Question bank: Objective test and long-form questions
CHAPTER 7 – PROCESS COSTING
7.1
PROCESS COSTING: THE BASIC RULES
The following examples take you through the basic rules for process costing.
Required
For each of the following examples, calculate:
(a)
the cost of completed output from the process, and
(b)
if there is any, the cost of any abnormal loss or the value of any abnormal gain
Example 1
1,500 litres of a liquid were input to a process at a cost of Rs.7,200. Normal loss is
20% of the input quantity. Actual loss was equal to the normal loss.
Example 2
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of
20% of the input is expected. The actual output for the period was only 1,100 litres.
Example 3
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of
20% of the input is expected. Loss is sold as scrap, for a net sales price of Rs.0.40
per litre. The actual output from the process was 1,200 litres.
Example 4
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from
the process was 1,100 litres. Normal loss is 20% of the input quantity. Any lost units
have a scrap value of Rs.0.40 per litre.
Example 5
1,500 litres of liquid were input to a process at a cost of Rs.7,200. Normal loss is
20% of the input quantity but the actual output for the period was 1,250 litres. Loss
has no scrap value.
Example 6
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from
the process was 1,250 units. Normal loss is 20% of the input quantity. Any lost units
have a scrap value of Rs.0.40 per litre.
7.2
PROCESS 1 AND PROCESS 2
A manufacturing company operates two processes. Output from Process 1 is
transferred as input to Process 2. Output from Process 2 is the finished product.
Data for the two processes in January are as follows:
Process 1
Opening work in process
Units introduced into the process
Units completed and transferred to the next process
(Process 2)
Closing work-in-progress
Material cost added during the period
Conversion cost added during the period
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27
Nil
14,000
10,000
4,000
Rs.70,000
Rs.48,000
The Institute of Chartered Accountants of Pakistan
Cost and management accounting
7.5
TWO PROCESSES
A chemical is manufactured by passing through two processes X and Y using two
types of direct material, A and B. In process Y, a by-product is also produced which
is then transferred to process Z where it is completed. For the first week of a month,
the actual data has been as follows:
X
9,400
(kgs)
Output of main product
(kgs)
Output of by-product
(Rs.)
123,500
Direct material - A (9,500 units)
(kgs)
500
Direct material - B added in process
(Rs.)
19,500
Direct material - B added in process
(Rs.)
15,000
Direct wages
(Rs. per unit)
5
Scrap value
(%)
4
Normal loss of units in process
Process
Y
8,000
1,400
1,250
300
48,100
10,000
10
5
20
1,651
500
6
5
Z
The factory overheads are budgeted @ 240% of direct wages and are absorbed on
the basis of direct wages. Actual factory overheads for the week amounted to Rs.
65,000. Estimated sales value of the by-product at the time of transfer to process Z
was Rs. 22 per unit.
Required
Prepare the following:
7.6
(a)
Process accounts for X, Y and Z.
(b)
Abnormal loss and abnormal gain accounts.
(c)
Factory overhead account.
(17)
SMART PROCESSING LIMITED
Smart Processing Limited produces lubricants for industrial machines. Material
COX is introduced at the start of the process in department A and subsequently
transferred to department B. Normal loss in department A is 5% of the units
transferred.
In department B, material COY is added just after inspection which takes place
when the production is 60% complete. 10% of the units processed are evaporated
before the inspection stage. However, no evaporation takes place after adding
material COY. During the year, actual evaporation in department B was 10%
higher than the estimated normal losses because of high level of sulpher contents in
natural gas used for processing.
Other details for the year ended December 31, 20X3 are as under:
Department A
Department B
Rupees
Opening work in process
Material input - 600,000 Litres
- 500,000 Litres
Labour
Overheads
© Emile Woolf International
2,184,000
17,085,000
8,821,000
2,940,000
30
2,080,000
9,693,000
6,389,000
3,727,000
The Institute of Chartered Accountants of Pakistan
Question bank: Objective test and long-form questions
7.9
JOINT PROCESS
In a joint process, two joint products are made, Product A and Product B. There is
no inventory of work-in-process. Information relating to last month’s production is set
out in the table below.
Joint
product
A
B
Opening
inventory
Closing
inventory
Sales
units
800
700
units
1,200
300
units
8,000
10,000
The costs of the joint process in the month were Rs.144,000. These are apportioned
between the joint products on the basis of units produced.
Required
Calculate the joint processing costs for the month that are charged to each product.
7.10
BINARY LTD
Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the
company to apportion the joint costs on the basis of estimated sales value at split off
point. BL incurred the following joint costs during the month of August 20X3:
Rs. in ‘000
16,000
Direct material
Direct labour
3,200
Overheads (including depreciation)
2,200
Total joint costs
21,400
During the month of August 20X3 the production and sales of Product A, B and
C were 12,000, 16,000 and 20,000 units respectively. Their average selling
prices were Rs. 1,200, Rs. 1,400 and Rs.1,850 per unit respectively.
In August 20X3, processing costs incurred on Product A after the split off point
amounted to Rs. 1,900,000.
Product B and C are sold after being packed on a specialized machine. The
packing material costs Rs. 40 per square foot and each unit requires the following:
Product
Square feet
B
C
4.00
7.50
The monthly operating costs associated with the packing machine are as follows:
Rupees
Depreciation
480,000
Labour
720,000
Other costs
660,000
All the above costs are fixed and are apportioned on the basis of packing material
consumption in square feet.
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The Institute of Chartered Accountants of Pakistan
Cost and management accounting
Required
7.11
(a)
Calculate the joint costs to be apportioned to each product.
(13)
(b)
BL has received an offer from another company to purchase the total output of
Product B without packaging, at Rs. 1,200 per unit. Determine the viability of
this offer.
(03)
PLATINUM LIMITED
Platinum Limited (PL) manufactures two joint products Alpha and Beta and a byproduct Zeta from a single production process. Following information is available
from PL’s records for the month of February 20X4:
Direct material
25,000 kg. @ Rs. 25 per kg.
Direct labour @ Rs. 15 per hour
Rs. 432,000
Normal process loss
20% of the material consumed
Overheads are allocated to the products at the rate of Rs. 10 per direct labour hour.
The normal loss is sold as scrap at the rate of Rs. 8 per kg.
Following data relates to the output from the process:
Product
Output ratio
Selling price per kg.
(Rs.)
Alpha
75%
95.0
Beta
15%
175.0
Zeta
10%
52.5
Alpha is further processed at a cost of Rs. 30 per unit, before being sold in the
market. Joint costs are allocated on the basis of net realisable value.
Required
Compute the total manufacturing costs for February 20X4. Also calculate the profit
per kg. for Alpha and Beta.
(10)
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34
The Institute of Chartered Accountants of Pakistan
Cost and management accounting
CHAPTER 7 – PROCESS COSTING
7.1
PROCESS COSTING: THE BASIC RULES
Example 1
litres
Input
Normal loss (20%)
Expected output
1,500
300
1,200
Cost per unit of expected output = Rs.7,200/1,200 litres = Rs.6 per litre.
Actual output = 1,200 litres.
Cost of actual output = 1,200 litres × Rs.6 = Rs.7,200.
There is no abnormal loss or abnormal gain.
Example 2
litres
Input
Normal loss (20%)
Expected output
Actual output
Abnormal loss
1,500
300
1,200
1,100
100
Cost per unit = same as in Example 1, Rs.6 per litre.
Cost of actual output = 1,100 litres × Rs.6 = Rs.6,600.
Cost of abnormal loss = 100 litres × Rs.6 = Rs.600.
Example 3
Rs.
Input cost
Scrap value of normal loss (300 × Rs.0.40)
Net cost of the process
7,200
120
7,080
Cost per unit of expected output = Rs.7,080/1,200 litres = Rs.5.90 per litre.
Actual output = 1,200 litres.
Cost of actual output= 1,200 litres × Rs.5.90 = Rs.7,080.
There is no abnormal loss or abnormal gain.
Example 4
Cost per unit = same as in Example 3, Rs.5.90 per litre.
Cost of actual output = 1,100 litres × Rs.5.90 = Rs.6,490.
Cost of abnormal loss = 100 litres × Rs.5.90 = Rs.590.
This cost of abnormal loss is the amount recorded in the process account.
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Answers
The net cost of abnormal loss is reduced (in the abnormal loss account) by the
scrap value of the lost units.
Rs.
Cost of abnormal loss in the process account
Scrap value of abnormal loss (100 × Rs.0.40)
Net cost of abnormal loss (= expense in the income statement)
590
(40)
550
Example 5
litres
Input
Normal loss (20%)
Expected output
Actual output
Abnormal gain
1,500
300
1,200
1,250
50
Cost per unit = same as in Example 1, Rs.6 per litre.
Cost of actual output = 1,250 litres × Rs.6 = Rs.7,500.
Value of abnormal gain = 50 litres × Rs.6 = Rs.300 (= debit entry in the process
account)
Example 6
litres
Input
Normal loss (20%)
Expected output
Actual output
Abnormal gain
1,500
300
1,200
1,250
50
Cost per unit = same as in Example 3, Rs.5.90 per litre.
Cost of actual output = 1,250 litres × Rs.5.90 = Rs.7,375.
Value of abnormal gain = 50 litres × Rs.5.90 = Rs.295.
This value of abnormal gain is the amount recorded in the process account (as a
debit entry).
The value cost of abnormal gain is reduced (in the abnormal gain account) by the
scrap value of the units that have not been lost.
Rs.
Value of abnormal gain in the process account
Scrap value forgone: (50 × Rs.0.40)
Net value of abnormal gain (= income in the income statement)
© Emile Woolf International
121
295
(20)
275
The Institute of Chartered Accountants of Pakistan
Answers
7.5
TWO PROCESSES
Process X A/c
Direct materials – A
Direct material – B
Direct wages
Production overheads
@ 240% of direct
wages
kgs
9,500
500
10,000
Rs.
123,500
19,500
15,000
Normal loss A/c
Abnormal loss A/c
Transfer to process Y
36,000
194,000
kgs
400
200
9,400
Rs.
2,000
4,000
188,000
10,000
194,000
Working:
Cost per unit of good units and abnormal loss units
Rupees
192,000
9,600
20
Total cost less scrap (194,000 – 2,000)
No. of units including abnormal losses (9,400 + 200)
Cost per unit (Rs.)
Process Y A/c
Transfer from process X
Direct materials – B
Direct wages
Production overheads
@ 240% of direct
wages
Abnormal gain A/c
kgs
9,400
300
9,700
185
9,885
Rs.
188,000
48,100
10,000
Normal loss A/c
Finished goods
Byproduct
24,000
270,100
5,550
275,650
kgs
485
8,000
1,400
Rs.
4,850
240,000
30,800
9,885
275,650
Working:
Cost per unit of good units and abnormal loss units
Total cost less scrap and by-product cost (270,100 – 4,850 – 30,800)
Less: Total No. of units less normal losses and by-product
(9700-485-1400)
Cost per unit (Rs.)
Rupees
234,450
7,815
30
Process Z A/c
Input
Direct materials – B
Direct wages
Production overheads
@ 240% of direct
wages
Units
1,400
20
1,420
Rs.
30,800
1,651
500
Normal loss A/c
Abnormal loss A/c
Finished goods
1,200
34,151
Units
71
99
1,250
Rs.
426
2,475
31,250
1,420
34,151
Working:
Cost per unit of good and abnormal loss units
Total cost less scrap (34,151 – 426)
No. of units including abnormal losses (1,420 – 71)
Cost per unit (Rs.)
© Emile Woolf International
125
Rupees
33,725
1,349
25
The Institute of Chartered Accountants of Pakistan
Cost and management accounting
Abnormal Loss A/c
Process X
Process Z
Units
200
99
Rs.
4,000
2,475
299
6,475
Bank Account
Bank account
Costing P & L A/c
Units
200
99
299
Rs.
1,000
594
4,881
6,475
Abnormal Gain A/c
Units
Bank A/c / normal loss
A/c
Costing P & L A/c
185
185
Rs.
1,850
3,700
5,550
Units
Process Y
Rs.
185
5,550
185
5,550
Factory overheads A/c
Rs.
Cash/bank/payables (actual
overheads)
65,000
Rs.
Charged to process accounts:
Process X
Process Y
Process Z
Cost of goods sold accounts:
Overheads under
absorbed
65,000
© Emile Woolf International
126
36,000
24,000
1,200
3,800
65,000
The Institute of Chartered Accountants of Pakistan
Answers
Statement of evaluation
Rs.
Cost of finished goods
Product X (50,000  (Rs. 7 + Rs. 3))
500,000
Product Y (25,000  (Rs. 7 + Rs. 3))
250,000
Cost of closing WIP
Materials (10,000 units  Rs. 7)
Conversion (7,500 units  Rs. 3)
70,000
22,500
92,500
Abnormal loss
Materials (4,250 units  Rs. 7)
Conversion (2,125 units  Rs. 3)
29,750
6,375
36,125
Process (WIP) account
Opening WIP
Direct materials
Conversion costs
units
15,000
82,500
-
97,500
7.9
Rs.
115,000 Finished goods
547,125
Product X
228,875
Product Y
units
Rs.
50,000
25,000
500,000
250,000
Normal loss
Abnormal loss
Closing WIP
8,250
4,250
10,000
12,375
36,125
92,500
97,500
891,000
891,000
JOINT PROCESS
Production
units
8,400
Joint product A: (1,200 + 8,000 –
800)
Joint product B: (300 + 10,000 –
700)
Total production
Joint processing costs
Joint processing costs per unit
9,600
18,000
Rs.144,000
Rs.8
Apportionment of joint costs
Rs.
67,200
76,800
144,000
To Joint product A: (8,400 × Rs.8)
To Joint product B: (9,600 × Rs.8)
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Cost and management accounting
7.10
BINARY LTD
(a)
Apportionment of joint costs
Total joints costs as given in the question
Rs. 21,400,000
Joint Costs (Rs.)
Product A:
Rs.12,500,000 (W-1) / Rs. 61,480,000 (W-1) x Rs.
21,400,000
Product B:
Rs.19,283,738 (W-1) / Rs. 61,480,000 (W-1) x Rs.
21,400,000
Product C:
Rs.29,696,262 (W-1) / Rs. 61,480,000 (W-1) x Rs.
21,400,000
W-1 : Computation of sales value at split off point
Product A
Product B
Rs.
Rs.
Sales value
Rs. 1,200 x 12,000
14,400,000
Rs. 1,400 x 16,000
22,400,000
Rs. 1,850 x 20,000
Less:
Further processing costs –
A
(1,900,000)
Packing costs - Fixed
B: Rs. 1,860,000
(556,262)
(W2)×64,000 ÷ 214,000
(W3)
C: Rs. 1,860,000
(W2)×150,000 ÷ 214,000
(W3)
Packing costs – Variable
B: 64,000 x Rs. 40
(2,560,000)
C: 150,000 x Rs. 40
Estimated sales value at
split off point
12,500,000 19,283,738
4,351,008
6,712,297
10,336,695
21,400,000
Product C
Rs.
Total
37,000,000
(1,303,738)
(6,000,000)
29,696,262 61,480,000
W-2: Fixed costs relating to packing machine = 480,000 + 720,000 + 660,000 = Rs.
1,860,000
W-3: Total Volume in Square Feet
Square Feet
Product
per Unit
B
4.00
C
7.50
© Emile Woolf International
132
Units produced
Total Volume
16,000
20,000
64,000
150,000
214,000
The Institute of Chartered Accountants of Pakistan
Answers
(b)
Decision to sell Product B without packaging for Rs. 1,200 per unit.
Packaged
(Rs.)
1400
160
1,240
Selling price per unit
Less: Variable cost of packing (Rs.40 x 4)
Contribution margin
Unpackaged
(Rs.)
1,200
1,200
Conclusion:
Since the alternative option has a lower contribution margin, the decision should be
to continue to sell Product B with packaging at Rs. 1,400 per unit.
7.11
PLATINUM LIMITED
(i)
Total cost of output:
Direct material [25,000 x Rs. 25]
Direct Labour
Overheads [ 432,000 / Rs. 15 x Rs. 10]
Less: Sale of scrap [ 25,000 x 20% x Rs. 8]
Total cost of products
Kg.
25,000
Rupees
625,000
432,000
288,000
1,345,000
(5,000)
20,000
(40,000)
1,305,000
(ii) Profit per kg of Alpha and Beta:
Rupees
1,305,000
(105,000)
1,200,000
Joint costs of products
Less: Sale of Zeta [20,000 x 10% x Rs. 52.5]
Product
Alpha
Beta
Kg.
Output
%
15,000
3,000
75%
15%
NRV at
Total NRV
split-off
95-30=65
975,000
175
525,000
Joint cost
allocation
1,500,000
1,200,000
18,000
© Emile Woolf International
133
780,000
420,000
Total
Profit
profit per Kg.
195,000
13
105,000
35
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