Cost-Management-Accounting-System 2

11/30/23, 2:49 PM Cost-Management-Accounting-System 2
Statement of Evaluation
Opening WIP (for completion) Rs. Rs.

Material – B 400 units @ Rs. 4 1,600
Wages ---- 800 units @ Rs. 2 1,600
Overheads ---- 800 units @ Rs. 1 800 4,000
Closing WIP
Material A ---- 5,000 Units @ Rs. 8 40,000
Material B ---- 3,500 Units @ Rs. 4 14,000
Wages ---- 2,500 units @ Rs. 2 5,000
Overheads ---- 2,500 units @ Rs. 1 2,500 61,500
Units completely processed during the 6,90,000

period ---- 46,000 units @ Rs. 15
Abnormal Gain 500 Units @ Rs. 15 7,500
Process II Account
Particulars Units Amount Particulars Units Amount

Rs. Rs.
To Balance b/d 2,000 25,750 By Normal 2,500 7,500
Loss
To Process I A/c 53,000 4,11,500 By Process 48,000 7,19,750
III A/c
(6,90,000 +
4,000 +
25,750)
To D. Materials 1,97,600 By balance 5,000 61,500
c/d
To D. Wages 97,600
To Overheads 48,800
To Abnormal 500 7,500
Gain
Total 55,500 7,88,750 Total 55,500 7,88,750
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Following information is available regarding process X for the month

of May 2016
Production Record:
Units in Process as on 01.05.2016 4,000

(All materials used; 25% complete for labour and
overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 31.5.2016 6,000
(All materials used; 33.33% complete for labour and
overhead)
Cost Record:
Work in Process as on 01.05.2016 Amount Rs.
Materials 6,000
Labour 1,000
Overhead 1,000
Cost during the month Amount Rs.

Materials 25,600
Labour 15,000
Overhead 15,000
Presuming that Average Cost method of inventory is used, prepare:

1. Statement of Equivalent Production
2. Statement showing cost for each element
3. Statement of Apportionment of Cost
4. Process cost account for Process A
Statement of Equivalent Production
Production Units Materials Labour &

Overheads
% Equiv. % Equiv.
Completion Units Completion Units
Completed 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33.33 2,000
Total 10,000 20,000 15,000
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Statement showing cost for each element

(All figures in Rs.)
Particulars Materials Labour Overhead Total
Cost of Opening WIP 6,000 1,000 1,000 8,000
Cost incurred during the 25,600 15,000 15,000 55,600
month
Total Cost (A) 31,600 16,000 16,000 63,600
Equivalent Units (B) 20,000 16,000 16,000
Cost per equivalent 1.58 1.00 1.00 3.58
unit (‘C)= (A/B)
Statement of Apportionment of Cost

Particulars Rs. Rs.
Value of output transferred (A) (14,000 50,120
units @ Rs. 3.58)
Value of Closing WIP

Material – 6,000 units @ Rs. 1.58 9,480
Labour – 2,000 units @ Rs. 1 2,000
Overheads - 2,000 units @ Rs. 1 2,000 13,480
Total Cost 63,600
Process X Account
Particulars Units Amount Particulars Units Amount

Rs. Rs.
To Opening 4,000 8,000 By Completed 14,000 50,120
WIP units
To Materials 16,000 25,600 By Closing 6,000 13,480
WIP
To Labour 15,000
To Overheads 15,000
Total 20,000 63,600 Total 20,000 63,600
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Exercise
Choose the correct option(s) for the following questions: (Answers are
highlighted in bold)
1. Total costs incur in a production process is divided by total number of

output units for calculating the
cost of indirect labor

cost of direct labor
cost of direct material
unit costs
2. Costs that are incurred in last department where product has been
processed and will be carried to next department where further
processing will be done are called
partial work costs

transferred-in costs
transferred-out costs
weighted average costs
3. Costing method which calculates per equivalent unit cost of all

production related work done till calculate date is classified as
weighted average method

net present value method
gross production method
average value method
4. If beginning work in process equivalent units are 2500 units, work

done in current period equivalent units are 3800 units and ending work
in process equivalent units are 5000 then complete equivalent units in
current period are
1800 units
1500 units
1300 units
1500 units
5. Equivalent units of production are equal to the

units completed by a production department in the period.
number of units worked on during the period by a production
department.
number of whole units that could have been completed if all
work of the period had been used to produce whole units.
identifiable units existing at the end of the period in a production
department.
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True or False:
i. Process costing is most appropriate when manufacturing large

batches of homogenous products. (True)
ii. Equivalent units are computed to assign costs to partially

completed units (True)
iii. The FIFO method combines beginning inventory and current

production to compute cost per unit of production. (False)
iv. The weighted average costing method assumes that units in

beginning inventory are the first units transferred. (False)
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4
VALUATION OF MATERIALS ISSUES
Unit Structure:
4.1 Introduction
4.2 Valuation of Material Issues - Following Aspects
4.3 Materials: Inventory Control
4.4 Labour Cost Accounting
4.1 INTRODUCTION
All receipts and issues of materials are the important aspects to continuous
flow of production. A systematic procedure should be adopted for movement
of materials from one place to another place. Materials received and
stored are issued on the basis of stores requisition, bills of materials, stock
in balance, proper authorization and pricing material issues etc. It is clear
that ascertainment of accurate material cost, fixing of material issue and
effective cost control are the primary objective in order to fulfill the needs of
management. For this reasons the following aspects considered to be the
subject matter of valuation of materials issues.
1. Valuation of total cost of materials purchased.
2. Material Issue Procedure.
3. Important methods of pricing of materials issued.
4.2 VALUATION OF TOTAL COST OF MATERIALS

PURCHASED
Material costing is very important in terms of the valuation of the cost

of materials consumed by the production department as well as in terms of
the estimation of the value of materials in stock. For costing purposes, the
material cost is worked out by the actual cost incurred by taking price
quoted by supplier as the basis subtracting the discounts and adding any
other expenses not covered. In practice discounts may be allowed by the
supplier in the following ways such as : (a) Trade Discount. (b) Quantity
Discount and (c) Cash Discount.
a. Trade Discount: Trade Discount is allowed by the seller to the buyer
who has to resell the goods. This allowance is to compensate the buyer
for the cost of storage, breaking bulk, selling repacking the goods etc.
b. Quantity Discount: This discount refers to the allowance which is
allowed by the supplier to the buyer to encourage large orders.
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Placing the large orders from the buyers gives savings in costs which
arise from large-scale production to the supplier. Part of the savings
allowed by supplier to the buyer by means of a quantity discount.
c. Cash Discount: Cash Discount is allowed by the supplier to a buyer to
encourage prompt payment of cash within the stipulated period.
2.MATERIALS ISSUE PROCEDURE

Issues of materials are based on production program. Based on this
and the bill of materials work orders are printed, listing for each material
quantity to be issued against each component requiring that material. The
storekeeper is very much concerned with the material control, as he is
responsible for the issue of materials based on the proper authorization of
material requisition and bills of materials.
Materials Requisition:
Purchase or Material Requisition is also known as Intent for Materials.
This is a document prepared by the production department for requisition
of materials is known as Materials Requisition. The storekeeper is
authorized to issue the materials based on the proper authority to avoid the
misappropriation of material. The store keeper is responsible to maintained a
record of serial number on requisition, issues and stock balances are up to
date are must be posted in stores ledger.
Bill of Materials:
Bill of materials is a document which shows a complete listing for
each material, quantity to be issued against each component requiring that
materials for a particular job order or process. Bill of Materials is prepared by
the production department before the quantity of the components to be
manufactured. This is helpful for the purpose of initiate material requisition
and estimation of cost materials to collect quotations.
3.METHOD OF PRICING OF MATERIALS ISSUES

In the relation to the estimation of the cost of the product for pricing
decisions, material issues assumes a key role. Material
price usually refers to the price quoted and accepted in the purchase
orders. Materials are issued from the stores to work orders based on the
material requisition. But stock of materials consists of different
consignment received at different dates and prices. There are different
methods used for pricing the materials issues may be summarized in the
following categories:
(A) Actual Price Method (or) Cost Price Method

(1) First In First Out (FIFO).
(2) Last In First Out (LIFO).
(3) Specific Price Method.
(4) Base Stock Method.
(5) Highest In First Out (HIFO).
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(B) Average Cost Method

(1) Simple Average Method.
(2) Weighted Average Method.
(3) Periodic Simple Average Method.
(4) Periodic Weighted Average Method.
(C) Standard Price Method.
(D) Inflated Price Method.
(E) Market Price Method (or) Replacement Price Method.
A. Actual Price Method

In this method, the materials issued are priced at their actual cost and
this involves identification of each lot purchased. This method is suitable
only in the case of materials purchased for a specific job. There are several
methods frequently used under actual cost price method which will be
discussed in details:
(1) First In First Out (FIFO): First In First Out is also known as FIFO.
Under this method, the pricing of issue is based on an assumption made
that the oldest stock is issued first. Therefore at the time of issue, the rate
pertaining to that will be applied until the whole lots is exhausted.
Advantages
(1) It is simple and easy to adaptability.
(2) It is beneficial when the prices are falling.
(3) As actual prices are issued, it reflects on profit no loss in the pricing.
(4) This method is very useful for slow moving materials.
Disadvantages
(1) Calculation becomes complicated due to fluctuation of material
prices.
(2) More chances of clerical errors due to complicated
calculations.
(3) Under fluctuating prices, one requisition involves more than one
price.
(4) In times of raising prices this method tends to show the production at
low cost since the cost of replacing the material will be higher.
Illustration: 1
From the following particulars, prepare the Stores Ledger Account
showing how the value of the issues would be recorded under FIFO
methods.
01.12.2003 Opening Stock 1,000 Units at Rs. 6 each
05.12.2003 Purchased 500 Units at Rs. 24.50 each
07.12.2003 Issued 750 Units
10.12.2003 Purchased 1,500 Units at Rs. 24 each
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12.12.2003 Issued 1,100 Units

17.12.2003 Issued 500 Units 18.12.2003 Issued 300 Units
29.12.2003 Issued 1,500 Units
Solution:
(2) Last In First Out (LIFO): This method is just opposite to First In First
Out method. The basic assumption here is that the most recent receipts
are issued first. The price of the materials to be issued would be the
cost price of the last lots of materials purchased.
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Advantages
1. It is beneficial when the period of raising prices.
2. Under this method, latest prices are issued thereby leading to lower
reported profits hence savings in taxes.
3. When there are wide fluctuations in price levels this methods tends
to minimize unrealized gains or losses in inventory.
Disadvantages
(1) This method involves more clerical work which leads to complicated
calculations.
(2) Under this method more than one price is to be adopted for the same
issue lot of material.
(3) Due to wide fluctuation of prices, comparison of cost of similar jobs
is very difficult.
Illustration: 2
Solve the illustration No.1, under LIFO method.
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(3) Specific Price Method: Specific Price Method is one of the methods of
actual price method. In this method adopted where the materials are
purchased for particular job or operation and the issue is charged with the
actual cost price. This method is suitable only in the case of special purpose
materials are purchased for a particular job. This method has been widely
used in job order industries which carry out individual jobs or contract
against specific orders.
Advantages -
(1) This method is simple and easy to operate.
(2) This method is useful where the job costing is in operation.
(3) Under this method, the actual material cost can be easily
identified.
(4) This method is desirable because actual cost of materials is
charged to production and therefore no profit no loss.
Disadvantages
(1) This method involves considerable amount of clerical work.
(2) If the purchases and issues are numerous, it is difficult to
identification of issues for a particular job.
(3) Base Stock Method: Under this method pricing is determined on
the basis of assumption made here is that a certain minimum quantity
of materials maintained in stock. This minimum quantity is known
as Base Stock or Safety Stock. This quantity cannot be used unless
an emergency arises. The minimum stock is in the nature of fixed
assets because it is created out of the first lot of the material
purchased. Therefore it always valued at the actual cost price of
the first lot and is carried forward as fixed assets. This method is
usually applied with FIFO or LIFO.
Illustration: 3
From the following details of stores receipts and issues of materials in
a manufacturing unit, prepare the stores ledger using Base Stock Method of
valuing the issues; assume base stock 200 tons.
1.1.2003 Purchased 500 tons at Rs. 2 per ton
10.1.2003 Purchased 300 tons at Rs. 2.10 per ton
15.1.2003 Issued 600 tons
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Closing Stock= 600 tons (200 x Rs. 2 + 400 x Rs. 2.10) = Rs. 1,240
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Illustration:
Solve illustration 3 Under Base Stock - LIFO method
Solution:
(5) Highest In First Out (HIFO): This method is based on the assumption
that the stock of materials should always be valued at the lowest possible
price. Accordingly materials purchased at the highest price should be used for
making the issue. This method is useful because issues are based on actual
cost. It aims at recovering the highest cost of materials when the market is
constantly fluctuating. But at the same time this method involves too many
complicated calculations. And also this method has not been adopted
widely.
Illustration: 4
From the following details of stores receipts and issues of material
"XYZ" in a manufacturing unit, prepare the Stores Ledger using Highest In
First Out Method (HIFO):
2003 January 1 Opening stock 4,000 units at Rs. 5

4 Purchased 1,000 units at Rs. 7 per unit
8 Purchased 1,200 units at Rs. 8 per unit
12 Issued 1,000 units
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15 Purchased 700 units at Rs. 10 per units

19 Purchased 300 units at Rs. 8 per unit
23 Issued 800 units
31 Issued 400 units
Solution:
Stores Ledger Account
(Highest In First Out (HIFO) Method)
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B. Average Cost Method

In this method, the issues to the production department are split into
equal batches from each shipment at stock. It is a realistic method reflecting
the price levels and stabilizing the cost price. The following various methods of
averaging issue prices may be used:
(1) Simple Average Method
(2) Weighted Average Method
(3) Periodic Simple Average Method
(4) Periodic Weighted Average Method
(1) Simple Average Method: Under this method, price of issue materials is
determined by dividing the total of the prices of the materials in stock, i.e.,
adding of different prices by the number of different prices. Then, this average
price is applied to the issues to production. This method is simple and easy to
operate. The value of closing stock becomes unrealistic. The following
formula is applied for calculation of material issue price under simple average
method:
Issue Price = Total of Unit Prices of Materials in Stock

Number of Prices
Illustration: 5
From the following prepare stores ledger account using Simple Average
Method for the month of January 2003:
January 1 Opening balance 500 units at Rs. 2 per unit

3 Issued 100 units
4 Issued 100 units
8 Issued 100 units
14 Purchased 200 units at Re. 1 per unit
16 Issued 150 units
20 Purchased 400 units at Rs. 4 Per unit
24 Issued 250 units
26 Issued 300 units
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11/30/23, 2:49 PM Cost-Management-Accounting-System 2

Opening WIP (for completion) Rs. Rs.

Units completely processed during the 6,90,000

Abnormal Gain 500 Units @ Rs. 15 7,500

Particulars Units Amount Particulars Units Amount

Following information is available regarding process X for the month

Units in Process as on 01.05.2016 4,000

Cost during the month Amount Rs.

Presuming that Average Cost method of inventory is used, prepare:

Statement of Equivalent Production

Production Units Materials Labour &

Statement showing cost for each element

Statement of Apportionment of Cost

Value of Closing WIP

Total Cost 63,600

Particulars Units Amount Particulars Units Amount

Total 20,000 63,600 Total 20,000 63,600

1. Total costs incur in a production process is divided by total number of

cost of indirect labor

partial work costs

3. Costing method which calculates per equivalent unit cost of all

weighted average method

4. If beginning work in process equivalent units are 2500 units, work

5. Equivalent units of production are equal to the

i. Process costing is most appropriate when manufacturing large

ii. Equivalent units are computed to assign costs to partially

iii. The FIFO method combines beginning inventory and current

iv. The weighted average costing method assumes that units in

4.2 VALUATION OF TOTAL COST OF MATERIALS

Material costing is very important in terms of the valuation of the cost

2.MATERIALS ISSUE PROCEDURE

3.METHOD OF PRICING OF MATERIALS ISSUES

(A) Actual Price Method (or) Cost Price Method

(B) Average Cost Method

A. Actual Price Method

12.12.2003 Issued 1,100 Units

2003 January 1 Opening stock 4,000 units at Rs. 5

15 Purchased 700 units at Rs. 10 per units

B. Average Cost Method

Issue Price = Total of Unit Prices of Materials in Stock

January 1 Opening balance 500 units at Rs. 2 per unit

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