The cost accounting system used by process is called process costing.
To prepare bread, we need mixing of white flour, ghee, sugar, eggs, baking powder etc.
From this mixture, different size of bread can be prepared.
These sized are baked in oven.
Baked bread cut and packed.
Process costing is applied in the oil refinery, chemical, timber, textile, sugar mill and food processing industries.
These companies set the right prices for their products and determine whether costs are tracking in line with forecasts.
A separate process account is prepared for each process.
Materials, labour, overhead, machine expenses etc are debited in each process.
Process costing helps to determine the cost of their products at each stage of the process of manufacturing.
It helps to control costs, evaluate performance and check the products at each stage.
Sometime opening stock and closing stock are given with their value.
In such a condition, a separate process stock account is opened.
Generally, the value of opening stock is given in the question but value of closing stock is to be determined on the basis of output cost.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3A
ABC Process Manufacturing Company has following information:
Process |
Output |
Normal loss |
Scrap per unit |
|
X |
4,700 |
8% |
$50 |
|
Y |
4,300 |
5% |
$100 |
|
5,000 units were introduced @ $60 per unit in process X. Other expenses were:
Particulars |
Process X |
Process Y |
|
Direct wages |
$120,000 |
$80,000 |
|
Direct expenses |
$80,000 |
$60,000 |
|
Other expenses |
$72,000 |
$32,200 |
|
Stock positions were: |
|
|
|
Opening stock |
100 units |
250 units |
|
Value per unit |
$100 |
$140 |
|
Closing stock |
200 units |
Nil |
|
Closing stock is valued on the basis of output cost. |
|
Required: (1) Process X account; (2) Process X stock account; (3) Process Y Account; (4) Process Y stock account
[Answer: PX = transfer to PX stock 4,700 units, $564,000;
PY = 4,600 units, $550,000;
PY = transfer to PY stock 4,300 units, $688,000;
FG = 4,550 units, $723,000]
SOLUTION:
Process X Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Materials input |
5,000 |
300,000 |
By Normal loss |
400 |
20,000 |
To Direct wages |
|
120,000 |
[5,000@8% x $50] |
|
|
To Direct expenses |
|
80,000 |
By Process X stock account |
4,700 |
564,000 |
To Other expenses |
|
72,000 |
[@ $120] |
|
|
To Abnormal gain |
100 |
12,000 |
|
|
|
|
5,000 |
584,000 |
|
5,000 |
584,000 |
Given and working note:
1. Normal loss units
= 5,000 @ 8%
= 400 units
2. Abnormal gain units
= Normal loss + output – input
= 400 + 4,700 – 5,000
= 100 units
3. Value of abnormal gain
= (Normal cost ÷ Normal output) x Abnormal gain units
= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units
= ($572,000 – $20,000) ÷ (5,000 units – 400 units) x 100 units
= ($552,000 ÷ 4,600 units) x 100 units
= $12,000
Process X Stock Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Opening stock @ $100 |
100 |
10,000 |
By Closing stock @ $120 |
200 |
24,000 |
To Process X account |
4,700 |
564,000 |
By Process Y account |
4,600 |
550,000 |
|
4,800 |
574,000 |
|
4,800 |
574,000 |
Process Y Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process X stock account |
4,600 |
550,000 |
By Normal loss account |
230 |
23,000 |
[From Process X stock A/c] |
|
|
[4,600@5% x $100] |
|
|
To Direct wages |
|
80,000 |
By Abnormal loss account |
70 |
11,200 |
To Direct expenses |
|
60,000 |
By Process Y stock account |
4,300 |
688,000 |
To Other expenses |
|
32,200 |
[@ $160] |
|
|
|
4,600 |
722,200 |
|
4,600 |
722,200 |
Given and working note:
1. Normal loss
= 4,600 @ 5%
= 230 units
2. Abnormal loss units
= Input – normal loss – output
= 4,600 – 230 – 4,300
= 70 units
3. Value of abnormal gain
= (Normal cost ÷ Normal output) x Abnormal gain units
= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units
= ($722,200 – $23,000) ÷ (4,600 units – 230 units) x 70 units
= ($699,200 ÷ 4,370 units) x 70 units
= $11,200
Process Y Stock Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Opening stock @ $140 |
250 |
35,000 |
By Finished goods account |
4,550 |
723,000 |
To Process X account |
4,300 |
688,000 |
|
|
|
|
4,550 |
723,000 |
|
4,550 |
723,000 |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3B
XYZ Process Company has following data:
Process A: |
||
|
Materials M |
10,000 kg @ $30 per kg |
|
Materials N |
6,000 kg @ $35 per kg |
|
Materials O |
4,000 kg @ $40 |
|
Normal loss is 5% |
@ $30 per kg |
|
Output is 19,400 kg. |
Machine hour 20,000 hours @ $20 per hour |
Process B: |
|
|
|
Materials X |
4,000 kg @ $70 per kg |
|
Materials Y |
4,000 kg @ $125 per kg |
|
Materials Z |
2,600 kg @ $110 |
|
Normal loss is 10% |
@ $100 per kg |
|
Output is 25,000 kg. |
Machine hour 40,000 hours @ $30 per hour |
Additional information:
a. Labour expenses $300,000 is divided on the basis of machine hours
b. 20,000 kg finished goods is sold @ $200 per kg.
c. Administrative expenses are $150,000
d. Selling expenses @ $5 per unit
Required: (1) Process A account; (2) Process B account; (3) Normal loss account; (4) Abnormal gain account;
(5) Abnormal loss account; (6) Profit and loss before abnormal gain or loss; (7) Profit and loss after abnormal gain or loss
[Answer: (1) PA: Transfer to PB 19,400 kg, $11,64,000;
Transfer to PB = 19,400 kg, $11,64,000;
(2) PB: NL = 3,000 kg, $300,000; AL = 2,000 kg, $240,000;
Transfer to FG 25,000 kg, $30,00,000;
(3) NL = 600 kg @ $30 and 3,000 kg @ $100;
(4) AG: P & L (Dr, profit) $12,000;
(5) AL = (Cr, gain) $40,000; (6) Net profit = $750,000;
(7) Net profit = $722,000]
SOLUTION:
Given and working note:
Machine hour ratio |
= 20,000: 40,000 or 1:2 |
Labour expenses |
= $ 300,000 |
Process A |
= 300,000 x 1/3 = 100,000 |
Process B |
= 300,000 x 2/3 = 200,000 |
Process A Account
Particulars |
Kg |
Amount |
Particulars |
Kg |
Amount |
|
To Materials: |
M |
10,000 |
3,00,000 |
By Normal Loss |
1,000 |
30,000 |
|
N |
6,000 |
2,10,000 |
[20,000@5% x $30] |
|
|
|
O |
4,000 |
1,60,000 |
By Process B account |
19,400 |
11,64,000 |
To Machine expenses |
|
4,00,000 |
|
|
|
|
To labour expenses |
|
1,00,000 |
|
|
|
|
To Abnormal gain account |
400 |
24,000 |
|
|
|
|
|
20,400 |
11,94,000 |
|
20,400 |
11,94,000 |
1. Normal loss
= 20,000 @ 5%
= 1,000 kg
2. Abnormal gain kg
= Normal loss + Actual output – Input
= 1,000 + 19,400 – 20,000
= 400 kg
3. Value of abnormal gain
= (Normal cost ÷ Normal output) x Abnormal gain units
= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units
= ($11,70,000 – $30,000) ÷ (20,000 units – 1,000 units) x 400 units
= ($11,40,000 ÷ 19,000 units) x 400 units
= $24,000
Process B Account
Particulars |
Kg |
Amount |
Particulars |
Kg |
Amount |
To Process A account |
19,400 |
11,64,000 |
By Normal Loss A/c |
3,000 |
3,00,000 |
To Materials: |
|
|
[30,000@10% x $100] |
|
|
X |
4,000 |
2,80,000 |
By Abnormal loss A/c |
2,000 |
2,40,000 |
Y |
4,000 |
4,10,000 |
By Finished goods A/c |
25,000 |
30,00,000 |
Z |
2,600 |
2,86,000 |
|
|
|
To Machine expenses |
|
12,00,000 |
|
|
|
To labour expenses |
|
2,00,000 |
|
|
|
|
30,000 |
35,40,000 |
|
30,000 |
35,40,000 |
Input
= 19,400 + 4,000 + 4,000 + 2,600
= 30,000
1. Normal loss
= 30,000 @ 10%
= 3,000 kg
2. Abnormal loss kg
= Input – normal loss – output
= 30,000 – 3,000 – 25,000
= 2,000 kg
3. Value of abnormal gain
= (Normal cost ÷ Normal output) x Abnormal gain units
= (Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units
= ($35,40,000 – $3,00,000) ÷ (30,000 units – 3,000 units) x 2,000 kg
= ($32,40,000 ÷ 27,000 units) x 2,000 kg
= $240,000
Particulars |
Kg |
Amount |
Particulars |
Kg |
Amount |
To Process A account |
1,000 |
30,000 |
By Abnormal gain account |
400$ |
12,000Ø |
To Process B account |
3,000 |
300,000 |
By Cash account: |
|
|
|
|
|
(600* kg @ $30) |
600* |
18,000 |
|
|
|
(3,000 kg @ $100) |
3,000 |
300,000 |
|
4,000 |
330,000 |
|
4,000 |
330,000 |
Balance figure kg*
Particulars |
Kg |
Amount |
Particulars |
Kg |
Amount |
To Normal loss account |
400 |
12,000 |
By Process B account |
400 |
24,000 |
[400 kg @ $30] |
|
|
|
|
|
To P&L account (profit; b/f ) |
|
12,000 |
|
|
|
|
400 |
24,000 |
|
400 |
24,000 |
Particulars |
Kg |
Amount |
Particulars |
Kg |
Amount |
To Process B account |
2,000 |
240,000 |
By Cash account |
– |
– |
|
|
|
(PB: 2,000 kg @ $100) |
2,000 |
200,000 |
|
|
|
By P&L account (loss; b/f ) |
– |
40,000 |
|
2,000 |
240,000 |
|
2,000 |
240,000 |
Particulars |
Amount |
Particulars |
Amount |
To Cost of F.G. (25,000 kg x $120) |
30,00,000 |
By Sales (20,000 kg @ $200) |
40,00,000 |
To Administrative expenses |
1,50,000 |
|
|
To S&D (20,000 kg x $5) |
1,00,000 |
|
|
To Net profit |
7,50,000 |
|
|
|
40,00,000 |
|
40,00,000 |
Particulars |
Amount |
Particulars |
Amount |
To Cost of FG (25,000 kg x $120) |
30,00,000 |
By Sales (20,000 kg @ $200) |
40,00,000 |
To Administrative expenses |
1,50,000 |
By Abnormal gain |
12,000 |
To S&D (20,000 kg x $5) |
1,00,000 |
|
|
To Abnormal loss |
40,000 |
|
|
To Net profit |
7,22,000 |
|
|
|
40,12,000 |
|
40,12,000 |
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#####
Problems and Answers of Process Costing |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3A
Crude Processing Industry has following extracted information:
Input in process I:
Materials X 6,000 kg at $3.00 per kg
Materials Y 4,000 kg at $1.75 kg
Other expenses incurred are $5,500
Running hours and cost of machine are 2,400 machine hours at $5 per machine hour.
Output realized is 9,300 kg.
Normal loss expected is 5% with a disposal value of $2 per kg.
Input in process II:
Materials A 5,700 kg at $6.00 per kg
Materials B 5,000 kg at $5.02 per kg
Other expenses incurred are $12,000
Running hours and cost of machine are 1,600 hours at $10 per machine hour.
Output realized is 19,500 kg.
Normal loss expected is 5% with a disposal value of $5.50 per kg.
Factory and other overhead expenses of $10,000 are absorbed by the two processes on the basis of running machine hours during the month; 17,500 kg of finished goods are sold at a selling price of $10.50 per kg. The selling and distribution expenses are $1.50 per kg.
Required: (1) Process I and II accounts; (2) Normal loss, abnormal loss and abnormal gain account
(3) Statement of P&L showing net profit before and after abnormal loss/gain
[Answer: PI: AL = 200 units, $1,000; PII = 9,300 units, $46,500; CPU = $5;
PII: AP = 500 units, $3,482; F.G = 19,500 units, $135,782; CPU = $6.963;
NL A/c: Cash = 500 units, $1,000; 500 units, $2,750; AP = 500 units, $2,750;
AL A/c: P & L (loss, b/f) = $600; AP A/c: P & L (profit, b/f) = $732;
Net profit before adjustment = $35,647;
Net profit after adjustment = $35,779]
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