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PROJECT REPORT
ON
PROCESS COSTING
M.COM – I ADVANCED ACCOUNTANCY
2015 - 2016
SUBMITTED BY
KAVITAKE CHHAYA LAXMAN
ROLL NO –A/24
PROJECT GUIDE
PROF. ROHAN GAIKWAD
SUBJECT: ADVANCED COST ACCOUNTING
People’s Education Society’s
DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS
WADALA, MUMBAI- 400 031.
ACKNOWLEDGEMENT
I hereby acknowledge all those who directly or indirectly helped me to draft the project
report. It would not have been possible for me to complete the task without their help
and guidance. It is my great privilege to thank Dr. Ambedkar College of Commerce
and Economics.
First of all I would like to thank the principal Dr. S.R. Kamble and the coordinator
Prof. Sanjay H. Khaire who gave me the opportunity to do this project work. They also
conveyed the important instructions from the university from time to time. Secondly, I
am very much obliged of Prof. Rohan Gaikwad for giving guidance for completing the
project.
I am thankful to all those persons who co-operated with me. They not only rendered
time out of their busy scheduled but also answered my queries without hesitation.
I must mention my hearty gratitude towards my family, other faculties and friends who
supported me to go ahead with the project.
Place: MUMBAI
Date:
(Signature):
People’s Education Society’s
DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS
WADALA, MUMBAI- 400 031.
CERTIFICATE
This is to certify that, Miss. Kavitake Chhaya Laxman of M.Com - I
Advanced Accountancy Semester I (2015-2016) has successfully completed
project on Process Costing under the guidance of Prof. Rohan Gaikwad
(Principal) (Co-ordinator)
(Project Guide) (External Examiner)
DECLARATION
I Miss. Kavitake Chhaya Laxman the student of Dr. Ambedkar College of
Commerce & Economics, studying in M.Com – I Advanced Accountacny
(Semester I), hereby declare that I have completed the project report on
Process Costing in the academic year 2015 – 2016.
The information submitted is genuine and practical to the best of my
knowledge.
Place: ______________
Kavitake Chhaya Laxman
( Roll No.A/24)
Index
SR. NO CONTENTS PAGE NO.
1 INTRODUCTION MEANING APPLICABILTY ADVANTAGES & DISADVANTAGES PROCESS CSTING & JOB COSTING
12
3 - 45
2 COSTING PROCEDURE – SIMPLE PROCESS ACCOUNTING PROCEDURE WORKSHEET – PRO – FORMA PROCESS
ACCOUNT
6 – 78
3 WASTE AND LOSSES MEANING ACCOUNTING FOR LOSSES WORKSHEET – CALCULATIONS FOR NORMAL
LOSS ETC. PROFORMA – JOURNAL ENTRIES PROFORMA – PROCESS A/C
9 – 1112131415
16 - 19
4 VALUATION OF WORK – IN – PROCESS EQUIVALENT UNITS STEPS IN CALCULATION OF EU & UC FLOW OF COSTS – AVERAGE OF FIFO AVERAGE METHOD FIFO METHOD ILLUSTRATION ELEMENT-WISE COST OF WIP EVALUATION OF METHODS PROCESS LOSSES/GAINS
2021 – 2324 – 2526 – 28
2929 – 3031 – 32
5 CASE STUDY – VOLANT TEXTILE MILLS LTD 33 - 42
iNTRODUCTION
MEANING 1) Process : A Process means a distinct manufacturing operation or stages. In Process
Industries, the raw material goes through a number of processes in a sequence
before the finished product is finally produced. For example production of coconut
oil involve the following distinct processes:
(1)COPRA CRUSHING (2) REFINING AND (3) FINISHING.
2) Process Costing: Process costing is method of costing used to find out the cost of
the product in each process. wheldon has defined process costing as “a method of
costing used to ascertain the cost of the product at each stage or operation of
manufacture …..”According to CIMA, London-“it is that form of operation costing
where standardized goods are produced”
3) Process Cost: According to CAS – 1 when the production process is such that
goods are produced from a sequence of continues or repetitive operation or
processes, the cost incurred during a period is considered as process cost.
APPLICABILITY AND NECESSITY Process Costing is applicable to several mining , manufacturing and public utility
industries, e.g. mines and quarries producing minerals and ores; industries producing
textiles , chemicals, soap, paper, plastics, alcohol, refined oil, electricity, gas and so on.
It becomes necessary to apply process costing to the Industries belonging to any of the
following categories:
ONE PRODUCT, MANY PROCESSES: A factory may produce a single
item through a number of processes or departments. it becomes necessary to
find out the cost of each process or department separately to control wastage
etc.
MANY PRODUCTS, MANY CYCLES: A bakery can use the same
equipments to produce either bread or cakes. it may produced only bread in one
cycle and change over to production of cakes in the next cycle. each cycle is
treated as a separate process so as to find out the cost of the item produced in a
particular cycle or process.
MANY PRODUCTS, SAME PROCESS: an oil refinery can obtain many joint
products such as refined oil, gas, steam etc. in the same process. Process
Costing is employed to ascertain the individual cost of each such product.
[A] ADVANTAGES
(1) PERIODICAL DETERMINATION OF COSTS: Process costs can be
collected and determined for even a short period like a day, a week or a month. In
Job Costing, on the other hand, costs can be collected and determined only after
the job is complete, which may take months or evens years.
(2) SIMPLE AND CHEAP: Process costing is much simple, easy and less expensive
method of costing as compared to other methods. There is no need for an elaborate
system of identifying the direct costs of a job or a batch.
(3)MANAGERIAL CONTROL: Being a simple system to establish and operate,
process costing facilitates greater control of the management over costs, wastage
etc.
(4)STANDARD PROCESS AND PRODUCTS: Since the processes and products
are standard, it is easy to make decisions regarding pricing, quotations, tenders etc.
[B] DISADANTAGES
(1)NO DETAILED ANALYSIS: Process Costing does not give a details analysis of
the cost as (i) it emphasizes the period rather than the unit or the product, and (ii) it
gives an average cost rather that the specific cost of the product.
(2)HISTORICAL COSTS: Process Costing gives only historical costs which are not
useful for forecast of future trends etc.
(3)ESTIMATES: The determination of percentages of normal loss, wastage,
distribution of costs over by – products and joint products, valuation of work in
progress involve estimate based on arbitrary decision of the management.
PROCESS COSTING V/S JOB COSTING
NO. PROCESS COSTING JOB COSTING
1.
2.
3.
4.
5.
It is period costing i.e. costs of all
processes during a period are
ascertained.
Cost unit is each process.
Direct costs are much more than
indirect.
It normally involves work - in -
process.
Cost of one process is transferred
to next process.
It is specific costing; i.e. cost of job
is ascertained till it ends, whatever
the time it takes.
Cost unit is the job order.
Costs are directs as well as indirect.
It may not involve work - in –
progress.
Cost of each job is separate.
Costing PROCUDER – SIMPLE PROCESS
Accounting Procedure
The accounting prouder in process costing is as follows:
1. Separate Process A/c: the entire manufacturing operation is divided in to
separate stages or process. each process of production is treated as a distinct cost centre
a separate process account is opened to record the cost incurred in such process.
2. Debit side of Process A/c: each process account is charged with the expenses
directly incurred for that process and plus its share of the overheads. the process
account is debited with the direct and indirect expenses ( material, wages and
overheads) pertain to that process.
a) Material : the raw material, sundry material and stores required for a
process are issued directly from the stores against a material
requisition slip. in addition, the cost of units transferred from the
earlier process, if any , also appears on the debit side of the process
account.
b) Labour : wages paid to workers directly employed in a process are
debited to the process account. like material, the distinction between
direct and indirect labour is not important in process costing. Indirect
labour expenses (e.g. manager`s salary) may, if necessary, be debited
on the basis of ratio of direct wages.
c) Expenses : the expenses directly related to the process such as
repairs of machinery, power etc. are debited to the respective process
account. Indirect expenses are apportioned over and absorbed by
various processes on a suitable basis such as ratio of material costs,
labour costs or prime costs.
3. Credit side of Process A/c : The Process account is credited with tha sale value
of residue etc.
4. Net cost of Process : The net cost of the output of the process (total cost less
sale value of residue) is transferred to the next process. the cost of each process is thus
made up of (i) cost brought forward from previous process and (ii) net cost of material,
labour and overheads added in the process less sale value of residue. the net cost of
the last process is transferred to finished goods account.
5. Average Unit Cost : The net cost is divided by the number of units produced to
determine the average cost per unit in that Process.
PRO-FORMA PROCESS ACCOUNT A PRO-FORMA PROCESS ACCOUNT WOULD APPEAR AS FOLLOW:
Dr. Process Account Cr.
Particulars Units Rate Particulars Units Rate
To Transfer from (1) Earlier Process
To Material
To Wages
To Expenses
To Overheads
By Sale of Residue
By Transfer to next process / finished goods
WASTE AND LOSSES
MEANING A manufacturing process is likely to give rise to some waste and losses. let us
first be clear about the exact meaning of these terms – viz waste and losses.
Waste : It represents the portion of basis raw materials lost in processing
having no recoverable value. Waste may be visible - remnants of basis raw
materials – invisible; e.g. disappearance of basic raw materials through
evaporations, smoke etc. normal waste is absorbed in the cost of net output ,
whereas abnormal waste is transferred to the costing profit and loss account.
Spoilage : It is the term used for materials which are badly damaged in
manufacturing operations, and they cannot be rectified economically and hence
taken out of process to be disposed of in some manner without further
processing. Spoilage may be either normal or abnormal. Normal spoilage costs
are included in costs either charging the loss due to spoilage to the production
order or by charging it to production overhead so that it is spread over all
products.
Salvage : It signifies those units or portions of production which can be
rectified and turned out as good units by the application of additional material,
labour or other service. For example, some mudguards produced in a bicycle
factory may have dents; or there may be duplication of page or omission some
pages in a book. Defectives arise due to sub-standards materials, bad –
supervision, bad – planning, poor workmanship, inadequate – equipment and
careless inspection.
Rectification : In the case of articles that have been spoiled, it is necessary to
take steps to salvage/reclaim as much of the loss as possible. For this purpose :
(i) all defective units should be sent to a place fixed for the purpose ;(ii) these
should be dismantled ;(iii) goods and serviceable parts should be separated and
taken into stock;(iv) parts which can be made serviceable by further work should
separated and sent to the workshop for the purpose and taken in to stock after the
defects have been removed; and (v) parts which cannot be made serviceable
should be collected in one place for being melted or sold.
Scrap : It has been defined as the incidental residue from certain types of
manufactures, usually of small amount and low value, recoverable without
further processing. Scarp may be treated in cost accounts in the following ways:-
I. Where the value of scrap is negligible, it may be excluded from costs. In other
words, the cost of scrap is borne by good units and income scrap is treated as
other income.
II. The sale value of scrap net of selling and distribution cost is deducted from
overhead to reduce the overhead rate. A variation of this method is to deducted
the net realizable value from material cost. This method is followed when
scraps cannot be aggregated job or process-wise.
III. When scrap is identifiable with a particular job or process and its value is
significant, the scrap account should be charged with full cost. The credit is
given to the job or process concerned. The profit or loss in the scrap account, on
realization, will be transferred to the costing profit and loss account.
CAS – 6
The provision of CAS – 6 (Material Cost) relating to scrap, waste, etc. are as follows
–
Scrap : Scrap means discarded material having some value in few cases and
which is usually either disposed of without further treatment (other than
reclamation and handling) or reintroduced into the production in place of raw
material.
Waste : Waste means material los during production or storage due to various
factors such as evaporation, chemical reaction, contamination, unrecoverable
residue, shrinkage, etc., and discarded material which may or may not have value.
Spoilage : Spoilage means production that does not meet with dimensional or
quality standards in such way that it cannot be rectified economically and sold for a
disposal value.
Marketable scrap : The production process may generate marketable scrap
or waste. Realized or realizable value of scrap pr waste shall be credited to the cost
of production.
Reprocessed scrap : In case, scrap or waste does not have ready market
and it is used for reprocessing, the scrap or waste value is taken at a rate of input
cost depending upon the stage at which such scrap or waste is recycled. The
expenses incurred for making the scrap suitable for reprocessing shall be deducted
from value of scrap or waste.
ACCOUNTING FOR LOSSES
Actual Basis : -
In this case, the actual sale value of scrap, spoilage or defectives is credited to the
process account. Thus amount of loss ( cost less sale value) relating to defective units
is wholly charged to the process account. This means that the amount of loss is
absorbed by or spread over the good units. However, losses are of two types, normal
loss and abnormal loss. Normal loss denotes the unavoidable or uncontrollable
loss .Abnormal loss on the other hand, denotes the avoidable or controllable loss. In
actual basis , no distinction is made between normal and abnormal loss. Hence in this
method, the cost per unit may vary from period to period. This vitiates or distorts the
unit costs of process.
Normal Basis : -
The normal basis of scrap accounting seeks to * enable the management to control
avoidable costs by distinguishing between the normal loss and the abnormal loss, and
avoid variations in unit costs due to change in amounts of scrap. In this method of
scrap accounting the figure of normal loss for each process is fixed on the basis of past
experience or technical data. Any loss above this figure is treated as abnormal loss.
Any loss below this figure is treated as abnormal gains. Normal loss is treated as
normal cost of production. Normal loss is treated as normal cost of production. But
cost of abnormal loss or gain is taken out from the process account. The net financial
loss on account of abnormal loss is debited to the costing profit and loss account. The
account of abnormal Gains is credited to the costing profit and loss account.
Worksheet : Calculation For Normal Loss Etc.
Steps What is to be calculated
How is it to be calculated
1. Normal Loss = Input x % of Normal Loss
2.
3.
4.
5.
6.
7.
Normal Output
Unit Cost
Abnormal Loss
Or
Abnormal Gains
Cost of Actual Output
Cost of Abnormal Loss
Cost of Abnormal Gains
= Input – Normal Loss
Normal Cost= ------------------------ Normal Output
Cost of Process – Sale Value of Normal Loss= -------------------------------------------------------------- Input – Normal Loss
= Normal Output – Actual Output
= Unit Cost X Units of Actual Output
= Unit Cost X Units of Abnormal Loss
= Unit Cost X Units of Abnormal Gains
Proforma Journal Entries
NO. Entry Amount1. Normal Loss Account Dr.
To Process….Account
Sales Value of Normal Loss
2. Next Process Account Dr. Cost of Good Output
To Process….Account
3. Abnormal Loss Account Dr.
To Process….Account
Cost of Abnormal Loss
4. Process …….. Account Dr.
To Abnormal Gains Account
Cost of Abnormal Gain
5. Actual Sale Dr.
To Normal Loss Account
Units of Normal Loss x Sale Price
6. Cash / Debtor
To Abnormal Loss Account
Sale Value of Abnormal Loss
7. Abnormal Gain Account Dr.
To Normal Loss Account
Sale Value of Abnormal Gain
8. Costing P & L Account Dr.
To Abnormal Loss Account
Cost – Sale Value of Abnormal
Loss
9. Abnormal Gain Account Dr.
To Costing P & L Account
Cost of Abnormal Gains – Sale
Value of Abnormal Gains
Proforma Process Accounts { NORMAL BASIS }
Process A Accounts ( Normal Loss )
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Material b/f
To Direct Material
To Direct Wages
To Direct Expenses
To Overheads
By Normal Loss A/c
By Transfer to next process
Process B Accounts ( Abnormal Loss )
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Material
To Direct Material
To Direct Wages
To Direct Expenses
To Overheads
By Normal Loss A/c
By Transfer to next process
Process C Accounts ( Abnormal Gain )
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Transfer from (1) Earlier Process
To Direct Material
To Direct Wages
To Direct Expenses
To Overheads
By Normal Loss A/c
By Transfer to next process
Normal Loss Accounts
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Process A/c A
To Process A/c B
To Process A/c C
By Actual Sale A
By Actual Sale B
By Actual Sale C
By Abnormal Gain A/c
Abnormal Gain Account
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Normal Loss A/c
To Costing Profit & Loss A/c
By Process A/c C
Abnormal Loss Account
Dr. Cr.
Particulars Units Rate Particulars Units Rate
To Process B ( Cost )By Actual Sale B
By Costing Profit & Loss A/c
Notes:
1.Quantity Reconciliation
Particulars Process A Process B Process C
Input (i)
Less : Normal Loss
= Normal Production (ii)
Actual Production
Abnormal Loss
Abnormal Gain
Sale of Scrap (i – ii)
xx
xx
xx
xx
Xx
xx
Xx
xx
xx
xx
xx
xx
- xx -
xx
Normal Cost2.Unit Cost = ---------------------- Normal Output
Cost of Process – Scrap Value of Normal Loss2.Unit Cost = ------------------------------------------------------------------ Input - Normal Loss
VALUATION OF WORK –IN-PROCESS EQUIVALENT UNITS
We have studies earlier how work - in-progress is valued in case of Units Costing
or Contract Costing. Let us now study how work-in-process is valid in case of process
costing. In the process industries there is likely to be partly competed units at the end
of accounting period that will be carried to the next accounting period. Such units of
unfinished work are in different stages of completion .Hence they cannot be taken as
full units for the purpose of calculation of units costs. Let us consider the following
example:
Dr. PROCESS Cr.
Particulars Units Rs. Particular Units Completion
Rs.
To Material
To Labour
To Overhead
40,000 50,000
10,000
10,000
By Transferred to Process B
By ClosingWork-in-process
30,000
10,000
100%
50%
40,000 70,000 40,000
70,000
The problem now is-how to compute the units cost of the output ? If we simply divided
Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value both the completed units at
the same rate. Therefore , the unfinished units should be converted into completed
units. In the above examples, 10,000 partly finished units on which 50% of the work
has been completed are equivalent to 5,000 fully completed units. on which Such
incomplete units so computed in term of completed units are knows as equivalent
units. The total output or production in terms of completed units is 30,000 + 5,000 =
35,000. Now we can divided the input cost Rs.70,000 by Produced units 35,000 to get
the Units cost of Rs. 2.the output transferred to process B can be valued at Rs. 60,000
(30,000 x 2). The work-in-process can be valued at Rs. 10,000 (5,000 x 2).
STEPS IN CALULATION OF EQUIVALENT UNITS AND UNIT COST
The calculation of the equivalent units and cost of output transferred to process B will
be worked out as follows:
Step 1 : Reconcile Input and Output
We should consider the physical flow of production – the units of input and output. In
the above example, Input is 40,000 units and output is (i) 30,000 units transferred to
process B and (ii) 10,000 units of closing work –in –process. The total output of
40,000units agrees with the total input of 40,000 units. However, the output is not all
of fully competed units. To make the output and input comparable, we must convert
the production into Equivalent Units.
Step 2 : Calculate Equivalent Units.
Completed units = 30,000
Work-in-process units = 10,000 at 50%competion = 5,000
Equivalent Units = 35,000
Step 3 : Calculate Total Cost of Material, Labour and Overhead
50,000 + 10,000 + 10,000 = Rs.70,000
Step 4 : Calculate Cost of each Equivalent Unit
Cost per Equivalent Units Rs.70,000 / 35,000 = Rs. 2.
Step 5 : Calculate Cost of production and cost of Work –in-process
Cost of production transferred = 30,000 x Rs.2 = Rs.60,000
Cost of work-in-process = 10,000 x 50% x Rs.2 = Rs.10,000
=Rs.70,000
This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).
Illustration 5 : (Work- Sheet Format : Only Closing Stock of WIP)
The above steps can be presented in a more refined format as shows below which can
be used by the students for problem involving only closing work-in-process.
Solution:
[A] EQUVIVALENT UNITS (EU)
Particular Qty. Reconciliation Equivalent Units [EU]
Input Output Material [M] Labour [L] Overheads [O]% EU % EU % EU
1. Fresh Units Introduced2. Fresh Units Completed3. Closing WIP
40,00030,00010,000
100 50
30,000 5,000
100 50
30,000 5,000
100 50
30,000 5,000
Total Units of [A] 40,000 40,000 35,000 35,000 35,000
[B] COST PER EU [CPEU]
Particulars Material Labour Overheads Total1.Cost incurred during the process2.Less: Sale of Normal ScrapTotal Cost [B]Equivalent Units [A]Cost Per EU[C =B + A]
50,000--
10,000--
10,000--
70,000--
50,000 10,000 10,000 70,00035,000 1.43
35,000 0.29
35,000 0.29 2.00
[C] COST APPORTIONMENT
Particulars EU CPU Rs. Total (Rs.)1.Finished Units Tfd.to Next Process2.Closing Work-in-process- Material- Labour- OverheadsTotal Cost [B] Apportioned
30,000
5,0005,0005,000
2.00
1.430.290.29
7,1431,4291,428
60,000
10,000 70,000
FLOW OF COST – AVERAGE OR FIFO When there are no opening W-I-P units as in the example above, valuation of closing
W-I-P is simple (see Para 6.3 below). In such cases, the entire closing W-I-P comes out
of the current cost and is valued accordingly, However, when there is opening stock of
work -in-process, the production completed during the period comes out of(i) units
completed out of the opening stock of WIP; and (ii) units started and completed in the
process in the current period. The cost of units completed out of the opening stock of
WIP will include partly the cost carried over from the previous period .Since the input
have different costs, the problem arises of which rate to use for valuation of the output.
The unit cost such situation, may be calculated under either of the two method, viz, (i)
the weighted average cost method or (ii) the first -in, first out (FIFO) method.
AVERAGE METHOD
Under the Average Method, Total cost in the process is divided by the Total equivalent
units produced by the process to ascertain the cost per equivalent unit. Total costs of
the process mean the total of the current production costs and the cost of the opening
work-in-process. Total Equivalent Units produced by the process mean the total of the
units completed during the period and Equivalent Units of work performed on the
opening and closing work-in-process. According to the Average Method (or, more
accurately, the Weighted Average Method), the cost of the opening work –in-process is
added to the cost incurred in the current period and average cost worked out. It should
be noted that in the calculating the equivalent units under the weighted average
method, the work done in the past is treated as if done in the current period. The
closing WIP under this method is made of the average costs of opening WIP and
current production.
FIFO MEHTOD
The method is based on the assumption that the materials in process moves on a first-
in, first-out basis. FIFO method assumes that the work on the opening stock is before
the materials put into the process during the current period are taken up. The units
completed during the process being usually more than the opening stock, it is assumed
that no units from the opening work-in-process will be left incomplete and so none of
them will find place in the closing work –in-process. Under the FIFO method, the cost
of work completed in a period are worked out in two parts. i.e. separately for (a)
opening work-in-process competed, and (b) units started and completed in the period.
Under the FIFO method, cost of closing WIP is based on the cost of the current
production only. In the FIFO method, the procedure of calculation of equivalent units
is different as the units competed from opening work-in-process and from current
production have to be accounted for separately.
ILLUSTRATIONS Let us consider the following example to understand the procedure of valuation under
these two methods.
Illustration 6: (Average)
Process A Period : September, 2003
Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000
Units brought into process- 50,000.
Cost incurred
- Material Rs. 60,000- Labour Rs. 25,000- Overheads Rs. 15,000
Transfer to process: 40,000 Competed units (entirely competed production)
Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the value of closing W-I-P.
Solution:
Step 1: Quantity Reconciliation:
Particulars Units Particulars UnitsOpening work-in-process(40%)Units started
10,00050,000
Units completedClosing work-in-process(75%)
40,00020,000
60,000 60,000
Step 2: Computation of equivalent units:
Particulars UnitsUnits competedClosing work-in-process (75%)
40,00015,000
Equivalent Units 55,000
It should be noted that in calculating the equivalent units under the weighted average method, the work done in the past is taken to have been done in the current period.
Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000.
Step 4: Cost per equivalent unit = Rs. 1,10,000 ÷ 55,000 = Rs. 2
Step 5: Cost competed units transferred to process = 40,000×Rs.2 = Rs. 80,000
Cost of closing work-in-process = 20,000 × 75% × Rs.2 = Rs. 30,000
Rs. 1, 10,000
[Average Method]
[A] EQUVIVALENT UNITS (EU)
Particular Qty. Reconciliation
Equivalent Units [EU]
Input Output Material [M] Labour [L] Overheads [O]% EU % EU % EU
1. Opening Work-in-Process2. Fresh Units Introduced3. Units Tfd. to Next Process4. Closing Work-in-Process
10,00050,000
40,00020,000
100 75
40,000 15,000
100 75
40,000 15,000
100 75
40,000 15,000
Total Units of [A] 60,000 60,000 55,000 55,000 55,000
[B] COST PER EU [CPEU]
Particulars Material Labour Overheads Total1.Cost of Opening WIP2.Cost incurred during the processTotal Cost [B]Equivalent Units [A]Cost Per EU[ C =B + A]
10,00060,000
--25,000
--15,000
10,0001,00,000
70,000 25,000 15,000 1,10,00055,000 1.27
55,000 0.45
55,000 0.27 2.00
[C] COST APPORTIONMENT
Particulars EU CPU Rs. Total (Rs.)1.Finished Units Tfd.to Next Process2.Work-in-process Closing Stock- Material- Labour
40,000
15,00015,000
2.00
1.270.45
19,0916,818
80,000
- OverheadsTotal Cost [B] Apportioned
15,000 0.27 4,091 30,000 1,10,000
The Process Account will be shown as follows:
Dr. Process A Account Cr.
Particulars Units % Rs. Particulars Units % Rs.Work-in-process(b/f) Material Labour Overhead
10,00050,000
40% 10,00060,00025,00015,000
Transferred toProcess B Work-in- process(c/f)
40,000
20,000
100%
75%
80,000
30,000
60,000 1,10,000 60,000 1,10,000
ELEMENT – WISE COST OF WIP Normally, It may be necessary to work out the unit process cost for each element of
cost separately because material, labour and overhead may be in different stage of
completion in the work-in-process inventory. All materials are usually you issued input
and into the process in the beginning itself. Therefore, the closing work-in-process in
generally taken as 100% compete in so far as the materials elements is concerned. For
materials added at the end of the process, the percentage of completion will be zero.
EVALUATION OF METHOD [1] Average Method:
(1) The weighted average method is simpler of the two and is widely used in practice
(2) But, Average method mixes up the costs in different period and does not correctly
reflect the extent of change of costs from period to period.
[2] FIFO Method:
(1) FIFO method is more suitable from the point of view of control as the past and
current costs are separated.
(2)FIFO method is, however ,complicated and tracing out the costs in to two parts
from process to process become tedious, particularly when the number of processes in
many.
(3) FIFO system is neither suitable nor rational when spoiled units are involved
because apportionment of such units between the opening the inventory and current
production is not possible.
[3] When choice Becomes Unnecessary
The difference in the result obtained by the two method would not be signification or
would disappear all together If :
(1)There is no opinion inventory, and so the question of first –in, first-out does not
arise at all.
(2)Opening inventory very small, compared to the fresh units introduce in the
process.
(3)The stage of completion of opening inventory is not sufficiently advance so that
the previous costs have practically no effect on current costs.
(4)There is not much difference in costs from period to period.
PROCESS LOSSES/ GAINS(1) Meaning: In many process, the physical quantity of output is found to be less than
that of the input, the difference being attributable to wastage, spoilage, shrinkage,
evaporation etc. occurring in course of manufacture. In order to compute connect cost
per unit. The units entering a process must be reconciled with the output coming out of
the process, and the loss units, as they are called, must be analyzed to determine the
factor leading to the loss. If a product passes through several processes, the lost units
will have an effect not only on the unit cost of the process in which they arise but also
on the cost of the subsequent processed on the cumulative unit cost of the final output.
(2) Normal Loss: Units may be lost at beginning of a process, during a process, or at
the end of a process. The treatment of normal spoilage costs in process accounts
depends upon the stage at which the spoilage (rejection or loss) is assumed to occur.
(i) At Beginning: When normal spoilage occurs at the beginning of a process, it
is assumed that the lost units never entered in the process. In the Computation of
equivalent units, the normal spoilage units are ignored with in the result that the cost of
spoilage in charged to the production units competed and to abnormal spoilage, if any ,
as well as the to the closing work-in-process.
(ii) At End: If the normal spoilage occurs at the end of a process, as is more
common, the spoiled units are taken into account for computing equivalent units so
that to cost of normal spoilage in charged only to the good units produced as well as to
abnormal spoilage, if any, but no amount is charged to the closing work-in-process.
The usual practice is to determined the cost of normal spoilage separately add it back
to the cost of good units produced. If the spoiled units can be sold scrap, the scrap
value is credited to the process account as the cost of the spoilage or loss.
(3) Abnormal Loss: Abnormal spoilage of defective work may arise in a process due
to unforeseen factors. The cost of such abnormal loss in not include in the cost of the
process but the average cost of the lost units is charge to an Abnormal Loss Account
which is credited with the scrap and closed by transfer to the Profit and Loss Account.
Thus, in computing the value of abnormal loss, scrap value of the abnormal lost units
will be ignored but in working out the loss for charging to Profit and Loss Account,
this will be taken into consideration.
(4) Abnormal Gains: Sometime, when the actual loss in process is less than the
anticipated loss, the difference between the two is considered to be abnormal gain. The
value of the abnormal gain is calculated in the same way as described above for
abnormal loss and is credited to an Abnormal Gain Account which is ultimately closed
by transfer to the Profit and Loss Accounts. The scrap value of the normal anticipated
loss in the process where abnormal gain occurs is credited to the process account with
the result that the net debit to the process is the cost of abnormal gains less the value of
scrap for the normal loss.
Case Study on Volant Textile Mills Ltd.Textiles: The word 'textile' is from Latin, from the adjective textilis, meaning 'woven', from textus, the past participle of the verb texere, 'to weave'.
Textile industry in India
The Textile industry in India traditionally, after agriculture, is the only industry that has generated huge employment for both skilled and unskilled labour in textiles. The textile industry continues to be the second largest employment generating sector in India. It offers direct employment to over 35 million in the country. In 2010, there were 2,500 textile weaving factories and 4,135 textile finishing factories in all of India.
About the unit
Volant Group is promoted by the Somani family, which has a textile manufacturing background since the year 1932 in Mumbai, India.
Volant is a multi-divisional textile manufacturing company having its facilities located at Solapur. The scope of its business includes yarn dyeing, weaving, woven fabric processing, knit processing, finishing and designing with state-of-the-art infrastructure.
Volant has also taken a 3 years management contract an open end (OE) spinning plant for cotton yarn there by having better control on the quality of yarn.
Date of Establishment: 1993Market Capital: 49.4703 (Rs. in Millions)Management Details: Chairperson - Rajesh Somani
MD - Anantvikram SomaniBusiness Operation: Textile - Spinning Registered Office address: Ansa Industrial Estate,Saki Vihar Road,Saki Naka, Andheri (E),Mumbai 400072.
Company History
Volant Textile Mills Ltd. incorporated in 1994, is a 100% Export Oriented Unit manufacturing cotton and bleached grey fabrics. The weaving unit comprises of- 36 nos. Sulzer machines - Model PU 130 ES 120 E10 D1 having 130' reed space. 5 nos of these Sulzer machines are with batching motion, 6 nos. Sulzer machines – Model PU 130 having 130” reed space with Dobby, 10 nos. Somet Rapier SM93 Model Looms having 90” reed space with Jacquard 1344 hooks, High Speed wrapping machine from Benninger India Ltd. Twin sow-box sizing machine with synchro-four system from Amba Machine Works Pvt. Ltd.
Weave - direct humidification plant from LTG, Germany
Inspections, checking, roll & bale packaging equipments
Generator plant for full capacity requirement
It has exported to all major markets of the world like Australia, Bangladesh, EEC, Hong Kong, Israel, Nigeria, Russia, Taiwan, USA. The company follows the American 10 point grey inspection In 2008, the promoters have made payment to SASF for buy back of 7,50,000 Equity shares at par, as per terms of the negotiated settlement the Company had entered into with SASF on September 27, 2006.
The Company added 6 Sulzer weaving machines with Dobby and 10 Jaquard weaving machines, commercial production of which started on October 09, 2008. The addition of machines was with reference to proposed Draft Rehabilitation scheme which has been submitted to the Operating Agency for bringing about Viability for the Company.
Products:
1. Fancy Shirting2. Fibres & Acrylic Waste3. Fabrics4. Fabrics Lumps5. Scrap
Processes involved in Manufacturing
Spinning
Weaving
Dyeing +Printing
Finishing
1. Spinning - Spinning is a process of making or converting fibre materials into yarns. Since few centuries ago, spinning have been known as a process of converting raw materials (fibre) such as cotton and wool into yarns for making textile fabric or products.
Fibres cannot be used to make clothes in their raw form. For this purpose, they must be converted into yarns. The process used for yarn formation is spinning.Drawing pulls the staple lengthwise over each other. As a result longer and thinner slivers are produced. After several stages of drawing out, the sliver is passed to the spindles where it is given its first twist and is then wound on bobbins. 'Roving' is the final product of the several drawing-out operations. It is the preparatory stage for the final insertion of twist. Till now,
enough twist is given for holding the fibres together but it has no tensile strength. It can break apart easily with a slight pull.
2. Weaving - Weaving is a method of fabric production in which two distinct sets of yarns or threads are interlaced at right angles to form a fabric or cloth.
Cloth is usually woven on a loom, a device that holds the warp threads in place while filling threads are woven through them. A fabric band which meets this definition of cloth (warp threads with a weft thread winding between) can also be made using other methods, including tablet weaving, back-strap, or other techniques without looms.
The way the warp and filling threads interlace with each other is called the weave. The majority of woven products are created with one of three basic weaves: plain weave, satin weave, or twill. Woven cloth can be plain (in one colour or a simple pattern), or can be woven in decorative or artistic designs.
In order to interlace the warp and weft yarn, there are three operations which often called primary motions are necessary:
Shedding- The process of separating the warp yarn into two layers by raising the harness to form an open area between two sets of warps and known as shed.
Picking- The process of inserting the filling yarn through the shed by the means of the shuttle less while the shed is opening.
Beating- The process of pushing the filling yarn into the already woven fabric at a point known as the fell and done by the reed.
3. Dyeing & Printing - Dyeing is the process of adding colour to textile products like fibres, yarns, and fabrics. Dyeing is normally done in a special solution containing dyes and particular chemical material. After dyeing, dye molecules have uncut chemical bond with fibre molecules. The temperature and time controlling are two key factors in dyeing.The common dyeing process of cotton yarn with reactive dyes at package form is as follows:
1. The raw yarn is wound on a spring tube to achieve a package suitable for dye penetration.
2. These softened packages are loaded on a dyeing carrier's spindle one on another.3. The packages are pressed up to a desired height to achieve suitable density of
packing.4. After dyeing, the packages are unloaded from the carrier into a trolley.5. The packages are then dried to achieve the final dyed package.
Textile printing is the process of applying colour to fabric in definite patterns or designs. In properly printed fabrics the colour is bonded with the fibre, so as to resist washing and friction. In printing, wooden blocks, stencils, engraved plates, rollers, or silkscreens can be used to place colours on the fabric. Colorants used in printing contain dyes thickened to prevent the colour from spreading by capillary attraction beyond the limits of the pattern or design.
4. Finishing - In textile manufacturing, Finishing refers to the processes that convert the woven or knitted cloth into a usable material and more specifically to any process performed after dyeing the yarn or fabric to improve the look, performance, or "hand" (feel) of the finished textile or clothing.
Some finishing techniques such as bleaching and dyeing are applied to yarn before it is woven while others are applied to the grey cloth directly after it is woven or knitted. Some finishing techniques, such as fulling, have been in use with hand-weaving for centuries; others, such as mercerisation, are by-products of the Industrial Revolution.
YARN DYEING
Equipped with State-of-the -Art dyeing machinery from Thies German, for Yarn and Beam dyeing capacity of 6 mt / day. KNIT PROCESSING
The Knit Processing capacity is 12 mt / day with finest machines. We are equipped with HT Fabric Dying machines from Sclavos, Greece. Relaxed Dryer from Santex, Switzerland. Baloon Padder from Bianco, Italy and a Compacter from Tubetex, USAFABRIC PROCESSING
Processing capacity of about 40,000 meters per day. The machines include Jigger Dyeing, Monforts Stenters (one having Stork coating attachment), Muzzi Sanfor, Hansa Calender and Teesta Packaging, using leading European technology.
In the Books of Textile Mills Ltd.
Process Accounts
(Approx. Figures)Dr. Process No. 1 A/c. Cr.Particulars Unit Rs. Particulars Units Rs.To Material @ Rs.1000
5000 5000000 By Normal Loss (sale of Scrap)
250 12500
To Wages 200000 By Weight Loss 250 --To Expenses 162500 By Process 1 Stock
A/c. (@ 300 per ton)4500 1350000
5000 1362500 5000 1362500
Dr. Process No. 1 Stock A/c. Cr.Particulars Unit Rs. Particulars Units Rs.
To Process 1 A/c.
4500 1350000 By Bank ( @ 320 ) 1500 480000
To Costing Profit & Loss A/c.
30000 By Process No.2 A/c.
3000 900000
4500 1380000 4500 1380000
Dr. Process No. 2 A/c. Cr.Particulars Unit Rs. Particulars Units Rs.
To Process 1 A/c.
3000 900000 By Normal Loss ( @ Rs.50 )
150 7500
To Wages 150000To Expenses 54000 By Weight Loss 300 --
By Process 2 Stock A/c. ( @ Rs.430 )
2550 1096500
3000 1104000 3000 1104000
Dr. Process No. 2 Stock A/c. Cr.Particulars Unit Rs. Particulars Units Rs.
To Process 2 A/c.
2550 1096500 By Bank
To Costing P & L A/c.
25500 ( sale @ 450 ) 1275 573750
162500 By Process 3 A/c. 1275 548250
2550 1222000 2550 1222000
Dr. Process No. 3 A/c. Cr.Particulars Unit Rs. Particulars Units Rs.
To Process 2 Stock A/c.
1275 548250 By Scrap 255 12750
To Wages 35000 By Weight Loss 255 --To Expenses 18550 By Process 3 Stock
A/c.765 589050
1275 601800 1275 601800
Dr. Process No. 3 Stock A/c. Cr.Particulars Unit Rs. Particulars Units Rs.
To Process 3 A/c.
765 589050
To CostingP & L A/c.
22950 By Bank ( sale @ 800 )
765 612000
765 612000 765 612000
Dr. Costing Profit & Loss A/c. Cr.Particulars Rs. Particulars Rs.
To Management Expenses 52500 By Process 1Stock A/c. 30000To Selling Expenses 40000 By Process 2 Stock A/c. 25500To Interest on Capital 10000 By Process 3 Stock A/c. 22950
By Net Loss 24050102500 102500
ConclusionThe researcher has observed the following points:
Process costing is used in situations where homogeneous products or services
are produced on a continuous basis.
To compute unit costs in a department, the department's output in terms of
equivalent units must be determined.
Volant Group is promoted by the Somani family, which has a textile
manufacturing background since the year 1932 in Mumbai, India.
It has a multi divisional textile manufacturing company having its facilities
located at Solapur.
The scope of its business includes yarn dyeing, weaving, woven fabric
processing, knit processing, finishing and designing with state-of-the-art
infrastructure.
This company is operational from the year 1993.
Raw materials used include cotton, silk, wool, flax, polyester, dyes, chemicals
and auxiliaries.
The processes involve spinning, weaving, dyeing, printing and finishing.
Volant has also taken a 3 years management contract on an open end spinning
plant for cotton yarn there by having better control on the quality of yarn.
