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Process Costing

concept of Process account

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Process Costing

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  1. Cost and Management Accounting CHAPTER-10 PROCESS COSTING

  2. Learning Objectives 1. How does process costing differ from job order product costing? 2. Why are equivalent units of production used in process costing? 3. How are equivalent units of production computed using the weighted average and FIFO methods of process costing? 4. How are unit costs and inventory values calculated using the weighted average and FIFO methods of process costing? PRESENTED BY: SHIBA PRASAD DAHAL

  3. Continuing . . . Learning Objectives 5. How is a cost of production report prepared? 6. What use do standard costs have in a process costing system? 7. What is the effect of multi-department processing on the computation of equivalent units of production? 8. How can quality control minimize spoilage? 9. How are journal entries prepared for a process costing system? PRESENTED BY: SHIBA PRASAD DAHAL

  4. Process Costing Costing procedure • Costs are recorded for a department. • Department costs are assigned equally to units produced. Production environment • Homogenous units • Mass produced • Automated • Continuous flow PRESENTED BY: SHIBA PRASAD DAHAL

  5. Concept and meaning of process costing Process is a set of sequential steps followed to complete a certain activity. The way of maintaining the costing records of each process is called costing. It refers to the method of cost accounting under which cost are accumulated for every process which are interrelated to each other. Process costing is used in manufacturing concerns where the raw materials are converted to finished goods after passing through a number of processes. For example; in case of cotton textiles, the first process may be spinning, second process may be weaving and the final process may be finished. PRESENTED BY: SHIBA PRASAD DAHAL

  6. Meaning of process costing • Characters institute of management accountants (CIMA), London defines "process costing is that form of operating costing where standardized goods are produced." • Likewise, according to Charles T. Hangmen, "process costing deals with the mass production of like units that usually pass in continuous fashion through a series of production steps called operation of process." • Process costing is mostly used in manufacturing concerns. It determines the cost of a product at each stage of manufacturing or process. This method of costing is adopted by industries involved in the manufacturing of textiles, biscuits, cement, paper, oil refining, etc. the output of first process becomes the input of the second process and so on as shown in following figure. PRESENTED BY: SHIBA PRASAD DAHAL

  7. PRESENTED BY: SHIBA PRASAD DAHAL

  8. Process Costing Figure Final Products NORMAL LOSS ABNORMAL LOSS ABNORMAL GAIN NORMAL LOSS ABNORMAL LOSS ABNORMAL GAIN NORMAL LOSS ABNORMAL LOSS ABNORMAL GAIN PRESENTED BY: SHIBA PRASAD DAHAL

  9. The following are the advantages of process costing: • It is simple and less expensive to find out the cost of each process. • It is easy to allocate the expense to process in order to have accurate costs. • Production activity in process costing is standardized. Hence, managerial control and supervision become easier. • In process costing, the products are homogeneous. As a result, costs per unit can be easily computed by averaging the total cost and price quotations become easier. • It is possible to determine process costs periodically at short integrals. PRESENTED BY: SHIBA PRASAD DAHAL

  10. The following are the disadvantages of process costing: • The cost obtained at the end of the accounting period is historical in nature and is of little use for effective's managerial control. • Since process cost is average cost, it may not be accurate for analysis, evaluation and control the performance of various departments. • Once an error is committed in one process, it is carried to the subsequent processes. • Process costing does not evaluate the efficiency of individual workers or supervisor. • The computation of average cost is difficult in those cases where more than one type of product is manufactured. PRESENTED BY: SHIBA PRASAD DAHAL

  11. Comparing Job Costingand Process Costing Job costing • Costs accumulated by thejob. • Work in process has a job cost record for each job. • Many unique, high cost jobs. • Jobs built tocustomerorder. Process costing • Costs accumulated by department orprocess. • Work in process has a production report for each batch ofproducts. • A few identical,low cost products. • Units continuouslyproduced for inventory in automated process. PRESENTED BY: SHIBA PRASAD DAHAL

  12. EP-2 • Job Order Cost sheet Why Process Costing Is Useful To helpset prices To evaluateproducts How are unitcosts used? To evaluateproductionefficiency To determinebalance sheetinventory PRESENTED BY: SHIBA PRASAD DAHAL

  13. EP-3 Nischal Company • Job Order Cost sheet Assigning Costs to Production • Production costs = Material + Labor + Overhead • Costs assigned to each process during period • Unit costs determined for each cost component and each process • Cost of completed unit = Sum of costs per unit for all processes through which product passes • Direct material cost measured from material requisition slips and invoiced prices • Direct labor cost determined from employee time sheets and wage rates • Overhead costs assigned through use of predetermined rates or actual costs • Actual overhead costs can be used if relatively constant each period and production volume is relatively steady PRESENTED BY: SHIBA PRASAD DAHAL

  14. Accounting for Process Costing Process costing having no process loss and stock PRESENTED BY: SHIBA PRASAD DAHAL

  15. Sp-1. Soln: • Process “ X ” A/C • Process “ Y” A/C PRESENTED BY: SHIBA PRASAD DAHAL

  16. Sp-2. Soln: • Process “ X ” A/C Sp-3. Soln: • Process “ I ” A/C Working Note: Normal Cost= Total Cost-value of scrap = 74000-2000 =72000 Normal Output= Total input units-Scrap Units=10000-1000=9000 Cost Per Unit = PRESENTED BY: SHIBA PRASAD DAHAL

  17. Sp-3. Soln: Contnue… • Process “ II ” A/C Working Note: Normal Cost= Total Cost-value of scrap = 83700-2700 =81000 Normal Output= Total input units-Scrap Units=9000-900=8100 Cost Per Unit = PRESENTED BY: SHIBA PRASAD DAHAL

  18. Sp-4. Soln: • Process “ II ” A/C Working Note: Normal Cost= Total Cost-value of scrap = 85770-270 =85,500 Normal Output= Total input units-Normal loss=900-45=855 Cost Per Unit =* Actual Yield = 840 units Abnormal Loss=Normal Output-Actual Output= 855-840=15 Units PRESENTED BY: SHIBA PRASAD DAHAL

  19. Sp-5. Soln: • Normal Output=1200-200=1000 Units • Actual Output= 900 Units • Abnormal Loss=Normal Output- Actual output = 1000-900= 100 Units. • Normal cost of Normal Output= Rs. 120000 ii. Value of abnormal loss: = x abnormal loss units Value of abnormal loss= PRESENTED BY: SHIBA PRASAD DAHAL

  20. Sp-6. Soln: • Process “Last” A/C Working Note: Normal Cost= Total Cost-value of scrap = 99000-3000 =96000 Normal Output= Total input units-Normal loss=1500-300=1200 Cost Per Unit =* Actual Yield = 1400 units Abnormal Gain=Actual Output-Normal Output= 1400-1200=200 Units PRESENTED BY: SHIBA PRASAD DAHAL

  21. Sp-7. a. Soln: • Process “B” A/C Working Note: Normal Cost= Total Cost-value of scrap = 264100-7600 =256500 Normal Output= Total input units-Normal loss=9500-950=8550 Units Cost Per Unit =* Actual Yield = 8700 units Abnormal Gain=Actual Output-Normal Output= 8700-8550=150 Units PRESENTED BY: SHIBA PRASAD DAHAL

  22. Sp-7. b. Soln: • Normal Loss A/C Abnormal gain A/C Sp-7. c. Soln: PRESENTED BY: SHIBA PRASAD DAHAL

  23. Sp-8. Soln: • Normal Output=2000-200=1800 Units • Actual Output= 1800 Units • Normal cost of Normal Output= Rs.(20000+10000)-(200 X 0.5)=29900 Cost per unit of Output:= =Rs. Sp-9, Solution a. Normal Output=(25000+10000+5000)-(1600+2400)=36000 units Actual Output=40000-3000=37000 units b. Abnormal Gain=37000-36000= 1000 units PRESENTED BY: SHIBA PRASAD DAHAL

  24. Sp-10. Soln: • Normal Output=7000-10% of 7000 =6300 Units • Actual Output= 6000 Units • Abnormal Loss Units= Normal Output-Actual Output=6300-6000=300 Units Value of abnormal loss =(Net value of abnormal loss+ Realized value of abnormal loss ) = 3900+(300 X 2)=Rs. 4500 SP. 11 Solution: Statement Of Equivalent Production PRESENTED BY: SHIBA PRASAD DAHAL

  25. Sp-12. Soln: • Statement Of Equivalent Production PRESENTED BY: SHIBA PRASAD DAHAL

  26. Sp-13. Soln: • Statement Of Equivalent Production • Sp-14. Solution • Units Completed 100% of 3000 = 3000 Units • Closing WIP = 40%b of 1000 units= 400 Units • Total Equivalent Production =3400 Units • Cost Per Units Of Equivalent Production=Total Process Cost/ Total Equivalent Units • =10200/3400=Rs.3 per units PRESENTED BY: SHIBA PRASAD DAHAL

  27. Ep-1. a. Soln: • Process “I” A/C Working Note: Normal Cost= Total Cost-value of scrap = 19200-200 =19000 Normal Output= Total input units-Normal loss=1000-50=950 Cost Per Unit =* PRESENTED BY: SHIBA PRASAD DAHAL

  28. Ep-1. a. Soln: • Process “II” A/C Working Note: Normal Cost= Total Cost-value of scrap = 34960-760 =34200 Normal Output= Total input units-Normal loss=950-95=855 Cost Per Unit =* Actual Yield = 840 units Abnormal Loss=Input-Normal loss –Actual Output = 950-95-840=15 Units PRESENTED BY: SHIBA PRASAD DAHAL

  29. Ep-1. a. Soln: • Process “III” A/C Working Note: Normal Cost= Total Cost-value of scrap = 55524-1260 =54264 Normal Output= Total input units-Normal loss=840-126= 714 Cost Per Unit =* Actual Yield = 750 units Abnormal Gain=Actual Output-Normal Output= 750-714=36 Units PRESENTED BY: SHIBA PRASAD DAHAL

  30. Ep-1. b. Soln: • Normal Loss A/C Abnormal Loss A/C Ep-1. c. Soln: PRESENTED BY: SHIBA PRASAD DAHAL

  31. Ep-1. d. Soln: Abnormal gain A/C PRESENTED BY: SHIBA PRASAD DAHAL

  32. PRESENTED BY: SHIBA PRASAD DAHAL

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