Example:1. The following information is given in respect of process A.

Material. 1000 kgs @6 per kg.

Labour. ₹5000
Direct expenses. ₹1000
Indirect expenses allocated to Process A Rs 1,000. Normal wastage 10% of input.
Scrap arising out of normal loss has a sale value of Rs 2 per unit. Prepare process account.
Example: From the following information relating to process-I, Prepare:
Process-I account; and
Abnormal loss account
Units introduced 2,000 units @ Rs 20 per unit. Labour cost Rs 10,800
Production overhead Rs 14,000
Normal loss 10% of input. No Scrap value.
Unit produced 1,700 units.
Example: From the following information relating to process-I, Prepare: (iii) Process-I account; and
(iv) Abnormal loss account
(f) Units introduced 9,000 units @ Rs 10 per unit.
(g) Labour cost Rs 20,000
(h) Direct expenses Rs 8,600
(i) Production overhead is 100% of direct labour
(j) Normal loss 5% of input. Scrap value Rs 4 per unit. (k) Unit produced 8,250 units.

Example: 4 In a process, 200 units of materials have been introduced at a cost of Rs 9,600 and other expenditures incurred in the
process are: Wages Rs 3,000 and overheads Rs 1,300. Estimated normal loss is 15% and scrap value is Rs 10 per unit. The actual
output is 180 units. All scrap were sold for cash.
Prepare the process account, normal loss account and abnormal gain account.

Work in Progress (Equivalent Production)

Process costing mainly deals with continuous type of production. At the end of the accounting period, there may be some work-in-
progress i.e. semi-finished goods may be in the pipeline. The valuation of such work-in-progress is done in terms of equivalent or
effective production.

Equivalent production
Equivalent production represents the production of a process in terms of completed units. Work in progress at the end of an
accounting period is converted into equivalent completed units. This is done by the following formula:
Equivalent units = Completed units + No. of units of Work in progress × Degree of Completion %

For example, in a month a chemical company had in process 1,00,000 litres of a chemical, of which 70,000 litres were completed
during the month and were transferred to packing and labelling department but the remaining 30,000 litres were only 40%
complete. The equivalent unit would be:
In the same example, let us assume, at the beginning of the month 30,000 litres of chemical were there, which were only 40%
complete. During the month 70,000 litres of chemical were fully processed and transferred to packing and labelling department.
There was no closing work in progress.

Note: Equivalent units should be calculated separately for Direct materials, Direct labour and Factory overhead; because the
proportion in respect of incomplete units is not always same for each cost element.

Example:1 A firm introduced 2,000 units of material in the manufacturing process. During the period 1,500 units were completed
and transferred to next process. However, the degree of completion on remaining 500 units was 100%, 60% and 30% for materials,
labour and overheads respectively. Which one of the following is the equivalent complete units with regard to labour? (UPSC
Assistant Director Cost- 2022)

Methods of calculating equivalent units of production

(1) FIFO method
(2) Weighted average method
FIFO

Equivalent units of Production = Equivalent units to complete opening WIP

(+) Units introduced and completed during the current period
(+) Equivalent units in Closing WIP
Equivalent units to complete opening WIP = units in opening WIP × (100% - percentage of completion of opening WIP)
Alternatively, equivalent units of production can be calculated as follows:
Equivalent units of Production = Total units transferred to Next process/ Finished stock f(+) Equivalent units in Closing WIP (-)
Equivalent units in Opening WIP
Example:2 Opening Work-in-progress (30% complete) 2000 units
Put into the process during the month. 20000 units.
Transferred to next process. 18000 units
Closing work-in-progress (40% complete). 4000 units.

Example:The following information pertains to Process A:

Opening work-in-progress (40% complete) valued at Rs 560 200 units
Units introduced during current period. 1000 units
Finished output during the period transferred to process B 1100 units
Closing work-in-progress (30% complete). 100 units
Costs incurred during the period. ₹8400
Make necessary calculations and prepare Process A Account.

Example: The mixing department is the first stage of Zodiac company’s production cycle. Conversion costs for this department
were 80% complete as to the beginning work-in-progress inventory and 50% complete as to ending work-in- progress (WIP)
inventory. Information as to conversion cost in the mixing department for January 2017 is as follows:

Weighted average method

Weighted average method
The weighted average method blends together the work that was done in the previous period with the work that is done in the
current period. This method also blends together the cost that was incurred in the previous period with the cost that is incurred in
the current period.

In weighted average method, the equivalent units of production is calculated as follows:

Completed units transferred to the next process or to finished stock XXX
Completed units transferred to the next process or to finished stock XXX
Add: Equivalent units in Closing WIP XXX
Equivalent units. XXX

1. 50 units are processed at a total cost of Rs. 80. There is a normal loss of 10 percent. The scrap units are sold at the rate of Rs.
0.25 each. If the output is 40 units, then the value of the abnormal loss is
2. A chemical process has normal wastage of 10 percent of input. In a period, 2,500 kg of material were input and there was
abnormal loss of 75 kg. What quantity of good production was achieved?
3. If a normal loss is 10%, abnormal loss is 100 units, output is 8,000 units, then number of units introduced in said process will be:
6. A process costing system for a company used an input of 5,000Kg of materials at Rs20 per Kg and labour hours of 1,000 at Rs 65
per hour. Normal loss is 20% and losses can be sold at a scrap value of Rs5per Kg. Output was 4,200 Kg. What is the value of the
output?
11. In Process I, 10,000 units were introduced during March 2017. 2000 units, 40% complete in all respects, remained as closing
work-in-progress at the end of the month. Compute the cost of closing work-in-progress if the total cost during the period was Rs
1,76,000.
12. In inter-process profits, the output of one process is transferred from one process to another not at....but at.. A. Transfer Price,
actual cost B. Actual cost, Transfer Price C. Market Price, Actual cost D. Any of the above
MARGINAL COSTING
Total Contribution = Fixed Costs + Profit
Fixed Costs = Total Contribution – Profit Profit = Total Contribution – Fixed Costs
Breakeven analysis:
Example: XYZ Ltd is manufacturing a single product, incurring variable costs of Rs 300 per unit and fixed costs of Rs 2,00,000 per
month. If the product sells for 500 Per unit, the break-even point will be:

Q. MNP Ltd sold 2,75,000 units of its product at Rs 37.50 per unit. Variable costs are 17.50 per unit (manufacturing costs of Rs 14
and selling cost Rs 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amounting to Rs 35,00,000 (including
depreciation of ` 15,00,000). There are no beginning or ending inventories.
COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.

Q. From the following information you are required to calculate: (a)Sales to break-even in unit
(b)Sales to break-even in sales revenue
(c)Sales to earn a profit of Rs 60,000
Additional information:
(i) Sales (10,000 units) Rs 1,60,000
(ii) Variable Cost Rs 96,000
(iii) Fixed Cost Rs 48,000

Q. From the following data, calculate:

(i) Break-even points (in units)
(ii) What should be the selling price per unit if the break-even point is to be brought down to 4,000 units?
(iii) How many units must be sold to earn a profit of Rs 10,000?
(iv) Profit, when number of units sold = 7000 units
 Additional Information:
Direct material Rs 4 Per unit
Direct labour Rs 3 Per unit
Variable overheads 100% of direct labour Selling price Rs 20 per unit
Fixed overheads Rs 50,000

MARGIN OF SAFETY::
Q. From the following information calculate break-even point ( in units) and the turnover required to earn a profit of Rs 36,000:
Fixed Overheads. Rs.180000
Variable Cost per unit Rs.10
Selling price per unit. Rs. 20
If the company is earning a profit Rs 36,000, express the margin of safety.
Q: A company earned a profit of Rs 30,000 during the year 2009-10. If the marginal cost and selling price of product are Rs 8 and
Rs 10 per unit respectively, find out the amount of “Margin of safety.”
Q. If Margin of Safety is Rs 2,40,000 ( 40% of sales) and P/V ratio is 30% of AB Ltd., calculate its: (a) Break even sales (b) Amount
of profit on sales of Rs 9,00,000.

MULTI-PRODUCT CVP ANALYSIS

Q: M Ltd. Manufactures three products P Q and R. the unit selling prices of these products are Rs 100, Rs 80 and Rs 50
respectively. The corresponding unit variable costs are Rs 50, Rs 40 and Rs 20. The proportions (quantity-wise) in which these
products are manufactured and sold are 20%, 30% and 50% respectively. The total fixed costs are Rs 14,80,000. Given the above
information, you are required to work out the overall break-even quantity and the product-wise break-up of such quantity.
Ans: (Overall Break even Quantity = 40,000 units)
Q. ABC Ltd. Has fixed costs of Rs 20,000. It has two products that it can sell, A and B. the company sells these products at a rate of
2 units of A to 1 unit of B. the unit contribution is Rs 1 per unit for A and Rs 2 per unit for B. How many units of A and B would be
sold at the break-even point?
Q. When volume is 3,000 units, average cost is Rs 4 per unit. When volume is 4,000 units, average cost is Rs 3.50. The break-even
point is 5,000 units. Find out profit-volume ratio.
Q. If margin of safety is 40% of sales, find out fixed costs when profit is Rs 20,000.
Q. If margin of safety is Rs 2,40,000 (40% of sales) and P/V ratio is 30% of AB Ltd., Calculate its fixed cost:
Q. The following forecasts relate to a single-product business for a period:
Variable costs ₹38640
Fixed Costs ₹39975
Sales revenue. ₹84000
Sales units. 6000
What sales revenue is required to achieve a profit of Rs 12,000 in the period?
STANDARD COSTING
The standard mix to produce 100 units of product is as follows:
Material A 80 units @ Rs 2 Per unitG
Material B 40 units @ Rs 6 Per unit
During the month, 120 units of product were actually produced and the consumption was as follows: Material A 80 units @ Rs 3 Per
unit
Material B 70 units @ Rs 5 Per unit. CALCULATE MATERIAL VARIANCE.

Calculation of Material Variances:

A. Material cost variance:
= Standard cost of Actual output – Actual cost or (SQ × SP) – (AQ× AP) = 480-590
= 110 (adverse)
B. Material Price Variance
= (Stand Price – Actual Price) × Actual Quantity Material A = (2- 3) × 80 =80(Adv)
Material B = (6-5) × 70 = 70 ( Favourable) = Material Price variance = 10 (Adverse)
C. Material usage Variance
= (Standard Quantity – Actual Quantity) × Standard Price
Material A = (96-80) × 2 Material B = (48-70)× 6 Material Usage variance
= 32 (Favourable) = 132 (Adverse) = 100 (adverse)

Material A = (96-100) × 2 = 8 (adverse) Material B = (48-50) × 6 = 12 (adverse) Material Yield Variance = 20 (adverse)
Calculation of Labour Variances:
A. Labour cost variance
= Standard labour cost – Actual labour cost Or
= ( Standard hours × Standard rate) – (Actual Hours × Actual rate)
Skilled = (30×60) – (20× 55) = 700 (F) Un-skilled = ( 90×20) – (130×24) = 1320 (A)
Labour Cost variance = 620 (A)
B. Labour rate variance
= (Standard Rate – Actual Rate ) × Actual Hours Skilled = ( 60-55) × 20 = 100 (F) Un-skilled = (20-24) × 130 = 520 (A) = Labour
rate variance = 420 (A)
C. Labour efficiency variance
= (Standard hours for actual output – Actual hours) × Standard rate Skilled = (30-20)×60 = 600 (F)
Un-skilled = (90-130) × 20 = 800 (A)
Labour efficiency variance = 200(A)
Verification:Labour cost variance = labour rate variance + labour efficiency variance 620(A) = 420(A) + 200(A)

Note: for calculating labour mix variance and labour yield variance, idle hours are to be excluded:
Skilled : 20 Hours – 9 Hours = 11 Hours Un-skilled : 130 Hours – 9 Hours = 121 Hours
Total hours actually worked = 132 Hours
Revised standard hours:
Skilled : 30/120×132 = 33 Hours Un-skilled : 90/120×132 = 99 Hours
Total = 132 Hours
D. Labour mix variance
= (Revised standard hours – Actual hours worked) × Standard rate
Skilled : (33-11) ×60 Un-skilled : (99-121) ×20 Labour mix variance
= 1,320 (F) = 440 (A) = 880 (F)
E. Labour yield variance
= (standard hours – Revised standard hours) × Standard rate Skilled : (30- 33) × 60 = 180 (A)
Un-skilled : (90-99) × 20 = 180 (A)
Labour yield variance = 360 (A)
F. Idle time variance
= standard rate × idle time
Skilled : 60× 9 = 540 (A) Un-skilled : 20× 9 = 180 (A) = Idle time variance = 720(A)
Verification:Labour efficiency variance = labour mix variance + labour yield variance+ idle time variance 200 (A) = 880(F) + 360(A)
+ 720 (A)

Example: XYZ Ltd using standard costing system presents the following information for the budget period:
A. Budgeted variable overheads = Rs 8,00,000
B. Overhead are recovered on the basis of standard machine hours. The company had budgeted for 1,00,000 machine hours for the
year.
C. During the budget period the company used 1,10,000 machine hours while it should have used 95,000 machine hours for actual
output.
D. Actual variable overheads = Rs 8,00,000. CAL VARIABLE OVERHEAD VARIANCE

1. Variable overhead cost variance =

[ (Standard variable overhead rate × Standard hours allowed for actual output)] – Actual variable overhead costs
= ( 8 × 95,000) – 8,00,000 = 7,60,000- 8,00,000 = 40,000 (Adverse)
2. Variable overheads expenditure variance
= (Standard rate – Actual rate) × Actual Hours = (8-7.2727) × 1,10,000 = 80,000 (F)
3. Variable Overhead efficiency variance
= (Stand hours – Actual Hours) × Stand rate = (95,000 – 1,10,000) × 8 = 1,20,000 (A)

Example: A company using standard costing system presents the following information for the budget period: Budgeted fixed
overheads = Rs 5,00,000
Overheads are recovered on the basis of standard machine hours. The company had budgeted for 1,00,000 machine hours for the
year.
During the budget period the company used 1,10,000 machine hours while it should have used 95,000 machine hours for actual
output.
Actual fixed overheads were Rs 4,70,000. Calculate following variances:
(a) Fixed overhead cost variance
(b) Fixed overheads expenditure variance
(c) Fixed overheads volume variance
Sol: Standard fixed overhead rate per machine hours = Budgeted fixed overhead/ budgeted machine hours. = 500000/ 100000
hours. = Rs 5 Per machine hours
Fixed overhead cost variance = (Standard rate × Standard Hours) – Actual fixed overheads = (5 × 95,000) – 4,70,000 = 4,75,000 –
4,70,000 = 5000 (F)
Fixed overhead expenditure variance = Budgeted fixed overhead cost – Actual fixed overheads cost = 5,00,000 – 4,70,000 = Rs
30,000 (F)
Fixed overhead volume variance = (Budgeted fixed overhead cost) – Fixed overhead absorbed = 5,00,000 – ( 95,000 × 5) =
5,00,000 -4,75,000 = 25,000 (A)

Example:ABC Ltd furnished the following data:

Budget. Actual(in part month)
No. of working days. 25. 27
Production in units. 20. 22000
Fixed overheads (Rs). 30. 31000
Budgeted overhead rate is Rs 1 per hour. In a particular month the actual hours worked were 31,500. Calculate the following
variances:
(a) Fixed overhead cost variance
(b) Fixed overhead Expenditure variance
(c) Fixed overhead Volume variance
(d) Fixed overhead Capacity variance
(e) Fixed overhead Calendar variance
(f) Fixed overhead Efficiency variance
Sol (a) Fixed overhead cost variance = (Standard rate × Standard hours allowed for actual output) – Actual fixed overhead cost
= (1 × 33,000*) – 31,000 = 2,000 (F)
*Standard hours allowed for actual output = 30,000/20,000 × 22,000= 33,000 Hours
(b) fixed overhead Expenditure variance = Budgeted fixed overhead cost – actual fixed overhead = 30,000 – 31,000 = 1,000
(adverse)
(c ) Fixed overhead volume variance = (Budgeted fixed overhead cost) – Fixed overhead absorbed = 30,000 – 33,000 = 3,000 (F)
(d) Fixed overhead capacity variance = (Budgeted hours – Actual hours) × Stand rate.
Budgeted hours = 30000 hours/ 25 days × 27 days = 32,400 hours =
(32,400-31,500) ×1 = 900 (A)
(e ) Calendar Variance= (Budgeted days – Actual days ) × Standard fixed overhead per day* = (25-27) × 1200 = 2400 (F)
*Standard fixed overhead per day = 30,000/25 = 1,200
(f ) Fixed overhead efficiency variance = (Standard hours – actual hours) × Standard rate = (33,000 – 31,500) × 1 = 1,500 (F).