Understanding Process Costing in Advanced Cost Management Accounting
Process costing is a crucial aspect of advanced cost management accounting, involving the allocation of costs in manufacturing. This process collects and processes costs incurred in different stages of production, distinguishing between normal and abnormal losses. It addresses wastage, cost allocation, and valuation of goods produced. Various methods are used to determine costs based on the units produced, identifying unavoidable losses and valuing outputs efficiently.
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Advanced Cost & Management Accounting Advanced Cost & Management Accounting Process Costing Process Costing Coordinator Dr. D. Heena Cowsar Assistant Professor of Commerce Bon Secours College for Women Thanjavur Coordinator Assistant Professor of Commerce Bon Secours College for Women Thanjavur Dr. D. Heena Cowsar
Process Process collecting processing Normal The occurs materials production tolerance Abnormal In In process processing conditions more Abnormal If If losses than loss they Process Costing Process costing collecting and processing cost Normal Loss The normal occurs majorly materials being production environment tolerance limit Abnormal Loss process costing, processing department conditions. . The more serious Abnormal Gain losses are than expected, loss and they are Costing costing is is a a term and assigning cost system Loss normal loss majorly due being processed environment and limit for Loss costing, abnormal department that The abnormal serious issues Gain are greater expected, the and gain are valued term used assigning manufacturing system is is used used in in cost manufacturing costs used when accounting to to describe costs when nearly cost accounting describe one to to the units are one method units produced are mass method for produced. . A A produced for the units mass produced nearly identical identical units loss is is the due to to the processed. . This the unavoidable the nature This loss and is is considered for machines unavoidable loss nature of of production loss cannot considered within machines and loss of of units production operation cannot be within the and human units in in a a processing operation or or the be avoided the normal human errors processing department the nature avoided under normal or or acceptable errors. . department that nature of of raw normal and acceptable that raw under normal and efficient efficient abnormal loss that should abnormal loss issues that loss can should not loss signifies need to to be can be not occur signifies that be identified be defined occur under that the identified and defined as as the under normal the production and fixed the loss normal and production operation fixed quickly loss or or spoilage and efficient operation has quickly. . spoilage of of units efficient working has one units in in a a working one or or that need greater than the difference gain units valued at at the than expected, difference is is known units are the full the extra known as as valued at at the full cost expected, the extra loss loss is is abnormal abnormal loss abnormal cost as as units loss. . If If losses gain. . units of of good losses are Abnormal good output, are less Abnormal output, less abnormal gain are valued cost per the same same cost per unit unit
SUM A A product finished stock. The normal wastage of each process is as follows: Process A- 3% of the units entering the process Process B 5% of the units entering the process Wastage of process A was sold at Re.0.50 per unit and that of Process B at Rs. 1per unit .10,000 units were issued to process A at a cost of Rs. 2 per unit. Sundry materials Wages Overhead expenses Actual output (units) Prepare Process account and other accounts. SUM NO product passes NO: : 1 1 passes through through two two distinct processes A and B and then to Process Rs. 2,000 10,000 2,100 9,500 Process A A PROCESS PROCESS B B Rs. 3,000 16,000 2,375 9,100
Solution: Process A account Amount Rs. 20,000 2,000 10,000 2,100 34,100 Units Units Amount Rs. 20,000 2,000 10,000 2,100 34,100 Units Units Amount Rs. 150 700 33,250 Amount Rs. 150 700 33,250 To raw materials To sundry materials To wages To overhead expenses To raw materials To sundry materials To wages To overhead expenses 10,000 10,000 By Normal loss By Abnormal loss By process B a/c ( By Normal loss By Abnormal loss By process B a/c (b/f 300 200 9,500 300 200 9,500 b/f) ) 10,000 10,000 10,000 10,000 34,100 34,100 Calculation of Abnormal Loss= Calculation of Abnormal Loss= Normal Cost of Normal Output Normal Cost of Normal Output X Abnormal units Normal Output Normal Output Normal output = 10,000 Normal output = 10,000- - 3% of 10,000 =9,700 units 3% of 10,000 =9,700 units Cost of normal output =Rs.34,100 Cost of normal output =Rs.34,100 Rs. 150 =RS.33,950 Rs. 150 =RS.33,950 = (33950/9700)X 200 = 700 = (33950/9700)X 200 = 700 (OR) (OR) Units rate =Rs. 33,950 /9,700 = Rs.3.50 Units rate =Rs. 33,950 /9,700 = Rs.3.50 Abnormal loss = normal output Abnormal loss = normal output actual output actual output =(10,000 =(10,000- -3% of 10,000) 3% of 10,000) - -9,500 9,500 =9,700 =9,700 9,500 =200 units 9,500 =200 units Cost =200 unitsXRs.3.50 = Rs. 700 Cost =200 unitsXRs.3.50 = Rs. 700 X Abnormal units
Solution: Process account Units Amount Rs. 33,250 3,000 16,000 2,375 450 9,575 55,075 Units Amount Rs. 475 54,600 To process A To sundry materials To wages To overhead expenses To abnormal gain 9,500 - - - 75 By normal loss By final stock @Rs. 6 475 9,100 9,575 55,075 Calculation of Abnormal Gain= Calculation of Abnormal Gain= Normal Cost of Normal Output Normal Output Normal output =9500 Normal output =9500- -475 = 9025 475 = 9025 Normal Cost of Normal Output = Rs. 54,625 Normal Cost of Normal Output = Rs. 54,625 Rs. 475 = 54,150 (54625 is the Debit side total without the cost of Abnormal gain) (54625 is the Debit side total without the cost of Abnormal gain) Abnormal gain = 54150/9025 = Rs. 6X 75= 450 Abnormal gain = 54150/9025 = Rs. 6X 75= 450 Finished Goods = 6X9100 = Rs. 54600 Finished Goods = 6X9100 = Rs. 54600 Normal Cost of Normal Output Normal Output Rs. 475 = 54,150
Normal loss account Amount Amount Normal loss account Units Units Units Units Amount Amount Rs. Rs. 150 150 475 475 Rs. Rs. 550 550 To Process A To Process A To Process B To Process B 300 300 475 475 By Sale By Sale (300xRs.0.05+400 x Rs1) (300xRs.0.05+400 x Rs1) By Abnormal Gain By Abnormal Gain 700 700 75 75 9,575 9,575 75 75 55,075 55,075 9,575 9,575 55,075 55,075 Abnormal loss account Abnormal loss account Units Units Amount Amount Rs. Rs. 200 200 Units Units Amount Amount Rs. Rs. 100 100 600 600 700 700 To process A To process A 200 200 By sales By sales By costing P&L a/c By costing P&L a/c 200 200 - - 200 200 700 200 Abnormal Gain Abnormal Gain Amount Amount Units Units Units Units Amount Amount Rs. Rs. 75 75 375 375 450 450 Rs. Rs. 450 450 To normal loss a/c To normal loss a/c To costing P&L a/c To costing P&L a/c 75 75 By process B By process B a/c a/c 75 75 75 75 75 75 450 450
SUM NO: 2 SUM NO: 2 Make out the necessary accounts from the following details: PROCESS A Materials 30,000 Labour 10,000 Over heads 7,000 Input (units) 20,000 Normal loss 10% Sale of wastes per unit Rs.1 There was no opening or closing stock or work-in-progress. Final output from process B was 17,000 units. PROCESS B 3,000 12,000 8,600 17,500 4% Rs.2
Process A a/c Process A a/c Units Amount Units Amount To materials 20000 30000 By normal loss 2,000 2,000 To Labour 10000 By abnormal loss 5,00 1,250 To over heads 7,000 By process B a/c @ Rs. 2.50 17,500 43,750 20,000 47000 20,000 47000 Cost per unit = Cost per unit = Total process cost Total process cost - - scrap value from normal loss normal Input normal Input Normal loss = = 47,000 47,000 2,000 2,000 = 2.50 20,000 20,000 2,000 2,000 Abnormal wastage (in units) Abnormal wastage (in units) Input Input Less: Normal Wastage 10% Less: Normal Wastage 10% Normal output Normal output Less: Actual output Less: Actual output Abnormal Wastage Abnormal Wastage scrap value from normal loss Normal loss = 2.50 20,000 20,000 2,000 2,000 18,000 18,000 17,500 17,500 500 500
Process B a/c Process B a/c Units 17,500 Amount Units Amount To process A a/c 43,750 By normal loss 700 1400 To Materials 3000 By Finished Goods a/c @ Rs. 2.50 17,500 43,750 To Labour 12000 To over heads 8600 785 200 To Abnormal Gain 17700 68135 17700 68135 Cost of abnormal gain = Cost of abnormal gain = Rs. 65,950 Cost of finished stocks = Cost of finished stocks = Rs. 65,950 Abnormal gain = Actual output Abnormal gain = Actual output - - Normal Output = 17,000 = 17,000 (17,500 = 17,000 = 17,000 16,800 = 2, 00 Units. = 2, 00 Units. Rs. 65,950 x 200 = Rs. 785 x 200 = Rs. 785 16,800 16,800 Rs. 65,950 x 17,000 = Rs. 66,735 x 17,000 = Rs. 66,735 16,800 16,800 Normal Output (17,500 4% of 17,500) 4% of 17,500) 16,800
Normal Loss Account Normal Loss Account Units Units Amount Amount Rs. Rs. Units Units Amount Amount Rs. Rs. To process A a/c To process A a/c To process B a/c To process B a/c 2,000 2,000 700 700 2,000 2,000 1,400 1,400 By sale By sale (process A: 2,000 (process A: 2,000 xRs.1+ process: B 500xRs.2) xRs.1+ process: B 500xRs.2) By abnormal gain a/c By abnormal gain a/c 2,500 2,500 200 200 3,000 3,000 400 400 3,400 3,400 3,400 3,400 2,700 2,700 2,700 2,700 Abnormal Loss Account Abnormal Loss Account Amount Amount Rs. Rs. Units Units Units Units Amounts Amounts Rs. Rs. To Process A a/c To Process A a/c 500 500 1250 1250 By sale By sale (500X1) (500X1) 500 500 500 500 By Costing P&L By Costing P&L -- -- 750 750 500 500 1250 1250 500 500 1250 1250 Abnormal Gain Account Abnormal Gain Account Units Units Amount Amount Rs. Rs. 400 400 Units Units Amount Amount Rs. Rs. 785 785 To Normal Loss To Normal Loss 200 200 To Process B a/c To Process B a/c 200 200 To Costing P&L a/c To Costing P&L a/c -- -- 385 385 200 200 785 785 200 200 785 785
