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8/10/2019 Cost Accounting (14)
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Chapter 17Process costing
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Departmental Production Report
Analysis ofphysical flow
of units.
Calculationof equivalent
units.
Computationof unit costs.
Analysis oftotal costs.
4-2
Process-costing procedures for
subsequent production departments are
covered in Cost Accounting texts
In our illustration, production requires
two sequential productionoperations: cutting and stitching.
Although the process-costing procedures for the
second department are similar to those illustrated for
the first, there is one additional complication.
The cost of goods completed and
transferred out of the Cutting
Department must remain assigned to
the partially completed product units
as they undergo further processing in
the Stitching Department.
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Manufacturing
overhead is applied
to Work-in-Process
Inventory using a
predetermined
overhead rate
Actual costs of
manufacturing overhead
are entered in Work-in-
Process Inventory
Actual Costing vs. Normal Costing
4-3
Both actual and normal costing can be used in conjunction with a process costing system. Our
illustration used a predetermined overhead rate based on direct-labor cost, which is normal
costing.
In our illustration, production requires two sequential production operations: cutting and
stitching. Although the process-costing procedures for the second department are similar tothose illustrated for the first, there is one additional complication. The cost of goods completed
and transferred out of the Cutting Department must remain assigned to the partially completed
product units as they undergo further processing in the Stitching Department. Process-costing
procedures for subsequent production departments may be studied now.
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Normal and abnormal loss and abnormal gain
In a processing operation loss of material is a normal phenomenon. The
amount of loss inherent in the process is called normal loss. Normal loss
can be fairly marked from the type and property of materials used, natureof process involved etc.
If the loss happened due to unexpected events or abnormal conditions
such as, sub-standard materials, accident , faulty plant design, the loss is
called abnormal loss. In effect, if any loss happens over and above the
normal loss, it is called abnormal loss. Normal and abnormal loss vary
according to industry type, level of efficiency, nature of production etc.
In some cases, actual loss is less than normal loss, in such cases, it is the
difference between normal loss and actual loss is called abnormal gain.
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Treatment in accounts
Normal loss : The cost of normal loss is absorbed by
units produced. When normal loss has a scrap value,
the same is credited in the process account.
Generally , if there is no abnormal gain, it may not be
necessary to maintain a separate account for normal
loss.
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Abnormal loss
Abnormal loss is charged to the respective cost of production.
The process account is credited by abnormal loss account with costof materials, labours and overheads equivalent to good units.Abnormal loss units rank equal with normal units. The normal lossunits is deducted from the total units and the scrap value isdeducted from the total costs.
The net costs is divided by the normal production, includingabnormal loss units which are converted to equivalent units, toarrive at the unit costs.
The units are then transferred to subsequent process or as finishedproducts.
Abnormal loss units to abnormal loss accounts.
Abnormal loss account is credited by realizable scrap value and thebalance is written off to costing Profit and Loss Account asabnormal loss.
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Abnormal gain
Abnormal gain does not affect cost of normal production. The
process account is debited with full cost of abnormal gain. Thetotal cost is deducted by normal loss and then it is divided by
the input units minus the normal loss units.
The abnormal gain account is debited and normal process lossaccount is credited. The balance is transferred to costing
Profit and Loss account as abnormal gain.
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From the following particulars of two processes Process X and Process Yprepare process accounts of X and Y
Process X Process Y
Input (units) 5000 4600
Normal Loss 10% ?
Cost incurred (Rs.)
Materials 8000 1500 Direct Labours 3000 4000
Overheads 2750 3010
Scrap value per unit 0.50 2
Output of Process Y was 4300 units and cost is Rs.5 and there is no WIP,closing or opening stocks.
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Process X Account
Dr
--------------------------------------------------
Units Cost/unit AmountTo Mat 5000 1.60 8000
To Lab 3000
To OH 2750
----------- --------------
5000 13750
ToAbnormal
Gain 100 3.00 300
---------- ------------
5100 14050
Cost per unit = (Total process cost
scrapvalue of normal loss)/ (Inputsnormalloss)
= 13750 250 / 5000 500
= 3.00
Cr.
--------------------------------------------------------
Units Cost/unit AmountBy Normal loss 500 0.50 250
By process YA/c 4600 3.00 13800
----------- --------------
5100 14050
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Process Y AccountDr
--------------------------------------------------Units Cost/unit Amount
To Process A
A/c. 4600 3.00 13800
To Mat 1500
To Lab 4000
To OH 3010
----------- --------------
4600 22310
Cost per unit = (Total process cost scrap
value of normal loss)/ (Inputsnormal
loss)
5 = 223102x / 4600x
x = 230 units
Cr.
--------------------------------------------------------
Units Cost/unit Amount
By Normal loss 230 2.00 460
By Abnormal
Loss 70 5.00 350
By Finished
goods A/c 4300 5.00 21500----------- --------------
4600 22310
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Transferred-in Costs
Are costs incurred in previous departments that are
carried forward as the products cost when it moves to a
subsequent process in the production cycle Also called Previous Department Costs
Journal entries are made to mirror the progress in
production from department to department
Transferred-in costs are treated as if they are aseparate type of direct material added at the beginning
of the process
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Inter-Process Profit
Output of one process when transferred to
the next process at cost plus a mark-up
percentage as profit, the difference between
the cost and transfer price is known as the
inter-process profit.
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Example
Following details are available for two processes X and Y
in Rupees
Process X Process Y
Materials 15000 --
Labour 10000 15000Overheads 10000 15000
Closing stock (at cost) 5000 7500
The output from process X is transferred to process Y at cost plus 25%mark-up basis and also the output from Y is also charged at 25% mark-upbasis. Finished stock sold at Rs.90000 and stocks worth of Rs.15000
remained unsold. No opening, closing work-in-progress.Show process Accounts and profits.
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Process X Account
Dr.
---------------------------------------------
Rs. Rs.
To Mat 15000
Lab 10000
OH 10000
Total cost 35000
Less Cl. Stock 5000
Cost of transfer 30000
Profit (25%) 7500
37500
Cr.
---------------------------------------------Rs.
To Process
Y A/c. 37500
-------------
37500--------------
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Process Y Account
Dr.
---------------------------------------------Rs. Rs.
To Process
X A/c. 37500
Lab 15000
OH 15000Total cost 67500
Less Cl. Stock 7500
Cost of transfer 60000
Profit (25%) 15000
75000
Cr.
---------------------------------------------Rs.
By Finished
Stock A/c. 75000
-----------------
75000
-------------------
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Finished Stock Account
Dr.
---------------------------------------------
Rs.
To Process Y A/c 75000
To Profit &
Loss A/c. 30000
---------------
105000
-----------------
Cr.
---------------------------------------------
Rs.
By Sales 90000
By Stock 15000
--------------
105000
----------------
Total Profit
Process X 7500Process Y 15000
Finished Goods 30000
52500
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Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order Operation Costing ProcessCosting (Products produced in batches) Costing
4-17
Job-order and process costing represent the polar extremes of product-costing systems. But some
production processes exhibit characteristics of both job-order and process costing environments. These
production processes often are referred to as batch manufacturing processes. Such processes are
characterized by high-volume production of several product lines that differ in some important ways but are
nearly identical in others. Since batch manufacturing operations have characteristics of both job-order
costing and process-costing environments, a hybrid product-costing system is required. One common
approach is called operation costing.
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Hybrid Costing Systems
A Hybrid-Costing System blends characteristics from
both job-costing and process-costing systems
Many actual production systems are in fact hybrids
Examples include manufacturers of televisions,
dishwashers and washing machines, as well as Adidas
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Operation Costing
Operation costing employs some aspects
of both job-order and process costing.
Job-order Operation Costing ProcessCosting (Products produced in batches) Costing
Conversion costs
assigned to batches
as in process costing.
Material Costs charged
to batches as in
job-order costing.
4-19
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This product-costing system is used whenconversion activities are very similar acrossproduct lines, but the direct materials differsignificantly.
Conversion costs are accumulated bydepartment, and process costing methods areused to assign these costs to products.
In contrast, direct-material costs areaccumulated by job order or batch, and job-ordercosting is used to assign material costs toproducts.
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Im ready to process
some leisure time.
4-21
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