Cost Accounting (14)

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.

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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

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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.

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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.

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Cost Accounting (14)