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 manufacturing company sells its work in progress goods (semi-finished or partially finished goods) to other company, whole seller or distributors.
While selling these goods some profit percentage is added.
Remaining goods are transferred to next process.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
BK Construction Work Ltd processes a patent material used in buildings. The following information is available:
Particulars |
Process A |
Process B |
Process C |
Raw materials used |
1,000 ton |
|
|
Cost per ton |
$200 |
|
|
Manufacturing wages and expenses |
$87,500 |
$39,500 |
$10,710 |
Weight lost (% of input; zero value) |
5% |
10% |
20% |
Scarp (sale price $50 per ton) |
50 ton |
30 ton |
51 ton |
Sale price per tone |
$350 |
$500 |
$800 |
Additional information:
a. Two-third (2/3) of the output of the process A and one half (1/2) of the output of process B are passed on to the next process and balance is sold.
b. The entire output of process C is sold.
c. Management expenses were $12,500 and selling and distribution expenses $10,000.
Prepare: (calculate rupees approximations, where necessary) (1) Three process accounts; (2) Statement of profit
[Answers: PA = transfer to warehouse 300 units, $95,000;
Transfer to PB = 600 units, $190,000; Profit = $10,000;
PB = transfer to warehouse 255 units, $144,000;
Transfer to PC = 600 units, $144,000; Profit = $13,500;
PC = transfer to warehouse 153 units, $122,160; Profit = $240;
Income statement = Net profit $1,240]
SOLUTION:
Process A Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Raw materials used |
1,000 |
200,000 |
By Normal Loss |
50 |
Nil |
To Mfg wages and expenses |
|
87,500 |
[1,000@5% x $0] |
|
|
|
|
|
By Scrap [@$50 per ton] |
50 |
2,500 |
|
|
|
By Warehouse [900 x 1/3] |
300 |
95,000 |
|
|
|
By Process B [900 x 2/3] |
600 |
190,000 |
|
1,000 |
287,500 |
|
1,000 |
287,500 |
Given and working note:
Output units
= Input – Normal loss – Scrap
= 1,000 – 50 – 50
= 900
Cost per units
= (Dr amount – Cr amount) ÷ Output
= ($287,500 – $2,500) ÷ 900 units
= $316.67
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process I Account |
300 |
95,000 |
By Bank (sales) @ $350 |
300 |
105,000 |
To P&L Account (profit) |
|
10,000 |
|
|
|
|
300 |
105,000 |
|
300 |
105,000 |
Process B Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
600 |
190,000 |
By Normal loss |
60 |
Nil |
To Mfg wages and expenses |
|
39,500 |
[600@10% x $0] |
|
|
|
|
|
By Scrap [@$50 per ton] |
30 |
1,500 |
|
|
|
By Warehouse [510 x 1/2] |
255 |
114,000 |
|
|
|
By Process C [510 x 1/2] |
255 |
114,000 |
|
600 |
229,500 |
|
600 |
229,500 |
Given and working note:
Output units
= Input – Normal loss – Scrap
= 600 – 60 – 30
= 510
Cost per units
= (Dr amount – Cr amount) ÷ Output
= ($229,500 – $1,500) ÷ 510 units
= $316.67
Warehouse Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process B Account |
255 |
114,000 |
By Bank (sales) @ $500 |
255 |
127,500 |
To P&L Account (profit) |
|
13,500 |
|
|
|
|
255 |
127,500 |
|
|
127,500 |
Process C Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process B account |
255 |
114,000 |
By Normal loss |
51 |
Nil |
To Mfg wages and expenses |
|
10,710 |
[255@20% x $0] |
|
|
|
|
|
By Scrap [@$50 per ton] |
51 |
2,550 |
|
|
|
By Warehouse |
153 |
122,160 |
|
255 |
124,710 |
|
255 |
124,710 |
Given and working note:
Output units
= Input – Normal loss – Scrap
= 255 – 51 – 51
= 153
Warehouse Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process I account |
153 |
122,160 |
By Bank (sales) @ $800 |
153 |
122,400 |
To P&L account (profit) |
|
240 |
|
|
|
|
153 |
122,400 |
|
153 |
122,400 |
Particulars |
Amount |
Particulars |
Amount |
To Management expenses |
12,500 |
By Profit from: |
|
To S&D expenses |
10,000 |
Process A account |
10,000 |
To Net profit |
1,240 |
Process B account |
13,500 |
|
|
Process C account |
240 |
|
23,740 |
|
23,740 |
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###########
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
A Product passes through three processes A, B and C. The details of expenses incurred on the three processes during the period are given below:
10,000 units of crude material were introduction in process A @ $100 per unit
Particulars |
Process A |
Process B |
Process C |
Sundry materials |
$10,000 |
$15,000 |
$5,000 |
Labour |
$30,000 |
$80,000 |
$65,000 |
Direct expenses |
$6,000 |
$18,150 |
$27,200 |
Selling price per unit of output |
$130 |
$175 |
$260 |
Actual output in units |
9,300 units |
5,400 units |
2,100 units |
Normal loss on the input |
5% |
15% |
20% |
Value of normal loss per units |
$2 |
$5 |
$10 |
Two-third of the output of process A and one-half of the output of process B was passed on to the next process and the balance was sold.
Management expenses during the year were $50,000 and selling expenses were $30,000. These are not allocable to the processes.
You are required to calculate:
(1) Three processes accounts; (2) Normal loss account; (3) Abnormal loss account; (4) Abnormal gain account;
(5) Profit and loss account
[Answer: (1) PA: Transfer to PB = 6,200 units, $682,000;
WH = 3,100 units, $341,000; Profit = $62,000;
PB: Transfer to PC = 2,700 units, $405,000; WH = 2,700 units, $405,000;
Abnormal gain = 130 units, $19,500; Profit = $67,500;
PC: WH = 2,100 units, $483,000; Profit = $63,000;
(2) Normal loss: Abnormal gain = 130 units, $650; Cash (b/f) = 1,840 units, $10,400;
(3) Abnormal loss: Cash = 200 units, $400 + 60 units; $600; P & L (loss) = $38,400;
(4) Abnormal gain: Normal loss = 130 units, $650; P & L (gain) = $18,850;
(5) Net profit = $96,550]
SOLUTION:
Process A Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Raw materials used |
10,000 |
10,00,000 |
By Normal loss A/c |
500 |
1,000 |
To Sundry materials |
|
10,000 |
[10,000@5% x $2] |
|
|
To Labour |
|
30,000 |
By Abnormal loss A/c |
200 |
22,000 |
To Direct expenses |
|
6,000 |
By Warehouse [9,300 x 1/3] |
3,100 |
3,41,000 |
|
|
|
By Process B [9,300 x 2/3] |
6,200 |
6,82,000 |
|
10,000 |
10,46,000 |
|
10,000 |
10,46,000 |
Normal wastage = 10,000 @ 5% = 500 units
Abnormal Loss = 10,000 – 500 – 9,300 output = 200 units
Value of abnormal loss
= (Dr amount – Cr amount) ÷ (Dr units – Cr units) x Abnormal loss units
= ($10,46,000 – $1,000) ÷ (10,000 units – 500 units) x 200 units
= $22,000
Warehouse A Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
3,100 |
3,41,000 |
By Bank (sales) @ Rs 130 |
3,100 |
403,000 |
To P&L A/c (profit) |
|
62,000 |
|
|
|
|
3,100 |
403,000 |
|
3,100 |
403,000 |
Process B Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
6,200 |
682,000 |
By Normal loss account |
930 |
4,650 |
To Sundry materials |
|
15,000 |
[6,200@15% x $5] |
|
|
To Labour |
|
80,000 |
By Warehouse [5,400 x 1/2] |
2,700 |
405,000 |
To Direct expenses |
|
18,150 |
By Process C [5,400 x 1/2] |
2,700 |
405,000 |
To Abnormal gain account |
130 |
19,500 |
|
|
|
|
6,330 |
8,14,650 |
|
10,000 |
8,14,650 |
Normal wastage = 6,200 @ 15% = 930 units
Abnormal Loss = 10,000 – 930 – 5,400 output = 130 units
Value of abnormal loss
= (Dr amount – Cr amount) ÷ (Dr units – Cr units) x Abnormal loss units
= ($7,95,150 – $4,650) ÷ (6,200 units – 930 units) x 130 units
= $19,500
Warehouse B Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
2,700 |
405,000 |
By Bank (sales @ $175) |
2,700 |
472,500 |
To P&L A/c (profit) |
|
67,500 |
|
|
|
|
2,700 |
472,500 |
|
2,700 |
472,500 |
Process C Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process B account |
2,700 |
405,000 |
By Normal loss account |
540 |
5,400 |
To Sundry materials |
|
5,000 |
[2,700@20% x $10] |
|
|
To Labour |
|
65,000 |
By Abnormal loss A/c |
60 |
13,800 |
To Direct expenses |
|
27,200 |
By Warehouse [2,100] |
2,100 |
483,000 |
|
2,700 |
502,200 |
|
2,700 |
502,200 |
Normal wastage = 2,700 @ 20% = 540 units
Abnormal Loss = 2,700 – 540 – 2,100 output = 60 units
Value of abnormal loss
= (Dr amount – Cr amount) ÷ (Dr units – Cr units) x Abnormal loss units
= ($502,200 – $5,400) ÷ (2,700 units – 930 units) x 60 units
= $13,800
Warehouse C Account
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process C account |
2,100 |
483,000 |
By Bank (sales @ $260) |
2,100 |
546,000 |
To P&L A/c (profit) |
|
63,000 |
|
|
|
|
2,100 |
546,000 |
|
2,100 |
546,000 |
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
500 |
1,000 |
By Abnormal gain [130 x $5] |
130 |
650 |
To Process B account |
930 |
4,650 |
By Cash A/c (b/f) |
1,840 |
10,400 |
To Process C account |
540 |
5,400 |
|
|
|
|
1,970 |
11,050 |
|
1,970 |
11,050 |
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Process A account |
200 |
22,000 |
By Cash account |
|
|
To Process C account |
60 |
13,800 |
Process A [200 x $2] |
200 |
400 |
|
|
|
Process C [60 x $10] |
60 |
600 |
|
|
|
By P&L account (loss) |
|
34,800 |
|
260 |
35,800 |
|
|
35,800 |
Particulars |
Units |
Amount |
Particulars |
Units |
Amount |
To Normal Loss |
130 |
650 |
By Process C account |
130 |
19,500 |
(from normal loss A/c) |
|
|
|
|
|
To P&L (profit, b/f) |
|
18,850 |
|
|
|
|
130 |
19,500 |
|
130 |
19,500 |
Particulars |
Amount |
Particulars |
Amount |
To Management expenses |
50,000 |
By Net profit from: |
– |
To Selling expenses |
30,000 |
Process A account |
62,000 |
To Abnormal loss |
34,800 |
Process B account |
67,500 |
To Net profit (b/f) |
96,550 |
Process C account |
63,000 |
|
|
By Abnormal gain account |
18,850 |
|
211,350 |
|
211,350 |
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Problem and Answer of Process Costing |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
Lumbini Foam Industries (P) Ltd manufactures different kinds of mattress. From Process I output are sold without cover and from Process II output are sold with cover. Following data are given for 3’x4’ size:
Particulars |
Process I |
Process I |
Raw materials input 1,000 kg |
200,000 |
– |
Direct labour |
30,000 |
19,500 |
Manufacturing expenses |
57,800 |
20,000 |
Weight lost (% of input without monetary value) |
5% |
10% |
Normal loss (sales price $ 50 per unit) |
50 kg |
30 kg |
Sale price per unit |
400 |
500 |
Additional information:
a. Two-third of the output of the Process I transferred to the Process II and balance is sold.
b. The entire output of Process II is sold out.
c. Management expenses were $15,000 and selling $7,500 for the period
Required: (a) Process I account; Process II account; (b) Statement of profit and loss
[Answer: Process I: Output for warehouse 300 units; $95,100;
Output for process II 600 units; $190,200; Profit $24,900;
Process II: Output for warehouse 510 units; $228,200; Profit $26,800;
Statement of P&L (net profit) $29,200]
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