Exercise Process Costing

Process costing
Process costing is a costing method involved in costing of operations or process relating

to convert materials into finished products. When production of similar units is carried on
continuously through a series of processes or operations, process costing appropriately
mass there. Manufacturing industries, such as, iron and steel, flour milling, cement, food
products, milk dairy, textiles, soap making, paper, box making, biscuits, mat products,
etc.
The main characteristics of process costing are:

1. The products are processed in one or more processes.
2. The products are standardized and homogeneous.
3. The products are distinguishable in process stages.
4. When a product is produced though different processes, the output of each
process is transferred to the next process and that of last process is transferred to
the finished stock.
 APPLICATION OF PROCESS COSTING

Process costing may be used in wide number of industries. It best suits in manufacturing
organizations.
 Manufacturing industries, such as, iron and steel, flour milling, cement, food
products, milk dairy, textiles, soap making, paper, box making, biscuits, mat
products, etc.
 Mining industries, such as, oil, coal, coking works, etc.
 Public utility services, such as, generation of electricity, water supply, etc.
 STEPS IN PROCESS COSTING
Five Steps in Process costing

• Step 1: Summarize the flow of physical units of output.
• Step 2: Compute output in terms of equivalent units.
• Step 3: Compute equivalent unit costs.
• Step 4: Summarize total costs to account for.
• Step 5: Assign total costs to units completed and to units in ending work-in-
process inventory.
 VARIOUS TYPES OF PROCESS

a. Sequential process
b. Parallel Process
c. Joint Process
d. Selective process.
 JOB COSTING Vs. PROCESS COSTING
 Process loss
 Normal loss
 Abnormal loss
 Abnormal gain
 DIRECT COST AND INDIRECT COSTS FOR PROCESS

Direct material and direct labor used in a process debited to the process. Indirect costs are
allocated to the process proportionately like departments and divisions of organizations.
Problem-1
The Northern Jute Mills Ltd. Manufactures gunny bags which pass through three
consecutive process. The following cost information is obtained for the month of January.
Process-1 Process-2 Process-3

Tk. Tk. Tk.
Materials 45000
Labor 21000 42000 18000
1, 00,000 gunny bags were completed during the month. Indirect expenses amounting to
Tk. 27,000 were allocated on the basis of direct labor cost. There were no opening or
closing inventories.
Prepare the Process Accounts showing cost per unit of goods produced in each process.
Problem-2
In a manufacturing concern, there are two consecutive processes. From the following
information prepare process accounts showing the total cost and also the cost per Kg in
each process:
Process A Process B
Tk. Tk.
Materials:
1,000 Kgs @ Tk. 2 per Kg 2000
200 kgs @ Tk. 4.50 kg 900
Labor 3000 4200
Indirect expenses 1480 1200
Suppose there was no work-in-progress in any process.

Problem-3 [Treatment of normal and abnormal loss]
The manufacturing of a pro product involves two consecutives processes. The following
cost and production figures are obtained in respect of each process for the moth of
February.
Process 1 Process 2
Units introduced 1900
Units transferred to next process 1760
Units transferred to finished stock 1700
Tk. Tk.
Value of units introduced 10450
Materials 916
Labor 6975 4190
Overhead 2620 2462
The wastage which is 5% normal in each process is sold at Tk. 2 per unit. There is no
opening or closing work in progress.
Prepare the necessary accounts showing the cost per unit in each process.
Problem-4 [Treatment of normal scrap and loss]

A product passes through two consecutive processes. Form past experience it is
ascertained that 2% of the units introduced in each process is lost and 4% is scrap.
Further difference in production is treated as abnormal scrap gain or loss. The scrap is
realized at Tk. 3 per unit in process I and Tk. 5 per unit in process II. On 1 st April, 1200
units are started in process I at a cost of Tk. 20 per unit. Other particulars relating the
processes are as under:
Process-I Process-II
Finished product (units) 1090 1070
Process stock (units)
April-I 150 100
April-II 140 80
Direct wages (Taka) 6210 6600
Manufacturing Expenses (Taka) 4902 3248
Process stock (Taka per unit)
April-1 29 39
April-30 At cost per unit of each process
Sales ( Taka) 50
Show process Accounts, Process Stock Accounts, and a profit and Loss Statement.
EQUIVALENT UNITS OF PRODUCTION

Equivalent units of production, the common denominator for completed units and
partially completed units, are computed by multiplying the units accounted for by their
percentage of completion for each category of costs. For example, certain goods may be
75% compete, certain goods may be 50% completed, certain goods may be only 20%
completed etc. The stage of completion is to be determined first. Stage of completion, in
some cases, can be exactly determined on the basis of machine hours or labor hours.
Suppose 100 machine hours are required to complete a particulars process, but the
process has utilized only 70 machine hours up to the end of the cost period. The process
may said to be 70% completed. This is known as concept of equivalent production.
Equivalent Units
Required statement for accounting equivalent unit of production
1. Statement of equivalent production: This statement determines amount of work in
progress and finished goods and determines portion of losses. This statement does
not show any value.
2. Statement of cost: This statement determine per unit cost of product.
3. Statement of evaluation: Equivalent units of various elements of product, finished
goods on the basis of per unit cost, work in progress and abnormal loss and gain
are included in this statement.
Process Account
After preparing the above statement a process account is to be prepared.
Problem-5
The following particulars ate obtained in respect of process C for the month of March:
Cost incurred Tk.

Materials 5350
Labor 13910
Factory overhead 10700
Received from process B: 2500 units valued at Tk. 20085.
Units scraped: 200

Scrap is sold at Tk 2.25 per unit
Normal loss: 5% of actual production
Work in progress at the end of month: 500 units (60% of the units 50% completed; 20%
of the units are 60% completed and rest the units are 20% completed.)
Prepare the necessary statement and complete Process Account-C.
 By-Products and Joint Products

When two or more products are obtained from a common process one of the products
may a major product and the other or others may be by products. The major product is
known as main product. By products are those which result incidentally from the
manufacture of the main product or products. Processing of by-product is not aimed in
the direction. Molasses from the production of sugar is an example of by-product.
If, from a common process two or more products, each of significant value and volume in
relation to total sales value and volume, are obtained, none of the products can be
regarded as major product, because, each product is more or less same importance with
regard to value, volume etc. such products are termed Joint Products. In oil refining
industry fuel, oil, gasoline, kerosene, lubricating oils are examples of joint products.
Problem 6
A company operates process I which yields a main product A and two by-products B and
C. the actual joint cost for a period was Tk. 16000. it was estimated that profit in the by
products B and C as percentage of sales would be 35% and 25% respectively, subsequent
costs were as follows:
Elements A B C
Tk. Tk. Tk.
Materials 200 150 50
Direct wages 400 500 100
Overheads 300 500 150
900 1150 300
The output for the period were 200 tons of A. 130 tons of B and 120 tons of C. the sales
of B and C were Tk. 8000 and 3000 respectively.
You are required to:

a. Prepare a statement showing the apportionment of joint cost over the different
products
b. Prepare accounts showing the cost of A, B and C per ton.

Exercise Process Costing

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Process costing

Process costing is a costing method involved in costing of operations or process relating

The main characteristics of process costing are:

 APPLICATION OF PROCESS COSTING

 STEPS IN PROCESS COSTING

Five Steps in Process costing

 VARIOUS TYPES OF PROCESS

 DIRECT COST AND INDIRECT COSTS FOR PROCESS

Process-1 Process-2 Process-3

Suppose there was no work-in-progress in any process.

Problem-4 [Treatment of normal scrap and loss]

EQUIVALENT UNITS OF PRODUCTION

Cost incurred Tk.

Received from process B: 2500 units valued at Tk. 20085.

Units scraped: 200

Prepare the necessary statement and complete Process Account-C.

 By-Products and Joint Products

You are required to:

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