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Process Costing | Sales of Processed Goods | Problems and Solutions

Arjun EP

Published on: January 29, 2022

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.

Sales of Processed Goods

(Sales of partially finished or fully finished goods)

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

Warehouse Account

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

Statement of Profit

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

Normal Loss Account

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

Abnormal Loss Account

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

Abnormal Gain Account

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

Profit and Loss Account

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