CHAPTER 10

PROCESS & OPERATION COSTING

CONCEPT 1: MEANING OF PROCESS COSTING

Process Costing is a method of costing used in industries where the material has to pass through

two or more processes for being converted into a final product.

It is defined as “a method of Cost Accounting whereby costs are charged to processes or

operations and averaged over units produced”.

Such type of costing method is useful in the manufacturing of products like steel, paper,

medicines, soaps, chemicals, rubber, vegetable oil, paints, varnish etc. where the production

process is continuous and the output of one process becomes the input of the following process

till completion.

This can be understood with the help of the following diagram:

Raw Finished
Material Process-I Process-II Process-III Goods

Basic Features

Industries, where process costing can be applied, have normally one or more of the following

features:

1. Each plant or factory is divided into a number of processes, cost centres or departments,

and each such division is a stage of production or a process.

2. Manufacturing activity is carried on continuously by means of one or more process run

sequentially, selectively or simultaneously.

3. The output of one process becomes the input of another process.

4. The end product usually is of like units not distinguishable from one another.

5. It is not possible to trace the identity of any particular lot of output to any lot of input

materials. For example, in the sugar industry, it is impossible to trace any lot of sugar bags

to a particular lot of sugarcane fed or vice versa.

6. Production of a product may give rise to Joint and/or By-Products.

Topper’s Classes Process & Operation Costing | 10.2
CONCEPT 2: COSTING PROCEDURE IN PROCESS COSTING
The Cost of each process comprises the cost of:

(i) Materials (ii) Employee Cost (Labour)

(iii) Direct expenses, and (iv) Overheads of production.

Materials: Materials and supplies which are required for each process are drawn against Material

Requisitions Notes from the stores. Each process for which the materials are used, are debited

with the cost of materials consumed on the basis of the information received from the Cost

Accounting department.

The finished product of first process generally become the raw materials of second process;

under such a situation the account of second process is debited with the cost of transfer from

the first process and also with the cost of any additional material used in process.

Employee Cost (Labour): Each process account should be debited with the labour cost or wages

paid to labour for carrying out the processing activities.

Sometimes the wages paid are apportioned over the different processes after selecting

appropriate basis.

Direct expenses: Each process account should be debited with direct expenses like depreciation,

repairs, maintenance, insurance etc. associated with it.

Production Overheads: Expenses like rent, power expenses, lighting bills, gas and water bills etc.

are known as production overheads. These expenses cannot be allocated to a process.

The suitable way out to recover them is to apportion them over different processes by using

suitable basis.

Usually, these expenses are estimated in advance and the processes debited with these expenses

on a pre- determined basis.

CONCEPT 3: STEPS OF PROCESS COSTING

1. Open a process A/c for every process and debit all the expenses.

2. Normal Loss % is estimated and accounted.

3. Calculate the Normal Cost / unit.

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 − 𝑁𝑜𝑟𝑚𝑎𝑙 𝐿𝑜𝑠𝑠 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑒𝑑
= 𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 – 𝑛𝑜𝑟𝑚𝑎𝑙 𝑙𝑜𝑠𝑠

4. Value the actual production units at Normal Cost.

5. Balancing figure of Process A/c will be Abnormal loss or Gain Valued at Normal cost.
Topper’s Classes Process & Operation Costing | 10.3
Process I A/c

Unit Rupees Unit Rupees

To Direct Material xxx xxx By Normal Loss xxx xxx

To Direct Labour xxx By units

To Overhead xxx completed and

To Abnormal Gain xxx xxx transferred to

next process xxx xxx

By Abnormal Loss xxx xxx

xxx xxx

Problem.3.1
From the following data, prepare process accounts indicating the cost of each process and the

total cost. The total units that pass through each process were 240 for the period.

Process I (₹) Process II (₹) Process III (₹)

Material 1,50,000 50,000 20,000

Labour 80,000 2,00,000 60,000

Other expenses 26,000 72,000 25,000

Indirect expenses amounting to ₹ 85,000 may be apportioned on the basis of wages. There was

no opening or closing stock. [S.M.1]

Solution
Dr. Process- I Account Cr.

Particulars Per unit Total Particulars Per unit Total

(₹) (₹) (₹) (₹)

To Material 625 1,50,000 By Process -II A/c 1,150 2,76,000

” Labour 334 80,000 (Transfer to

Process-II)

” Other expenses 108 26,000

” Indirect expenses* 83 20,000

1,150 2,76,000 1,150 2,76,000

Topper’s Classes Process & Operation Costing | 10.4
Dr. Process- II Account Cr.

Particulars Per unit Total Particulars Per unit Total (₹)

(₹) (₹) (₹)
To Process-I A/c 1,150 2,76,000 By Process-III A/c 2,700 6,48,000

” Material 208 50,000 (Transfer to Process-

III)
” Labour 834 2,00,000

” Other expenses 300 72,000

” Indirect 208 50,000

expenses*
2,700 6,48,000 2,700 6,48,000

Dr. Process- III Account Cr.

Particulars Per unit Total Particulars Per unit Total (₹)

(₹) (₹) (₹)
To Process-II A/c 2,700 6,48,000 By Finished Stock 3,200 7,68,000
A/c
Material 83 20,000 (Transferred)
” Labour 250 60,000
” Other expenses 104 25,000

” Indirect 63 15,000
expenses*
3,200 7,68,000 3,200 7,68,000

* Apportionment of Indirect expenses among Process-I, Process-II and Process-III Total Wages

to processes (I + II +III) = ₹ 80,000 + ₹ 2,00,000 + ₹ 60,000 = ₹ 3,40,000.

Apportionment to:
85,000
Process- I = × ₹ 80,000 = ₹ 20,000;
3,40,000
85,000
Process- II = × ₹ 2,00,000 = ₹ 50,000 and
3,40,000
85,000
Process- III = × ₹ 60,000 = ₹ 15,000
3,40,000
Topper’s Classes Process & Operation Costing | 10.5
CONCEPT 4: TREATMENT OF NORMAL, ABNORMAL LOSS AND ABNORMAL GAIN
Normal and Abnormal Loss

Loss of material is inherent during processing operation. The loss of material under different

processes arises due to reasons like evaporation or a change in the moisture content etc.

Process loss is defined as the loss of material arising during the course of a processing operation

and is equal to the difference between the input quantity of the material and its output.

There are two types of material losses viz.

(i) Normal loss and

(ii) Abnormal loss.

Normal Process Loss: It is also known as normal wastage. It is defined as the loss of material

which is inherent in the nature of work. Such a loss can be reasonably anticipated from the nature

of the material, nature of operation, the experience and technical data.

It is unavoidable because of nature of the material or the process. It also includes units

withdrawn from the process for test or sampling.

Treatment in Cost Accounts: The cost of normal process loss in practice is absorbed by good

units produced under the process. The amount realised by the sale of normal process loss units

should be credited to the process account.

Problem.4.1: (Normal loss with no realisable value)

A product passes through Process- I and Process- II. Materials issued to Process- I amounted to

₹ 40,000, Wages ₹30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated

was 5% of input. 4,750 units of output were produced and transferred-out from Process-I. There

were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap has no

realisable value.

You are required to PREPARE Process- I account, value of normal loss and units transferred to
Process-II.
Solution Process- I Account
Particulars Units (₹) Particulars Units (₹)

To Material 5,000 40,000 By Normal loss 250 0

To Wages - 30,000

To Overhead - 27,000 By Process II 4,750 97,000

5,000 97,000 5,000 97,000

Topper’s Classes Process & Operation Costing | 10.6
Value of units transferred to Process-II:
Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Units transferred
₹ 97,000−0
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠
× 4,750 units = 97,000

Problem.4.2 (Normal loss with realisable value)

A product passes through Process- I and Process- II. Materials issued to Process- I amounted to

₹ 40,000, Wages ₹30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated

was 5% of input. 4,750 units of output were produced and transferred-out from Process-I.

There were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap

has realisable value of ₹ 2 per unit.

You are required to PREPARE Process- I account, value of normal loss and units transferred to

Process-II.

Solution Process- I Account

Particulars Units (₹) Particulars Units (₹)

To Material 5,000 40,000 By Normal loss 250 500

To Wages - 30,000

To Overhead - 27,000 By Process II 4,750 96,500

5,000 97,000 5,000 97,000

Value of Normal loss = Scrap realisable value less cost to sale

= 250 units × ₹2 = ₹500

Value of units transferred to Process-II:

Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Units transferred
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 4,750 units = ₹ 96,500

CONCEPT 5: ABNORMAL PROCESS LOSS

It is also known as abnormal wastage. It is defined as the loss in excess of the pre-determined

loss (Normal process loss). This type of loss may occur due to the carelessness of workers, a bad

plant design or operation, sabotage etc.

Such a loss cannot obviously be estimated in advance. But it can be kept under control by taking

suitable measures.
Topper’s Classes Process & Operation Costing | 10.7
Treatment in Cost Accounts: The cost of an abnormal process loss unit is equal to the cost of a

good unit. The total cost of abnormal process loss is credited to the process account from which

it arises. Cost of abnormal process loss is not treated as a part of the cost of the product. In

fact, the total cost of abnormal process loss is debited to costing profit and loss account.

Abnormal Loss A/c

Unit Rupees Unit Rupees

To Process I xx xx By Bank xx xx

To Process II xx xx By P/L A/c xx xx

xx xx xx xx

It is transferred to P/L A/c after adjusting recovery from sale of scrap

Problem.5.1 (Abnormal loss with realisable value)

A product passes through Process- I and Process- II. Materials issued to Process- I amounted to

₹ 40,000, Wages ₹30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated

was 5% of input. 4,550 units of output were produced and transferred-out from Process-I.

There were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap

has realisable value of ₹ 2 per unit.

You are required to PREPARE Process- I account, value of normal loss, abnormal loss and units

transferred to Process-II.

Solution Process- I Account

Particulars Units (₹) Particulars Units (₹)

To Material 5,000 40,000 By Normal loss 250 500

To Wages - 30,000 By Abnormal Loss 200 4,063

To Overhead - 27,000 By Process II 4,550 92,437

5,000 97,000 5,000 97,000

Value of Normal loss = Scrap realisable value less cost to sale

= 250 units × ₹2 = ₹500

Value of Abnormal loss:

Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Abnormal loss units
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 200 units = ₹ 4,063
Topper’s Classes Process & Operation Costing | 10.8
Value of units transferred to Process-II:
Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Units transferred
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 4,550 units = ₹ 92,437

CONCEPT 6: ABNORMAL PROCESS GAIN/ YIELD

Sometimes, loss under a process is less than the anticipated normal figure. In other words, the

actual production exceeds the expected figures.

So, abnormal gain may be defined as an unexpected gain in production under the normal conditions.

This arises due to over- estimation of process loss, improvements in work efficiency of workers,

use od better technology in production etc.

Treatment in Cost Accounts: The process account under which abnormal gain arises is debited

with the abnormal gain and credited to abnormal gain account which will be closed by transferring

to the Costing Profit and Loss account. The cost of abnormal gain is computed on the basis of

normal production.

Abnormal Gain A/c

Particulars Units Rupees Particulars Units Rupees

To Normal Loss xx xx By Process II A/c xx xx

To P/L A/c xx

xx xx xx xx

It is transferred to P/L A/c as profit but after adjusting Loss of Non – realisation of Normal

Loss Unit due to abnormal gain.

Problem.6.1 (Abnormal gain/ yield with realisable value)

A product passes through Process- I and Process- II. Materials issued to Process- I amounted to

₹ 40,000, Wages ₹ 30,000 and manufacturing overheads were ₹ 27,000. Normal loss anticipated

was 5% of input. 4,850 units of output were produced and transferred-out from Process-I.

There were no opening stocks. Input raw material issued to Process I were 5,000 units. Scrap

has realisable value of ₹ 2 per unit.

You are required to PREPARE Process- I account, value of normal loss, abnormal loss/ gain and

units transferred to Process-II.

Topper’s Classes Process & Operation Costing | 10.9
Solution Process- I Account

Particulars Units (₹) Particulars Units (₹)

To Material 5,000 40,000 By Normal loss 250 500

To Wages - 30,000

To Overhead - 27,000 By Process II 4,850 98,532

To Abnormal Gain A/c 100 2,032

5,100 99,032 5,100 99,032

Value of Normal loss = Scrap realisable value less cost to sale = 250 units × ₹2 = ₹500

(Even though the actual loss is less than the expected loss (Normal loss), value of the normal loss

is calculated on the estimated figure)

Value of Abnormal Gain:

Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Abnormal Gain units
₹ 97,000−₹ 500
= 5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠 × 100 units = ₹ 2,032

Value of units transferred to Process-II:

Total Cost−Realisable value of normal loss
= Total input units−Normal loss units
× Units transferred
₹ 97,000−₹ 500
= × 4,850 units = ₹ 98,532
5,000 𝑢𝑛𝑖𝑡𝑠−250 𝑢𝑛𝑖𝑡𝑠

Abnormal Gain A/c

Particulars Units (₹) Particulars Units (₹)

To Normal Loss A/c 100 200 By Process-I A/c 100 2,032

(100 units × ₹2)

To Costing P&L A/c - 1,832

100 2,032 100 2,032

(The Costing P&L Account is credited only for actual gain amount)

Problem.6.2
A product passes through three processes.
The output of each process is treated as the raw material of the next process to which it is
transferred and output of the third process is transferred to finished stock.
Process I (₹) Process II (₹) Process III (₹)
Material issued 40,000 20,000 10,000
Labour 6,000 4,000 1,000
Manufacturing overhead 10,000 10,000 15,000
Topper’s Classes Process & Operation Costing | 10.10
10,000 units have been issued to the Process-I and after processing, the output of each process
is as under:
Process Output Normal Loss
Process-I 9,750 units 2%

Process-II 9,400 units 5%

Process-III 8,000 units 10%

No stock of materials or of work-in-process was left at the end. CALCULATE the cost of the

finished articles. [S.M.2]

Solution
Dr. Process-I Account Cr.
Particulars Units Total Particulars Units Total
(₹) (₹)
To Material 10,000 40,000 By Normal Loss A/c 200 -

” Labour - 6,000 (2% of 10,000 units) 50 286

” Abnormal Loss A/c
” Manufacturing - 10,000 9,750 55,714
(₹5.7142 × 50 units)
OH
” Process-II A/c

(₹ 5.7142 × 9,750 units)

10,000 56,000 10,000 56,000

Cost per unit of completed units and abnormal loss:

Total Cost 56,000
= = 5.7142
Inputs − Normal loss 10,000units − 200units

Dr. Process-II Account Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Process-I A/c 9,750 55,714 By Normal Loss A/c 488 -

(5% of 9,750 units)

” Material - 20,000 ” Process-III A/c 9,400 91,051

(₹ 9.6862 × 9,400

” Labour - 4,000 units)

” Manufacturing OH - 10,000

” Abnormal Gain A/c 138 1,337

(₹ 9.6862 × 138

units)

9,888 91,051 9,888 91,051

Topper’s Classes Process & Operation Costing | 10.11
Cost per unit of completed units and abnormal gain:
Total Cost 89,714
= = 9.6862
Inputs − Normal loss 9,750units − 488units

Dr. Process - III Account Cr.

Particulars Units Total Particulars Units Total

(₹) (₹)

To Process-II A/c 9,400 91,051 By Normal Loss A/c (10% of 940 -

9,400 units)

” Material - 10,000 ” Abnormal Loss A/c (₹ 460 6,364

13.8358 × 460 units)

” Labour - 1,000 ” Finished Stock A/c (₹ 8,000 1,10,687

13.8358 × 8,000

units)
” Manufacturing OH - 15,000

9,400 1,17,051 9,400 1,17,051

Cost per unit of completed units and abnormal loss:

Total Cost 1,17,051
= = 13.8358
Inputs − Normal loss 9,400units − 940units

Problem.6.3
RST Limited processes product Z through two distinct processes-Process-I and Process-II. On

completion, it is transferred to finished stock. From the following information for the current

year, prepare Process-I, Process-II and finished stock A/c:

Particulars Process- I Process -II

Raw materials used 7,500 units -

Raw materials cost per units ₹ 60 -

Transfer to next process/ Finished stock 7,050 units 6,525 units

Normal Loss (on inputs) 5% 10%

Directs wages ₹ 1,35,750 ₹ 1,29,250

Directs Expenses 60% of Direct wages 65% of Direct wages

Manufacturing overheads 20% of Direct wages 15% of Direct wages

Realisable value of scrap per unit ₹ 12.50 ₹ 37.50

6,000 units of finished goods were sold at a profit of 15% on cost. Assume that there was no

opening or closing stock of work of work-in-process. [S.M.3]

Topper’s Classes Process & Operation Costing | 10.12

Solution Process- I A/c

Particulars Units (₹) Particulars Units (₹)
To Raw material used 7,500 4,50,000 By Normal loss 375 4,688

(₹ 60 × 7,500 units) (5% of 7,500

units) × ₹ 12.5

To Direct wages - 1,35,750 By Process- II A/c 7,050 6,82,403

(₹ 96.7947 × 7,050

units)

To Direct expenses - 81,450 By Abnormal loss 75 7,259

(₹ 96. 7947 × 75

units)

To Manufacturing 27,150

overhead
7,500 6,94,350 7,500 6,94,350
Cost per unit of completed units and abnormal loss:
Total Cost Realisable value from normal loss
Inputs units - Normal loss units

= 6,94,350 - 4,688
=
6,89,662
= 96.7947
7,500 units - 375 units 7,125units
Process- II A/c

Particulars Units (₹) Particulars Units (₹)

To Process- I A/c 7,050 6,82,403 By Normal loss 705 26,438

(10% of 7,050 units)

× ₹ 37.5

To Direct wages - 1,29,250 By Finished Stock A/c 6,525 9,13,824

( ₹ 140.0496 × 6,525

units)

To Direct expenses - 84,013

To Manufacturing - 19,387

overhead

To Abnormal gain 180 25,209

(₹ 140.0496 × 180)

7,230 9,40,262 7,230 9,40,262

Topper’s Classes Process & Operation Costing | 10.13
Cost per unit of completed units and abnormal loss:

Total Cost - Realisable value from normal loss

=
Inputs units - Normal loss units
9,15,053- 26,438 8,88,615
= = = 1,40.0496
7,050 units - 705units 6,345units

Finished Goods Stock A/c

Particulars Units (₹) Particulars Units (₹)

To Process II A/c 6,525 9,13,824 By Cost of Sales 6,000 8,40,298

(₹140.0496 × 6,000 units)

By Balance c/d 525 73,526

6,525 9,13,824 6,525 9,13,824

Income Statement

Particulars (₹) Particulars (₹)

To Cost of sales 8,40,298 By Abnormal gain 18,459

(₹140.0496 × 6,000 units) {180 units × (₹ 140.0496 – ₹ 37.50)}

To Abnormal loss 6,322 By Sales (₹ 8,40,298 × 115%) 9,66,343

{75 units × (₹ 96.7947 – ₹ 12.50)}

To Net Profit 1,38,182

9,84,802 9,84,802

Problem.6.4
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process

- Process P, Process Q and Process R. The following data relating to cost and output is obtained

from the books of accounts for the month of April 2017:

Particulars Process P Process Q Process R

Direct Material 38,000 42,500 42,880

Direct Labour 30,000 40,000 50,000

Production overheads of ₹ 90,000 were recovered as percentage of direct labour.

10,000 kg of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of material

or work in process. The entire output of each process passes directly to the next process and

finally to warehouse.

There is normal wastage, in processing, of 10%. The scrap value of wastage is ₹ 1 per kg.
Topper’s Classes Process & Operation Costing | 10.14
The output of each process transferred to next process and finally to warehouse are as under:

Process P = 9,000 kg

Process Q = 8,200 kg

Process R = 7,300 kg

The company fixes selling price of the end product in such a way so as to yield a profit of 25% on

selling price. Prepare Process P, Q and R accounts. Also calculate selling price per unit of end

product. [May 2018, 10 Marks]

Solution Process- P A/c

Particulars Units (Kg) (₹) Particulars Units (Kg) (₹)
To Raw Material 10,000 50,000 By Normal loss A/c 1,000 1,000

(₹ 5 × 10,000 Kg) (10% of 10,000) × ₹ 1

To Direct Material - 38,000 By Process – Q A/c 9,000 1,39,500

To Direct Labour - 30,000 (₹ 15.50 × 9,000 kgs)

To Production OH 22,500

(90,000 × 3/12)

10,000 1,40,500 10,000 1,40,500

Cost Per unit of completed units

Total Cost − Re alisableValue from normal loss `1,40,500 −`1,000

= =
Input units − Normal loss units 10000kgs − 1000kgs

`1,39,500
= = ₹ 15.50
9000kgs

Process- Q A/c

Particulars Units (Kg) (₹) Particulars Units (Kg) (₹)

To Process –Q A/c 9,000 1,39,500 By Normal loss 900 900

To Direct Material 42,500 (10% of 9,000)Kg× ₹ 1

To Direct Labour - 40,000

To Production OH - 30,000 By Process – R A/c 8,200 2,54,200

(90,000 × 4/12) (₹ 31 × 8,200 kg.)

To Abnormal Gain 100 3,100

(₹ 31 × 100 kgs)

9,100 2,55,100 9,100 2,55,100

Topper’s Classes Process & Operation Costing | 10.15
Cost Per unit of Completed units and abnormal Gain

Total Cost − Re alisableValue from normal loss ` 2,52,000 −`900

= =
Input units − Normal loss units 9000kgs − 900kgs

` 2,51,100
= = ₹ 31
8100kgs

Process- R A/c

Particulars Units (Kg) (₹) Particulars Units (Kg) (₹)

To Process –Q A/c 8,200 2,54,200 By Normal loss 820 820

To Direct Material 42,880 (10% of 8,200)Kg× ₹1

To Direct Labour - 50,000 By Finished Goods 7,300 3,79,600

To Production OH - 37,500 (₹ 52× 7,300 kg.)

(9,000 × 5/12) By Abnormal Loss 80 4,160

(₹ 52 ×80kg)

8,200 3,84,580 8,200 3,84,580

Cost Per unit of Completed units and abnormal Gain

Total Cost − Re alisableValue from normal loss `3,84,580 −`820

= = = ₹ 52
Input units − Normal loss units 8200kgs − 820kgs

Calculation of Selling Price

Cost of Product = ₹ 3,79,600

(52 × 7,300 kg)

+ Profit = ₹ 1,26,533.33

Sales = 5,06,133.33

÷ No. of kg. = 7,300 kg

Selling Price p.u. = ₹ 69.33

Problem.6.5
A product passes through two distinct processes before completion.

Following information are available in this respect:

Process – 1 Process – 2

Raw materials used 10000 units -

Raw material cost (per unit) ₹ 75 -

Transfer to next process/ Finished good 9000 units 8200 units

Topper’s Classes Process & Operation Costing | 10.16
Normal loss (on inputs) 5% 10%

Direct wages ₹ 3,00,000 ₹ 5,60,000

Direct expenses 50% of direct wages 65% of direct wages

Manufacturing overheads 25% of direct wages 15% of direct wages

Realisable value of scrap (per unit) ₹ 13.50 ₹ 145

8000 units of finished goods were sold at a profit of 15% on cost.

There was no opening and closing stock of work-in-progress.

Prepare:

(i) Process-1 and Process-2 Account

(ii) Finished goods Account

(iii) Normal Loss Account

(iv) Abnormal Loss Account

(v) Abnormal Gain Account [Nov. 2019, 10 Marks]

Solution.
(i) Dr. Process – 1 Account Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Raw Material By Normal Loss A/c @ 13.5 500 6,750

consumed 10,000 7,50,000 By Process 2 @ 133.5 9,000 12,01,500

To Direct wages - 3,00,000 By Abnormal Loss @ 133.5 500 66,750

To Direct Expenses - 1,50,000

To Manufacturing 75,000

overheads

10,000 12,75,000 10,000 12,75,000

Cost per unit of completed units and abnormal loss:

12,75,000 − 6,750
= = 133.5
10,000 units − 500 units

(ii) Dr. Process – 2 Account Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Process – I A/c 9,000 12,01,500 Normal Loss A/c @ 145 900 1,30,500

To Direct Wages - 5,60,000 By Finished Stock A/c 8,200 21,04,667

To Direct Expenses - 3,64,000 (bal. fig)

Topper’s Classes Process & Operation Costing | 10.17
To Manufacturing

overheads - 84,000

To Abnormal gain

(₹ 256.67×100 units) 100 25,667

9,100 22,35,167 9,100 22,35,167

Cost per unit of completed units and abnormal gain:

22,09,500 − 1,30,500
= = 256.67
8,100 units

Dr. Finished Goods A/c Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Process II A/c 8,200 21,04,667 By Cost of Sales 8,000 20,53,333

By Balance c/d 200 51,334

8,200 21,04,667 8,200 21,04,667

(iii) Dr. Normal Loss A/c Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Process – I 500 6,750 By abnormal Gain II 100 14,500

To Process II 900 1,30,500 By Cash 500 6,750

By Cash 800 1,16,000

1,400 1,37,250 1,400 1,37,250

(iv) Dr. Abnormal Loss A/c Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Process – I 500 66,750 By Cost Ledger Control A/c 500 6,750

By Costing P & L A/c - 60,000

(Abnormal loss)

66,750 66,750

(v) Dr. Abnormal Gain A/c Cr.

Particulars Units Total (₹) Particulars Units Total (₹)

To Normal Loss 100 14,500 By Process II 100 25,667

To Costing P & L A/c 11,167

100 25,667 100 25,667

Topper’s Classes Process & Operation Costing | 10.18

Problem.6.6
A product passes through Process-I and Process-II.

Particulars pertaining to the Process-I are:

Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing

overheads were ₹ 52,500. Normal Loss anticipated was 5% of input. 9,650 units of output were

produced and transferred out from Process-I to Process II. Input raw materials issued to

Process I were 10,000 units.

There were no opening stocks.

Scrap has realizable value of ₹ 5 per unit.

You are required to prepare:

(i) Process-I Account

(ii) Abnormal Gain/Loss Account [Dec. 2021, 5 Marks]

Solution (i) Process-I Account

Particulars Units (₹) Particulars Units (₹)

To Materials 10,000 80,000 By Normal Loss A/c 500 2,500

(5% of 10,000)

To Wages - 60,000 By Process-II A/c 9,650 1,93,000

(₹ 20* × 9,650 units)

To Manufacturing OH - 52,500

To Abnormal Gain A/c 150 3,000

(₹ 20* × 150 units)

10,150 1,95,500 10,150 1,95,500

* (80,000 + 60,000 + 52,500) – 2,500/10,000 – 500 = ₹ 20

(ii) Abnormal Gain – Account

Particulars Units Total (₹) Particulars Units Total (₹)

To Normal Loss A/c 150 750 By Process I – A/c 150 3,000

To Costing P & L A/c - 2,250

150 3,000 150 3,000

Topper’s Classes Process & Operation Costing | 10.19

Problem.6.7
N Ltd. produces a product which passes through two processes – Process I and Process – II. The

company has provided following – information related to the Financial Year 2021-22:

Process I Process II

Raw Material @ ₹ 65 per unit 6,500 units -

Direct Wages ₹ 1,40,000 ₹ 1,30,000

Direct Expenses 30% of Direct Wages 35% of Direct Wages

Manufacturing Overheads ₹ 21,500 ₹ 24,500

Realisable value of scrap per unit ₹ 4.00 ₹ 16.00

Normal Loss 250 units 500 units

Unit transferred to Process II/Finished stock 6,000 units 5,500 units

Sales - 5,000 units

There was no opening or closing stock of work-in-progress.

You are required to prepare:

(i) Process – I Account

(ii) Process – II Account

(iii) Finished Stock Account

[Nov. 2022, 10 Marks]

Solution Process-I A/c

Particulars Units (₹) Particulars Units (₹)

To Raw material used 6,500 4,22,500 By Normal loss 250 1,000

(₹ 65 × 6,500 units) (250 units × ₹ 4)

To Direct wages - 1,40,000 By Process- II A/c 6,000 6,00,000

(₹ 100 × 6,000 units)

To Direct expenses - 42,000 By Abnormal loss 250 25,000

(30% of ₹ 1,40,000) (₹ 100 × 250 units)

To Manufacturing overhead 21,500

6,500 6,26,000 6,500 6,26,000

Topper’s Classes Process & Operation Costing | 10.20
Total Cost - Realisable value from normal loss
Cost per unit of completed units and abnormal loss:
Inputs Units - Normal loss units
6,26,000 - 1,000 6,25,000
= = = 100
6,500 units - 250 units 6,250 units
Process- II A/c

Particulars Units (₹) Particulars Units (₹)

To Process - I A/c 6,000 6,00,000 By Normal loss 500 8,000

(500 units × ₹ 16)

To Direct wages - 1,30,000 By Finished Stock A/c 5,500 7,92,000

(₹ 144 × 5,500 units)

To Direct expenses - 45,500

(35% of ₹ 1,30,000)

To Manufacturing overhead - 24,500

6,000 8,00,000 6,000 8,00,000

Cost per unit of completed units and abnormal loss:

Total Cost - Realisable value from normal loss

=
Inputs Units - Normal loss units
8,00,000 - 8,000 7,92,000
= = = 144
6,000 units - 500 units 5,500 units

Finished Goods Stock A/c

Particulars Units (₹) Particulars Units (₹)

To Process II A/c 5,500 7,92,000 By Cost of Sales 5,000 7,20,000

(₹ 144 × 5,000 units)

By Balance c/d 500 72,000

5,500 7,92,000 5,500 7,92,000

Problem.6.8
A product passes through two processes; Process A and Process B. The output of Process A is

treated as input of Process B. The following information has been furnished:

Process A Process B
Input Material

78,000 kg. @ ₹ 5 ₹ 3,90,000 -

Indirect Material - ₹ 34,320

Topper’s Classes Process & Operation Costing | 10.21
Wages ₹ 2,85,000 ₹ 3,30,000

Overhead ₹ 1,67,400 ₹ 1,11,600

Output transferred to Process B 68,640 kgs

Transfer to Finished Stock - 69,000 kgs

Normal loss of input material (weight in kgs.) 7,800 kgs 240 kgs

There is no realisable value for normal loss. No stock of raw materials on work-in-process was

left at the end.

Yon are required to prepare the Process account for each Process. [Nov. 2023, 5 Marks]

CONCEPT 7: MISSING FIGURE

Problem.7.1
A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct

Processes – X, Y and Z. The following data is given:

Process X Process Y Process Z

Material consumed (in ₹) 2,600 2,250 2,000

Direct wages (in ₹) 4,000 3,500 3,000

• The total Production Overhead of ₹ 15,750 was recovered @ 150% of Direct wages.

• 15,000 units at ₹ 2 each were introduced to Process ‘X’.

• The output of each process passes to the next process and finally, 12,000 units were

transferred to Finished Stock Account from Process ‘Z’.

• No stock of materials or work in progress was left at the end.

The following additional information is given:

Process % of wastage to normal input Value of Scrap per unit (₹)

X 6% 1.10

Y ? 2.00

Z 5% 1.00

You are required to:

(i) Find out the percentage of wastage in process ‘Y’, given that the output of Process ‘Y’ is

transferred to Process ‘Z’ at ₹ 4 per unit.

(ii) Prepare Process accounts for all the three processes X, Y and Z. [July 2021, 10 Marks]
Topper’s Classes Process & Operation Costing | 10.22

Solution
Dr. Process-X Account Cr.
Particulars Units (₹) Particulars Units (₹)
To Material introduced 15,000 30,000 By Normal Loss A/c 900 990

[(6% of 15,000 units) x ₹1.1]

” Additional material - 2,600 ” Process-Y A/c 14,100 41,610

” Direct wages - 4,000 (₹ 2.951* × 14,100 units)

” Production OH - 6,000

15,000 42,600 15,000 42,600

*Cost per unit of completed units

= Total Cost - Realisable value from normal loss/Input units – Normal loss units

= ₹ 42,600 - ₹ 990/15,000 units – 900 units = ₹ 2.951

Dr. Process-Y Account Cr.

Particulars Units (₹) Particulars Units (₹)

To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of 14,100
units) x ₹ 2]
” Additional material - 2,250 ” Process-Z A/c 12,205 48,820
” Direct wages - 3,500 (₹ 4 × 12,205 units)
” Production OH - 5,250

14,100 52,610 14,100 52,610

#Calculation for % of wastage in process ‘Y’:

Let’s consider number of units lost under process ‘Y’ = A

Now, Total Cost - Realisable value from normal loss/Input units – Normal loss units = 4

= ₹ 52,610 - ₹ 2A/14,100 units – A = ₹ 4 => = ₹ 52,610 - ₹ 2A = ₹ 56,400 - ₹ 4A

2A = ₹ 3,790 = > A = 1,895 units

% of wastage = 1,895 units/14,100 units = 13.44%

Dr. Process-Z Account Cr.

Particulars Units (₹) Particulars Units (₹)

To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610

[(5% of 12,205 units) x ₹ 1]

” Additional material - 2,000 ” Finished Stock A/c 12,000 59,726

(₹ 4.9771$ × 12,000 units)

Topper’s Classes Process & Operation Costing | 10.23
” Direct wages - 3,000

” Production OH - 4,500

” Abnormal gain 405 2,016

(₹ 4.9771$ × 405 units)

12,610 60,336 12,610 60,336

CONCEPT 8: VALUATION OF WORK-IN-PROCESS

The cost incurred in such industries represents the cost of work carried on opening work-in-

process, closing work-in-process and completed units.

Thus to ascertain the cost of each completed unit, it is necessary to ascertain the cost of work-

in-process in the beginning and at the end of the process.

Equivalent Units

Equivalent units or equivalent production units, means converting the incomplete production units

into their equivalent completed units.

Under each process, an estimate is made of the percentage completion of work-in-process with

regard to different elements of costs, viz., material, labour and overheads.

The formula for computing equivalent completed units is:

𝑨𝒄𝒕𝒖𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒖𝒏𝒊𝒕𝒔 𝒊𝒏 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒐𝒇

Equivalent completed units = ( ) × ( )
𝒕𝒉𝒆 𝒑𝒓𝒐𝒄𝒆𝒔𝒔 𝒐𝒇 𝒎𝒂𝒏𝒖𝒇𝒂𝒄𝒕𝒖𝒓𝒆 𝑾𝒐𝒓𝒌 𝑪𝒐𝒎𝒑𝒍𝒆𝒕𝒆𝒅

CONCEPT 9: EQUIVALENT PRODUCTION

Step 1: Statement of Equivalents Units

Particulars Physical Equivalent Production

Unit Material Labour Overhead

% of Units % of Units % of Units

Completion Completion Completion

Opening WIP xxx xxx xxx xxx xxx xxx xxx

Finished Stock xxx xxx xxx xxx xxx xxx xxx

[Units completed]

Normal Loss - - - - - - -
Topper’s Classes Process & Operation Costing | 10.24
Abnormal loss xxx xxx xxx xxx xxx xxx xxx

Closing WIP 1 xxx xxx xxx xxx xxx xxx xxx

Closing WIP 2 xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx

For Equivalent units calculation:

1. Normal Loss Units are treated as NIL (0%) Completion Units

2. Abnormal loss units are treated as equal to 100% completed units unless specified otherwise.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 – 𝑁𝑜𝑟𝑚𝑎𝑙 𝐿𝑜𝑠𝑠
Step 2: Cost per unit = 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛

Step 3: Prepare Statement of Evaluation.

Particular Material Labour Overheads Total

Opening WIP EU x Rate EU x Rate EU x Rate xx

Units Introduced & Completed EU x Rate EU x Rate EU x Rate xx

Abnormal Loss EU x Rate EU x Rate EU x Rate xx

Closing WIP EU x Rate EU x Rate EU x Rate xx

Problem.9.1
An English willow company who manufactures cricket bat buys wood as its direct material. The

Forming department processes the cricket bats and the cricket bats are then transferred to the

Finishing department where stickers are applied.

The Forming department began manufacturing 10,000 initial bats during the month of December

for the first time and their cost is as follows:

Direct material: ₹ 33,000

Conversion costs: ₹ 17,000

Total ₹ 50,000

A total of 8,000 cricket bats were completed and transferred to the Finishing department, the

rest 2,000 were still in the Forming process at the end of the month.

All of the forming departments direct material were placed, but, on average, only 25% of the

conversion costs was applied to the ending work in progress inventory.

CALCULATE:

(i) Equivalent units of production for each cost.

(ii) The Conversion cost per Equivalent units.

(iii) Cost of closing work in process (WIP) and finished products. [T.1]
Topper’s Classes Process & Operation Costing | 10.25

Solution
(i) Calculation of equivalent units of production:

Equivalent Units
Output Particulars Units Material Conversion cost
% Units % Units

Finished output 8,000 100 8,000 100 8,000

Closing W-I-P 2,000 100 2,000 25 500

Total 10,000 10,000 8,500

(ii) Calculation of cost per equivalent unit

Direct Material Conversion costs

Total cost (₹) 33,000 17,000

Equivalent units 10,000 8,500

Cost per equivalent unit (₹) 3.30 2.00

Statement of Evaluation

Particular Material Conversion Cost Total

Units Introduced & Completed 8,000 x 3.3 8,000 x 2 42,400

Closing WIP 2,000 x 3.3 500 x 2 7,600

Problem.9.2
A company produces a component, which passes through two processes. During the month

of April, materials for 40,000 components were put into Process I of which 30,000 were

completed and transferred to Process II. Those not transferred to Process II were 100%

complete as to materials cost and 50% complete as to labour and overheads cost. The

Process I costs incurred were as follows:

Direct Materials ₹ 15,000

Direct Wages ₹ 18,000

Factory Overheads ₹ 12,000

Of those transferred to Process II, 28,000 units were completed and transferred to

finished goods stores. There was a normal loss with no salvage value of 200 units in Process

II. There were 1,800 units, remained unfinished in the process with 100% complete as to

material and 25% complete as regard to wages and overheads.

No further process material costs occur after introduction at the first process until the
Topper’s Classes Process & Operation Costing | 10.26
end of the second process, when protective packing is applied to the completed components.

The process and packing costs incurred at the end of the Process II were:

Packing Materials ₹ 4,000

Direct Wages ₹ 3,500

Factory Overheads ₹ 4,500

Required

(i) Prepare Statement of Equivalent Production, Cost Per unit and Process I A/c

(ii) Prepare State of Equivalent Production. Cost per Unit and Process II A/c. [T.5]

Solution
Step 1: Process I A/c

Particulars Unit (₹) Particulars Units (₹)

To Direct material 40,000 15,000 By Process II A/c 30,000 36,965

To Direct wages - 18,000 By Closing W-I-P 10,000 8,035

To Factory overhead - 12,000 - -

40,000 45,000 40,000 45,000

Statement of Equivalent Production

Equivalent Units
Output Particulars Units Material Labour & Overheads
% Units % Units
Finished output 30,000 100 30,000 100 30,000

Closing W-I-P 10,000 100 10,000 50% 5,000

Total 40,000 40,000 35,000

Statement of Cost Per Unit

Direct Material Labour & Overheads

Total cost (₹) 15,000 30,000

Equivalent units 40,000 35,000

Cost per equivalent unit (₹) 0.375 0.8571

Statement of Evaluation

Particular Material Labour & Overheads Total

Units Introduced & Completed 30,000 x 0.375 30,000 x 0.8571 36,965

Closing WIP 10,000 x 0.375 5,000 x 0.8571 8,035

Topper’s Classes Process & Operation Costing | 10.27
Step 2: Process II A/c

Particulars Units (₹) Particulars Units (₹)

To Process I 30,000 36,965 By Finished Stock 28,000 46,607

To Direct wages - 3,500 By Normal loss 200 -

To Factory overhead - 4,500 By WIP stock 1,800 2,358

To Packing charges - 4,000

30,000 48,965 30,000 48,965

Statement of Equivalent Production

Equivalent Units

Output Particulars Units Material Labour & Overheads

% Units % Units

Finished output 28,000 100 28,000 100 28,000

Closing W-I-P 1,800 100 1,800 25% 450

Total 29,800 29,800 28,450

Statement of Cost Per Unit

Direct Material Labour & OH Packing Material

Total cost (₹) 36,965 8,000 4,000

Equivalent units 29,800 28,450 28,000

Cost per equivalent unit (₹) 1.24 0.28119 0.14286

Statement of Evaluation

Particular Material Labour & OH Packing Material Total

Units Introduced 28,000 x 1.24 28,000 x 0.28119 28,000 x 0.14286 46,607

& Completed

Closing WIP 1800 x 1.24 450 x 0.28119 - 2358

CONCEPT 10: PROCESS COSTING METHODS

Mainly two methods for valuation of work-in-process are followed:

1. First-in-First Out (FIFO) method.

2. Weighted Average (Average) method

Topper’s Classes Process & Operation Costing | 10.28
CONCEPT 11: FIFO METHOD
Under this method the units completed and transferred are taken from both opening work-in-

process (WIP) and freshly introduced materials/inputs. The cost to complete the opening WIP

and other completed units are calculated separately.

The cost of opening WIP is added to cost incurred on completing the incomplete (WIP) units into

complete one.

The total cost of units completed and transferred is calculated by adding opening WIP cost to

cost on freshly introduced inputs. In this method the closing stock of work in process is valued

at current cost.

Method of Cost Formula:

FIFO

 Opening WIP will be completed firstly in current period

 then work on new Raw Material will start.

Working Notes:

- Cost / Unit

= Total Current period cost – Normal Loss real / Total Equivalent units

- Working Note

Cost of unit completed will include

(i) Opening WIP pre period cost

(ii) Opening Work in Progress current period cost

(iii) Units Introduced and Completed during the period cost

Note: Normal Loss % can be

1. Of current period units introduced = Input × %

2. Of units Introduced × Opening WIP = (Opening WIP + Introduced) × %

3. Of units produced = (Opening WIP + Input) – Closing WIP × %

Problem.11.1
Opening work-in-process 1,000 units (60% complete);

Cost ₹ 1,10,000.

Units introduced during the period 10,000 units; Cost ₹ 19,30,000.

Transferred to next process - 9,000 units.

Topper’s Classes Process & Operation Costing | 10.29
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 realise ₹ 10 per unit. Scraps are 100% complete.

Using FIFO method, compute equivalent production and cost per equivalent unit. Also,

evaluate the output. [S.M.4]

Solution Statement of Equivalent Production Units (Under FIFO Method)

Particulars Input Particulars Output Equivalent Production
units units (%) Equivalent units
Opening W-I-P 1,000 From opening WIP 1,000 40 400

Units introduced 10,000 From fresh inputs 8,000 100 8,000

Units completed 9,000

(Transferred to next

process)

Normal Loss 1,100 - -

{10% (1,000 + 10,000

units)}

Closing WIP 800 75 600

Abnormal loss 100 100 100

(Balancing figure)

11,000 11,000 9,100

Computation of cost per equivalent production unit:

Cost of the Process (for the period) ₹ 19,30,000

Less: Scrap value of normal loss (₹ 10 × 1,100 units) (₹ 11,000)

Total process cost ₹ 19,19,000

Cost per equivalent unit = ₹19,19,000/9,100 units = ₹ 210.88

Statement of Evaluation
Particulars Equivalent Cost per EU Amount

Units (EU) (₹) (₹)

(i) Opening W-I-P completed during the 400 210.88 84,352

period

Add: Cost of W-I-P at beginning - - 1,10,000

Topper’s Classes Process & Operation Costing | 10.30
Complete cost of 1,000 units of opening W-I-P 1,000 194.35 1,94,352

(ii) Completely processed units 8,000 210.88 16,87,040

(iii) Abnormal Loss 100 210.88 21,088

(iv) Closing W-I-P 600 210.88 1,26,528

(The difference in total amount may arise due to rounding off error)

Problem.11.2
Hill manufacturing Ltd uses process costing to manufacture Water density sensors for hydro

sector. The following information pertains to operations for the month of May.

Particulars Units

Beginning WIP, May 1 16,000

Started in production during May 1,00,000

Completed production during May 92,000

Ending work in progress, May 31 24,000

The beginning work in progress was 60% complete for materials and 20% complete for conversion

costs. The ending inventory was 90% complete for material and 40% complete for conversion

costs. Costs pertaining to the month of May are as follows:

Beginning inventory costs are material ₹ 27,670, direct labour ₹ 30,120 and factory overhead

₹12,720. Cost incurred during May are material used, ₹ 4,79,000, direct labour ₹ 1,82,880,

factory overheads ₹ 3,91,160.

CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.

(ii) Cost per equivalent unit for conversion cost. [T.2]

Solution
(i) Calculation of equivalent units of production:

Equivalent Units
Input Details Units Output Units Material Conversion cost
Particulars % Units % Units
Beginning WIP 16,000 From beginning 16,000 40 6,400 80 12,800

WIP

Unit Introduced 1,00,000 Completed 76,000 100 76,000 100 76,000

output

Closing W-I-P 24,000 90 21,600 40 9,600

Total 1,16,000 Total 1,16,000 1,04,000 98,400

Topper’s Classes Process & Operation Costing | 10.31
(ii) Calculation of cost per equivalent unit for conversion costs

Particulars Amount (₹)

Direct labour 1,82,880

Factory overheads 3,91,160
5,74,040
Equivalent units 98,400
Cost per equivalent unit (₹) 5.83

Problem.11.3
Following details have been provided by M/S AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)

(ii) Units introduced during the year - 17000 units

(iii) Cost of the process (for the period) - ₹ 33,12,720

(iv) Transferred to next process - 15000 units

(v) Closing works-in-progress - 2200 units (80% complete)

(vi) Normal loss is estimated at 12% of total input (including units in process in the

beginning).

Scraps realise ₹ 50 per unit. Scraps are 100% complete. Using FIFO method, compute:

(i) Equivalent production

(ii) Cost per equivalent unit [Nov. 2018, 5 Marks]

Solution. Statement of Equivalent Production Units (Under FIFO Method)

Particulars Input Particulars Output Equivalent Production
Units Units (%) EU
Opening WIP 3000 From opening WIP 3000 30 900

Units Introduction 17,000 From fresh Inputs 12,000 100 12,000

Units Completed 15,000

(Transferred to next

process)

Normal loss [12% 2,400 - -

(3000 + 17000 units)]

Closing WIP 2,200 80 1,760

Abnormal loss 400 100 400

(Balancing figure)

20,000 20,000 15,060

Topper’s Classes Process & Operation Costing | 10.32
Computation of Cost per equivalent Production unit:

Cost of the process (for the period) ₹ 33,12,720

Less:

Scrap value of normal loss (₹ 1,20,000)

(₹ 50 × 2400 units)

Total Process Cost ₹ 31,92,720

` 31,92,720
Cost per Equivalent unit = = ₹ 212
15060units

So, (i) Equivalent Production = 15060 units

(ii) Cost per equivalent unit = ₹ 212

CONCEPT 12: AVERAGE COST METHOD

Under this method, the cost of opening work-in-process and cost of the current period are

aggregated and the aggregate cost is divided by output in terms of completed units.

The equivalent production in this case consists of work-load already contained in opening work-

in-process and work-load of current period.

The main difference between FIFO method and average method is that units of opening work in

process and their cost are taken in full under average method while under FIFO method only the

remaining work done now is considered.

(i) Add opening WIP in current year Units Introduced.

(ii) Add opening WIP previous year cost in current year cost element wise.

Cost / unit: Opening WIP previous year + Current Year WIP / Eq. units

Note:

 In WIP, M1 (coming from previous process) is generally assumed 100% Completed, % of

Material given is used for M2.

 Packing Material Cost will only be added on Finished stock.

Topper’s Classes Process & Operation Costing | 10.33

Problem.12.1
Refer to information provided in Problem 11.1 above and solve this by Weighted Average Method.

[S.M.5]

Solution Statement of Equivalent Units (Under Weighted Average Method)

Particulars Input Particulars Output Equivalent Production

units units
(%) Equivalent

units

Opening W-I-P 1,000 Units completed 9,000 100 9,000

Units introduced 10,000 (Transferred to next

process)

Normal Loss {10% 1,100 - -

(1,000 + 10,000 units)}

Closing W-I-P 800 75 600

Abnormal loss (Bal. fig.) 100 100 100

11,000 11,000 9,700

Computation of cost per equivalent production unit :

Cost of Opening W-I-P ₹ 1,10,000

Cost of the Process (for the period) ₹ 19,30,000

Less: Scrap value of normal loss (₹ 10 x 1,000 units) (₹ 11,000)

Total process cost ₹ 20,29,000

₹ 20,29,000
Cost per equivalent unit = 9,700 𝑢𝑛𝑖𝑡𝑠 = ₹ 209.18

Statement of Evaluation

Particulars Equivalent Cost per Amount

Units (EU) EU (₹) (₹)

(i) Units Completed and transferred to next process 9,000 209.18 18,82,620

(ii) Abnormal Loss 100 209.18 20,918

(iii) Closing W-I-P 600 209.18 1,25,508

Topper’s Classes Process & Operation Costing | 10.34

Problem.12.3
Following information is available regarding Process I for the month of February:
Production Record:
Units in process as on 1st February 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.2.2020 6,000
(All materials used, 33 - 1/3% complete for labour and overhead)
Cost Records
Work-in-process as on 1st February ₹
Materials 6,000
Labour 1,000
Overhead 1,000
8,000
Cost during the month
Materials 25,600
Labour 15,000
Overhead 15,000
55,600
Presuming that average method of inventory is used, prepare:
(i) Statement of equivalent production.

(ii) Statement showing cost for each element.

(iii) Statement of apportionment of cost.

(iv) Process cost account for Process I. [T.3]

Solution
Process-I Cost Account

Particulars Units (₹) Particulars Units (₹)

To Opening W-I-P 4,000 8,000 By Completed units 14,000 50,120

To Materials 16,000 25,600 By Closing W-I-P 6,000 13,480

To Labour - 15,000

To Overhead - 15,000

20,000 63,600 20,000 63,600

Topper’s Classes Process & Operation Costing | 10.35
(i) Statement of equivalent production (Average cost method)

Particulars Input Particulars Output Equivalent Production

Units Units Material Labour & O.H.
% Units % Units
Opening WIP 4,000 Completed and 14,000 100 14,000 100 14,000

transferred

Units 16,000 Closing WIP 6,000 100 6,000 33-1/3 2,000

introduced

20,000 20,000 20,000 16,000

Statement showing cost for each element

Particulars Materials Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in- process 6,000 1,000 1,000 8,000

Cost incurred during the month 25,600 15,000 15,000 55,600

Total cost: (A) 31,600 16,000 16,000 63,600

Equivalent units: (B) 20,000 16,000 16,000

Cost per equivalent unit: (C) = (A ÷ B) 1.58 1 1 3.58

Statement of apportionment of cost

Amount Amount
(₹) (₹)
1. Value of units completed and transferred 50,120

(14,000 units × ₹ 3.58)

2. Value of Closing W-I-P:

- Materials (6,000 units × ₹ 1.58) 9,480

- Labour (2,000 units × ₹ 1) 2,000

- Overheads (2,000 units × ₹ 1) 2,000 13,480

Problem.12.4
Following details are related to the work done in process-I by XYZ Company during the month of

March:

Opening work-in process (2,000 units) (₹)

Materials 80,000

Labour 15,000

Overheads 45,000
Topper’s Classes Process & Operation Costing | 10.36
Materials introduced in process-I (38,000 units) 14,80,000

Direct Labour 3,59,000

Overheads 10,77,000

Units scrapped: 3,000 units

Degree of completion:

Materials 100%

Labour and overheads 80%

Closing work-in process: 2,000 units

Degree of completion:

Materials 100%

Labour and overheads 80%

Units finished and transferred to Process-II; 35,000 units

Normal Loss:
5% of total input including opening work-in-process

Scrapped units fetch ₹ 20 per piece.

You are required to prepare using average method:
(i) Statement of equivalent production

(ii) Statement of cost

(iii) Statement of distribution cost and

(iv) Process-I Account, Normal Loss Account and Abnormal Loss Account. [T.4]

Solution Process-I A/c

Particulars Units (₹) Particulars Units (₹)

To Opening W.I.P: By Normal Loss 2,000 40,000

(₹20 × 2,000 units)

- Materials 2,000 80,000 By Abnormal loss 1,000 72,000

- Labour -- 15,000 By Process-I A/c 35,000 28,00,000

- Overheads -- 45,000 By Closing WIP 2,000 1,44,000

To Materials 38,000 14,80,000

introduced

To Direct Labour 3,59,000

To Overheads 10,77,000

40,000 30,56,000 40,000 30,56,000

Topper’s Classes Process & Operation Costing | 10.37
(i) Statement of Equivalent Production

Particulars Input Particulars Output Equivalent Production

Units Units Material Labour & O.H.
% Units % Units
Opening WIP 2,000 Completed and 35,000 100 35,000 100 35,000
transferred to
Process-II
Units 38,000 Normal Loss 2,000 - - - -
introduced (5% of 40,000)
Abnormal loss 1,000 100 1,000 80 800
(Balancing figure)
Closing WIP 2,000 100 2,000 80 1,600
40,000 40,000 38,000 37,400
Statement showing cost for each element

Particulars Materials Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in-process 80,000 15,000 45,000 1,40,000

Cost incurred during the month 14,80,000 3,59,000 10,77,000 29,16,000

Less: Realisable Value of normal (40,000) - - (40,000)

scrap (₹ 20 × 2,000 units)

Total cost: (A) 15,20,000 3,74,000 11,22,000 30,16,000

Equivalent units: (B) 38,000 37,400 37,400

Cost per equivalent unit: 40.00 10.00 30.00 80.00

(C) = (A ÷ B)

Statement of Distribution of cost

Amount (₹) Amount (₹)

1. Value of units completed and transferred 28,00,000

(35,000 units × ₹ 80)

2. Value of Abnormal Loss:

- Materials (1,000 units × ₹ 40) 40,000

- Labour (800 units × ₹ 10) 8,000

- Overheads (800 units × ₹ 30) 24,000 72,000

Topper’s Classes Process & Operation Costing | 10.38
3. Value of Closing W-I-P:

- Materials (2,000 units × ₹ 40) 80,000

- Labour (1,600 units × ₹ 10) 16,000

- Overheads (1,600 units × ₹ 30) 48,000 1,44,000

Normal Loss A/c

Particulars Units (₹) Particulars Units (₹)

To Process-I A/c 2,000 40,000 By Cost Ledger Control A/c 2,000 40,000

2,000 40,000 2,000 40,000

Abnormal Loss A/c

Particulars Units (₹) Particulars Units (₹)

To Process-I A/c 1,000 72,000 By Cost Ledger Control A/c 1,000 20,000

By Costing Profit & Loss A/c 52,000

1,000 72,000 1,000 72,000

Problem.12.5
‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane

crushing for juice extraction, then filtration and boiling of juice along with some chemicals and

then letting it cool to cut solidified jaggery blocks.

The main process of juice extraction (Process – I) is done in conventional crusher, which is then

filtered and boiled (Process – II) in iron pots. The solidified jaggery blocks are then cut, packed

and dispatched. For manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which

extracts only 45 litre of juice. Following information regarding Process – I has been obtained

from the manufacturing department of Healthy Sweets for the month of January:

(₹)
Opening work-in process (4,500 litre)

Sugarcane 50,000

Labour 15,000

Overheads 45,000

Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000

Direct Labour 2,00,000

Overheads 6,00,000
Topper’s Classes Process & Operation Costing | 10.39
Abnormal Loss: 1,000 kg

Degree of completion:

Sugarcane 100%

Labour and overheads 80%

Closing work-in process: 9,000 litre

Degree of completion:

Sugarcane 100%

Labour and overheads 80%

Extracted juice transferred for filtering and boiling: 39,500 litre (Consider mass of 1 litre of

juice equivalent to 1 kg).

You are required to PREPARE using average method:

(i) Statement of equivalent production,

(ii) Statement of cost,

(iii) Statement of distribution cost, and

(iv) Process-I Account. [T.6]

Solution (i) Statement of Equivalent Production

Particulars Input Particulars Output Equivalent Production

Units Units Sugarcane Labour & O.H.

% Units % Units

Opening WIP 4,500 Completed and 39,500 100 39,500 100 39,500

transferred to

Process - II

Units 1,00,000 Normal Loss 55,000 - - - -

introduced (55%* of

1,00,000)

Abnormal loss 1,000 100 1,000 80 800

Closing WIP 9,000 100 9,000 80 7,200

1,04,500 1,04,500 49,500 47,500

* 100 kg of sugarcane extracts only 45 litre of juice.

Thus, normal loss = 100 – 45 = 55%

Topper’s Classes Process & Operation Costing | 10.40
(ii) Statement showing cost for each element

Particulars Sugarcane Labour Overhead Total

(₹) (₹) (₹) (₹)
Cost of opening work-in- process 50,000 15,000 45,000 1,10,000

Cost incurred during the month 5,00,000 2,00,000 6,00,000 13,00,000

Total cost: (A) 5,50,000 2,15,000 6,45,000 14,10,000

Equivalent units: (B) 49,500 47,500 47,500

Cost per equivalent unit: (C) = (A ÷ B) 11.111 4.526 13.579 29.216

(iii) Statement of Distribution of cost

(₹) (₹)
1. Value of units completed and transferred 11,54,032

(39,500 units × ₹ 29.216)

2. Value of Abnormal Loss:

- Sugarcane (1,000 units × ₹ 11.111) 11,111

- Labour (800 units × ₹ 4.526) 3,621

- Overheads (800 units × ₹ 13.579) 10,863 25,595

3. Value of Closing W-I-P:

- Sugarcane (9,000 units × ₹ 11.111) 99,999

- Labour (7,200 units × ₹ 4.526) 32,587

- Overheads (7,200 units × ₹ 13.579) 97,769 2,30,355

(iv) Process-I A/c
Particulars Units (₹) Particulars Units (₹)
To Opening W.I.P: By Normal Loss 55,000 -

- Sugarcane 4,500 50,000 By Abnormal loss 1,000 25,613

[₹ 25,595 + ₹ 18

(difference due to

approximation)]

- Labour - 15,000 By Process-II A/c 39,500 11,54,032

- Overheads - 45,000 By Closing WIP 9,000 2,30,355

To Sugarcane introduced 100,000 5,00,000

To Direct Labour 2,00,000

To Overheads 6,00,000

1,04,500 14,10,000 1,04,500 14,10,000

Topper’s Classes Process & Operation Costing | 10.41

Problem.12.6
Following details are related to the work done in Process-I by ABC Ltd. during the month of May

2019:

(₹)
Opening work in process (3,000 units)

Materials 1,80,500

Labour 32,400

Overheads 90,000

Materials introduced in Process-I (42,000 units) 36,04,000

Labour 4,50,000

Overheads 15,18,000

Units Scrapped : 4,800 units

Degree of completion

Materials : 100%

Labour & Overhead : 70%

Closing Work-in-process : 4,200 units

Degree of completion

Materials : 100%

Labour & Overhead : 50%

Units finished and transferred to Process-II : 36,000 units

Normal Loss:

4% of total input including opening work-in-process

Scrapped units fetch ₹ 62.50 per piece.

Prepare:

(i) Statement of equivalent production.

(ii) Statement of cost per equivalent unit.

(iii) Process-I A/c

(iv) Normal Loss Account and

(v) Abnormal Loss Account. [Nov. 2020, 10 Marks]

Topper’s Classes Process & Operation Costing | 10.42

Solution
(i) Statement of Equivalent Production (Weighted Average method)

Particulars Input Particulars Output Equivalent Production

Units Units Material L & O.H.
% Units % Units
Opening WIP 3,000 Completed and 36,000 100 36,000 100 36,000

transferred to

Process-II

Units introduced 42,000 Normal Loss 1,800 - - - -

(4% of 45,000 units)

Abnormal loss 3,000 100 3,000 70 2,100

(Balancing figure)

Closing WIP 4,200 100 4,200 50 2,100

45,000 45,000 43,200 40,200

(ii) Statement showing cost for each element

Particulars Materials (₹) Labour (₹) Overhead (₹) Total (₹)

Cost of opening work- in-process 1,80,500 32,400 90,000 3,02,900

Cost incurred during the month 36,04,000 4,50,000 15,18,000 55,72,000

Less: Realisable Value of normal (1,12,500) - - (1,12,500)

scrap (₹ 62.50 × 1,800 units)

Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400

Equivalent units: (B) 43,200 40,200 40,200

Cost per equivalent unit: 85.00 12.00 40.00 137.00

(C) = (A ÷ B)

Statement of Distribution of cost

Particulars Amount (₹) Amount (₹)

1. Value of units completed and transferred: (36,000 units × ₹ 137) 49,32,000

2. Value of Abnormal Loss:

- Materials (3,000 units × ₹ 85) 2,55,000

- Labour (2,100 units × ₹ 12) 25,200

- Overheads (2,100 units × ₹ 40) 84,000 3,64,200

Topper’s Classes Process & Operation Costing | 10.43
3. Value of Closing W-I-P:

- Materials (4,200 units × ₹ 85) 3,57,000

- Labour (2,100 units × ₹ 12) 25,200

- Overheads (2,100 units × ₹ 40) 84,000 4,66,200

(iii) Process-I A/c

Particulars Units (₹) Particulars Units (₹)
To Opening W.I.P:

Materials 3,000 1,80,500 By Normal Loss 1,800 1,12,500

Labour - 32,400 (₹ 62.5 × 1,800 units)

Overheads - 90,000

To Materials introduced 42,000 36,04,000 By Abnormal loss 3,000 3,64,200

To Labour 4,50,000 By Process-I A/c 36,000 49,32,000

To Overheads 15,18,000 By Closing WIP 4,200 4,66,200

45,000 58,74,900 45,000 58,74,900

(iv) Normal Loss A/c

Particulars Units (₹) Particulars Units (₹)
To Process-I A/c 1,800 1,12,500 By Cost Ledger Control A/c 1,800 1,12,500

1,800 1,12,500 1,800 1,12,500

(v) Abnormal Loss A/c

Particulars Units (₹) Particulars Units (₹)
To Process-I A/c 3,000 3,64,200 By Cost Ledger Control A/c 3,000 1,87,500

(₹ 62.5 × 3,000 units)

By Costing Profit & Loss A/c 1,76,700

(Bal. Figure)

3,000 3,64,200 3,000 3,64,200

Problem.12.7
STG Limited is a manufacturer of Chemical ‘GK’, which is required for industrial use. The

complete production operation requires two processes. The raw material first passes

through Process I, where Chemical ‘G’ is produced.

Topper’s Classes Process & Operation Costing | 10.44
Following data is furnished for the month April 2022:

Particulars (In kgs.)

Opening work-in-progress quantity 9,500

(Material 100% and conversion 50% complete)

Material input quantity 1,05,000

Work Completed Quantity 83,000

Closing work-in-progress quantity 16,500

(Material 100% and conversion 60% complete)

You are further provided that:

Particulars (in ₹)

Opening work-in-progress cost

Material cost 29,500

Processing cost 14,750

Material input cost 3,34,500

Processing cost 2,53,100

Normal process loss may be estimated to be 10% of material input. It has no realizable value. Any

loss over and above normal loss is considered to be 100% complete in material and processing.

The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for

producing Chemical ‘GK’. Further materials are added in Process II which yield 1.20 kg. of Chemical

‘GK’ for every kg. of Chemical ‘G’ introduced.

The chemicals transferred to Process II for further processing are then sold as Chemical ‘GK’

for ₹ 10 per kg. Any quantity of output completed in Process I, are sold as Chemical ‘G’ @ ₹ 9 per

kg. The monthly costs incurred in Process II (other than the cost of Chemical ‘G’) are:

Input 60,000 kg. of Chemical ‘G’

Materials Cost ₹ 85,000

Processing Costs ₹ 50,000

You are required:

(i) Prepare Statement of Equivalent production and determine the cost per kg. of Chemical,

‘G’ in Process I using the weighted average cost method.

(ii) Prepare a statement showing cost of Chemical ‘G’ transferred to Process II, cost of

abnormal loss and cost of closing work-in-progress.

Topper’s Classes Process & Operation Costing | 10.45
(iii) STG is considering the option to sell 60,000 kg. of Chemical ‘G’ of Process I without

processing it further in Process-II. Will it be beneficial for the company over the current

pattern of processing 60,000 kg in process-II?

(Note: You are not required to prepare Process Accounts) [May 2022, 10 Marks]

Solution
(i) Statement of Equivalent Production

Particulars Input Particulars Total Material Processing

quantity Cost

% Units % Units

Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000

Material Input 1,05,000 Normal loss 10,500 - - - -

(10% of 1,05,000)

Abnormal loss 4,500 100% 4,500 100% 4,500

(Bal. fig.)

Closing WIP 16,500 100% 16,500 60% 9,900

1,14,500 1,14,500 1,04,000 97,400

Statement of Cost for each element

Particulars Material (₹) Processing (₹) Total cost (₹)

Cost of opening WIP 29,500 14,750 44,250

Cost incurred during the month 3,34,500 2,53,100 5,87,600

Total cost (A) 3,64,000 2,67,850 6,31,850

Equivalent production (B) 1,04,000 97,400

Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25

(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal

loss and cost of closing work-in-progress

(₹)
Units transferred (60,000 × 6.25) 3,75,000

Abnormal loss (4,500 × 6.25) 28,125

Closing work in progress:

Material (16,500 × 3.5) 57,750

Processing cost (9,900 × 2.75) 27,225

84,975
Topper’s Classes Process & Operation Costing | 10.46
(iii) Calculation of Incremental Profit / Loss after further processing

Particulars (₹) (₹)

Sales if further processed (A) (60,000 × 1.20 × ₹ 10) 7,20,000

Calculation of cost in Process II

Chemical transferred from Process I 3,75,000

Add: Material cost 85,000

Add: Process cost 50,000

Total cost of finished stock (B) 5,10,000

Profit, if further processed (C = A – B) 2,10,000

If sold without further processing then,

Sales (60,000 × ₹ 9) 5,40,000

Less: Cost of input without further processing 3,75,000

Profit without further processing (D) 1,65,000

Incremental Profit after further processing (C – D) 45,000

Additional net profit on further processing in Process II is 45,000.

Therefore, it is advisable to process further chemical ‘G’.

CONCEPT 13: INTER PROCESS PROFIT

To control cost and to measure performance, different processes within an organization are

designated as separate profit centres.

In this type of organizational structure, the output of one process is transferred to the next

process not at cost but at market value or cost plus a percentage of profit.

The difference between cost and the transfer price is known as inter-process profits.

Advantages:

1. Comparison between the cost of output and its market price at the stage of completion is

facilitated.

2. Each process is made to stand by itself as to the profitability.

Disadvantages:

1. The use of inter-process profits involves complication.

2. The system shows profits which are not realised because of stock not sold out.
Topper’s Classes Process & Operation Costing | 10.47

Problem.13.1
A Ltd. produces product AXE which passes through two processes before it is completed and

transferred to finished stock. The following data relate to October:

Particulars Process I Process II Finished Stock

₹ ₹ ₹
Opening stock 7,500 9,000 22,500

Direct materials 15,000 15,750 -

Direct wages 11,200 11,250 -

Factory overheads 10,500 4,500 -

Closing stock 3,700 4,500 11,250

Inter-process profit included in opening stock - 1,500 8,250

Output of Process I is transferred to Process II at 25% profit on the transfer price. Output of
Process II is transferred to finished stock at 20% profit on the transfer price. Stock in process
is valued at prime cost. Finished stock is valued at the price at which it is received from process
II. Sales during the period are ₹ 1,40,000. Prepare Process accounts and finished goods account
showing the profit element at each stage. [S.M.6]

Solution Process- I Account

Particulars Total Cost Profit Particulars Total Cost Profit

(₹) (₹) (₹) (₹) (₹) (₹)
Opening stock 7,500 7,500 - Process-II A/c* 54,000 40,500 13,500
Direct 15,000 15,000 - Closing Stock 3,700 3,700 -
materials
Direct wages 11,200 11,200 -

Prime Cost 33,700 33,700

Overheads 10,500 10,500 -
Total Cost 44,200 44,200
Profit** 13,500 - 13,500
57,700 44,200 13,500 57,700 44,200 13,500

Total cost - Closing stock 44,200 - 3,700

*Transfer price = =
75% 75%
= ₹ 54,000

**Profit on transfer = 54,000 × 25%

= ₹ 13,500
Topper’s Classes Process & Operation Costing | 10.48
Process- II Account

Particulars Total (₹) Cost Profit Particulars Total (₹) Cost Profit
(₹) (₹) (₹) (₹)
Opening stock 9,000 7,500 1,500 Finished Stock 1,12,500 75,750 36,750
A/c**
Transferred 54,000 40,500 13,500 Closing stock* 4,500 3,750 750
from Process- I
Direct 15,750 15,750 -
materials
Direct wages 11,250 11,250 -
Prime cost 90,000 75,000 15,000
Overheads 4,500 4,500 -
Total cost 94,500 79,500 15,000
Profit*** 22,500 - 22,500
1,17,000 79,500 37,500 1,17,000 79,500 37,500
75,000
* Cost of Closing Stock = × 4,500 = ₹ 3,750
90,000
Total cost - Closing stock 94,500 - 4,500
**Transfer price = = = ₹ 1,12,500
80% 80%
***Profit on transfer = 1,12,500 × 20% = ₹ 22,500

Finished Stock Account

Particulars Total (₹) Cost (₹) Profit Particulars Total Cost Profit
(₹) (₹) (₹) (₹)
Opening stock 22,500 14,250 8,250 Costing P&L 1,40,000 82,425 57,575

A/c

Process- II 1,12,500 75,750 36,750 Closing 11,250 7,575 3,675

stock*

Profit 16,250 -- 16,250

1,51,250 90,000 61,250 1,51,250 90,000 61,250

Cost of transfer from Process- II

* Cost of Closing Stock = ×Value of closing stock
Transfer price from Process- II

(As per instruction given in the question)

75,750
=  11,250 = ₹ 7,575
1,12,500
Topper’s Classes Process & Operation Costing | 10.49

Problem.13.2
KT Ltd. produces a product EMM which passes through two processes before it is completed and

transferred to finished stock. The following data relate to May 2019:

Particulars Process Finished Stock

A (₹) B (₹) (₹)

Opening Stock 5,000 5,500 10,000

Direct Materials 9,000 9,500

Direct Wages 5,000 6,000

Factory Overheads 4,600 2,030

Closing Stock 2,000 2,490 5,000

Inter-process profit included in operating stock 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output

of Process B is transferred to finished stock at 20% on profit on the transfer price. Stock in

process is valued at prime cost. Finished stock is valued at the price at which it is received from

Process B. Sales during the period are ₹ 75,000. Prepare the Process cost accounts and Finished

stock account showing the profit element at each stage. [May 2019, 10 Marks]

Solution. Process – A A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(₹) (₹) (₹) (₹) (₹) (₹)

Opening Stock 5,000 5,000 - Process B A/c 28,800 21,600 7,200

Direct materials 9,000 9,000 -

Direct wages 5,000 5,000 -

19,000 19,000 -

Less: Closing stock (2,000) (2,000) -

Prime Cost 17,000 17,000 -

Overheads 4,600 4,600 -

Process Cost 21,600 21,600 -

Profit 7,200 - 7,200

(33.33% of total cost)

28,800 21,600 7,200 28,800 21,600 7,200

Topper’s Classes Process & Operation Costing | 10.50
Process – B A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(₹) (₹) (₹) (₹) (₹) (₹)

Opening Stock 5,500 4,500 1,000 Finished 61,675 41,550 20,125

Process A A/c 28,800 21,600 7,200 stock A/c

Direct materials 9,500 9,500 -

Direct wages 6,000 6,000 -

49,800 41,600 8,200

Less: Closing stock (2,490) (2,080) (410)

Prime Cost 47,310 39,520 7,790

Overheads 2,030 2,030 -

Process Cost 49,340 41,550 7,790

Profit 12,335 - 12,335

(33.33% of total cost)

61,675 41,550 20,125 61,675 41,550 20,125

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit

(₹) (₹) (₹) (₹) (₹) (₹)

Opening Stock 10,000 6,000 4,000 Costing P&L 75,000 44,181 30,819

Process B A/c 61,675 41,550 20,125 A/c

71,675 47,550 24,125

Less: Closing stock (5,000) (3,369) (1,631)

COGS 66,675 44,181 22,494

Profit 8,325 - 8,325

75,000 44,181 30,819 75,000 44,181 30,819

Problem.13.3
MNO Ltd has provided following details:

• Opening work in progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and overheads

70% complete).

• Input of materials is 55,000 units at ₹ 2, 20,000. Amount spent on Labour and Overheads is

₹ 26,500 and ₹ 61,500 respectively.

Topper’s Classes Process & Operation Costing | 10.51
• 9,500 units were scrapped; degree of completion for material 100% and for labour &

overheads 60%.

• Closing work in progress is 12,000 units; degree of completion for material 100% and for

labour & overheads 90%.

• Finished units transferred to next process are 43,500 units. Normal loss is 5% of total input

including opening work in progress. Scrapped units would fetch ₹ 8.50 per unit.

You are required to prepare using FIFO method:

(i) Statement of Equivalent production

(ii) Abnormal Loss Account [Jan. 2021, 5 Marks]

Solution
(i) Statement of Equivalent Production (Using FIFO method)

Particulars Input Particulars Output Equivalent Production

Units Units
Material Labour &
O.H.
% Units % Units

Opening WIP 10,000 Completed and

transferred to

Process-II

- From opening WIP 10,000 - - 30 3,000

- From fresh inputs 33,500 100 33,500 100 33,500

Units introduced 55,000 43,500 33,500 36,500

Normal Loss 3,250 - -

(5% of 10,000 +

55,000 units)

Abnormal loss 6,250 100 6,250 60 3,750

(9,500 – 3,250)

Closing WIP 12,000 100 12,000 90 10,800

65,000 65,000 51,750 51,050

Topper’s Classes Process & Operation Costing | 10.52
(ii) Abnormal Loss A/c
Particulars Units (₹) Particulars Units (₹)

To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125

(Refer Working Note – 2) (3,000 units x ₹ 8.5)

To Costing P&L A/c - 23,427

6,250 53,125 6,250 53,125

Working Notes:
1. Computation of Cost per unit

Particulars Materials Labour Overhead

(₹) (₹) (₹)

Input costs 2,20,000 26,500 61,500

Less: Realisable value of normal scrap (27,625) - -

(3,250 units x ₹ 8.5)

Net cost 1,92,375 26,500 61,500

Equivalent Units 51,750 51,050 51,050

Cost Per Unit 3.7174 0.5191 1.2047

Total cost per unit = ₹ (3.7174 + 0.5191 + 1.2047) = ₹ 5.4412

2. Valuation of Abnormal Loss

(₹)
Materials (6,250 units × ₹ 3.7174) 23,233.75

Labour (3,750 units × ₹ 0.5191) 1,946.63

Overheads (3,750 units × ₹ 1.2047) 4,517.62

29,698

CONCEPT 14: OPERATION COSTING

This product costing system is used when an entity produces more than one variant of final

product using different materials but with similar conversion activities. Which means conversion

activities are similar for all the product variants but materials differ significantly.

Operation Costing method is also known as Hybrid product costing system as materials costs are

accumulated by job order or batch wise but conversion costs i.e. labour and overheads costs are

accumulated by department, and process costing methods are used to assign these costs to

products.
Topper’s Classes Process & Operation Costing | 10.53
Moreover, under operation costing, conversion costs are applied to products using a

predetermined application rate. This predetermined rate is based on budgeted conversion costs.

For example, a company is manufacturing two grades of products, Product- Deluxe and Product-

Regular.

Both the products pass through a similar production process but require different quality and

quantities of raw materials. The cost of raw material is accumulated on the basis of job or batches

or units of two variants of products. But the costs for the conversion activities need not to be

identified with the product variants as both the Products requires similar activities for

conversion.

Hence, conversion activity costs are accumulated on the basis of departments or processes only.

Example of industries are ready made garments, Shoe making, jewelry etc.

CONCEPT 15: THEORY

Problem.15.1
Distinguish between Job costing and Process Costing. (Any five points of differences)
[May 2022, 5 Marks]

Solution
Job Costing Process Costing
A Job is carried out or a product is produced by The process of producing the product has a

specific orders. continuous flow and the product produced is

homogeneous.

Costs are determined for each job. Costs are compiled on time basis i.e., for

production of a given accounting period for

each process or department.

Each job is separate and independent of other Products lose their individual identity as they

jobs. are manufactured in a continuous flow.

Each job or order has a number and costs are The unit cost of process is an average cost for

collected against the same job number. the period.

Costs are computed when a job is completed. Costs are calculated at the end of the cost

The cost of a job may be determined by adding period. The unit cost of a process may be

all costs against the job. computed by dividing the total cost for the

period by the output of the process during

that period.
Topper’s Classes Process & Operation Costing | 10.54

Problem.15.2
How will you treat normal loss, abnormal loss and abnormal gain in process costing? Explain.

[May 2023, 4 Marks]

CONCEPT 16: MULTIPLE CHOICE QUESTIONS

1. The type of process loss that should not be allowed to affect the cost of good units is:

[ICAI Module]

(a) Abnormal loss (b) Normal loss

(c) Seasonal loss (d) Standard loss

2. 200 units were introduced in a process in which 20 units is the normal loss. If the actual

output is 150 units, then there is: [ICAI Module]

(a) No abnormal loss (b) No abnormal gain

(c) Abnormal loss of 30 units (d) Abnormal gain of 30 units

3. 100 units are processed at a total cost of ₹ 160, normal loss is 10%, & scrap units are

sold @ ₹ 0.25 each. If the output is 80 units, then the value of abnormal loss is:

[ICAI Module]

(a) ₹ 2.50 (b) ₹ 16 (c) ₹ 17.50 (d) ₹ 17.75

4. The cost of normal process loss is: [ICAI Module]

(a) Absorbed by good units produced and amount realised by the sale of loss units

should be debited to the process account.

(b) Debited to costing profit and loss account.

(c) Absorbed by good units produced.

(d) Debited to costing profit and loss account and amount realised by the sale of loss

units should be credited to the process account.

5. When average method is used in process costing, the opening inventory costs are:

(a) Subtracted from the new costs

(b) Added to the new costs

(c) Kept separate from the costs of the new period

(d) Averaged with other costs to arrive at total cost [ICAI Module]

6. Spoilage that occurs under inefficient operating conditions and is ordinarily controllable

is called: [ICAI Module]

(a) Normal spoilage (b) Abnormal spoilage

(c) Normal defectives (d) None of the above

Topper’s Classes Process & Operation Costing | 10.55
7. The value of abnormal loss is equal to: [ICAI Module]

(a) Total cost of materials

(b) Total process cost less realizable value of normal loss

(c) Total process cost less cost of scrap

(d) Total process cost less realizable value of normal loss less value of transferred out

goods.

8. Abnormal Process Gain/Yield arises due to:

(a) Over-estimation of process loss

(b) Improvements in work efficiency of workers

(c) Use better technology in production

(d) All of the above.

9. Operation Costing is also known as ............................:

(a) Process Costing (b) Operating Costing

(c) Hybrid Product Costing (d) None of the above.

10. In which of the following situations an abnormal gain in a process occurs:

(a) When normal loss is equal to actual loss

(b) When the actual output is greater than the planned output

(c) When actual loss is more than the expected loss

(d) When actual loss is less than the expected loss

11. Inter-process profit is calculated, because: [ICAI Module]

(a) a process is a cost centres

(b) each process has to report profit

(c) the efficiency of the process is measured

(d) the wages of employees are linked to the process profitability.

12. Under Weighted Average (Average) Method: [ICAI Module]

(a) The cost to complete the opening WIP is ignored.

(b) The cost to complete the opening WIP and other completed units are calculated

separately.

(c) The cost of opening work-in-process and cost of the current period are aggregated

and the aggregate cost is divided by output in terms of completed units.

(d) Closing stock of work in process is valued at current cost.

Topper’s Classes Process & Operation Costing | 10.56
13. A process account is debited by abnormal gain, the value is determined as: [ICAI Module]

(a) Equal to the value of normal loss

(b) Cost of good units less realizable value of normal loss

(c) Cost of good units less realizable value of actual loss

(d) Equal to the value of good units less closing stock

14. When compared with normal spoilage, abnormal spoilage: [ICAI Module]
(a) Arises more frequently from factors that are inherent in the manufacturing process.

(b) Is given the same accounting treatment as normal spoilage.

(c) Is generally thought to be more controllable by purchase department than

production department.

(d) Is not typically influenced by the "tightness" of production standards.

15. Lean Labs develops 55mm film using a four-step process that moves progressively through

four departments. The company specializes in overnight service and has the largest drug

store chain as its primary customer. Currently, direct labor, direct materials, and overhead

are accumulated by departments. The cost accumulation system that best describes the

system Lean Labs is using is: [ICAI Module]

(a) Operation costing (b) Activity-based costing

(c) Job-order costing (d) Process costing

16. Assume 550 units were worked on during a period in which a total of 500 good units were

completed. Normal spoilage consisted of 30 units; abnormal spoilage, 20 units. Total

production costs were ₹ 2,200. The company accounts for abnormal spoilage separately on

the income statement as loss due to abnormal spoilage. Normal spoilage is not accounted

for separately. What is the cost of the good units produced? [ICAI Module]

(a) ₹ 2,080 (b) ₹ 2,115 (c) ₹ 2,200 (d) ₹ 2,332

17. IC Limited uses process costing systems and inspects its goods post manufacturing. An

engineer noticed on May 31st the following:

Good units completed 15,000

Normal spoilage (units) 300

Abnormal spoilage (units) 100

Unit costs were: Material ₹ 2.50 and conversion costs (Labour & overheads) ₹ 6.00. The

number of units that company would transfer to its finished goods stock and the related

cost of these units are: [ICAI Module]

Topper’s Classes Process & Operation Costing | 10.57
(a) 15,000 units transferred at a cost of ₹ 127,500

(b) 15,000 units transferred at a cost of ₹ 130,050

(c) 15,000 units transferred at a cost of ₹ 135,000

(d) 15,300 units transferred at a cost of ₹ 130,050

18. In a process 8,000 units are introduced during a period. 5% of input is normal loss. Closing

work in progress 60% complete is 1,000 units. 6,600 completed units are transferred to

next process. Equivalent production for the period is:

(a) 9,000 units (b) 7,440 units (c) 5,400 units (d) 7,200 units.

19. Which of the following statement is not true?

(a) Operation Costing is the refinement of process costing, and concerned with the

determination of the cost of each operation rather than the process.

(b) Process Costing is used in industries where the material has to pass through two or

more processes for being converted into final product.

(c) In calculation of Inter-Process Profit, the output of one process is transferred to

the next process at effective/average cost per unit.

(d) All of the above.

20. Which of the following Statement is not true about the Normal Loss/wastage of

Materials?

(a) Normal loss is the loss of material which is inherent in the nature of work.

(b) Normal loss can be reasonably anticipated from the nature of the material, nature

of operation.

(c) Normal loss does not include units withdrawn from the process for test or sampling.

(d) None of the above.

21. A product passes through Process I and Process II.

Materials issued to Process I amounted to ₹40,000, wages ₹30,000 and manufacturing

overheads were ₹27,000. Normal loss anticipated was 5% of input. 4,750 units of output

were produced and transferred out from Process I.

There were no opening stocks. Input of raw material issued to Process I were 5,000 units.

Scrap has realisable value of ₹2 per unit.

You are required to compute the cost of the output transferred to Process II.

(a) ₹ 97,000 (b) ₹ 96,000 (c) ₹ 96,500 (d) None of the above.
Topper’s Classes Process & Operation Costing | 10.58
22. 10,000 units of raw materials are introduced into a process at a cost of ₹17,000. Labour

cost and overheads for the process are ₹5,100 and ₹3,400 respectively. 7,500 units were

completed, of the remaining 2,500 units, on an average 40% work has been done.

Ascertain the cost of one complete unit.

(a) ₹4 (b) ₹2 (c) ₹5 (d) ₹3

23. Equivalent production of 1,000 units, 60% complete in all respects, is:

(a) 1,000 units (b) 1,600 units

(c) 600 units (d) 1,060 units.

24. When Actual Loss is .......................... than the estimated loss, the difference between the

two is considered to be Abnormal Loss:

(a) More (b) Less

(c) Both (a) and (b) (d) None of these.

25. The value of abnormal loss is equal to:

(a) Total cost of materials

(b) Total process cost less cost of scrap

(c) Total process cost less realisable value of normal loss less value of transferred out

goods

(d) Total process cost less realisable value of normal loss.

26. The Process Costing is not used in one of the following:

(a) Chemical (b) Textiles (c) Cement (d) Oil refining.

27. In Process X of a manufacturing concern, 10,000 units are introduced during May, 2023.

The normal loss is estimated to be 4% of the input. At the end of the month 1,200 units

were lying as incomplete. The stage-wise completion of the inventory was given as under:

Material 80% complete; Labour 60% complete, and Overheads 50% complete.

You are required to prepare Statement of Equivalent production assuming that 8,300 units

were transferred to finished goods stores.

(a) Equivalent Production – Material 9,000, Labour 9,170, and Overhead 9,360.

(b) Equivalent Production – Material 9,360, Labour 9,360, and Overhead 9,000.

(c) Equivalent Production – Material 9,360, Labour 9,170, and Overhead 9,000.

(d) Equivalent Production – Material 9,360, Labour 9,000, and Overhead 9,000.
Topper’s Classes Process & Operation Costing | 10.59
28. When Actual Loss is .......................... than the estimated loss, the difference between the

two is considered to be Abnormal Gain:

(a) More (b) Less (c) Higher (d) None of these.

29. Abnormal Process Loss arises due to:

(a) The carelessness of workers (b) A bad Plant design

(c) Bad Operation, sabotage (d) All of the above.

30. Process Costing is also known as ..............................:

(a) Continuous Costing (b) Batch Costing

(c) Multiple Costing (d) Job Costing.

31. The Method of Costing applied in Biscuit Industries is ................... Costing and in Steel

Industries ................. Costing:

(a) Job, Contract (b) Job, Process

(c) Batch, Multiple (d) Process, Operation.

32. Equivalent units represent the production of a process in terms of .................... units.

(a) Completed (b) Total Production

(c) Semi-finished (d) Both (a) and (c).

33. When 1,000 units are 60% complete in a process, it is equivalent to ............ completed units:

(a) 60 (b) 600 (c) 6,000 (d) 1,000.

34. In Inter Process Profits, the output of one process is transferred from one process to

another not at ................. but at ...................:

(a) Market Price, Actual Cost (b) Actual Cost, Market Price

(c) Both (a) and (b) (d) None of these.

35. In Process Costing, the abnormal loss is treated as .................... cost and written off to

Costing Profit and Loss Account:

(a) Unit (b) Period

(c) Future (d) Process.

36. An Input of 5,000 kgs of material introduced into the process and the expected loss is

8% and if the actual output from the process is 4,300, the abnormal loss is .................... kg:

(a) 400 (b) 300 (c) 500 (d) 600.

Topper’s Classes Process & Operation Costing | 10.60

ANSWERS
1 2 3 4 5 6 7 8 9 10

a c c c b b d d c b

11 12 13 14 15 16 17 18 19 20

c c b d d b b b c c

21 22 23 24 25 26 27 28 29 30

b d c a c c c b d a

31 32 33 34 35 36

b a b b b b