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MEANING
1) Process :A Process means a distinct manufacturing operation or stages.
In Process Industries, the raw material goes through a number of
processes in a sequence before the finished product is finally produced.
For example production of coconut oil involve the following distinct
processes:
(1) COPRA CRUSHING (2) REFINING AND (3) FINISHING.
2) Process Costing: Process costing is method of costing used to find out
the cost of the product in each process. wheldon has defined process
costing as a method of costing used to ascertain the cost of the product
at each stage or operation of manufacture ..According to CIMA,
London-it is that form of operation costing where standardized goods
are produced
[A] ADVANTAGES
[B] DISADANTAGES
NO.
1.
PROCESS COSTING
JOB COSTING
It is period costing i.e. costs of all It is specific costing; i.e. cost of job
processes during a period are is ascertained till it ends, whatever
ascertained.
2.
3.
Direct costs are much more than Costs are directs as well as indirect.
indirect.
4.
5.
progress.
Costing
PROCUDER
PROCESS
SIMPLE
Accounting Procedure
The accounting prouder in process costing is as follows:
1. Separate Process A/c:the entire manufacturing operation is divided in
to separate stages or process. each process of production is treated as a
distinct cost centre a separate process account is opened to record the cost
incurred in such process.
process
account.
Indirect
expenses
are
Dr.
Particular
s
To
Transfer
from
(1) Earlier
Process
To
Material
To Wages
Unit Rat
s
e
Process Account
Particular
s
By Sale of
Residue
By
Transfer
to next
process /
finished
goods
To
Expenses
To
Overheads
Cr.
Unit Rat
s
e
MEANING
A manufacturing process is likely to give rise to some waste and losses. let
us first be clear about the exact meaning of these terms viz waste and
losses.
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II.
The sale value of scrap net of selling and distribution cost is deducted
from overhead to reduce the overhead rate. A variation of this method
is to deductedthe net realizable value from material cost. This method
is followed when scraps cannot be aggregated job or process-wise.
III.
CAS 6
The provision of CAS 6 (Material Cost) relating to scrap, waste, etc. are
as follows
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process
may
generate
12
are of two types, normal loss and abnormal loss. Normal loss denotes the
unavoidable or uncontrollable loss .Abnormal loss on the other hand,
denotes the avoidable or controllable loss.In actual basis , no distinction is
made between normal and abnormal loss. Hence in this method, the cost per
unit may vary from period to period. This vitiates or distorts the unit costs of
process.
Normal Basis : The normal basis of scrap accounting seeks to * enable the management
to control avoidable costs by distinguishing between the normal loss and the
abnormal loss, and avoid variations in unit costs due to change in amounts of
scrap. In this method of scrap accounting the figure of normal loss for each
process is fixed on the basis of past experience or technical data. Any loss
above this figure is treated as abnormal loss. Any loss below this figure is
treated as abnormal gains. Normal loss is treated as normal cost of
production. Normal loss is treated as normal cost of production. But cost of
abnormal loss or gain is taken out from the process account. The net
financial loss on account of abnormal loss is debited to the costing profit and
loss account. The account of abnormal Gains is credited to the costing profit
and loss account.
How is it to be
calculated
Steps What is to be
calculated
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1.
Normal Loss
2.
Normal Output
3.
Unit Cost
Normal Cost
= -----------------------Normal Output
4.
Abnormal Loss
Or
Abnormal Gains
5.
Cost
of
Output
6.
7.
Cost of Abnormal
Loss
Cost of Abnormal = Unit Cost X Units of Actual Output
Gains
= Unit Cost X Units of Abnormal Loss
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NO.
Amount
Entry
1.
Dr.
2.
Dr.
3.
Dr.
4.
Process .. Account
Dr.
To Abnormal Gains Account
5.
Actual Sale
Dr.
To Normal Loss Account
6.
Cash / Debtor
To Abnormal Loss Account
Abnormal Gain Account
Dr.
To Normal Loss Account
8.
9.
7.
Proforma
Process
{ NORMAL BASIS }
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Accounts
Units
Rate
To Material b/f
Particulars
Units
Rate
By Normal
Loss A/c
To Direct
Material
By Transfer to
next process
To Direct
Wages
To
DirectExpenses
To Overheads
Units
Rate
Particulars
By Normal
Loss A/c
By Transfer to
next process
To Direct
Expenses
To Overheads
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Units
Rate
Dr.
Cr.
Particulars
Units
Rate
To Transfer
from
(1)
Earlier Process
Particulars
Units
Rate
By Normal
Loss A/c
To Direct
Material
By Transfer to
next process
To Direct
Wages
To Direct
Expenses
To Overheads
Units
Rate
Particulars
By Actual Sale
A
By Actual Sale
B
By Actual Sale
C
By Abnormal
Gain
A/c
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Units
Rate
Units
Rate
Particulars
To Normal Loss
A/c
Units
Rate
By Process A/c
C
To Costing
Profit & Loss
A/c
Units
Rate
Particulars
To Process B
( Cost )
By Actual Sale
B
By Costing
Profit & Loss
A/c
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Units
Rate
Notes:
1.Quantity Reconciliation
Process
A
Process B
Process C
xx
xx
Xx
xx
xx
xx
Xx
xx
xx
xx
xx
xx
xx
Particulars
Input
(i)
xx
Abnormal Gain
Sale of Scrap (i ii)
Normal Cost
2.Unit Cost = ---------------------Normal Output
Cost of Process Scrap Value of Normal Loss
2.Unit Cost = -----------------------------------------------------------------Input - Normal Loss
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PROCESS
Units
Rs.
40,000 50,000
Cr.
Particular
By Transferred
to Process B
Units
30,00
0
Completion
100%
Rs.
10,000
By Closing
10,000 Work-in-process
50%
10,00
0
40,00
0
40,000 70,000
70,000
The problem now is-how to compute the units cost of the output ? If we
simply divided Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value
both the completed units at the same rate. Therefore , the unfinished units
should be converted into completed units. In the above examples, 10,000
partly finished units on which 50% of the work has been completed are
equivalent to 5,000 fully completed units. on which Such incomplete units
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STEPS
IN
CALULATION
OF
EQUIVALENT UNITS AND UNIT COST
The calculation of the equivalent units and cost of output transferred to
process B will be worked out as follows:
Step 1 : Reconcile Input and Output
We should consider the physical flow of production the units of input and
output. In the above example, Input is 40,000 units and output is (i) 30,000
units transferred to process B and (ii) 10,000 units of closing work in
process. The total output of 40,000units agrees with the total input of 40,000
units. However, the output is not all of fully competed units. To make the
output and input comparable, we must convert the production into
Equivalent Units.
Step 2 : Calculate Equivalent Units.
Completed units
= 30,000
= 5,000
Equivalent Units
= 35,000
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= Rs.60,000
= Rs.10,000
=Rs.70,000
This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).
Qty.Reconciliation
Input
Output
Material[M]
%
EU
Labour[L]
%
EU
Overheads[O]
%
EU
40,000
30,000
10,000
40,000
100
50
40,000
30,000
5,000
100
50
35,000
30,000
5,000
35,000
100
50
30,000
5,000
35,000
Material
50,000
-50,000
35,000
1.43
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Labour
10,000
-10,000
35,000
0.29
Overheads
10,000
-10,000
35,000
0.29
Total
70,000
-70,000
2.00
Next
EU
CPU
30,000
2.00
5,000
5,000
5,000
70,000
1.43
0.29
0.29
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Rs.
Total (Rs.)
60,000
7,143
1,429
1,428
10,000
weighted average method, the work done in the past is treated as if done in
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the current period. The closing WIP under this method is made of the
average costs of opening WIP and current production.
FIFO MEHTOD
The method is based on the assumption that the materials in process moves
on a first-in, first-out basis. FIFO method assumes that the work on the
opening stock is before the materials put into the process during the current
period are taken up. The units completed during the process being usually
more than the opening stock, it is assumed that no units from the opening
work-in-process will be left incomplete and so none of them will find place
in the closing work in-process. Under the FIFO method, the cost of work
completed in a period are worked out in two parts. i.e. separately for (a)
opening work-in-process competed, and (b) units started and completed in
the period. Under the FIFO method, cost of closing WIP is based on the cost
of the current production only. In the FIFO method, the procedure of
calculation of equivalent units is different as the units competed from
opening work-in-process and from current production have to be accounted
for separately.
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ILLUSTRATIONS
Let us consider the following example to understand the procedure of
valuation under these two methods.
Illustration 6: (Average)
Process A
Period
September, 2003
Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000
Units brought into process- 50,000.
Cost incurred
- Material
Rs. 60,000
- LabourRs. 25,000
- Overheads
Rs. 15,000
Transfer to process: 40,000 Competed units (entirely competed production)
Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the
value of closing W-I-P.
Solution:
Step 1: Quantity Reconciliation:
Particulars
Opening work-in-process(40%)
Units started
Units
10,000
50,000
60,000
Particulars
Units completed
Closing work-inprocess(75%)
Units
40,000
20,000
60,000
Units
40,000
15,000
55,000
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It should be noted that in calculating the equivalent units under the weighted
average method, the work done in the past is taken to have been done in the
current period.
Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000.
Step 4: Cost per equivalent unit = Rs. 1,10,000 55,000 = Rs. 2
Step 5: Cost competed units transferred to process = 40,000Rs.2 = Rs.
80,000
Cost of closing work-in-process = 20,000 75% Rs.2
Rs.
30,000
Rs. 1,
10,000
[Average Method]
1.
2.
3.
4.
Opening Work-in-Process
Fresh Units Introduced
Units Tfd. to Next Process
Closing Work-in-Process
Total Units of [A]
Qty.Reconciliatio
n
Input
Output
Labour[L]
%
EU
Overheads[O]
%
EU
10,000
50,000
60,000
40,000
20,000
60,000
100
75
28
40,000
15,000
55,000
100
75
40,000
15,000
55,000
100
75
40,000
15,000
55,000
Labour
-25,000
Overheads
-15,000
25,000
15,000
55,000
0.45
55,000
0.27
Total
10,00
0
1,00,00
0
1,10,00
0
2.00
EU
CPU
40,000
2.00
15,000
15,000
15,000
1.27
0.45
0.27
Rs.
Total
(Rs.)
80,000
19,091
6,818
4,091
30,000
1,10,000
Process A Account
Particulars
Work-inprocess(b/f)
Material
Labour
Overhead
Units
10,00 40%
0
50,00
0
Cr.
Rs.
Particulars
Transferred to
10,000 Process B
60,000
Work-in25,000 process(c/f)
15,000
29
Units
40,00 100%
0
75%
20,00
0
Rs.
80,000
30,000
60,00
0
1,10,000
60,00
0
1,10,000
EVALUATION OF METHOD
[1] Average Method:
(1) The weighted average method is simpler of the two and is widely used in
practice
(2) But, Average method mixes up the costs in different period and does not
correctly reflect the extent of change of costs from period to period.
[2] FIFO Method:
(1) FIFO method is more suitable from the point of view of control as the
past and current costs are separated.
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that the net debit to the process is the cost of abnormal gains less the value
of scrap for the normal loss.
34
Case study
VOX is a company that assembles camcorders from components bought in
from suppliers. A camcorder component kit is issued from stores to the
assembly line when another camcorder has to be assembled.
There are partially completed camcorders (WIP) at the end of each month.
Incomplete camcorders are assembled in order of completeness, ie the one
closest to completion is finished first, the second closest to completion next,
etc.
The following data was obtained for June:
Opening WIP: 25 component kits - GBP2,000 (100% complete all
components issued to factory); assembly work done in the previous
month - GBP1,800 (60% complete); total value of opening WIP:
GBP3,800
Costs incurred: 100 components kits - GBP8,200; assembly line GBP10,450
Output: 95 camcorders
Closing WIP: 30 component kits - 100% complete; assembly work 50% complete.
The value of WIP is determined in relation to the components issued to the
factory and the extent to which a camcorder has been assembled. All
components required to make a camcorder are issued to the factory at the
start of the assembly process. So opening and closing WIP are 100%
complete in terms of components.
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output
95
Opening WIP
25
70
The next step is to calculate the number of equivalent units for components.
The figure for opening WIP is 0, since no more components were issued to
these partially completed products. A figure of 70 is included for the 70
camcorders started and completed in June; 30 is included for closing WIP
since all the components required to assemble these camcorders were issued
in June. The total equivalent units for components is 100 (table 2).
The calculation of equivalent units for assembly is not as simple since the
assembly work is not 100% for opening and closing WIP. A figure of 10 is
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included for opening WIP since this represents the remaining work (40%)
that had to be done in June ie 25 x (100% - 60%); 70 is included for the
camcorders started and completed in June; 15 (30 x 50%) is included for the
assembly work undertaken in June in relation to the closing WIP. The total
equivalent units for assembly work is 95 (table 2).
Assembly
10
70
70
Output
70
80
Closing WIP
30
15
Opening
WIP
100
95
The cost of an equivalent unit for components and assembly for June is:
Component kits: GBP8,200 / 100 ie GBP82 per equivalent unit
Assembly: GBP10,450 / 95 ie GBP110 per equivalent unit.
The value of output is obtained by multiplying the equivalent units by the
cost per equivalent unit for components and assembly then adding these
figures to opening WIP:
Output: GBP3,800 + (10 x GBP110) + (70 x GBP82) + (70 x
GBP110) ie GBP18,340 (Table 3).
The value of closing WIP is obtained by multiplying the equivalent units by
the cost per equivalent unit for components and assembly:
Closing work: (30 x GBP82) + (15 x GBP110) ie GBP4,110 (Table 3).
Table 3: Valuation of output and closing WIP
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Total
Component
Assembly
s
Opening
WIP
GBP3,800
GBP1,100
GBP0
GBP1,10
GBP13,44
GBP5,740
GBP7,70
0
June output
GBP18,34
0
Closing WIP
GBP4,110
GBP2,460
GBP1,65
0
The above figures are then used to prepare the process account for June
(Table 4).
Table 4: Process account
June process account
Opening
WIP
GBP3,800
Output
GBP18,340
Components
GBP8,200
Closing WIP
GBP4,110
Assembly costs
GBP10,450
GBP22,450
GBP22,450
Process costing uses actual costs to value output and closing WIP. It
consequently provides little information about performance since it doesnt
compare actual performance against a benchmark, ie standard cost.
An analysis must be undertaken to gain an insight into performance. The
analysis for June revealed:
Average cost of a component kit has increased from GBP80 (Opening WIP:
GBP2,000 / 25) to GBP82
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