Process and Operation Costing

Question 1.
Explain the “Equivalent Production.” [CA Inter Nov. 2013, 4 Marks]
Answer:
Equivalent Production:
When opening and closing stocks of work-in-process exist, unit costs cannot be computed by simply dividing the total cost by total number of units still in process. We can convert the work-in-process units into finished units called equivalent production units so that the unit cost of these uncompleted (WIP) units can be obtained. Equivalent Production units = Actual number of units in production × Percentage of work completed. It consists of balance of work done on opening work-in-process, current production done fully and part of work done on closing WIP with regard to different elements of costs viz., ma-terial, labour and overhead.

Question 2.
Explain briefly the procedure for the valuation of Work-in-process. [CA Inter Nov. 2002, 2 Marks]
Answer:
Valuation of Work-in process: The valuation of work-in-process can be made in the following three ways, depending upon the assumptions made regarding the flow of costs.

• First-in-first-out (FIFO) method
• Last-in-first-out (LIFO) method
• Average cost method

A brief account of the procedure followed for the valuation of work-in-process under the above three methods is as follows:

FIFO method: According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.
The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.

LIFO method: According to this method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing work-in-process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work-in-progress if any.

Average cost method: According to this method opening inventory of work-inprocess and its costs are merged with the production and cost of the current period, respectively. An average cost per unit is determined by dividing the total cost by the total equivalent units, to ascertain the value of the units completed and units in process.

Question 3.
What is inter-process profit? State its advantages and disadvantages. [CA Inter Nov. 2012, 4 Marks]
Answer:
Definition of Inter-Process Profit and its advantages and disadvantages:
In some process industries, the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits.

The advantages and disadvantages of using inter-process profit, in the case of process type industries are as follows:
Advantages:

• Comparison between the cost of output and its market price at the stage of completion is facilitated.
• Each process is made to stand by itself as to the profitability.

Disadvantages:

• The use of inter-process profits involves complication.
• The system shows profits which are not realised because of stock not sold out.

Question 4.
“Operation costing is defined as refinement of Process costing.” Explain it. [CA Inter May 2007, 3 Marks]
Answer:
Operation costing is concerned with the determination of the cost of each operation rather than the process:

• In the industries where process consists of distinct operations, the operation costing method is applied.
• It offers better control and facilitates the computation of unit operation cost at the end of each operation.

Question 5.
What are the steps to be followed for preparing the production cost report which is prepared at the end of each accounting period? [ICAI Module]
Answer:
Step-1: Analysis of physical flow’ of production units The first step is to determine and analyse the number of physical units in the form of inputs (introduced fresh or transferred from previous process, beginning WIP) and outputs (completed and WIP).

Step-2: Calculation of equivalent units for each cost elements
The second step is to calculate equivalent units of production for each cost element i.e. for material, labour and overheads.

Step-3: Determination of total cost for each cost element
Total cost for each cost element is collected and accumulated for the period.

Step-4: Computation of cost per equivalent unit for each cost element In this step, the cost per equivalent unit for each cost element is calculated by dividing the total cost determined in Step-3 by the equivalent units as deter-mined in Step-2.

Step-5: Assignment of total costs to units completed and ending WIP In this step, the total cost for units completed, units transferred to next process, ending WIP, abnormal loss etc. are calculated and posted in the process account and production cost report.

Practical Questions

Normal Loss, Abnormal Loss & Abnormal Gain

Question 1.
A product passes through Process-I and Process-II.
Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing overheads were ₹ 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output were produced and transferred out from Process-I to Process-II. Input raw materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit.
You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account [CA Inter Dec. 2021, Nov. 2008, 5 Marks]
Answer:
(i)

(ii)

Question 2.
A product passes through two processes. The output of Process I becomes the input of Process II and the output of Process II is transferred to warehouse. The quantity of raw materials introduced into Process I is 20,000 kg at 10 per kg. The cost and output data for the month under review are as under:

	Process I	Process II
Direct materials	₹ 60,000	₹ 40,000
Direct labour	₹ 40,000	₹ 30,000
Production overheads	₹ 39,000	₹ 40,250
Normal loss:	8%	5%
Output	18,000	171400
Loss realisation/Unit	2.00	3.00

The company’s policy is to fix the Selling price of the end product in such a way as to yield a Profit of 20% on Selling price.
Required:
(i) Prepare the Process Accounts
(ii) Determine the Selling price per unit of the end product. [CA Inter Nov. 2002, 9 Marks]
Answer:
Process I Account

Process II Account

Working Notes:

1. Valuation of abnormal loss & units finished & transfer to process II A/c:
Total Expenditure incurred in the Process – Scrap realisation of normal loss
= Units introduced in the Process – Normal loss unit
= 2,00,000+60,000+40,000+39,000−3,20020,000−1,600
= 3,35,80018,400
= ₹ 18.25

2. Valuation of Abnormal gain & units finished & transfer to warehouse:

3. Determination of selling price per Unit of the end Product:
Uet the S.P. be ₹ 100
Profit = 20% of 100 = ₹ 20
Cost = ₹ 100 – ₹ 20 = ₹ 80
It the cost price is 25.5, the selling price of the end product
= 25.5080 × 100 = ₹ 31.875

Question 3.
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process – Process P, Process 0 and Process R. The following data relating to cost and output is obtained from the books of account for the month of April 2021:

Production overheads of ₹ 90,000 were recovered as percentage of direct labour. 10,000 kg. of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of materials or work-in-process. The entire output of each process passes directly to the next process and finally to warehouse. There is normal wastage, in processing, of 10%. The scrap value of wastage is ₹ 1 per kg. The output of each process transferred to next process and finally to warehouse are as under:
Process P = 9,000 kg.
Process 0 = 8,200 kg.
Process R = 7,300 kg.
The company fixes selling price of the end product in such a way so as to yield a profit of 25% selling price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product. [CA Inter May 2018, 10 Marks]
Answer:
Process P Account

Cost Per Unit:
= ₹1,40,500−₹1,00010,000kgs−1,000kgs
= ₹1,39,5009,000kgs
= ₹ 15.50

Process Q Account

Cost Per Unit:
= ₹2,52,000−₹9009000kgs−900kgs
= ₹2,51,0008100kgs
= ₹ 31

Process R Account

Cost per unit
= ₹3,84,580–₹8208200kgs−820kgs
= ₹ 52

Calculation of Selling Price:

Cost per unit	₹ 52
Add: Profit 25% on selling price ie. 1/3rd of cost	₹ 17.33
Selling price per unit	₹ 69.33

Question 4.
A product passes through two processes A and B. During the year 2021, the input to process A of basic raw material was 8,000 units @ ₹ 9 per unit. Other information for the year is as follows:

	Process A	Process B
Output units	7,500	4,800
Normal loss (% to input)	5%	10%
Scrap value per unit (₹)	2	10
Direct wages (₹)	12,000	24,000
Direct expenses (₹)	6,000	5,000
Selling price per unit (₹)	15	25

Total overheads ₹ 17,400 were recovered as percentage of direct wages. Selling expenses were ₹ 5,000. These are not allocated to the processes. 2/3rd of the output of Process A was passed on to the next process and the balance was sold. The entire output of Process B was sold.
Prepare Process A and B Accounts. [CA Inter May 2012, 8 Marks]
Answer:
Process I Account

Cost of Abnormal Loss in Process A = 95,800−8008,000−400 = 95,0007,600 = ₹ 12.50 per unit

Process II Account

Cost of Abnormal gain = 1,03,100−5,0005,000−500 = 98,1004,500 = 21.80 per unit

Working Note:
Profit & Loss Account

Note:
1. As mentioned selling expenses are not allocable to process which is debited directly to the Profit & Loss A/c.
2. It is assumed that Process A and Process B are not responsibility centres and hence, Process A and Process B have not been credited to direct sales. P/L A/c is prepared to arriving at profit/loss.

Question 5.
M J Pvt. Ltd, produces a product “SKY” which passes through two processes, viz. Process A and Process B. The details for the year ending 31st March, 2021 are as follows:

	Process A	Process B
40.000 Units introduced at a cost of	₹ 3,60,000
Material Consumed	₹ 2,42,000	₹ 2,25,000
Direct Wages	₹ 2,58,000	₹ 1,90,000
Manufacturing Expenses	₹ 196,000	₹ 1,23,720
Output in Units	37,000	27,000
Normal Wastage of Inputs	5%	10%
Input Scrap Value(per unit)	₹ 15	₹ 20
Selling Price (per unit)	₹ 37	₹ 61

Additional Information:
(a) 80% of the output of Process A, was passed on to the next process and the balance was sold. The entire output of Process B was sold.
(b) Indirect expenses for the year was ₹ 4,48,080.
(c) It is assumed that Process A and Process B are not responsibility centre.
Required:
(i) Prepare Process A and Process B Account.
(ii) Prepare Profit & Loss Account showing the net profit/net loss for the year. [CA Inter May 2014, 8 Marks]
Answer:
Process A A/c

Cost per unit = ₹10,56,000−₹30,000₹40,000 unit −2,000 units  = ₹
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,0000 units – (37,000 units + 2,000 units)
= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units  = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units

Profit & Loss Account

= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units  = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= 360 units

Profit & Loss Account

= 1,000 units
Transfer to Process B = 37,000 units × 80%
= 29,600 units
Sale = 37,000 units × 20%
= 7,400 units

Process B Account

Cost per unit = ₹13,37,920−₹59,200₹29,600 units −2,960 units  = ₹ 48 per unit
Normal wastage = 29,600 units × 10%
= 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units
= – 360 units

Profit & Loss Account

Working notes:

Question 6.
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, 2020:

	Process I	Process II
25,000 units introduced at a cost of	₹ 2,00,000	–
Material consumed	₹ 1,92,000	₹ 96,200
Direct labour	₹ 2,24,000	₹ 1,28,000
Manufacturing expenses	₹ 1,40,000	₹ 60,000
Normal wastage of input	10%	10%
Scrap value of normal wastage (per unit)	₹ 9.90	8.60
Output in Units	22,000	20,000

Required:
(i) Prepare Process I and Process II account.
(ii) Prepare Abnormal effective/wastage account as the case may be in each process. [CA Inter May 2008, 8 Marks]
Answer:

Question 7.
PQR Ltd. processes a range of product including a toy ‘Alpha’, which passes through three processes before completion and transfer to the finished goods warehouse. The information relating to the month of October 2021 are as follows:

The production overhead is absorbed as a percentage of direct wages. There was no opening and closing stock.
Prepare the following accounts:
(i) Process-I
(ii) Process-II
(iii) Process-Ill
(iv) Abnormal Loss
(v) Abnormal Gain [CA Inter Nov 2019, 8 Marks]
Answer:
(i)

Cost per unit = ₹45,400−₹4002,000 units – 200 units  = ₹ 25 Per unit

(ii) Process II Account

Cost per unit = ₹87,860−₹4601,840 units – 92 units  = ₹ 50 per unit

(iii) Process- III Account

Cost per unit = ₹1,42,680−₹1,7401,740 units – 174 units  = ₹ 90 per unit

(iv) Abnormal Loss Account

(v) Abnormal Gain Account

Question 8.
A product passes through two distinct processes before completion. Following information are available in this respect:

	Process 1	Process 2
Raw materials used	10,000 units	–
Raw material cost (per unit)	₹ 75
Transfer to next process/Finished good	9,000 units	8,200 units
Normal loss (on inputs)	5%	10%
Direct wages	₹ 3,00,000	₹ 5,60,000
Direct expenses	50% of direct wages	65% of direct
Manufacturing overheads	25% of direct wages	15% of direct wages
Realisable value of scrap (per unit)	₹ 13.50	₹ 145

8,000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock of work-in-progress.
Prepare:
(i) Process 1 and Process 2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account [CA Inter Nov. 2019, 10 Marks]
Answer:
Process 1 Account

Cost per unit of Completed units and abnormal loss:
= ₹12,75,000−₹6,75010,000 units −500 units 
= ₹12,68,2509,500 units 
= ₹ 133.50

Process 2 Account

Cost per unit of Completed units and abnormal loss:
= 22,09,500−₹1,30,5009,000 units −900 units 
= ₹20,79,0008,100 units 
= ₹ 256.67

Finished Goods Account

Equivalent Production: fifo Method

Question 9.
Following details have been provided by M/s AR Enterprises:
(i) Opening work-in-progress 3,000 units (70% complete)
(ii) Units introduced during the year 17,000 units
(in) Cost of the process (for the period) ₹ 33,12,720
(tv) Transferred to next process 15,000 units
(v) Closing work-in-progress 2,200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the beginning). Scraps realise ? 50 per unit. Scraps are 100% complete
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit [CA Inter Nov. 2018, 5 Marks]
Answer:

Computation of cost per equivalent production unit:
Cost of the Process (for the period) = ₹ 33,12,720
Less: Scrap value of normal loss (₹ 50 × 2,400 units) = ₹ 1,20,000
Total process cost = ₹ 31,92,720
Cost per Equivalent unit = ₹31,92,72015,060 units 

Question 10.
The following information relate to Process A:
(i) Opening WIP – 8,000 units at ₹ 75,000
(ii) Degree of Completion:
Material – 100%
Labour and Overhead – 60%
(iii) Input 1,82,000 units at – ₹ 7,37,500
(iv) Wages paid – ₹ 3,40,600
(v) Overheads paid – ₹ 1,70,300
Units scrapped – 14,000
Degree of Completion:
Material – 100%
Wages and Overheads – 80%
(vi) Closing WIP 18,000 units
Degree of Completion:
Material – 100%
Wages and Overheads – 70%
(vii) Units completed and transferred 1,58,000 to next Process
(viii) Normal loss 5% of total input including opening WIP.
(ix) Scrap value is ₹ 5 per unit to be adjusted out of direct material cost You are required to compute on the basis of FIFO basis:
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process. [CA Inter Nov, 2014, 8 Marks]
Answer:
Statement of Equivalent Production
(FIFO Method)

Total cost per unit = ₹ (4.00 + 2.0106 + 1.0053) = ₹ 7.0159

Value of units transferred to next process:

Question 11.
The following information is furnished by ABC Company for Process II of its manufacturing activity for the month of April 2021:
(i) Opening Work-in-Progress-Nil
(ii) Units transferred from Process I – 55,000
(iii) Expenditure debited to Process II
Consumables – ₹ 1,57,200
Labour – ₹ 1,04,000
Overhead – ₹ 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP- 2,000 units (Degree of completion)
Consumables – 80%
Labour – 60%
Overhead – 60%
(vi) Units scrapped – 2,000 units, scrapped units were sold at ₹ 5 per unit
(vii) Normal loss 4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit.
(iii) Determine the value of Work-in-Process and units transferred to Process III. [CA Inter Nov. 2015, 8 Marks]
Answer:
(i) Statement of Equivalent Production

(ii) Determination of Cost per Unit

(iii) Determination of value of Work-In-Process and units transferred to Process-III

Question 12.
From the following Information for the month ending October, 2021. Prepare Process 111 Cost Accounts:

Opening WIP In Process III	1,800 units at ₹ 27,000
Transfer from Process II	47,700 units at ₹ 5,36,625
Transferred to Warehouse	43,200 units
Closing WIP of Process III	4,500 units
Units scrapped	1,800 units
Direct material added in Process III	₹ 1,77,840
Direct Wages	₹ 87,840
Production overheads	₹ 43,920

Degree of completion:	Opening Stock	Closing Stock	Scrap
Materials	80%	70%	100%
Labour	60%	50%	70%
Overheads	60%	50%	70%

The normal loss in the process was 5% of the production and scrap was sold @ ₹ 6.75 per unit. [CA Inter Nov. 2003, 10 Marks]
Answer:
Statement of Equivalent Production:

Statement of cost per unit

Statement of Evaluation

Process III Account

Question 13.
From the following Information for the month ending October, 2020, prepare Process Cost accounts for Process III. Use First-in-first-out (FIFO) method to value equivalent production.
Direct materials added in Process III (Opening WIP) – 2,000 units at ₹ 25,750
Transfer from Process II – 53,000 units at ₹ 4,11,500
Transferred to Process IV – 48,000 units
Closing stock of Process III – 5,000 units
Units scrapped – 2,000 units
Direct material added in Process III – ₹ 1,97,600
Direct wages – ₹ 97,600
Production Overheads – ₹ 48,800

Degree of completion:

	Opening Stock	Closing Stock	Scrap
Materials	80%	70%	100%
Labour	60%	50%	70%
Overheads	60%	50%	70%

The normal loss in the process was 5% of production and scrap was sold at ₹ 3 per unit. [CA Inter Nov. 2005, 14 Marks]
Answer:
Process III Process Cost Sheet (FIFO Method) Period
Op. Stock: 2,000 units
Introduced: 53,000 units

Statement of Equivalent Production

Statement of Cost for each Element

Statement of Evaluation

Process III Account

Question 14.
A Company produces a component, which passes through two processes. During the month of April, 2021, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:

Direct Materials	₹ 15,000
Direct Wages	₹ 18,000
Factory Overheads	₹ 12,000

Of those transferred to Process II, 28,000units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

Direct Materials	₹ 4,000
Direct Wages	₹ 3,500
Factory Overheads	₹ 4,500

Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c. [CA Inter May 2006, 10 Marks]
Answer:
(i) Statement of Equivalent Production

Statement of Cost

Cost Analysis (Process I):
Finished and passed to next process

Process I Account

(ii) Statement of Equivalent Production

Total Cost per unit = 1.52159

Cost Analysis (Process II):

Process II Account:

Question 15.
XP Ltd. furnishes you the following information relating to process II.
Opening work-in-progress – NIL
Units introduced 42,000 units @ ₹ 12
Expenses debited to the process:
(a) Direct material ₹ 61,530
(b) Labour ₹ 88,820
(c) Overhead ₹ 1,76,400
Normal loss in the process = 2%.of input
Closing work-in-progress – 1,200 units

Degree of completion:
Materials – 100%
Labour – 50%
Overhead – 40%
Finished output – 39,500 units

Degree of completion of abnormal loss:
Material – 100%
Labour – 80%
Overhead – 60%
Units scraped as normal loss were sold at ₹ 4.50 per unit.
All the units of abnormal loss were sold at ₹ 9 per unit.
Prepare:
(a) Statement of equivalent production;
(b) Statement showing the cost of finished goods, abnormal loss and closing WIP;
(c) Process II account and abnormal loss account.
[CA Inter Nov. 2009, 8 Marks]
Answer:
(a) Statement of Equivalent Production

(b) Statement of Cost

(c) Process II Account

Question 16.
Following information is available regarding Process A for the month of October 2020:
Production Record:

(i) Opening work-in progress	40,000 Units
(ii) (Material: 100% complete, 25% complete for labour & overheads)
(iii) Units Introduced	1,80,000 Units
(iv) Units Completed	1,50,000 Units
(v) Units in process on 31.10.2020 (Material: 100% complete, 50% complete for labour & overheads)	70,000 Units

Cost Records:
Opening Work-in-progress

Material	₹ 1,00,000
Labour	₹ 25,000
Overheads	₹ 45,000

Cost incurred during the month:

Material	₹ 6,60,000
Labour	₹ 5,55,000
Overheads	₹ 9,25,000

Assure that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process A Account. [CA Inter Nov. 2010, 8 Marks]
Answer:
Statement of Equivalent Production
(FIFO Method)