Cost Accounting

Course Code: 306

Book Recommended
i. Cost Accounting
Banerjee B.
ii. Managerial Accounting
Garrison Noreen Brewer
 Process Costing
 Process costing is a form of operations costing which is used where
standardized homogeneous goods are produced.
 This costing method is used in industries like chemicals, textiles,
steel, rubber, sugar, shoes, petrol, etc. Process costing is also used in
assembly types of industries.
 It is assumed in process costing that the average cost presents the cost
per unit.
 Features of Process Costing
 The production is continuous;
 The product is homogeneous;
 The process is standardized;
 The output of one process becomes the raw material of another process;
 The output of the last process is transferred to the finished stock
 Costs are collected process-wise;
 Both direct and indirect costs are accumulated in each process;
 If there is a stock of semi-finished goods, it is expressed in terms of equivalent
units; and
 The total cost of each process is divided by the normal output of that process to
find out the cost per unit of that process.
 Purpose of Process Costing
 To determine the unit cost.
 To determine the method of allocation of manufacturing costs.
 To allocate the accumulated cost to process cost centers.
 To express incomplete units in terms of completed units.
 To give accounting treatment to process losses such as waste, scrap,
defective goods, and spoiled goods.
 To differentiate the main product from the by-product and joint
product.
 To give accounting treatment to joint products and by-products.
 To calculate the cost of the main product accurately.
 Advantages
 Process costing helps determine of cost each process and the
final product as well as unit costs.
 Cost can be easily determined when the methods of production
are standardized.
 Cost finding is simpler and less expensive than job costing.
 Use of standard costing system is very effective in process
costing.
 The performance analysis and managerial control are facilitated
to a greater extent because of the availability of cost data in the
form of prompt and accurate cost reports.
 Disadvantages

 Historical cost-based process costing may not be useful for future managerial
decision-making.
 It becomes necessary to adjust the closing stock value to its cost price because
the closing stock is valued in the balance sheet at cost price.

 If the adjustment is affected in the closing stock, such valuation is not accepted
by the auditor and tax authorities.

 The method involves additional clerical work by way of calculating the transfer
price and then ascertaining the value of the closing stock at its cost price.
 Job Costing
 A method of costing in which the cost of each ‘job’ is determined is
known as Job Costing.
 Here job refers to a specific work or assignment or a contract where
the work is performed according to the customer’s instructions and
requirements.
 The output of each job consists of normally one or less of units. In
this method, each job is considered as a distinct entity, for which cost
is ascertained. Job
 All the jobs are heterogeneous in many respects and each job requires
separate treatment.
 The flow of Costs

 The flow of costs refers to the manner or path in which costs move through
a firm.

 Typically, the flow of costs is relevant with manufacturing companies

whereby accountants must quantify what costs are in raw materials, work in
process, finished goods inventory, and cost of goods sold.

 The flow of costs applies not only to inventory but also to factors in other
processes to which a cost is attached, such as labor and overhead.
The cost process
 Differences Between Job Costing and Process Costing
BASIS FOR Job Costing Process Costing
COMPARISON
Meaning Job costing refers to calculating A costing method, in which the costs
the cost of a special contract, which are charged to various processes
work order where work is and operations is ascertained, is known
performed as per client's or as Process Costing.
customer's instructions.

Nature Customized production Standardized production

Assignment of Calculating cost of each job. First of all, cost is determined for the
cost process, thereafter spread over the
produced units.

Identity Each job is different from Products are manufactured

another. consecutively and so they lose their
identity.
Industry type Job costing is suitable for Process costing is perfect
the industries which for the industry where
manufactures products mass production is done
as per customer's order

Losses Losses are usually not Normal losses are

segregated. carefully ascertained and
abnormal losses are
bifurcated.

Work-in- WIP may or may not exist WIP will always be

progress (WIP) at the beginning or at the present in the beginning
end of the financial year. or at the end of the
accounting
 Similarities Between Job-Order and Process Costing

 Both systems assign material, labor, and overhead costs to products and they
provide a mechanism for computing unit product costs.

 Both systems use the same manufacturing accounts, including Manufacturing

Overhead, Raw Materials, Work in Process, and Finished Goods.

 The flow of costs through the manufacturing accounts is basically the same
in both systems.
 Terms in process costing

 Normal loss:
 The fundamental principle of costing is that the good units should bear the amount
of normal loss.
 Normal loss is anticipated and in a process it is inevitable.
 It is included in the total cost of the product due to which cost per unit increases.
The cost of normal loss is therefore not worked out.
 The number of units of normal loss is credited to the Process Account and if they
have some scrap value or realizable value the amount is also credited to the
Process Account.
 If there is no scrap value or realizable value, only the units are credited to the
process account.
 Treatment of Normal Loss
❑Generally, the cost of normal loss is absorbed by the cost units.
 Normal Output = Units introduced – Units of normal loss
 Normal Cost of Normal Output = Total Cost – Scrap value of Normal
Loss.

❑In the process, A/c units of normal wastage are shown in the unit column
of the credit side and if there is any scrap value then that will be shown in
the amount column of the credit side corresponding to lost units.
Abnormal Loss:
 If the units lost in the production process are more than the normal loss, the difference
between the two is the abnormal loss.

 It is excluded from the total cost due to which it does not affect the cost per unit of the
product.

 The relevant process of account is credited and the abnormal loss account is debited
with the abnormal loss valued at the full cost of finished output.

 The amount realized from the sale of scrap of abnormal loss units is credited to the
abnormal loss account and the balance in the abnormal loss account is transferred to
the Costing Profit and Loss Account.
 Treatment of Abnormal Loss
 Abnormal loss is transferred directly to P/L Account.
 Value of Abnormal wastage = The normal cost of normal output/Normal
output * Units of abnormal Wastage
 Here, Normal Cost of Normal Output = Total Cost – Scrap value of Normal
Loss.
 Units of abnormal Wastage = Normal Output – Actual Output
 Normal output = Units introduced – Units of normal loss
Abnormal Gain:

 If the actual production units are more than the anticipated units after deducting
the normal loss, the difference between the two is known as abnormal gain.

 It is excluded from the total cost due to which it does not affect the cost per unit
of the product.

 The valuation of abnormal gain is done in the same manner as that of the
abnormal loss.

 The units and the amount are debited to the relevant Process Account and
credited to the Abnormal Gain Account.
 Treatment of Abnormal Gain
 When the Actual output is more than the normal output.
 Value of Abnormal Gain = Normal cost of normal output/Normal
output* Units of Abnormal Effectives(Gains)
 Here, Units of Abnormal Effective(Gains) = Units entered – Normal
Wastage – Actual output.
Problem 1: (Normal / Abnormal Loss)
Prepare a Process Account and Abnormal Loss Account from the following
information.
The input of Raw material 1000 units @ Tk. 20 per
Unit Direct Material Tk.4,200/-
Direct Wages Tk.6,000/-
Production Overheads Tk. 6,000/-
Actual output transferred to process II 900 units
Normal Loss 5%
Value of Scrap per unit Tk.8/-
Solution:
Process I A/C
Dr. Cr.
Particulars Units Amount Particulars Units Amount
To Basic material 1000 20000 By Normal Loss 50 400

To Direct Materia 4200 By Abnormal Loss 50 1884

To direct labor 6000 By Process II 900 39,916

(Output transferred
to next processes)
To Production 6000
overhead
36,200 36,200
 Abnormal Gain A/C
Dr. Cr.

Particulars Units Amount (Tk.) Particulars Units Amount (Tk.)

To, Process-I A/C 50 1884 By, Bank A/C 50 400
By, Costing P/L A/C 50 1484
50 1884 50 1884
Working Notes:
i. Cost of abnormal Loss=Abnormal Units
= 50
= Tk.1884

ii. It has been assumed that units of abnormal loss have also been sold at the same rate i.e.
of Normal Scrap.
 Inter-Process Profit
Normally, finished goods are transferred to the immediate next process
at the cost of production basis. In some process industries, finished
goods are transferred to the immediate next process by including a
nominal profit. The profit so incorporated is called inter-process profit.
The price fixed by adding the nominal amount of profit for the transfer
of finished goods to the next process is known as the transfer price.
Adding profit on the goods transferred is termed as mark-up price.

Transfer Price = Cost of output+ Profit

 Unrealized Profit
Realized Profit, Unrealized Profit, and Provision for Unrealized Profit

•An unrealized, or "paper" gain or loss is a theoretical profit or deficit that

exists on balance, resulting from an investment that has not yet been sold for
cash.
Unrealized profit = production cost of closing stock
The unrealized profit in the closing stock is eliminated by creating a
stock reserve.

•A realized profit or loss occurs when an investment is actually sold for a

higher or lower price than where it was purchased.
Objectives of Inter-Process Profit

The output of a particular process is transferred to the next process by adding

a nominal amount of profit for the following objectives:

* To assess the performance of the process operation.

* To examine whether the output can compete with the market or not.

* To decide whether the output should be sold without further processing or

put for further processing
 Process Costing (Inter-process profit)
Valuation of stock:
Production cost of closing stock =
Unrealized profit = production cost of closing stock
Problem:2
Process –I (Tk.) Process-II(Tk.) Finished Goods(TK)
Direct Materials 30000 15 -
Direct Labor 20000 30 -
Direct Overhead 10000 12 -
Closing Stock 9000 20 7000

Sales of Finished goods amount to Tk. 1,20,000. In each process profit of 25% on the transfer,
price is added. Calculate inter-process unrealized profits and realized gross profit.
Solution:
Process-I A/C

Dr. Cr.
Particulars Total P. Cost Profit Particulars Total P. Cost Profit
Direct Materials 30000 30000 - Process-II A/C 68000 51000 17000
Direct Labor 20000 20000
Factory Overhead 10000 10000

60000 60000 -
Less: C. Stock 9000 9000
Process Cost 51000 51000 Process Cost 51000 51000
Profit 33.33% on the cost 17000 17000 Profit 33.33% on the cost 17000 17000
Transfer Price 68,000 51,000 17000 68000 51000 17000
 Process-II A/C
Dr. Cr.

Total P. Cost Profit Total P Cost Profit

Process 1 A/C 68000 51000 17000 Finished Stock A/C 140000 90720 49280
Direct Materials 15000 15000
Direct Labor 30000 30000
Factory Overhead 12000 12000

125000 108000 -
Less: C. Stock 20000 17280 2720
Process Cost 105000 90720 14280
(+) Profit 33.33% on the cost 35000 - 35000
Transfer Price 140,000 90720 49280 140000 90720 49280
 Finished Stock A/C

Total P. Cost Profit Total P Profit

Cost
Process 2A/C 140000 90720 49280 Sales 142000 86184 55816
Less: C. Stock 7000 4536 2464

133000 86184 46816

Profit(142000-13300)=9000 9000 9000
142000 86184 55816 142000 86184 55816
1. Profit 25% on Transfer price = 33.33% on cost.
2. Calculation of production cost and unrealized profit on closing stock:
Process 2: Production cost = ×20000 = Tk.17280
Unrealized profit = Tk. (20000-17280) =Tk. 2720
Finished Stock: Production cost = × 7000 = Tk.4536
Unrealized profit = Tk. (7000-4536) =Tk. 2464
3. Provision for Unrealized profit = (Tk. 2720 + Tk. 2464) = Tk. 6184.
4. Calculation of total profit:

Process TK. Tk.

Process-1 - 17000
Process-2 35000
Less: Provision for Unrealized profit 2720 32280
Finished Stock 9000
Less: Provision for UP 2464 6536

Total Profit 55816

Problem 3: There are three processes in a factory. The following particulars are obtained in respect of the processes for the
month of February:
Process A Process B Process C F. Stock
Opening Stock 8000 12000 9000 15000
Closing Stock 12000 6000 25000 20000
Direct Materials 30000 13000 21000
Direct Labor 40000 25000 20000
Factory Overhead 14000 16000 19000

Sales for the month amounted to Tk. 3,10,000. The output of the previous process is transferred to the next process and to
finished stock at 20% profit on the transfer price.
Stocks in processes are valued at prime cost and finished stock is valued at the price at which it is received from process C.
Provisions for unrealized profits on 31st January are:
Tk.
Process B 2000
Process C 2300
Finished Stock 6498
Calculate inter-process unrealized profit and total gross profit realized.
Problem 4: Product X passes through three processes--- process I, process II and process III-
Completion. The output of each process is charged to the next process at a price calculated to give
a profit of 20% on the transfer price and the output of process III is charged to finished stock on a
similar basis. The following information is available for the year ended 31 st December, 20X1:

Process I Process II Process III

Tk. Tk. Tk.
Material consumed 40000 60000 20000
Wage paid 60000 40000 80000
Stock at 31st December 20000 40000 60000

Stock in each process has been valued at prime cost to the process. There was no stock in hand at
January 1 and work-in-process in any processes at December 31. Of the goods passed into
Finished Stock, Tk. 40000 remained in hand at December 31, and the balance has been sold for
Tk. 360000.
Prepare: (i) Process Account and total apparent profits; and (ii) Realized profits.
 Three Key Concepts
Concept#1 Each department needs to calculate the cost of its ending work in
process inventory and the cost of its completed units(per unit and total) that are
transferred to the next process.
Concept#2 Each department needs to calculate a separate unit cost for each type
of manufacturing cost that it incurs. For example, if a department adds materials
cost, labor cost, and overhead cost to the production process it would need to
compute a unit cost for each of the three cost categories.
Concept #4 Most departments usually have some partially completed units on
hand. When counting the department’s output, these partially completed units are
transferred into an equivalent number of fully completed units.
Equivalent Units = Number of partially completed units × Percentage completion
 Equivalent Production and Procedure

Equivalent units of production is a term applied to the

work-in-process inventory at the end of an accounting period. It is the
number of completed units of an item that a company could theoretically
have produced, given the number of direct materials, direct labor, and
manufacturing overhead costs incurred during that period for the items
not yet completed. In short, if 100 units are in process but you have only
expended 40% of the processing costs on them, then you are considered
to have 40 equivalent units of production.
 Calculation of Equivalent Units of Production
Step 1
First, the equivalent production of opening work-in-progress should be
determined by taking into account the degree of work to be performed in the
current period.
For example, if the opening work-in-progress is 500 units, 40% complete in all
respects, then the degree of work to be performed in the current period is 60%.
In this case, the equivalent production for opening work-in-progress in the
period is 300 units (i.e., 500 x 60%).
Step 2
Secondly, the number of units introduced and completed in the current period
should be calculated.
This involves deducting the closing work-in-progress from the amount
introduced in the process during the current period.
Step 3
Thirdly, the equivalent units of production for the closing work-in-progress should be
determined by considering the number of units of closing work-in-progress and the level of
completed work.
If the closing work-in-progress is 800 units, 70% complete in all respects, the equivalent
units of production of closing work-in-progress is 560 units (i.e., 800 x 70%).
Step 4
Finally, the equivalent units of production calculated via the previous three steps should be
aggregated to ascertain the total output in terms of equivalent units or equivalent
production.
A unit is not transferred out unless it is completed. In this way, every transferred-out unit is
an equivalent unit.
The units that remain in the ending work-in-process inventory, however, are not complete.
Therefore, to convert the work-in-process inventory into equivalent units, it is important to
keep the percentage of completion in the calculation.
 Three Statements

1. Statement of Equivalent Production: This statement shows the number of

equivalent completed units.

2. Statement of Cost: This statement is prepared to compute the element-wise cost

per equivalent unit. For this purpose, the cost of each element is divided by the
equivalent units of production of that element.

3. Statement of Evaluation: This statement shows the apportionment of the total

process cost to finished output and work-in-progress of the process.
 Evaluation in Different Cases

I. When there is only closing work-in-progress but with no process losses.

Under this case, the closing work-in-progress is converted into equivalent units on the basis
of an estimate as regards the degree of completion of materials, labor, and production
overhead.
II. When there is only closing work-in-progress but with process losses.
In the case of normal loss, nothing should be added as equivalent production. However, an
abnormal loss should be considered as the production of good units completed during the
period.
II. When there is opening as well as closing work in progress but with no process loss.
Sometimes in a continuous process, there will be opening as well as closing work in
progress which are to be converted into the equivalent of completed units for apportionment
of process costs. The procedure of conversion of opening work in progress will vary
depending upon whether the average cost or FIFO or LIFO method of apportionment of
costs is followed.
 First In First Out Method [FIFO]

 In this method, the assumption is that the incomplete units from the opening stock
are completed first and then the units introduced in the process are completed.
 The costs added in each process during the current period are prorated to the
production necessary to complete the opening work in progress, to complete the
units added in the process, and units in the work in progress.
 The objective of the first in first out method is to value the inventory at the current
costs and as such the main problem is to calculate the equivalent production under
this method.
 Average Method
 Process costs are sometimes computed on the basis of average costs. Where
the degree of completion of opening work in progress is not given, the average
method is used.
 The average process cost is obtained by adding the cost of opening work in
progress and the cost of units introduced in the process during the current
period and dividing this total cost by the total equivalent units obtained by
adding the number of units completed and equivalent units of the closing work
in progress of each element, material, labor and overheads.
 The main object of the average method is to even out the fluctuations in prices
and hence is used when the prices fluctuate widely during a particular period.
 Weighted Average Method
If a manufacturing unit is manufacturing two or more products, that are quite dissimilar
to each other, the weighted average method is used. Under this method, the weighted
average is computed and used in the valuation of the incomplete units.

IV. When there is an opening as well as closing work-in-progress but with losses.
Under this equivalent production units regarding opening and closing work in progress
are to be calculated with due adjustment for process losses.
Problem 5: The following details are related to the work done in Process ‘X’ Pearson
Company during the month of January 2014: (Average Costing)

Value in
Opening work-in-progress (2,000 units)
Materials 80,000
Labor 15,000
Overhead 45,000
Materials introduced in Process ‘A’ (38,000 units) 14,80,000
Direct Labor 3,59,000
10,77,000
Units scrapped - 2000 Units
Degree of Completion Material 100%
Labor and Overhead 80%
Closing work-in-progress: 2,000 units
Degree of Completion Material 100%
Labor and Overhead 80%
Units finished and transferred to Process B 35000 Units; Normal Loss is 5% of total output including opening
work-in-progress. Scrapped units fetch 20 per unit
You are required to prepare:
(i) Statement of equivalent production
(ii) Statement of cost
(iii) Statement of distribution cost, and
(iv) Process ‘A’ Account, Normal and Abnormal Loss Accounts
========x=======
Problem 6: Prepare a statement of equivalent production, statement of cost, and process account from the
following information using the average costing method.
Opening Stock 50,000 Units
Material Tk.25,000
Labor Tk.10,000
Overheads Tk.25,000
Units Introduced Tk.2,00,000 Units
Material Tk.1,00,000
Wages Tk. 75,000
Overheads Tk.70,000 During the period
1,50,000 units were completed and transferred to Process- II. Closing stock 1,00,000 units. Degree of
completion:
Material 100 %
Labor 50 %
Overheads 40 %
 Problem 7: XYZ Ltd. manufactures a single product that passes through three consecutive processes. The company uses the
average cost method. The following data relate to the operations of process C for the month of February:
Opening Work- in process 1600 units
Cost of Opening Work- in Process:
Materials from Process B Tk.14500 Labor Tk. 7200 Overhead Tk. 4000
Transfer from Process B 7400 units, value Tk.66500
Transfer to Finished Goods 5000 units.
Goods finished but not yet transferred 1000 units.
Units lost (abnormal) 1000
(Labor and overhead 50% complete)
Costs incurred during the month:
Labor Tk. 30300 Overhead Tk.18500
Closing Work-in-Process 2000 units
(Labor and overhead 50% complete)
Prepare the statements necessary for the purpose of valuation of work-in-process and show process C account.
Problem 8. (Equivalent Production Average Costing): During the month of July 2013 in an Industry 2,000
units were introduced into Process I. The cost of the 2,000 units was 11,600. At the end of the month, 1,500 units
had been produced and transferred to Process II; 360 units were still in process; and 140 units had been scrapped.
A normal loss of 5% on input is allowed. It was estimated that the incomplete units (i.e. the work-in-progress) had
reached a stage in production as follows:
Material 75% completed
Labor 50% completed
Production overhead 50% completed
The total costs incurred were (in addition to the 2,000 units):
Direct materials introduced during the process 3,080
Direct wages 6,880
Production overheads 3,440
Units scrapped realized 2 each
The units scrapped had passed through the process, so were 100% completed as regards material, labor, and
overhead.
Prepare the Process Account and Abnormal Loss Account.
Problem 9: Opening work-in-process - 1,000 units (60% complete) Cost Tk. 1,100.
Units introduced during the period 10,000 units; Cost Tk. 19,300. Transferred to next
process - 9,000 units.
Closing work-in-process - 800 units (75% complete). Normal loss is estimated at 10%
of total input including units in process at the beginning. Scrap realized @ Tk.1.00 per
unit. Scrapped units are 100% complete.
Compute equivalent production and cost per equivalent unit according to the FIFO and
average cost method.
Also, evaluate the output.
Problem 10: The ABC manufacturing company uses the FIFO method in process costing. The following figures
were obtained from Dept. 2 for the month of January:
Received from Dept.1: 8000 units, value Tk. 46200
Transferred to DEPT. 3: 6500 units
Abnormal wastage: 1000 units
Stages of completion: 100%. Costs added by the Dept. during the month:
Materials--------Tk. 11400
Labor--------------Tk. 38500
Overhead---------Tk. 19250
Opening work in progress: 1000 units, value Tk. 11500, Stage of completion: Materials 80%: Labor and overhead
40%, Closing work-in-progress 1200units. Stage of completion: Materials 75%; Labor and overhead 50%. You
are required to prepare:
i. Statement of equivalent production;
ii. Statement of costs;
iii. Statement of distribution cost; and
iv. Process ‘2’ Account, Normal and Abnormal Loss Accounts
 By-product joint-product and their treatment
A by-product is a product that arises incidentally in the production of
the main products and which has a relatively small sales value
compared with the main products.
When the process of making one thing results in a second product as
well, that second thing is called a byproduct. Molasses, for example, is
a byproduct of refining sugar.

Joint products are two or more products that are generated within a
single production process.
Examples of joint products are gasoline, diesel, kerosene, lubricants,
tar, paraffin, and asphalt obtained from crude oil.
 Spoiled Goods and Defective Goods
Spoiled units – are units that do not meet production standards and are
either sold for their salvage value or discarded. When spoiled units are
discovered, they are taken out of production and no further work is
performed on them.

Defective units – are units that do not meet production standards and
must be processed further in order to be saleable as good units or as
irregulars.