Process Costing

A. Fill in the blanks

1. One example of an industry employing process costing is textiles, cement, iron &
steel.

2. Process costing is employed in an organization which manufacturers standard type of

products.

3. Process costing method is based on scientific basis and hence not a scientific method.

4. Materials which lose value due to reasons like evaporation, shrinkage is called as waste.

5. Spoilage means production that does not meet standard quality requirements .

6. Spoilage items will have to be sold as scrap.

7. Discarded material having some value in some cases is called as scrap.

8. The type of scrap that will have some value when sold is called as marketable scrap.

10 Reprocessed scrap means scrap that requires further processing before the same can
be sold.

11 The type of materials which is inevitable and unavoidable is called as normal loss.

12.The type of loss that arises due to the poor handling of materials or defect in the mfg
Process is called as abnormal loss.

13. Actual production less normal production = abnormal gain

14. normal production less actual production = abnormal loss

15. Abnormal gain is debited to Process Account.

16. Normal loss is valued at realizable value.

17. Abnormal loss and abnormal gain are valued at output value.

18. Balances in abnormal loss or abnormal gain account is transferred to costing P & L
A/c.

19. Abnormal loss can be controlled.

20. Normal loss cannot be controlled.

21. Normal loss is classified as product cost.

22. Normal loss does not affect the valuation of closing stock.

23. Input is 1,00,000 units. Normal loss is 20%, output is 75,000 units. Therefore, abnormal
loss is 5,000 units.

24. Input is 50,000 units. Normal loss is 10%. Actual output is 45,900 units. Therefore,
abnormal gain is 900 units.

25. Cost of abnormal loss is Rs 90. Abnormal loss is sold at Rs 15. Thus transfer to costing
profit and loss account is Rs 75.
26. Process cost is Rs 33,040/-. Scrap value of normal loss is Rs 800/-. Input 800 units.
Normal loss 200 units. Cost per unit is Rs 54/-. (33,040-800 = 32240/600 units)

27. Equivalent production = actual goods produced in mfg process x % of completion.

28. FIFO Method assumes that opening stock is completed first.

29. Under FIFO Method, the cost of work completed is divided into opening WIP and units
started/completed.

30. Under FIFO method, past and current period costs can be worked out.

31. Under weighted average method, total process costs are divided by total equivalent
units.

32. Weighted Average method is more simpler than FIFO Method.

33. FIFO method is a very complicated method.

34. Equivalent units are equal quantity of completed units.

35. Equivalent units are calculated on the basis of degree of completion.

36. WIP is Raw materials in the processing stage.

37. Normal loss cost is charged to output of goods produced.

38. Cost of opening WIP is added to cost of goods produced to arrive at weighted average
cost.

39. Scrap value realized from normal loss is credited to Process account.

40. Opening WIP is 800 units. Materials completed 40%. Equivalent units that will be
completed in this process is 480 units.

41. Closing WIP is 1,200 units. Materials completed 100%, Labour completed 50% and
overheads completed 50%. Equivalent units of materials 1,200 units, labour 600 units
and overheads 600 units.

42. Units completed in a manufacturing process is 50,000 units. There was no opening WIP.
But closing WIP was 800 units which were 60% complete. Therefore equivalent units of
closing WIP is 480 units.

43. Opening WIP 600 units. Units introduced in this process is 6,000. Units completed in
this process 5,000 units. Normal loss is 1,000 units. Abnormal loss units is 600 units.

44. Normal loss = input x % of normal loss.

45. Cost of actual output = actual output x unit cost

46. A manufacturing process produces 8,000 units. 10,000 units were introduced at Rs
10/- per unit. Direct wages and overheads incurred Rs 5/- per unit. What is the value
of closing WIP by assuming that there was no opening WIP ?

Closing WIP units = 2,000 units

Total Cost per unit = Rs 10/- + Rs 5/- = Rs 15/- per unit
 Value of closing WIP = 2,000 x 15 = Rs 30,000/-

47. A manufacturing process produced 10,000 units in a month. There was no opening WIP
units. But 800 units were incomplete with 60% completion at the end of the closing
period. What are the equivalent units of the closing WIP ?

800 units x 60% = 480 units

48. During a month a certain product was manufactured in a process. The conversion costs
incurred were Rs 22,500/-. Opening WIP Nil units. Fully completed units were 2,000
units. 500 units were only 50% complete. What was the conversion cost per unit ?

Total units = 2,000 + 500 x 50% = 2,250 units

Conversion cost = 22,500
Conversion cost per unit = 22,500/2250 = Rs 10/- per unit

49. A company uses weighted average method of stock valuation. Input units 10,000, output
units 9,850 units. Opening stock 300 units (100% completer for materials and 70% for
labour and overheads), closing stock 450 units (100% complete for materials and 50%
for labour and overheads). What are the equivalent units for labour and overheads ?

Completed units = 9,850

Add : - closing stock units = 225
Total = 10,075 units

50. Conversion costs incurred were Rs 60,000/- in Process Q. Opening WIP Nil units.
11,000 units were completed in Process Q. Incomplete units 2,000 units which were
only 50% complete as regards conversion costs which were in WIP at the period end
What is the conversion cost per unit of production ?

Fully completed = 11,000 units

Units incompleted = 1,000 units
Total units = 12,000 units
Conversion cost = 60,000
Conversion cost per unit = 60,000/12,000 = Rs 5/- per unit

Cost Allocation

1. Overheads are total of indirect materials, indirect labour,indirect expenses and

employee costs.

2. Allocation of overheads is assigning a whole item of cost directly to a cost centre.

3. Apportionment of overheads is distribution of overheads to more than one cost centre
on some equitable basis.

4. Overhead absorption rate = Total overheads/total units.

5. Primary distribution of overheads relates to apportionment of production overheads

to cost centres on some suitable basis.

6. Secondary distribution of overheads is the process of re-distribution of overheads of

service department to different production departments.

7. Rent, rates, taxes of building are apportioned to different departments on the basis of
floor space.

8. Repairs, depreciation, maintenance and insurance of plant is apportioned on the basis

of WDV/Book value of plant & machinery.

9. Lighting expenses is apportioned on the basis of floor space/light points.

Some examples of apportionment for expenses have been mentioned in serial nos 7,8
and 9. Requesting all to refer to my ppt where I have already given the basis for
apportionment of different expenses.

10. Material cost which cannot be charged directly are called as indirect materials.

11. Costs that can be controlled are called controllable cost.

12. Overheads are classified on the basis of behaviour as fixed, variable and semi
variable overheads.

13. Overheads are classified on the basis of function as factory, office and
selling/distribution overheads.

14. Rent for a building is a fixed overheads

15. Depreciation of a machinery is classified under factory overheads.

16. Packing cost is classified as selling and distribution overheads.

17. In Reciprocal secondary distribution, the cost of service departments are apportioned
to production as well as service departments.

18. In Non Reciprocal secondary distribution, the costs of service departments are only
apportioned to production departments.

19. The secondary distribution method in which overheads of service department are
apportioned to both production and service departments uptil the stage at which the
overheads of service department become negligible is called repeated distribution
method.

20. The secondary distribution method in which the distribution of service departments are
allocated on the basis of mathematical equation is called simultaneous equation
method.

21. The secondary distribution method where the overheads of the service departments are
distributed only to the production departments is called as step ladder method.

22. Trial and error method follows reciprocal basis of distribution of overheads as per
primary distribution.
23. Basis for apportionment of indirect labour expenses is direct labour.

24. There are 2 production departments A and B. There are 2 service departments X and
Y. Total service dept X overhead costs as per primary distribution are Rs 10,000/-.
Overhead costs of Department X are apportioned as under

20% to department Y
40% each to department A and B.

In this scenario the overheads of Department X apportioned to Department A is Rs,

4,000/-

25. In a factory there are 2 production departments A and B and one service
department X. It incurred insurance expenses of stock of Rs 15,000/-. Value of stocks
of department A is Rs 25,000/- and that of department B is Rs 50,000/-. Accordingly,
insurance expenses apportioned to department A should be Rs 5,000/-
(25,000/75,000 x 15,000)

26. The total overheads of production departments A and B are Rs 1,00,000/- and Rs
2,50,000/- after both primary and secondary distribution of overheads. Labour hours
of department A are 10,000 hours and of department B are 12,500 hours. Therefore,
the overhead absorption rate for department B is Rs 20/- Per hour. (2,50,000/12,500
= 20).

27. Employee recreation expenses incurred in a month is Rs 24,000/-. There are 2

production departments A and B and one service department X. Wages of department
A, B and X are Rs 50,000, Rs 75,000 and Rs 25,000/-. Employee recreation expenses
apportioned to department X are Rs 4,000/- (25,000/1,50,000 x 24,000).

28. The departments that provide assistance to production departments to carry out
manufacturing is called service departments.

Activity based costing

1. The method of costing in which the overheads are allocated based on activities is called
Activity Based Costing.

2. The method of costing in which the overheads are allocated based on volumes is called
as Absorption Costing or Traditional Costing.
3. The method of costing in which the costs are attributed based on benefits received from
indirect activities like ordering, setting up, quality, etc is called as Activity Based
Costing.

4. Any element that causes a change is a cost activity is called as Cost Driver.

5. A cost pool is a term used to indicate grouping of costs incurred on a particular activity
that drives them.

6. The cost driver for ordering activity is number of purchase orders.

7. The cost driver for Research and Development Department is number of projects.

8. The cost driver for a customer service department is number of calls received or
number of calls serviced.

9. The cost driver for material handling department is number of material orders.

Students are requested to kindly go through the ppt sent for cost pool and cost driver
for different activities. Some examples have been illustrated in serial nos 7,8 and 9 for
cost pool. Requested to also read the cost drivers for each activity.

10 The costs arrived at as per activity based costing as compared to traditional costing is
more realistic.

11 Activity Based Costing focuses on different activities involved in an organization.

12 Number of machine hours is a cost driver.

13 Material handling cost is a cost pool. whereas no of material movements is called cost
driver.

14 Activity based costing uses multiple cost drivers in an organization.

15 Activity Based costing can be implemented in organizations which have a wide range of
products and whose operations are complex.

16 ABC system can be implemented in organizations where different activities can be

identified.

17 ABC system becomes costly and complex system than traditional absorption costing
system and hence unsuitable for smaller organizations.

18 Cost drivers are required for allocation for indirect costs and not for direct costs in an
organization.

19 In an organisation, the cost per set up for set-up department is Rs 100/-. There are 2
products A and B. Product A requires 50 set ups and product B requires 80 set ups.
The set up cost for product A is Rs 5,000/- (50 set ups x Rs 100/- per set up).

20 Activity based costing System is possible only in those organizations where all
activities can be identified, overheads for each activity can be identified and that there
is cooperation between service and production departments.

21 Beta Limited has collected the following data for its factory

Activity Cost Driver Capacity Cost (Rs.)

Power & fuel KWH 10,000 KWH Rs 2,00,000/-

Product P consumes 500 KWH of power and fuel. Therefore Power and fuel cost to be
allocated to Product P is Rs 10,000/- (2,00,000/10,000 x 500)