,100
Production Overhead Rs. 99,050
Units Scrap 11,000 units
Transferred to Process IV 1,89,000 units
Closing Stock 18,000 units
 24

Degree of Completion :
Opening Closing Scrap
Stock Stock
Material 70 % 80 % 100 %
Labour 50 % 60 % 80 %
Overhead 50 % 60 % 80 %

There was a normal loss of 5% production and unit scraped

were sold at Rs. 1.50

Solution :

Input Output Equivalent Production

Particular Units Particulars Units Material Labour Overheads
s % Units % Units % Units
Opening Normal
Stock 5,000 Loss 10000
Process II Op. Stock
Transfer 213,000 Processed 5000 - - 30 1500 50 2500
Introduces &
Completed 184000 100 184000 100 184000 100 184000
Abnormal
Loss 1000 100 1000 100 1000 80 800
Closing
Stock 18000 100 18000 80 14400 60 10800
218000 218000 203000 200900 198100

Note : Units Produced: Opening stock + units introduced – closing stock

: 5000 +213000 – 18000 = 200000
Normal Loss : 5 % of 200000 = 10000 units

Statement of Cost

Particulars Cost Equivalent Cost

Rs. Units Per
Rs. Unit
Rs.
Material – I
Transfer from Previous 8,27,000
process
Less – Value of scrap 15,000 8,12,000 2,03,000 4.00
(normal)
Material – II
Aded+ in the process 4,01,800 2,00,900 2.00
Direct Wages 1,98,100 1,98,100 1.00
Overheads 99,050 1,98,100 0.50
7.50
 25

Statement of Apportionment of Cost

Particulars Elements Equivalent Cost Cost Total cost

Units Per Rs. Rs.
Unit
Rs.
Op. Stock Material I -- --
Processed
Material II 1,500 2.00 3,000
Wages 2,500 1.00 2,500
Overheads 2,500 0.50 1,250 6,750
Units introduced Material I 1,84,000 4.00 7,36,000
and
Completed Material II 1,84,000 2.00 3,68,000
Wages 1,84,000 1.00 1,84,000
Overheads 1,84,000 0.50 92,000 13,80,000
Closing stock Material I 18,000 4.00 72,000 13,86,750
Material II 14,400 2.00 28,800
Wages 10,800 1.00 10,800
Overheads 10,800 0.50 5,400 1,17,000
Abnormal loss Material I 1,000 4.00 4,000
Material II 1,000 2.00 2,000
Wages 800 1.00 800
Overheads 800 0.50 400 7,200
TOTAL 15,10,950

Dr. Process III A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Balance 5,000 36,000 By Normal 10,000 15,000
b/d. Loss
To Process 2,13,000 8,27,000 By Process 1,89,000 14,22,750
II A/c. IV A/c.
To Materials 4,01,800 By 1,000 7,200
Abnormal
Loss
To Wages 1,98,100 By Closing 18,000 1,17,000
Stock
To 99,050
Overheads
2,18,000 15,61,950 2,18,000 15,61,950

Note :
Cost of goods transferred to Process IV :
Value of Opening Stock 36,000
Cost incurred in this process for Opening Stock 6,750
Cost incurred for the units introduced & Processed 13,80,000
Total 14,22,750
 26

Illustration 8
The following information is given in respect of Process
costing 10 : 3 for the month of January 2009.
Opening stock – 2,000 units made up of
Rs.
Direct Material – I 12,350
Direct Material – II 13,200
Direct Labour 17,500
Overheads 11,000

Transferred from Process 2 – 20,000 units @ Rs. 6 per unit.

Transferred to Process 4 – 17,000 units
Expenditure incurred in process – 3

Rs.
Direct Material 30,000
Direct Labour 60,000
Overheads 60,000

Scrap:1,000 units-Direct Materials 100%,Direct Labour 60%,

Overheads 40%.
Normal Loss 10 % of Production.
Scrapped units realized Rs. 4/- per unit
Closing stock : 4,000 units – Degree of completion. Direct
Materials 80 %, Direct Labour 60 % and Overheads 40 %.
Prepare Process 3 Account using average price method along
with necessary supporting statements.
[C. A. – Inter, May 2001]
Solution :

Statement of Equivalent Production (weighted Average cost

Material)

Particulars Total Material – I Material – II Labour Overheads

Units % Units % Units % Units
Units
Completely
Processed 17000 100 17000 100 17000 100 17000 100 17000
Normal Loss 1800 --
10% of (2000 +
20000 – 4000)
Abnormal Gain 800 100 800 100 800 100 800 100 800
Closing Stock 4000 100 4000 80 3200 60 2400 40 1600
22000 20200 19400 18600 17800
 27

Statement of Cost

Particulars Cost Equivalent Rate / Equivalent

Rs. Units Units
Rs.
Material – I :
Opening balance 2000 units 12,350
Cost of 20000 units @ Rs. 6
Per unit 1,20,000
1,25,150 20,200 6.1955
Material – II :
Opening Stock 13,200
In Process II 30,000
43,200 19,400 2.2268
Labour :
Opening Labour 17,500
In Process II 60,000
77,500 18,600 4.1667
Overheads :
Opening Stocks 11,000
In Process II 60,000
71,000 17,800 3.9888
Total cost per unit 16.5778

Valuation of Equivalent Unit

Rs.
Finished goods (17000 units x Rs. 16.5778) 2,81,822
Abnormal Units (800 units x Rs. 16.5778) 13,262
Workinprogress
Material I (4000 units x Rs. 6.1955) 24,782
Material II (3200 units x Rs. 2.2268) 7,126
Labour (2400 units x Rs. 4.1667) 10,000
Overheads (1600 units x Rs. 3.9888) 6,382 48,290

Dr. Process III A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Opening 2,000 57,050 By Normal Loss 1,800 7,200
WIP
To Process 2 20,000 1,20,000 By Finished Goods
To Direct Units 17,000 2,81,822
Material II 30,000 By Closing Balance 4,000 48,290
To Direct 60,000
Labour
To Overheads 60,000
To Abnormal 800 13,262
Gain
22,800 3,37,312 22,800 3,37,312
 28

Illustration.9
The finished product of a factory pass through two
processes : the entire material being placed in process at the
beginning of the first process. From the following production and
last data relating to the first process, work out the value of the
closing inventory and the value of the materials transferred to the
second process.

Process I Rs.
Opening inventory 10,000
Material 27,500
Labour 50,000
Manufacturing Overheads 40,000
Opening inventory (25 percent complete) 4,000
Put into Process 12,000
Transferred to II Process 10,000
Closing inventory (20 percent completed) 5,000
Spoilage during process 1,000
[I.C.W.A., Final]

Solution :
Process I A/c

Particulars Kg. Amount Particulars Kg. Amount

Rs. Rs.
Opening 4,000 10,000 Transferred 10,000 1,15,750
Inventory to Process II
Material 12,000 27,500 Normal Loss 1,000 --
Labour 50,000 Closing 5,000 11,750
Inventory
Manufacturing
Overheads 40,000
16,000 1,27,500 16,000 1,27,500

Working Note :
Statement of Equivalent Production Units

Particulars Output Material Labour Overheads

Kg. Qty. % Qty. % Qty. %
Opening Stock 4,000 3,000 75 3,000 75 3,000 75
Processed
Completely 6,000 6,000 100 6,000 100 6,000 100
Processed
Normal Loss 1,000 -- -- -- -- -- --
Closing Inventory 5,000 1,000 20 1,000 20 1,000 20
16,000 10,000 10,000 10,000
 29

Statement of Element of Cost on the basis of Equivalent

Production

Particulars Cost Equivalent Cost per Unit

Rs. Units Rs.
Material 27,500 10,000 2.75
Labour 50,000 10,000 5.00
Overheads 40,000 10,000 4.00
Total 11.75

Statement of Apportionment of Cost

Particulars Elements Equivalent Cost Cost Total

Units Per Rs. cost
Unit Rs.
Rs.
Op. Stock Material 3,000 2.75 8,250
Processed
Labour 3,000 5.00 15,000
Overheads 3,000 4.00 12,000 35,250
Completely Material 6,000 2.75 16,500
Processed
Labour 6,000 5.00 30,000
Overheads 6,000 4.00 24,000 70,500
Closing Material 1,000 2.75 2,750
Inventory
Labour 1,000 5.00 5,000
Overheads 1,000 4.00 4,000 11,750
TOTAL 1,17,500

Value of goods transferred to next process

Rs. Units
Value of opening stock (given) 10,000
Additional cost on opening stock 35,250 4,000
Value of completely processed units 70,500 6,000
1,15,750 10,000

Illustration 10

ABC Limited manufactures a product ‘2X’ by using the

process normally R. T. for the month of May 2009, the following
data is available.
 30

Process R. T.
Material Introduced 16,000 units
Transfer to next process 14,000 units
Work-in-Process 4,000 units
At the beginning of the month (4/5 completed) 3,000 units
At the end of the month (2/3 completed)
Cost records:
Work-n-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 goods finished output

transferred to next process.

Defects in these units are identified in their finished state.

Materials 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 :
(1) Statement of equivalent production (average cost method)
(2) Statement of cost and distribution of cost
(3) Process accounts
[C.A. PCE. Nov. 2007]
Solution :
Statement of Equivalent Production (average cost method)

Input Particulars Output Equivalent Production

units Units
Materials Conversion cost
% completed Equivalent % Equivalent
Units Complet Units
ed
4000 Opening WIP -- --
16000 Introduced and 14,400 100 14,400 100 14,400
Completed to
next
Normal 1,440 100 1,440 100 1,440
spoilage
Abnormal 1,160 100 1,160 100 1,160
spoilage
Closing WIP 3,000 100 3,000 66.67 2,000
20000 20000 20000 19000
 31

Statement showing cost of each element

Particulars Materials Conversion

cost
Opening 30,000 29,200
Cost in process 1,20,000 1,60,800
Total (a) 1,50,000 1,90,000
Equivalent Units (b) 20,000 19,000
Cost per unit (a ÷ b) 7.50 10.00

Statement showing distribution of cost

Particulars Equivalent Cost per (Rs.)

Units unit
Units completed
Materials 14,400 7.50 1,08,000
Conversion cost 14,400 10.00 1,44,000 2,52,000
Normal spoilage 1,440 17.50 25,200
(10 %)
Closing stock :
Material 3,000 7.50 22,500
Conversion cost 2,000 10.00 20,000 42,500
Abnormal Stock:
Material 1,160 7.50 8,700
Conversion Stock 1,160 10.00 11,600 20,300

Dr. Process A/c. Cr.

Particulars Rs. Particulars Rs.

To Opening WIP 59,200 By Profit and Loss
A/c.
To Material 1,20,000 (abnormal) 20,300
Introduced
To Conversion cost 1,60,800 By Transfer to Next 2,77,200
Incurred Process
By Closing WIP 42,500
340000 3,40,000

Illustration.11

GH & Co. manufactures a product. The process costing is

followed and work-in-progress stocks at the end of each month are
valued at FIFO basis.

At the beginning of the month of June, the inventory of work-

in-progress showed 400 units, 40% complete, valued as follows:
 32

Rs.
Material 3,600
Labour 3,400
Overheads 1,000
Total 8,000

In the month of June, materials were purchased for Rs.

75,000. Wages and overheads in the month amounted to Rs.
79,800 and Rs. 21,280 respectively. Actual issue of material to
production was Rs. 68,500. Finished stock in the month was 2500
units. There was no loss in process.

All the end of the month, the work-in-process inventory was

500 units, 60 percent complete as to labour and overheads and 80
% complete as to materials.

Prepare a Process Account for recording the month’s

transactions and prepare a Process Cost Sheet showing total and
units costs
[I.C.W.A., Final]
Solution:

Dr. Process A/c. Cr.

Particulars Units Rs. Particulars Units Rs.

To Opening 400 8,000 BY Transfer to
Stock
To Material 2,600 68,500 Finished stock 2,500 1,56,094
To Labour 79,800 By Work-in-
To Overheads 21,280 Progress 500 21,486
3000 1,77,580 3000 1,77,580

Working Note :

Statement of Equivalent Production (Units)

Input Particulars Outp Material Labour Overhead

ut Qty. % Qty. % Qty. %
400 Opening 400 240 60 240 60 240 60
Stock
Completely
2600 Processed 2,100 2,100 100 2,100 100 2,100 100
Work-in- 500 400 80 300 60 300 60
Progress
3000 3,000 2,740 2,640 2,640
 33

Working Note :
(1) For opening stock also equivalent production has been
calculated as it was partly complete and it has to be
converted into finished product in this period. They were
completed 60 % in this period.

(2) Total units produced in a month are 2,50 units. Out of this
400 units of opening stock has been deducted because they
have been partly processed in this particular month and we
have already calculated equivalent units of opening stock.
Only, 2,100 units have been introduced and completed in the
particular period.

(3) For closing stock also equivalent production in terms of total

units completed has been calculated.

Statement of Element of cost on the basis of Equivalent Units

Cost Equivalent Cost per

Rs. Units unit
Rs.
Material 68,500 2.740 25.000
Labour 79,800 2.640 30.2273
Overheads 21,280 2.640 8.0606

Statement of Apportionment of Cost

Particulars Equivalent Cost Details Total
Units Per Unit Rs. Rs.
Rs.
Op. Stock Material 240 25.0000 6,000
Processed
Labour 240 30.2273 7,255
Overheads 240 8.0606 1,935 15,190
Completely Material 2,100 25.0000 52,500
Processed
Labour 2,100 30.2273 63,477
Overheads 2,100 8.0606 16,927 1,32,904
Work-in- Material 400 25.0000 10,000
Process
Labour 300 30.2273 9,068
Overheads 300 8.0606 2,418 21,486
TOTAL 1,69,580

Total Cost of 2500 units

Rs.
Cost of opening stock 8,000
Additional cost of opening stock processed 15,190
Cost of completely processed 1,32,904
1,56,094
 34

Illustration 12

The following data is available in respect of Process I for

February 1990.

(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
(4) Direct wages incurred Rs. 16,7540
(5) Production overheads 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 stage
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 80 % of the total input (opening
stock plus units put in)
(10) Scrap value is Rs. 4 per unit

You are required to :

(a) Compute equivalent production
(b) Calculate the cost per equivalent unit for each element
(c) Calculate the cost of abnormal loss (or gain), closing work in
process and the units transferred to the next process using
the FIFO method.
(d) Show the Process Account for February 1990
[C.A., Inter]
 35

(a) Statement of Equivalent Production (FIFO Method)

input Output Equivalent

Particulars Particulars Material Labour &
units Units
Overheads
Units % Units %
Op. Stock Units
of completed
W.I.P. 800 Work on Op. 800 -- 320 40
stock
Units New units 7100 7100 100 7,100 100
9,200 Closing stock 900 900 100 630 70
Introduced
Normal Loss 800 -- --
Abnormal 400 400 100 320 100
Loss
10,000 10,000 8,400 8,370

(b) Statement of cost per equivalent units for each element

Particulars Cost Equivalent Cost Per

Rs. Unit Unit
Material 36,800
Less : Scrap
realization
(800 units @ Rs. 4) 3,200 33,600 8,400 4.00
Labour 16,740 8,370 2.00
Overheads 8,370 8,370 1.00

I Statement showing cost of abnormal loss, closing WIP and units

transferred to the next process :

Particulars Cost per Equivalent Total cost

unit Rs. unit Rs.
Abnormal Loss
Materials 4.00 400 1,600
Labour 2.00 320 640
Overheads 1.00 320 320
2,560
Closing WIP
Material 4.00 900 3,600
Labour 2.00 630 1,260
Overheads 1.00 630 630
7900 units transferred to next 5,490
process
(i) Cost of opening WIP (80 units) 4,000
(ii) Cost incurred on opening WIP
Material -- --
Labour 2.00 320 640
Overheads 1.00 320 320
960
 36

(iii) Cost of completing 7100 units

Material 4.00 7100 28400
Labour 2.00 7100 14200
Overheads 1.00 7100 7100
49700
Total (I + ii + iii) 54600

Dr. Process A/c. for February 1990 Cr.

Particulars Units Rs. Particulars Units Rs.

To Opening 800 4000 By Finished 7900 54660
WIP Goods
To Materials 9200 36800 By Closing WIP 900 5490
To Labour -- 16740 By Normal Loss 800 3200
To Overheads -- 8370 By Abnormal 400 2560
Loss
10000 65910 10000 65910

1.8 EXERCISE

1.8.1 Objective type:

Answer in Brief
1. State any four features of process costing.
2. Define process costing,
3. What do you mean by normal loss ? How is it treated in
process cost accounts?
4. What do you mean by abnormal loss ? How is it treated in
process cost accounts?
5. Distinguish between normal loss and abnormal loss.
6. What do you mean by abnormal effective? How is it treated
in process cost accounts?
7. What do you mean by inter process profit? What purpose
does it serve?
8. What do you mean be equivalent production?
9. Name any four industries in which process costing is
applicable?
10. Enumerate any two advantages of process costing.
11. Enumerate any two disadvantages of process costing.
12. What do you meant by equivalent units?
 37

Multiple Choice Questions

1. The type of spoilage that should not affect the cost of
inventories is
(a) Abnormal spoilage (c) Seasonal spoilage
(b) Normal spoilage (d) Indirect spoilage

2. Materials may not be put into process

(a) At the beginning of an operation
(b) Continuously
(c) At the end of the operation
(d) In the shipping department.

3. Process cost method is especially suitable for

(a)Custom production (c) FIFO
(b) Standard costs (d) LIFO

4. In process costing, costs follow

(a) Price rise (c) Product flow
(b) Price declines (d) Finished goods

5. When average costing is used, the opening inventory costs

are
(a) Kept separate from the costs for the new period
(b) Added to the costs of the new period
(c) Subtracted from the new costs
(d) Averaged with other costs to arrive at total cost.

6. A disadvantage of FIFO costing is that

(a) The first units produced cannot be distinguished from
later production.
(b) Several units costs are used at the same time.
(c) The units have to be kept separate
(d) The shipping costs are higher

7. Which of the following method of costing can be used in a

large oil refinery?
(a) Process costing (c) Unit costing
(b) Operating costing (d) Job costing
 38

8. Which of the following paid is odd :

(a) Construction-Contract costing
(b) Ship-building-Job costing
(c) Brick manufacturing – Process costing
(d) Transport undertaking – Operating costing

9. A product which has practically no sales or utility value is

(a) Waste (c) Spoilage
(b) Scrap (d) Defectives

10. Trimmings in timber industry should be treated as a :

(a) Waste (c) Spoilage
(b) Scrap (d) Defectives

11. The type of process loss that should not affect the cost of
inventory is
(a) Abnormal loss (c) Seasonal loss
(b) normal loss (d) standard loss

12. The stage where joint products are separated from each
other is known as
(a) break-even point (b) angle of incidence
(c) split-off point

13. Fifty units are put in a process at a total cost of Rs. 90.
Wastage is normally 10% without any scrap value. If output
is 40 units the amount of abnormal loss would be
(a) Rs. 80 (c) Rs. 10
(b) Rs. 8 (d) Rs. 9

14. Abnormal loss is charged to

(a) process account (b) costing profit and loss account
(c) Normal loss account

(Answers: 1(a), 2 (d), 3 (b), 4(c), 5(a), 6(b), 7(a), 8(c), 9(a),
10(b).)11 (a), 12(c), 13 (c), 14(b) )
 39

1.8.2 Short notes

1. Write a short note-Inter process profits.(Apr-08)
2. Write a Short Note-Treatment of losses in Process.(Apr 07)
3. Write a short Note-Equivalent Production. (Apr-07)
4. Describe the main features of process costing.
5. Explain the features of process costing
6. How would you treat abnormal gain ?

1.8.3. Long questions

2. What do you mean by inter-process profits in process cost
accounts.
3. Explain the methods to be adopted in the treatment of joint
products and by-products in process account.
4. What do you understand by `Normal’ and `Abnormal’ Wastage
during the process of manufacture?
5. Describe briefly the method known as Process Costing, stating
four types of manufactures which would be suitable for its
application. A description of the method of dealing with by-
products is not required.
6. Explain the concept of Equivalent Production. Discuss the two
methods of its valuation.

1.8.4 Practical Problems

Illustration 1:
During a particular period 2,000 units at a cost of ` 60,000 were
introduced into Process ‘A’ (at the beginning). The normal loss was
estimated at 5% of the input. At the end, 1,400 units were produced
and transferred to the Process ‘B’, 460 units being partially
completed and 140 units scrapped. The partially completed units
had reached the following state of production:
Materials 100% complete
Labour 50% complete
Overheads 50% complete
Additional costs incurred during the process were:
Materials Rs. 17,000
Labour Rs.33, 400
Overheads Rs. 16,700
The units scrapped realised Rs.10 per unit.
Prepare Process ‘A’ A/c with all relevant statements.

(Ans.: Equivalent Units, Material: 1,900, Labour: 1670, Overheads: 1,670

Transfer to Process B 1,400 units @Rs. 70 p.u.)
(M.Com. Mar. 2002)
 40

Illustration 2 :

XYZ Ltd. is engaged in process industry. During the month August

2000, 2000 Units were introduced in process ‘X’. The normal loss
was estimated at 5% of input. At the end of the month 1,400 units
had been produced and transferred to process ‘Y’. 460 units were
incomplete and 140 units, after passing through fully the entire
process had to be scrapped. The incomplete units had reached the
following state of completion:

Materials 75% Completed

Labour 50% Completed
Overheads 50% Completed

Following are the further information on the process ‘X’ :

Cost of the 2000 units Rs. 58,000

Additional Direct materials Rs. 14,400
Direct Labour Rs. 33,400
Direct Overheads Rs. 16,700
Units scrapped realised Rs. 10 each
Prepare statement of equivalent production, statement of cost,
statement of evaluation and process ‘X’ account.
(M.Com. Mar. 2005)

Ans. (Equivalent Units, Material: 1,785, Labour: 1,670, Overheads: 1,670)

Illustration 3 : (FIFO)
The following information is available for Process IV of Swastik
Fabrications Ltd. for the month of March 2005.
Opening Stock: 4,800 units @ Rs.16,500
Degree of Completion: Material 70%
Labour 60%
Overheads 60%
Transfer from Process III: 30,600 units @ Rs. 30,600
Transfer to Process V: 27,600 units
Direct Material introduced in Process IV: ` 13,440
Direct Labour introduced in Process IV: ` 39,420
Production overheads incurred ` 52,560
Units scrapped: 2,400
Degree of completion: Material 100%
Labour 70%
Overheads 70%
 41

Closing stock 5400 units

Degree of completion: Material 60%
Labour 40%
Overheads 40%

There was a normal loss of 10% of production in the process.

Unites scrapped were realised at Re. 1 per unit. From the above
information prepare:
1) Statement of equivalent production
2) Cost of equivalent unit for each element of the cost, the
loss, the work-in-process, etc.
3) Process account using FIFO method.
(M.Com. Oct. 2005)
Ans. (Equivalent Units, Material I: 27,600, Material II: 26,880, Labour: 26,460,
Overheads: 26,460)

Illustration 4 : (FIFO)

The following data pertains to Process I for March 2003 of Beta

Limited :

Particulars Units Rs.

Opening Work-in-Progress … … … … ... 1,500 15,000
Degree of completion :
Materials 100%; Labour and
overheads 33⅓%
Input of Materials … … … … ... 18,500 52,000
Direct Labour … … … … ... 14,000
Overheads … … … … ... 28,000
Closing Work-in-Progress … … … … ... 5,000

Degree of Completion Materials 90% and Labour and Overheads

30%.
Normal Process Loss is 10% of total input (opening work in
progress units + units put in).
Scrap value 2.00 per unit.
Units transferred to the next process 15,000 units.
You are required to:
1) Compute equivalent units of production.
2) Compute cost per equivalent unit for each cost element i.e.,
materials, labour and overheads.
3) Compute the cost of finished output and closing work-in-
progress.
4) Prepare the process and other Account.
 42

Assume:
i) FIFO Method is used by the Company.
ii) The cost of opening work-in-progress is fully transferred to the
next process.
(M.Com. Mar.2006)

Ans. (Equivalent Units, Material: 16000, Labour:14,000, Overheads: 14,000)

Illustration 5: (Weighted Average)

From the following details prepare Statement at Equivalent

Production, statement of Cost and find the value of: (a) Output
transferred and (b) Closing work in progress

Opening work in progress (units) 2,000

Materials (100% Complete) 7,500
Labour (60 % Complete) 3,000
Overheads (60% Complete) 1,500
Units introduced into this process 8,000
There are 2,000 units in process at the end and the stage of
completion is estimated to be :
Materials 100%
Labour 50%
Overheads 50%
8,000 units are transferred to next process.
The process costs for the period are:
Materials Rs. 1, 00,000
Labour Rs.78,000
Overheads Rs. 39,000
(M.Com. Oct. 2006)

Ans. (Equivalent Units, Material:10,000, Labour: 9,000, Overheads: 9,000)

Illustration 6 : (Average)

Shete and Shete Pvt. Ltd. gives the following particulars relating to
process ‘P’ in its plants for the month of January 2007 :
 43

Particulars Rs. Rs.

Work-in-Progress (500 units) on
01-01-2007
Material (100%) ………… 12,000 -
Degree of Completion Labour (50%) ………… 7,200 -
Overheads (50%) ………… 16,000 35,200
Units introduced during the Month
January, 2007 – Units – 19,500 ………… - -
Processing Cost incurred during the
Month
January, 2007 Materials ………… 4,65,500 -
Labour ………… 1,80,000 -
Overheads ………… 2,64,800 9,10,300

Particulars Units
Output transferred to Process Q ………… 18,200
Units Scrapped (Degree of Completion Material 100%, 1,400
Labour 80% and Overheads 80%) ………… 400
Work-in-Progress (Closing Balance) …………
(Degree of Completion-Materials 100%, Labour and Overheads
50%)

Normal loss in processing is 5% of total input and scrapped units

fetch 2.50 each. Prepare the following statements for Process ‘P’
for January, 2007 :
a) Statement of Equivalent Production
b) Statement of Cost and Statement of Evaluation
c) Process ‘P’ A/c
d) Abnormal Loss A/c
Use Average Method
(Mar. 07, adapted)
Ans. (Equivalent Units, Material: 19,000, Labour: 18,720, Overheads: 18,720)

Illustration 26 : (FIFO – No Losses)

Avdoot Ltd., a manufacturer of a specialized product, is have

a process costing system. The stock of work-in-progress at the end
of each month is valued on First in First Out (FIFO) basis. At the
beginning of January 2008 the stock of work-in-progress was 2000
units (40% completed) which was valued as :
 44

Material Rs. 18,000

Labour Rs. 17,000
Overheads Rs. 5,300
During the month of January 2008, actual issue of materials
for the production purpose was Rs. 3,42,500. wages and
overheads in the month of January, 2008 amounted to
Rs. 4,02,600 and Rs. 1,12,200 respectively. Finished production
taken into the stock in the month was 12,500 units. There was no
loss in the process. At the end of the month of January, 2008 the
stock of Work-in-Progress was 2500 units (60% complete as to
Labour and Overheads and 80% complete as to materials).
Prepare the following statements for January, 2008.
a) No. of units introduced in the process b) Statement of Equivalent Production
c) Statement of Cost d) Statement of Evaluation
e) Process Account.
(Apr. 08, adapted)
(Equivalent Units, Material: 13,700, Labour: 13,200, Overheads:
13,200)

Illustration 27 : (FIFO – Process A/c with Abnormal Loss)

From the following information prepare Process account as per
FIFO assumption:
Opening stock Degree of completion
80 units @ ` 6 per unit Rs. 4,800 Material 60%
Labour 40%
Overheads 40%
Transfer from previous process : 12,000 units costing Rs. 16,350
Transfer to next process : 9,700; Units scrapped 1,300 units
Normal loss 10%; Closing stock : 1,800 units
Degree of completion
For units scrapped : For closing stock :
Material 100% Material 60%
Labour 50% Labour 50%
Overheads 50% Overheads 50%
Scrap realised Re. 1.00 per unit
Other information `
Material 10,500
Labour 20,760
Overheads 16,470
(M.Com, Oct. 2008, adapted)
(Ans. Equivalent Units, Material I: 10,900, Material II: 10,500, Labour: 10,380,
Overheads: 10,380)