Chapter 12 Process Costing

Lecture 68

Question 1:
EZ Ltd makes a product requiring several successive processes. Details of the first process for November
are as follows:
Opening WIP 800 units
Degree of completion:
Materials (valued at Rs. 79,520) 100%
Conversion (valued at Rs. 14,900) 25%
Units transferred to process 2 3,400 units
Closing WIP 600 units
Degree of completion:
Materials (valued at Rs. 79,520) 100%
Conversion (valued at Rs. 14,900) 50%
Costs incurred in the period:
Material Rs. 400,000
Conversion Rs. 344,000
There were no process losses.
Required:
Prepare the process account for November using the first in fist out method.

Question 2:
The following information relates to a production process Zampa of Lucky Ltd for the month of January
2016:
Opening WIP: 4500 units
Material cost (100% complete) Rs. 18,900
Conversion cost (30% complete) Rs. 1,455
During the January:
Production started 10,500 units
Completed output 12,000 units
Closing WIP 3,000 units
(100% complete for material cost and 60% complete for conversion cost)
All the materials are added to production at the beginning of the process whereas conversion cost incurred
evenly throughout the process.
The cost incurred in the January were:
Material cost Rs. 56,100
Conversion cost Rs. 26,145
Required:
Prepare process account of Zampa for the month of January 2016 using FIFO method.

Question 3:
Zebra Ltd uses process costing for determining the cost per unit of its output. The following data relates
to Process I for the month of April 2023:
Opening WIP:
Quantity 1500 units
Value Rs. 4,500
Introduced during the April 5,000 units
Transferred to process II 5,500 units
Closing WIP 1,000 units

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Chapter 12 Process Costing

Degree of completion: Opening WIP Closing WIP

Materials 100% 100%
Labour and overheads 80% 60%
Cost added during April:
Material Rs. 10,000
Labour Rs. 9,800
Overheads Rs. 4,900
There were no process losses.
Required:
Calculate the cost of output transferred to process II and closing WIP for April.

Question 4:
A manufacturing company P Ltd makes one product that passes through many processes. The details of
the process A for the month of June 2019 are as follows:
Materials Rs. 186,200
Labour Rs. 72,000
Overheads Rs. 109,400
Units introduced into the process 19,500
There were 500 units of opening WIP which are valued as follows:
Materials Rs. 4,800
Labour Rs. 3,200
Overheads Rs. 6,400
Units transferred to next department were 18,200 whereas 1,800 units were in closing WIP. Closing WIP
was fully complete as to materials but only 50% complete for labour and 50% complete for overheads.
There were no process losses during the month.
Required:
Calculate the cost of output transferred to the next process and closing WIP.

Question 5:
The following information relates to a production process-Z to Alpha Ltd.
Input quantities 25,000 units
Normal loss 10% of input
Actual output 21,250 units
Direct materials are added in full at the beginning of the process whereas conversion cost is incurred
evenly through the process. Inspection occurs when the product are 60% through the process, where loss
units are identified and separated from good output.
The costs incurred in the period were:
Direct materials Rs. 67,500
Conversion costs Rs. 33,000
There was no opening and closing stock of work in process.
Required:
Prepare Process account.

Question 6:
A manufacturing company Q Ltd makes one product that passes through many processes. The details of
the process A for the month of July 2022 are as follows:
Materials Rs. 740,000
Labour Rs. 179,500
Overheads Rs. 538,500

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Chapter 12 Process Costing

Units introduced into the process 19,000

There were 1,000 units of opening WIP which were valued as follows:
Materials Rs. 40,000
Labour Rs. 7,500
Overheads Rs. 22,500
Total 1,500 units were scrapped during the month, which were 100% complete with respect to material
and 80% complete for labour and overheads.
Units transferred to next department B were 17,500.
Normal loss in processing is 5% of the total input (Opening WIP and units introduced during the period).
Scrapped units fetch Rs. 20 each.
Required:
Prepare accounts for process A. Abnormal loss /gain and scrap for the month of July 2022.

Question 7:
The details of the process W of Safi Ltd for the month of March 2021 are as follows:
Materials Rs. 42,000
Conversion cost Rs. 26,145
Units introduced into the process 10,500
There were 4,500 units of opening WIP valued at Rs. 20,355. Degree of completion of opening WIP was
as under:
Materials 100%
Conversion cost 30%
Total 750 units were scrapped during the month, which were 100% complete with respect to material and
50% complete for conversion costs.
Units in closing WIP were 100% complete with respect to material and 60% complete for conversion
costs.
Units completed and transferred to next process were 11,250.
Normal loss in processing is 5% of the units introduced during the month, which are scrapped at Rs. 1
each.
Required:
Prepare account for process.

Question 8:
Normal loss is expected as 10% of inspected units. Calculate the normal loss under the following
scenarios.
Stage of completion
Scenarios (a) (b) (c) (d)
Units
Opening work in progress 1,000 50% 50% 70% 70%
Units introduced during the period 10,000
Closing work in progress 2,000 80% 40% 40% 80%
Inspection stage 60% 60% 60% 60%

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Inspection stage:
NL of 5% input only used new untro if
raw material.
NL of 5% of total input all raw
material used
normal loss is 5%of Units Introduced.

• Inspection is always done on 100%.

• he will tell you 50% inspected.
• If Inspection is done he will tell you the
percentage.
Chapter 12 Process Costing

Question 8:
Normal loss is expected as 10% of inspected units. Calculate the normal loss under the following
scenarios.
Stage of completion
Scenarios (a) (b) (c) (d)
Units
Opening work in progress 50,000 40% 60% 70% 80%
Units introduced during the period 600,000
Closing work in progress 25,000 75% 70% 80% 40%
Inspection stage 50% 75% 60% 75%

Cost of rework:
Sometimes the loss incurred in processing is not scrapped but is subject to a further rectification process,
this extra processing cost is referred to as rework.
Rework might be performed on units that are either classified as normal or abnormal loss:
Normal rework:
The rework cost is charged to the normal processing cost. Rework may involve some material use, labor
use,etc. Hence the entry is:
Process account x
Materials account x
Direct labour account x
Abnormal rework:
Abnormal rework is not charged to process account so that it will not appear in future estimates for
similar jobs. It is recorded in a separate loss account.
Loss from abnormal rework account x
Materials account x
Direct labour account x

Question 9:
Input to process A 1,000 units at a total input cost of Rs. 50,000
Normal loss 10% of the input
Actual output from the process A 850units
Rectification cost of loss units Rs. 10 per unit
Required:
(a) Prepare accounting entries to record the rework cost.
(b) Prepare account for process A

Joint and by-products:

Joint product:
Where two or more products are:
 Simultaneously generated
 From a single process
 Using common input and
 Having sufficiently high (similar) sale value.
By-Products:
By-products are produced jointly along with the main product and possesses following features:
 Relatively minor in quantity and value
 Produced incidentally (not intended or desired) in the manufacturing of the main product.

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Chapter 12 Process Costing

Industry Joint products By-products

Petroleum refinery Petrol, diesel, kerosene, etc Paraffin, tar, etc
Rice industry Patent rice Husk, bran
Soap Patent soap Glycerin

Treatment of joint products:

Joint cost of the input can be apportioned amongst the joint products (to determine cost per unit) using
any of the three bases;
 Units basis (cost per unit is the same for all the joint products)
 Sale value at “split off point”
 Net realizable value (NRV) at split off point (used when joint products are not saleable.)
(NRV = Final sale value – processing cost after split off point)
Split off point:
It is a stage in manufacturing process where joint products become separately identifiable.

Treatment of by-products:
Sale value of the by-products can be treated by following any of the following methods.
 As revenue (add to the revenue from the main products in income statement).-
No cost/value is assigned in the process cost.
 As other income No cost/value is assigned in the process cost.
 As deducted from the process input cost (just like scrap value of normal loss units). This is the
most commonly used method.
Note: While dealing with by-products
Expected output = Input – Normal loss – by-products

Question 10:
Two joint products A and B are produced from a common process-X by Nasir Ltd.
During the month of January, 20,000 units of material were introduced in the process X. the total costs of
processing (direct materials and conversion costs) were Rs. 339,700. Output from the process during
January was 12,500 units of A and 7,500 units of B.
A has a sale value of Rs.100 per unit at split off point (on completion of product X) or alternatively it can
be sold for Rs. 300 per unit after further processing costs of Rs. 62.50 per unit.
B has a sale value of Rs.137.50 per unit at split off point or alternatively it can be sold for Rs. 200 per unit
after further processing costs of Rs. 37.50 per unit.
Required:
Allocate joint cost amongst the joint products using following basis and prepare process account in each
scenario.
(a) Unit produced basis
(b) Sale value at split off point
(c) Net realizable value (NRV) at split off point basis

Question 11:
Kawther Grain Rice Mills processed 100 tons of paddy during the month of December. Costs incurred in
the process were as follows:
(i) 100 tons paddy @ Rs. 9 per ton
(ii) Transportation cost Rs. 5,000
(iii) Loading and unloading costs Rs. 2000
(iv) Other labour costs Rs. 8000
(v) Factory overheads Rs. 10,000

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Chapter 12 Process Costing

Output from the common process were:

(i) Rice 80 tons
(ii) Risk husk 18 tons (by-product)
(iii) Evaporation loss 2 tons (Normal loss)
Rice husk is expected to sell for Rs. 2,000 per ton.
Required:
Calculate cost per ton of the rice produced when sale proceed of rice husk is:
(a) Treated as other income
(b) Deducted from the process cost

Question 12:
The following information relates to a company that produces two joint products C and D and one by-
product G in a process.
Data for January:
Materials input (87,500 units) Rs. 541,000
Conversion costs Rs. 210,000
Joint products output and value at split off point:
C: 36,000 units Rs. 4,500,000
D: 30,000 units Rs. 1,500,000
Normal loss is 2,000 units. Units lost have a scrap value of Rs. 2 per unit. 12,000 units of by-product G
are produced. Each unit is sold for Rs. 1 per unit.
Company policy is to credit by products sale value to the process account. Joint cost are distributed
amongst the joint products on sales value basis. There was no opening or closing stock of work in
process.
Required:
Prepare the process account for January.

Costs bookkeeping systems:

Cost book keeping systems can be categorized into three types in terms how the cost accounts relate to
other ledger accounts. These three systems are called
 Integrated accounts
 Interlocking accounts
 Fully-interlocking accounts

Integrated accounts:
 A single set of accounting records that provide financial and costs accounts using a common input of
data
 A system where all information (both financial and costing) is kept in a single set of books.
 The costs accounts arte integrated into the entity’s bookkeeping system. There is a single general
ledger which includes the cost accounts.
 In practice most companies and ERP solutions available in the market use integrated accounting
system.
Advantages of integrated accounts:
 Avoids duplication of effort between cost and financial accounting systems
 Removes the need to reconcile two different systems
 A single consistent profit figure is available.

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Chapter 12 Process Costing

Disadvantages of integrated accounts:

Using a single system for external reporting and the provision of management information reduces
flexibility.
For example: inventory must be valued at full absorption cost for external reporting purpose in according
with IAS: Inventories) but management might require marginal cost information for decision making.

Interlocking accounts:
 A system in which the books are divided into two ledgers.
 Cost accounts are maintained in a cost ledger (also known as the factory ledger) and
 The other accounts are maintained in the general ledger.
There are separate records but these are kept in agreement or are readily reconcilable.
It is convenient to think of a business split into two entities:
 The head office maintains the general ledger which is used to generate external reports
 A factory maintains the cost ledger (or factory ledger) which is used to record manufacturing.
Expenses incurred by the head office for the factory:
General Ledger Debit Credit
Purchase of direct materials
Factory ledger control a/c X
Payables X
Payment for direct labour
Factory ledger control a/c X
Cash X
Production overhead incurred
Factory ledger control a/c X
Cash/Payables X

Factory Ledger Debit Credit

Purchase of direct materials
General ledger control a/c X
Payables X
Payment for direct labour
Factory ledger control a/c X
Cash X
Production overhead incurred
Factory ledger control a/c X
Cash/Payables X

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