Process Costing | Opening and Closing Stock with Value | Problem and Solution

 

 

Process Costing

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.

 

 

Opening Stock and Closing Stock with Value

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

 

Normal Loss Account

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*

Abnormal Gain Account

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

 

Abnormal Loss Account

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

 

Statement of P&L (before abnormal gain or loss)

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

 

 

Statement of P&L (after abnormal gain or loss)

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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