CA - IPCC

PAPER 3 PART A
COST ACCOUNTING
CA K HARIHARAN

1
 • Understand the meaning of process costing
1
100%
• Understand the accounting treatment of normal
2 and abnormal loss and abnormal gain

• Understand the equivalent production method

.3

• Understand the inter-process profit method

.4

2
} Stages of production

One Another
Raw
identifiable identifiable
material
stage stage

3
 OUTPUT

INPUT

4
} Output of one process becomes input of the next
process
} End products are usually like units
◦ Not distinguishable from one another
} Process may be carried out either -
◦ Sequentially – for single product (or)
◦ Parallely - after split off point – joint product
} To maintain separate accounts for each and every
process
Cont…

5
} One to one input-output reconciliation of
quantity not possible
} .
Cost unit of
Output of
process
process
account

Cost centre of
process Process
account
} Output of the last process is transferred to the
finished stock account

6
} Loss of material
} Arising during the course of a processing operation

Input Output Process

quantity quantity loss

7
 Process
loss

Normal Abnormal
loss loss

8
} Inherent in nature of work
} Anticipated from
◦ Nature of material
◦ Nature of operation
◦ Past experience
◦ Technical data
} Cost of normal loss
◦ absorbed by good unit produced under the process
} Accounting treatment for Sale of normal process
loss units
◦ Amount realised should be credited to process account

9
} Over and above the normal loss is abnormal loss
} Loss in excess of pre-determined loss
} Cannot obviously be estimated in advance
} Reasons for abnormal loss:
◦ Carelessness of workers
◦ Improper training
◦ Poor quality of raw material
◦ A bad plant design or operation

10
} Accounting treatment for total cost of abnormal
loss
◦ Credited to process account from which it arise

◦ After adjusting normal loss scrap value, cost of abnormal

loss is debited to costing profit and loss account

Cost of an
Cost of a good
abnormal
unit
process loss unit

11
Expected
Output > Actual
Output
Abnormal
loss

12
} Unexpected gain in production under normal
condition
} When loss under a process is less than the
anticipated normal figure
} Wherein, actual production exceeds expected figures
} Difference between
◦ Actual and expected loss (or)
◦ Actual and expected production

13
} I,e Abnormal gain = Actual Output – Expected
Output
} It should be debited to process A/c
} Value of abnormal gain after adjusting normal loss
scrap value, credited to costing P & L A/c

14
 PROCESS-I A/C

Particulars Unit Rate Amount Particulars Unit Rate Amount

(Rs.) (Rs.) (Rs.) (Rs.)
To Material XXX X XXX By Normal XXX X XXX
Loss
To Labour XXX By XXX X XXX
Abnormal
Loss
To XXX By Output XXX X XXX
Overheads t/f to Next
Process
TOTAL XXX XXX TOTAL XXX XXX

15
} WN.1 Computation of process loss
◦ Process loss = Input Qty – Output Qty
◦ Process loss can be classified as
– Normal and abnormal loss (or)
– Abnormal gain
} WN.2 Computation of Cost per unit
◦ CPU = (Gross Cost – Normal Loss Value) / (Input Qty –
Normal Loss Qty)

16
} JK Ltd. produces a product “AZE”, which passes
through two processes, viz., process I and process II.
The output of each process is treated as the raw
material of the next process to which it is
transferred and output of the second process is
transferred to finished stock. The following data
related to December, 2007:

Cont…

17
 Particulars Process I Process II
25,000 units introduced
at a cost of Rs. 2,00,000 -
Material consumed Rs. 1,92,000 Rs. 96,020
Direct labour Rs. 2,24,000 Rs. 1,28,000
Manufacturing expenses Rs. 1,40,000 Rs. 60,000
Normal wastage of input 10% 10%
Scrap value of normal
wastage (per unit) Rs. 9.90 Rs. 8.60
Output in Units 22000 20000

Cont…

18
} Required:
} Prepare Process I and Process II account.
} Prepare Abnormal effective/wastage account as the
case may be each process.

19
} Process - I Account
Particula Amount Particula Amount
rs Units CPU (in Rs.) rs Units CPU (in Rs.)
By Normal
To Input 25000 8 2,00,000 wastage 2500 9.90 24,750
By
To Abnormal
Material 1,92,000 wastage 500 32.5 16,250
To Direct
Labour 2,24,000
By Output
To T/f to
Manufactu Process II
ring Exp. 1,40,000 a/c 22000 32.5 7,15,000
TOTAL 25000 7,56,000 TOTAL 25000 7,56,000

Cont…

20
INPUT QTY 25, 000
OUTPUT QTY (22,000)
PROCESS LOSS QTY 3,000

Normal Abormal
loss loss 500
2,500 (B/F)

21
}
} Gross cost – normal loss scrap value
} Cost per unit =
} Input qty – normal loss qty
}
} 7,56,000 – 24,750
} =
} 25000-2500
}
} = Rs. 32.50 per unit

} Cont…

22
 Amount Amount
Particulars Units CPU (in Rs.) Particulars Units CPU ((in Rs.)

To Process I 22000 32.5 7,15,000 By Normal wastage 2200 8.60 18,920

To Material 96,020 By Finished stock 20000 49.5 9,90,000

To Direct Labour 1,28,000

To Manufacturing Exp. 60,000

To Abnormal effect 200 49.5 9,900

TOTAL TOTAL
22200 10,08,920 22200 10,08,920

Cont… 23
INPUT QTY 22, 000
OUTPUT QTY (20,000)
PROCESS LOSS QTY 2,000

Normal Abormal
loss Gain 200
2,200 (B/F)

24
}
} 9,99,020 – 18,920
} Cost per unit =
} 22000-2200
}
} = Rs. 49.50 per unit

Cont…

25
Particula Amount Particula Amount
rs Units CPU (in Rs.) rs Units CPU ((in Rs.)
To
Process I By Cash
A/c 500 32.5 16,250 (Sales) 500 9.90 4,950
By
Costing P
& L 11,300
A/c(B/F)
TOTAL 500 16,250 TOTAL 500 16,250

Cont…

26
Particula Amount Particula Amount
rs Units CPU (in Rs.) rs Units CPU (in Rs.)
To By
Normal Process II
wastage 200 8.60 1,720 A/c 200 49.50 9,900
To
Costing P
& L
A/c(B/f) 8,180
TOTAL 520 9,900 TOTAL 200 9,900

27
} A product passes through three processes A, B and
C, 10,000 units at a cost of Re. 1 were issued to
process A. The other direct expenses were:

Particulars Process A Process B Process C

(Rs.) (Rs.) (Rs.)
Sundry materials 1,000 1,500 1,480
Direct Labour 5,000 8,000 6,500
Direct expenses 1,050 1,188 1,605

Cont…

28
} The wastage of Process A was 5% and Process B was
4%. The wastage of Process A was sold at Re. 0.25
per unit and that of B at Re. 0.50 per unit and that of
C at Re. 1.00 per unit. The overhead charges were
168% of direct labour. The final product was sold at
Rs. 10.00 per unit, fetching a profit of 20% on sales.

} You are required to find the percentage of wastage

in Process C.

Cont…

29
 Amount Amount
Particulars Units CPU (in Rs.) Particulars Units CPU (in Rs.)
By Normal
To Units introduced 10000 1 10,000 Wastage a/c. 500 0.25 125
By T/f to
Process B
To Sundry Materials 1,000 A/c.(B/F) 9500 25,325

To Direct Labour 5,000

To Direct Expenses 1,050

To Overheads(168% of DL) 8,400
TOTAL 10000 25,450 TOTAL 10000 25,450

`Cont…
30
} Specialty of the problem
} In this problem, each products output are not provided

} Hence, necessity of computation of process loss does not

arise.

} Therefore, there is no Abnormal Loss/Abnormal Gain in this

problem.

} If there is no abnormal loss/gain, then balancing figure itself

transferred to next process.

} Therefore we no to compute cost per unit also.

Cont…

31
 Amount Particula Amount
Particulars Units CPU (in Rs.) rs Units CPU ((in Rs.)
By
Normal
To Units Wastage
introduced 9500 25,325 a/c. 380 0.50 190
By T/f to
To Sundry Process C
Materials 1,500 A/c.(B/f) 9120 49,263
To Direct
Labour 8,000

To Direct
Expenses 1,188
To
Overheads
(168% of
DL) 13,440
TOTAL TOTAL Cont…
9, 500 49,453 9500 49,453
32
 Amount Particula Amount
Particulars Units CPU (in Rs.) rs Units CPU ((in Rs.)
By
Normal
Wastage
By Process B A/c. 9120 49,263 a/c. X 1 X

To Sundry Materials 1,480

To Direct Labour 6,500

By
Finished
To Direct Expenses 1,605 Goods Y 8 8Y

To Overheads 10,920
TOTAL TOTAL
9120 69,768 9120 69,768

Cont…

33
} Computation of percentage of wastage in Process C:
} Selling price = Rs. 10
} Profit = 20 % = Rs.2/-
} Cost of production is Rs. 8/-

} Let X = Normal Loss Qty

} & Y = FG Qty
} X+Y = 9120
} X+8Y=69768

} By Solving this equation, we will get X = 456 units

} Y = 8664 units
Cont…

34
 Amount Amount
Particulars Units CPU (in Rs.) Particulars Units CPU ((in Rs.)

By Process B A/c. (trf.) 9120 49,263 By Normal Wastage a/c. 456 1 456

To Sundry Materials 1,480

To Direct Labour 6,500

To Direct Expenses 1,605 By Finished Goods 8664 8 69,312

To Overheads 10,920
TOTAL TOTAL
9120 69,768 9120 69,768

Cont…

35
} Converting incomplete production units into their
equivalent completed units

36
 Example:
If the No. of physical unit in process is 500 units;
percentage of completion of work is 50%, then
Equivalent Production Unit = 500 units × 50% =
250 units.

37
STEPS
1. Prepare statement of Equivalent Production
a) Compute Input-output Qty reconciliation
b) Compute percentage of completion and their equivalent
production
2. Compute Cost Per Equivalent Unit
3. CPU = (Total Cost / Equivalent Units)
4. Prepare statement of evaluation (i.e. Compute the value
of Closing Work in Progress, Output transferred to next
process & Abnormal loss or Abnormal gain if any)
5. Prepare process accounts

38
Input Unit Output Unit Material Labour Overhead
% of Eq. Unit % of Eq. Unit % of Eq. Unit
complet comple comple
ion tion tion
Op. XXX Output T/f XXX XXX XXX XXX XXX XXX XXX
WIP to next
process
Current XXX Normal XXX XXX XXX XXX XXX XXX XXX
period Loss
Input
Abnormal XXX XXX XXX XXX XXX XXX XXX
Loss
Cl. WIP XXX XXX XXX XXX XXX XXX XXX
TOTAL XXX XXX XXX XXX XXX

39
Particulars relating to process A :-

Work-in-progress (opening balance) on 1.12.2004 --- 500 units

Rs.
Material 4,800
Labour 3,200
O.H 6,400
14,400
Units introduced during the month 19,500.
Processing costs incurred during the month:
Rs.
Materials 1,86,200
Labour 72,000
O.H 1,06,400 Rs. 3,64,600

40
Output :
Units transferred to process B 18,200
Units scrapped (completely processed) 1,400
Work-in-process (closing balance) 400
Degree of completion : Materials 100%, Labour and O.H 50%.
Normal loss in processing is 5% of total input and normal scrapped unit
fetch
Re.1 each.

Prepare the following statements for process A for December 2004.

•Statement of equivalent production.(using Weighted Average Method)
•Statement of cost.
•Statement of evaluation.
•Process ‘A’ account.

41
 PARTICULARS INPUT PARTICULARS OUTPUT MATERIAL LABOUR OVERHEAD

% EU % EU % EU

OPENING WIP 500 OUTPUT TRANSFERRED 18200 100% 18200 100% 18200 100% 18200
TO NEXT PROCESS

CURRENT NORMAL LOSS @ 5% 1000

PERIOD INPUT 19500 (5/100*20000) NOT APPLICABLE

ABNORMAL LOSS 400 100% 400 100% 400 100% 400

(B/f)

CLOSING WIP 400 100% 400 50% 200 50% 200

TOTAL 20000 TOTAL 20000 19000 18800 18800

42
 PROCESS LOSS = 1400

NORMAL ABNORMAL
LOSS LOSS
Rs.1000 Rs.400(B/F)

43
 Particulars Cost Equivalent Units Cost per Unit Equivalent
Unit

Materials 4,800

1,86,200

1,91,000

Less: Scrap Value (1,000) 1,90,000 19000 10

Labour 3,200

72,000 75,200 18800 4

Overheads 6,400

1,06,400 1,12,800 18800 6

44
 PARTICULARS UNITS CPU RS. PARTICULARS UNITS CPU RS.
1
To Opening WIP 500 14,400 By Normal Loss 1,000 1,000
WN 2

To Input 19,500 1,86,200 By Abnormal Loss 400 8,000

WN 3
By Output
To Direct Labour 72,000 Transferred 12,200 3,64,000
WN 4

To Overheads 1,06,400 By Closing WIP 400 6,000

TOTAL 20,000 3,79,000 TOTAL 20,000 3,79,000

45
 EQIVALENT COST P.U. VALUATION
UNIT

Abnormal Material 400 10 4,000

Loss
(400 UNITS)
Labour 400 4 1,600

Overhead 400 6 2,400

Total of Abnormal Loss (400 units) 8,000

46
 EQIVALENT UNIT COST P.U. VALUATION

OUTPUT Material 18200 10 1,82,000

TRANSFERRED
TO NEXT Labour 18200 4 72,800
PROCESS
(18200 UNITS) Overhead 18200 6 1,09,200

Total of OUTPUT TRANSFERRED TO NEXT PROCESS 3,64,000

(18200 UNITS)

47
 EQIVALENT COST P.U. VALUATION
UNIT

CLOSING Material 400 10 4,000

WIP
(400 UNITS) Labour 200 4 800

Overhead 200 6 1,200

Total of CLOSING WIP (400 units) 6,000

48
} In general, degree of completion of Abnormal loss is
100 % for all the component

} If the degree of completion for units scrapped there

in question then the same percentage we have to
take for abnormal loss

} Degree of completion of Normal Loss is always NOT

APPLICABLE.

49
The following data are available in respect of process I for a month.

Opening WIP : 900 units at Rs.4,500

Degree of completion : Materials 100%, Labour 60%, Overhead 60%
Input of materials : 9100 units at Rs.27,300
Direct wages : Rs.8,200
Production overhead : Rs.16,400
Unit scrapped : 1,200 units
Degree of completion : Materials 100%, Labour 70%, Overhead 70%.
Closing WIP : 1000units
Degree of completion : Materials 100%, Labour 80%, Overhead 80%.
Units transferred to next process : 7,800

Normal process loss is 10% of total input (opening stock plus units put in). Scrap value is Rs.3
p.u.

50
Required:
•Compute equivalent production;
•Compute cost per equivalent unit for each element and cost of abnormal
loss, closing WIP and units transferred to the next process; and
•Prepare process accounts.

51
 PARTICULARS INPUT PARTICULARS OUTPUT MATERIAL LABOUR OVERHEAD

% EU % EU % EU

OPENING WIP 900 OUTPUT TRANSFERRED 0% 0 40% 360 40% 360

TO NEXT PROCESS –Op
WIP 900

Current period input 6900 100% 6900 100% 6900 100% 6900

CURRENT NORMAL LOSS @ 10% 1000

PERIOD INPUT 9100 (10/100*10000) NOT APPLICABLE

ABNORMAL LOSS 200 100% 200 70% 140 70% 140

(B/F)

CLOSING WIP 1000 100% 1000 80% 800 80% 800

TOTAL 10,000 TOTAL 10,000 8,100 8,200 8,200

52
WN 1 Process Loss Calculation = Rs. 1,200

Normal loss Abnormal Loss

Rs. 1,000 Rs. 200(B/F)

Statement of computation of Cost per unit

Component Total Cost Equivalent Unit Cost per unit (Rs.)

Material 27,300
(-) Normal Loss SV (3,000)

24,300 8,100 3

Labour 8,200 8,200 1

Overhead 16,400 8,200 2

53
 Rs. 1,020

200 Units

Material Labour Overhead

Equivalent 200 140 140

Unit
(X) Cost Per Unit 3 1 2

Rs.1,020

54
 7,800 Units

Opening WIP Current Period IP

900 6,900

Material Labour Overhead Material Labour Overhead

EU NIL 360 360 6,900 6,900 6,900

CPU NIL 1 2 3 1 2

Rs. 1,080 Rs. 41,400

Rs. 42,480
(+) Cost of opening WIP Rs. 4,500
Rs. 46,980
55
 1000 Units

Material Labour Overhead

Equivalent Unit 1000 800 800

X Cost per Unit 3 1 2

Rs. 5,400

56
PARTICULARS UNITS CPU RS. PARTICULARS UNITS CPU RS.

To Opening WIP 900 4,500 By Normal Loss 1,000 3 3000

WN 2

To Current period IP 9,100 27,300 By Abnormal Loss 200 1020

WN3

To Direct Labour - 8,200 [email protected] 7800 46,980

WN4

To Overheads 16,400 By Closing WIP 1000 5400

TOTAL 10,000 3,79,000 TOTAL 10,000 3,79,000

57
The following information is available in respect of process III for January. Prepare process
Accounts.

Opening WIP 1000 units

Cost of opening WIP Material---process II Rs.39,000;

process III Rs.7,500;
Labour----Rs.11,200;
O.H--------Rs.11,800.

Transfer from process II 6,000 units at a cost of Rs.2,36,000

Cost incurred in process III

Materials Rs.52,000
Labour Rs.1,03,600
O.H Rs.1,54,100
Closing WIP 2,000 units

58
Degree of completion

Materials 60%
Labour 50%
O.H 40%

4,700 units were transferred to process IV during the period.

Units scrapped : 300 units completed as

materials 100%;
labour 80%,
O.H 60%

Normal loss is 5% of production, Scrap realizes Rs.20 p.u

Prepare process account

59
} If the problem is to be solved using FIFO method, %
of completion for opening WIP should be there in
the question.

} In case % of completion of opening WIP is not given,

we can solve only by using Weighted Average
Method.

60
} In case % of completion of opening WIP is given in
the question & the problem does not specifically
mention which method to use, even then we have to
solve the problem by way of FIFO because the
intention behind providing the degree of completion
of opening WIP is to make use of it.

61
} Two materials will come if the question requires
preparation of any process account other than the
first process. (provided opening WIP should not be
NIL)

62
PARTICULARS INPUT PARTICULARS OUTPUT MATERIAL A MATERIAL B LABOUR OVERHEAD
P – II P – III

% EU % EU
% EU % EU

OpeningWIP 1,000 OUTPUT 100% 4,700 100% 4,700 100% 4,700 100 4,700
TRANSFERRED %
TO NEXT PROCESS
4,700

CURRENT NORMAL LOSS

PERIOD @ 5% 250 NOT APPLICABLE
INPUT 6,000 (WN 1)
ABNORMAL LOSS 50 100% 50 100% 50 80% 40 60% 30
(B/F)
CLOSING WIP 2000 100% 2000 60% 1200 50% 1000 40% 800

TOTAL 7,000 TOTAL 7,000 6,750 5,950 5,740 5,530

6,750

63
Particulars Amount (Rs.)

Opening WIP 1,000

Current Period Input 6000

Total WIP 7,000

Closing WIP (2,000)

Production 5,000

Normal Loss @ 5 % 250

64
Component Total Cost Equivalent Unit Cost per unit
Material A 39,000
(+) 2,36,000
(-) Normal Loss SV (5,000)

270,000 6,750 40
Material B 7,500
(+) 52,000

59,500 5,950 10
Labour 11,200
(+) 103,600

114,800 5,740 20
Overhead 11,800
(+) 154,100

1,65,900 5,530 30

65
 50 Units

Material A Material B Labour Overhead

Equivalent 50 50 40 30
Unit
(X) Cost Per Unit 40 10 20 30

Rs. 4,200

66
 4700 Units

Material A Material B Labour Overhead

Equivalent 4,700 4,700 4,700 4,700

Unit
(X) Cost per Unit 40 10 20 30
Rs. 4,70,000

67
Rs. 1,36,000

2000 Units

Material A Material B Labour Overhead

Equivalent 2,000 1,200 1,000 800

Unit
(X) Cost per Unit 40 10 20 30

Rs. 1,36,000

68
PARTICULARS UNITS CPU RS. PARTICULARS UNITS CPU RS.
20
To Opening WIP 1,000 69,500 By Normal Loss 250 5,000
WN 1

To Current period IP 6,000 2,36,000 By Abnormal Loss 50 4,200

WN 2
To Direct Material 52,000 ByOutputTransferred 4,700 4,70,000
WN 3
To Direct Labour 103,600 By Closing WIP 2,000 1,36,000

To Overhead 154,100

TOTAL 7,000 6,15,200 TOTAL 7,000 6,15,200

69
In a manufacturing unit, raw material passes through four processes
and the output of each process is the input of the subsequent process.

The loss in the four processes I,II,III & IV are respectively 25%, 20%,
20%, and 16-2/3% of the input.

If the end product at the end of the process IV is 40,000 kgs, what is the
quantity of raw material required to be fed at the beginning of process I
and the cost of the same at Rs.4 per kg?

70
Process Input (in kg) Process Loss (in Output (in kg)
kg)

1 100 25% = 25 75

2 75 20% = 15 60

3 60 20% = 12 48

4 48 16 2/3 % = 8 40

71
Hence, if input = 100 Kgs after rendering four process
output = 40 Kgs

In the given problem, actual output comes to 40,000 kgs,

Therefore input should be 1,00,000 kgs(40,000 X 100 /40)

Value of RM = 100000 kgs X Rs.4 = Rs.400,000

72
} Degree of Completion for Abnormal gain is always
100 %

} Even Degree of completion of process loss is given,

degree of completion of abnormal gain is always
100% (unlike abnormal loss)

73
} QUESTION 7
The following data pertains to process I for march 2009 of
DISA Ltd:
} Opening WIP 1500 units at Rs.15,000.
} Degree of completion
– Material 100%
– Labour and Overhead 33 1/3 %.
} Input of materials 18500 units at Rs.52000.
} Direct labour Rs.14,000.
} Overhead Rs.28,000

Cont…

74
} Closing WIP 5000 units:
◦ Degree of completion
– Material 90%
– Labour & OH 30%
} Normal process loss is 10% of total input.
} Scrap value Rs.2 per unit
} Unit transferred to the next process 15000 units.

You are required to compute Statement of equivalent

production and prepare the process account.

75
 INPUT PRODUCTION OUTPUT EQUIVALENT

Particulars Units Particulars Units Material Labour and Overheads

% Units % Units

Op. WIP 1500 From Op. WIP 1,500 - - 66 2/3 1000

15000
Introduced 18500 Into. & completed 13,500 100 13500 100 13500

Tr. to next process

Normal loss 2000 - -

Closing WIP 5000 90 4500 30 1500

Less: abnormal Gain (2000) 100 (2000) 100 (2000)

TOTAL 20000 TOTAL 20000 16000 14000

Cont…

76
 Statement of Cost per Equivalent Unit for Cost
element
Particulars Cost Equivalent Cost per
(Rs.) Units equivalent units
Materials 52,000
Less: Scrap value 4,000 48,000 16000 3
Labour 14,000 14000 1
Overheads 28,000 14000 2

Cont…

77
 15, 000 Units

From Opening From current

WIP period input
1500
13,500

Labour & Overhead =

1000 X 3 (1+2)
3000 MATERIAL LABOUR & OVERHEAD
Equivalent 13500 13500
Unit
(X) Cost per
Unit 3 1+2

Rs. 81000

Total Value
= 3000+81000+cost of opening WIP Rs. 15,000 = 99,000
78
 5,000 units

Equivalent 4,500 1500 1500

Unit
(X) Cost per
Unit 3 1 2

Rs. 18,000

79
 2,000 units

Equivalent 2,000 2,000 2,000

Unit
(X) Cost per
Unit 3 1 2

Rs. 12,000

80
 a. Process Account I
Particulars Units CPU Amount Particulars Units CPU Amount
(in Rs.) (in Rs.)
To Opening By Normal
WIP 1500 15,000 Loss 2000 2 4,000
To Units By Transfer
introduced to Next
(Material) 18500 52,000 Process 15000 WN 1 99,000
To Direct By Closing
Labour 14,000 WIP 5000 WN 2 18,000

To Overheads 28,000
To Abnormal
Gain 2000 WN 3 12,000
TOTAL 22000 121,000 22000 121,000
Cont…
81
 b. Abnormal Gain Account

Particulars Units CPU Amou Particulars Units CPU Amount

nt (in Rs.)
(in Rs.)
To Normal
Loss A/c. 2,000 2 4,000 By Process I 2,000 6 12,000

To Costing P &
L s A/c.(B/f) 8,000
TOTAL 12,000 12,000

82
} Generally in process costing output of the one
process becomes the input of the next process at
cost.

} However, if the output of one process is transferred

to the next process at market value or cost plus a
percentage of profit, then the difference between
cost and the transfer price is known as inter-process
profit.

83
} ADVANTAGES
◦ Facilitate comparison between the cost of output and its
market price at the stage of completion
◦ Each process is made to stand by itself as to the
profitability

} DISADVANTAGES
◦ Use of inter-process profits involves complication
◦ System shows profits which are not realised because of
stock not sold out

84
Shoba Ltd. Produces product, which passes through 2 processes before it is completed and
transferred to finished stock.
Particulars Process I Process II Finished stock

Rs. Rs. Rs.

Opening stock 7,500 9,000 22,500

Direct materials 15,000 15,750
Direct wages 11,200 11,250
Factory O.H 10,500 4,500
Closing stock 3,700 4,500 11,250
Inter process profit included
in opening stock
1,500 8,250

85
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. Stocks in process are valued at prime cost. Finished stock is valued at the
price at which it is received from the process II. Sales during the period are Rs.
1,40,000.

Required:

Process cost accounts and finished goods account showing the profit element at
each stage.

86
Particulars Cost Profit Total Particulars Cost Profit Total
To Opening 7,500 - 7,500 By Transfer 40,500 13,500 54,000
Stock to Process
II
To Direct 15,000 - 15,000
Material
To Direct 11,200 - 11,200
Wages
Prime Cost 33,700 - 33,700
(-)Closing 3,700 - 3,700
Stock
30,000 - 30,000
(+) Factory 10,500 - 10,500
Overhead
Total Cost 40,500 - 40,500
(+)Profit @ - 13,500 13,500
25%
TOTAL 40,500 13,500 54,000 TOTAL 40,500 13,500 54,000

87
Particulars Cost Profit Total Particulars Cost Profit Total

To Transfer 40,500 13,500 54,000 By Transfer 75,750 36,750 1,12,500

from to FG a/c
Process I

To Opening 7,500 1500 9,000

Stock
To Direct 15,750 - 15,750
4500
Material
To Direct 11,250 - 11,250
(15000/90000)
Wages
Prime Cost 75,000 15,000 90,000

(-)Closing 3,750 750 4,500

Stock
71,250 14,250 85,500
(+) Factory 4,500 - 4,500
Overhead
Total Cost 75,750 14,250 90,000
(+)Profit - 22,500 22,500
TOTAL 75,750 36,750 1,12,500 TOTAL 75,750 36,750 1,12,500

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 Particular Cost Profit Total Particular Cost Profit Total
s s
To 75,750 36,750 1,12,500 By Sales 82,500 57,500 1,40,000
Transfer
from
Process II

To 14,250 8,250 22,500

Opening
11250(45000/
Stock 135000)

90,000 45,000 1,35,000

(-) Closing 7,500 3,750 11,250
Stock
82,500 41,250 1,23,750
Profit - 16,250 16,250
(B/f)
TOTAL 82,500 57,500 1,40,000 TOTAL 82,500 57,500 1,40,000

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 JOB COSTING PROCESS COSTING
• Job is performed against specific • Process is continuous
order
• Each job is unique in nature i.e. • All the end products are
heterogeneous homogeneous in nature
• Cost of job is calculated only when • Cost of process is calculated at the
a job is completed end of the each period
• Cost centre is job • Cost centre is a process
• There may or may not be work in • Since process is a continuous one
process some work will always be in
process.

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 JOB COSTING PROCESS COSTING
• Generally no transfers from one • Always output of one process will
job to another be transferred to next process as
input
• The cost of each job is complied • The unit cost here is the average
separately by adding material, cost of the process for a given
labour and overheads period
• Detailed supervision and control is • Supervision and control is
needed as each job is distinct and comparatively easier as the process
different from others operations are standardized.

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WISHING YOU ALL SUCCESS!

CA.K.HARIHARAN

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