Contract Costing Meaning Types of Contracts | Process Costing | Process Losses

Contract Costing Meaning Types of Contracts | Process Costing | Process Losses :-

Contract Costing Meaning Types of Contracts | Process Costing | Process Losses
Contract Costing Meaning Types of Contracts | Process Costing | Process Losses

Meaning Contract Costing 

Contract Costing is a special type of job costing where the unit of  cost is a single contract. Contract itself is a cost centre and  is executed under the customer’s specifications. Contract Costing is defined by the ICMA Terminology as “That form of specific order costing which applies where work is undertaken to customer’s special requirements and each order is of long duration. The work   is usually of constructional nature.”

Contract Costing is also termed as ”Terminal Costing.” The principles of job costing are also applicable to contract costing and are used by such concerns of builders, public works contractors, constructional and mechanical engineering firms and ship builders etc. who undertake work on a contract basis.

SPECIAL FEATURES OF CONTRACT COSTING

The following are the special features of Contract Costing:

  1. The cost unit is a specific contract.
  2. Each contract takes a long time to complete.
  3. The work being of a constructional nature, the same is executed at customer’s site, as per his specifications.
  4. Bulk of the materials purchased and delivered direct to the contract site or obtained from the central stores through the requisition slips.
  5. Generally specific portions of the contract are given to sub- contractors.
  6. Most of costs which are normally treated as indirect can be identified specifically with a particular contract and are charged to it as direct cost.
  7. Overheads constitute only a very small proportion of the cost of the contract. However, indirect costs consist mainly of administrative cost of the central office.
  8. Scale of operations and cost control becomes difficult due to theft of materials, labour time utilization, pilferage etc.
  9. The pay roll is prepared either at the site or at a central administrative office.

TYPES OF CONTRACTS

There are three types of contract which are mentioned below:

  1. Fixed price contract: The contract that is executed with the fixed price which is agreed by the contract and the contractee is called the fixed price contract. Under this contract, no modification   is made in the agreed contract price irrespective of the changes in the price level of material and labour in feature. In such type of contract, the contractor is benefited when the price of material and labour decrease. In contrary to this, the contractee  is benefited if  the price of material and labour increase.
  2. Fixed price contract with escalation and de-escalation clauses: Escalation clause is a of agreement that that aims to reduce the risks that is causes due to the changes in the price of materials, labour and other services. Under this, the contract price is adjusted in accordance, with the changes in the price of material, labour and other services. The additional cost raised due to the increase in price is born by the contracted. Similarly, the contract price is reduced if the cost decreases below a certain percentage. It is called de-escalation or reverse clause. Escalation clause safe guides the interest of both the contractor and contractor against unfavorable price change in future. Such clause may also apply where material and labour utilization exceeds a particular limit. In this case, however, contractor will have to prove that excessive utilization is not because of decrease in efficiency. The contractor allows a rebate in the bills presented by him to the extent of the decrease in price.
  3. Cost plus contract: The contract in which the contract price is determined by adding a certain percentage of profit on cost is known as cost plus The cost plus contract is adopted to overcome with problem of fixing the contract price caused due to nature of contract, duration of completion of contract, uncertainly of material, change in the price level, new technology etc. this type of contract is mostly followed by the government for production of special articles not usually manufactured, urgent repairs  of  vehicles, roads bridge etc. under this types of contract, the contract starts the work and payment is  made by the contracted gradually  on the basis of the cost incurred in the work completed plus certain percentage of profit.

RECORDING COST ON CONTRACT OR COSTING PROCEDURE

In contract costing, costs are allocated, collected and accumulated according to the contract works. Each contract is treated as a separate entity in which each contract account may be maintained separately or in general ledger itself for the purpose of costing and cost control. The following  are the costing procedure  for different costs relating to the important expenses:

a. Materials

The procedures of recording materials in a contract account are as follows:

 

Item Treatment
Stock of Materials The    opening     stock    is    debited     and closing stock is credited
Purchase of Materials The material purchased for the contract is debited to the contract account
Transfer of Materials Material transferred to the contract from other contracts is debited while material transferred out is credited
Sale of Materials The material sold from the contract is credited in the selling price
Profit/Loss on sale The profit on sale is credited whereas loss is debited to the contract account
Loss of Material Loss of material due to theft, fire, damage etc is credited. Claim accepted by insurance company is credited like sales

a. Plant and Machinery

The machinery used for a contract is recorded in a contract account through two ways.

  1. The cost of machinery and equipment to be used for a longer period or purchase for the contract is shown in the debit side of a contract account. The book value of the machinery and equipment is shown in credit side. The book value is calculated by deducting the depreciation from the cost of the machinery  and equipment.
  2. If the machinery and equipment is used for a short time in the contract, the amount of depreciation charged is only debited in the contract account. In such a situation, the purchase price in the debited side and the book value in the credit side are not shown. This is generally done, if the plant and equipment are  not used till the end of te accounting period.

The treatments of plant and machinery in a contract account under different conditions have been presented below:

Item Treatment
Plant at beginning The value of plant at the beginning is debited whereas the plant at the end is credited
Purchase of Machinery The machinery purchased for the contract is debited to the contract account
Transfer of Machinery Machine transferred to the contract from other contracts is debited while machine transferred out is credited
Sale of Machinery The value of machinery sold from the contract is credited in the selling price or market value
Profit/Loss on sale The profit on sale is credited whereas loss is debited whereas loss suffered is credited
Loss of Machine Loss of machine due to theft, fire, damage etc is credited. Claim accepted by insurance company is credited like sales

 

b.  Labour:

In the case of contract costing, all labour engaged at site and the salaries and wages paid to the labour and workers are treated  as direct labour cost is debited to Contract Account.

c.  Direct Expenses:

Most of the expenses like electricity, insurance telephone, postage, sub-contracts, Architect’s fees etc. can also be treated as direct cost is debited to Contract Account.

d. Overhead Cost:

In the case of contract costing overheads incurred only an insignificant part of the total cost of contract account. The nature office and administrative expenses of a particular contract may be apportioned on suitable basis.

e. Cost of extra work:

Sometimes, in case of a contract, some additional work o variations of the work originally contracted for may be required by the contractee. Since the additional work required will not be covered by the terms and condition of original contract, it will be the subject of a separate charge., if the additional work required by the contractee is quite substation, it should be treated as a separate contract and dealt with in a separate account to be opened for it.  But in case the additional work is not substantial, the expenses incurred on extra work should be debited to contract account as  ‘cost of extra work’ and the extra amount which the contractee has agreed to pay to the contractor should be added to the original contract price.

Some other terms used in Contract Costing

  1. Sub-Contracts: Sub-Contracts refer to some portions of the specified work connected with the main contract, to be done by the sub-contractor. For example, the work of painting, special flooring, steel work etc. may be given to the sub-contractors. Usually sub-contract has been undertaken on cost-plus basis and the cost of such sub-contract should be treated as a direct charge and is debited to Contract account.
  2. Work Certified: In the case of the small contracts which are completed within the shorter period, the contractor pays the contract price on the completion of the contract. In the case of contracts of long duration, the contract agreement provides interim payment to the contractor. It is done on the basis of certificates issued by the contractee’s Surveyor, Architect or Engineer. At the same time Contractee usually does not pay to the full value of the work certified. A portion of amount say 20% or 30% thereof shall be retained by the Contractee. The money so retained is called as “Retention Money.” This retention money is intented to ensure that the contractor to complete the work as scheduled and according to specifications. Money retained could also be used for imposing penalties for faulty or delayed work. This amount will be settled on completion of the contract.
  3. Work Uncertified: If the progress of a work is unsatisfactory or the work has not reached the stipulated stage, though certain work is completed, such work does not qualify for  a certificate by the Contractee’s Architect or Surveyor is termed as “Work Uncertified.” It is valued at cost and credited to  Contract  Account and debited to Work in Progress account.
  1. Work in Progress: Work in progress includes the amount of work .certified and the amount of work uncertified. The work in progress account will appear on the asset side of the balance sheet. The amount of cash received from the contractee and reserve for contingencies will be deducted out of this amount.

TREATMENT OF PROFIT OR LOSS ON CONTRACT ALC.

The accounting treatment of profits or loss of contracts in the following stages :

  • Profit or Loss on incomplete contracts
  • Profits or Loss on completed contracts
  • Profit or Loss on Incomplete Contracts

To determine the profits to be taken to Profit and Loss Account in the case of incomplete contracts, the following situations may arise :

  • Completion of Contract is Less than 25%: In this case no profit should be taken to Profit and Loss
  • Completion of Contract is up to 25% or more but Less than 50%: In this case one-third of the notional profit, reduced in  the ratio of cash received to work certified, should be transferred to Profit and Loss Account. It can be expressed as:

1/3 x Notional Profit x Cash Received/ Work Certified

  • Completion of Contract is up to 50% or more but Less than 90%: In this case two-third of the notional profit reduced by proportion of cash received to work certified is transferred to Profit and Loss Account. The equation is

2/3 x Notional Profit x Cash Received/ Work Certified

  • Completion of Contract is up to 90% or more than 90%, i.e., it is nearing completion: In this case the profit to be taken to  Profit and Loss Account is determined by determining the estimated profit and using anyone of the following formula :
  1. Estimated profit x Work Certified/Contract price
  2. Estimated profit x Work Certified/Contract price x Cash received/Work Certified

    OR

Estimated profit x Cash Received/Contract Price

  1. Estimated Profit x Cost of work done to date/Estimated Total Cost
  2. Estimated Profit = Cost of work done to date/Estimated Total Cost x Cash received/Work Certified
  3. Normal Profit = Work Certified/Contract Price
  • Profits or Loss on Completed Contracts

When a contract is completed, the overall profit  or loss  on the contract is transferred to the Profit and Loss Account.

Illustration

The following are the expenses on a contract which commences on 1st Jan. 2013

Particulars Amt Rs.
Materials Purchased 1,00,000
Materials on hand 5,000
Direct Wages 1,50,000
Plant issued 50,000
Direct Expenses 80,000

The contract price was Rs.  15,00,000 and the same was  duly received when the contract was completed in August 2013. Charge indirect expenses at 15% on wages. Provide Rs. 10,000 for depreciation on plant and prepare the contract account and the contracte’s account.

Illustration

The following information is available from the books of a contractor relating to a contract for Rs 75 lakhs. The Contractee pays 90% of the value of the work  done as certified by the architect.

Particulars 2006 2007 2008
Materials 9,00,000 11,00,000 6,30,000
Wages 8,50,000 11,50,000 8,50,000
Direct Expenses 35,000 1,25,000 45,000
Indirect Expenses 15,000 20,000
Work Certified 17,50,000 56,50,000 75,00,000
Work Uncertified 1,00,000
Plant Issued 1,00,000

 

The value of plant at the end of 2006, 2007 & 2008 was Rs.

80,000, Rs. 50,000 and Rs. 20,000 respectively.

Prepare Contract Account, Work in Progress Account, and Contracte’s Account Show the relevant figures in the Balance Sheet

Solution

Contract Account for the year 2006

Particulars Amt Rs. Particulars Amt Rs.
To Materials 9,00,000 By WIP A/c:
To Wages 8,50,000 –    Work Certified 17,50,000
To Direct Expenses 35,000 –    Plant at Site 80,000
To Plant 1,00,000
To Indirect Expenses 15,000 By P&L A/c 70,000
Total 19,00,000 Total 19,00,000

 

Contract Account for the year 2007

Particulars Amt Rs. Particulars Amt Rs.
To WIP A/c: By WIP A/c:
–    Work Certified 17,50,000 –    Work Certified 56,50,000
–    Plant at Site 80,000 –    Work uncertified 1,00,000
To Materials 11,00,000 –    Plant at Site 50,000
To Wages 11,50,000
To Direct Expense 1,25,000
To Indirect Expenses 20,000
To P&L A/c 9,45,000
To WIP A/c (Reserve) 6,30,000
Total 58,00,000 Total 58,00,000

Contract Account for the year 2008

Particulars Amt Rs. Particulars Amt Rs.
To WIP A/c: By Contractee’s A/c 75,00,000
–    Work Certified 56,50,000 By Plant 20,000
–    Work Uncertified 1,00,000
–    Plant at Site 50,000
(Less): Reserve (6,30,00)
To Materials 6,30,000
To Wages 8,50,000
To Direct Expense 45,000
To P&L A/c (Profit) 8,25,000
Total 75,20,000 Total 75,20,000

 

WIP Account

Year Particulars Amt Rs. Year Particulars Amt Rs.
2006 To Contract A/c 18,30,000 2006 By Balance c/d 18,30,000
2007 To balance b/d 18,30,000 2007 By Contract A/c 18,30,000
To Contract A/c 58,00,000 By Contract A/c 6,30,000
By balance c/d 51,70,000
Total 76,30,000 Total 76,30,000
2008 To balance b/d 51,70,000 2008 By Contract A/c 51,70,000

 

Contracte’s Account

 

Year Particulars Amt Rs. Year Particulars Amt Rs.
2006 To Balance c/d 15,75,000 2006 By cash 15,75,000
2007 To balance c/d 50,85,000 2007 By balance b/d 15,75,000
By Cash 35,10,000
Total 50,85,000 Total 50,85,000
2008 To Contract A/c 75,00,000 2008 By balance b/d 50,85,000
By Cash 24,15,000
Total 75,00,000 Total 75,00,000

 

Balance Sheet as on 31st December 2006

Particulars Amt Rs. Amt Rs.
Work In Progress
–    Work Certified 17,50,000
–    Work uncertified
–    Plant at Site 80,000
Less: Reserve
18,30,000
Less: Cash Received 15,75,000 2,55,000

Balance Sheet as on 31st December 2007

Particulars Amt Rs. Amt Rs.
Work In Progress
–    Work Certified 56,50,000
–    Work uncertified 1,00,000
57,50,000
Less: Reserve 6,30,000
51,20,000
Less: Cash Received 50,85,000 35,000
Plant at Site 50,000

PROCESS COSTING

Meaning

Process Costing is a method of costing. It is  employed  where each similar units of production involved in different series of process from conversion of raw materials into finished output. Thus, .unit cost is determined on the basis of accumulated costs of each operation or at each stage of manufacturing a product. Charles T. Horngren defines process costing as “a method   of costing deals with the mass production of the like units that usually pass the continuous fashion through a number  of  operations called process costing.” Textiles, chemical  works, cement industries, food processing industries etc. are the few examples of industries where process costing is applied.

CHARACTERISTICS OF PROCESS COSTING

 

  1. Continuous or mass production where products pass through distinct processes or operations.
  2. Each process is deemed as a separate operations or production centres.
  3. Products produced are completely homogenous and standardized.
  4. Output and cost of one process are transferred to the next process till the finished product completed.
  5. Cost of raw materials, labour and overheads are collected for each process.
  6. The cost of a finished unit is determined by accumulated of all costs incurred in all the process divided by the number of units produced.
  7. The cost of normal and abnormal losses usually incurred at different stages of production is added to finished goods.
  8. The interconnected processes make the final output of by- product or joint products Possible.

ADVANTAGES & DISADVANTAGES

Advantages :

The main advantages of process costing are:

  • Determination of the cost of process and unit cost is possible at short intervals.
  • Effective cost control is possible.
  • Computation of average cost is easier because the products produced are homogenous.
  • It ensures correct valuation of opening and closing stock of work in progress in each process.
  • It is simple to operate and involve less expenditure.

Disadvantages :

  • Computation of average cost does not give the true picture because costs are obtained on historical basis.
  • Operational weakness and inefficiencies on processes can be concealed.
  • It becomes more difficult to apportionment of joint costs, when more than one type of products manufacturing.
  • Valuation of work in progress is done on estimated basis, it leads to inaccuracies in total costs.
  • It is difficult to measure the performance of individual workers and supervisors.

Illustration-

Following figures show the cost of A product passes through three processes. In March 1000 units were produced. Prepare the  process accounts and find out per unit of each process.

(All Figures in Rs.)

Process I Process II Process III
Raw Materials 50,000 30,000 20,000
Wages 30,000 25,000 25,000
Direct Expenses 7,000 3,000 5,000

 Overhead expenses were Rs 12,000 and it should be apportioned on the basis of wages.

Solution

Process I Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To             Raw Materials 1,000 50,000 By Process II A/c

(Output transferred at Rs 91.50 per Unit)

1,000 91,500
To Wages 30,000
To          Direct Expenses 7,000
To Overheads (6/16*12000) 4,500
Total 1,000 91,500 Total 1,000 91,500

 

Process II Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Process II A/c

(Transferred from Process I)

1,000 91,500 By Process II A/c

(Output transferred  at Rs 153.25 per Unit)

1,000 1,53,250
To Raw Materials 30,000
To Wages 25,000
To                Direct

Expenses

3,000
To Overheads (5/16*12000) 3,750
Total 1,000 1,53,250 Total 1,000 1,53,250

 

Process III Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Process III A/c

(Transferred     from Process II)

1,000 1,53,250 By    Finished Stock

(Output transferred @        Rs    207 per unit)

1,000 2,07,000
To Raw Materials 20,000
To Wages 25,000
To                   Direct

Expenses

5,000
To Overheads (5/16*12000) 3,750
Total 1,000 2,07,000 Total 1,000 2,07,000

PROCESS LOSSES :

Process Losses may be defined as the loss of material occur at different stages of manufacturing process. The following are the types of losses unavoidable during the course of processing operations such as:

  • Normal Process Loss
  • Abnormal Process Loss
  • Abnormal Process Gain
  • Spoilage
  • Defectives
  • Normal Process Loss: The cost of normal process loss in practice is absorbed by good units produced under the process. This is known as Normal Process Loss or Normal Wastage. For example, evaporation, scrap, stamping process etc. The amount realized by the sale of normal process loss units should be credited to process Account.
  • Abnormal Process Loss: The cost of an abnormal  process loss unit is equal to the cost of good unit. . The total cost of abnormal process loss is credited to process account  from  which it arises. This is known as Abnormal Process Loss. Such loss may be caused by breakdown of machinery, false production planning, lack of effective supervision, substandard materials etc., Cost of abnormal process loss is not treated as cost of the product. In fact, the total cost of abnormal process loss is debited to Costing Profit and Loss Account.

Computation of Abnormal Loss:

Value of Abnormal Loss = Normal Cost of Normal Output * Units of Abnormal Loss

Normal Output

Where:

Quantity of Abnormal Loss = Normal Output – Actual Output Normal Output = Input – Normal Loss

If actual output is less than normal output to balance represents Units of Abnormal Loss.

  • Abnormal Process Gain: Abnormal Process Gain may be defined as unexpected gain in production under normal conditions. The process account under which abnormal gain arises is debited with abnormal gain. The cost of abnormal gain is computed on the basis of normal production.
  • Spoilage: Normal Spoilage (i.e., which is inherent in the operation) costs are included in costs either by charging the loss due to spoilage to the production order or by charging it to production overhead so that it is spread over all the products. Any value realized from the sale of spoilage is credited to production order or production overhead account as the case may be.  The  cost of abnormal spoilage is charged to Costing Profit and Loss Account. When spoiled work is the result of rigid specification, the cost of spoiled work is absorbed by good production while the cost  of disposal is charged to production overhead.
  • Defectives: Defectives that are considered inherent in the process and are identified as normal can be recovered by using the following method.
    • Charged to goods products
    • Charged to general overheads
    • Charged to departmental overheads
    • If defectives are abnormal, they are to be debited to Costing Profit and Loss Account.

Equivalent Production

Equivalent Production represents the production of  a  process in terms of completed units. In other words, it means converting the uncompleted production into its equivalent of completed units. The term equivalent unit means a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of  the substituted quantity, (e.g. 100 units of 70% completed = 70 completed units).

The principle applies when operation costs are being apportioned between work- in-progress and completed  output.  Thus in each process an estimate is made of the percentage completion of any work-in-progress. A production schedule and a cost schedule will then be prepared.

The work-in- progress is inspected and an estimate is made of the degree of completion, usually on a percentage basis. It is  most important that this estimate is as accurate as possible  because a mistake at this stage would affect the stock valuation used in the preparation of final accounts. The formula of equivalent production is:

Equivalent units of work-in-progress = Actual no. of units in progress of manufacture X Percentage of work completed

For example, if 70% work has been done on the average on 200 units still in process, then 200 such units will be equal to 140 completed units. The cost of work-in-progress will be equal to 140 completed units.

Calculation of Equivalent Production :

Following steps are worth noting in its calculation under different methods:

Method I

Under this method opening work-in-progress is stated in equivalent completed units by applying the percentage of work needed to complete the unfinished work of the previous  period. Then number of units started and completed (i.e. units started less closing stock) are added. Further equivalent completed units of closing work-in-progress are also added to get the equivalent production.

Method II

Under this method units completed during the period (i.e. units started + opening stock units—closing stock units) are added to the units of closing stock completed during the period and out of the total units, opening stock units completed in previous year are deducted to get the units of equivalent production.

Method III

Under this method units of uncompleted input are added to the units of incomplete work in opening stock and out of the total units, incomplete work  in closing stock are deducted to have units  of equitant production.

Often in a continuous process there will be opening as well  as closing work-in-progress which are to be converted into equivalent of completed units for apportionment of process costs. The procedure of conversion of opening work-in-progress will vary depending upon which method of valuation of work-in-progress is used.

valuation of work-in-progress can be made in the following ways depending upon the assumptions made regarding the flow of costs:

  • Average Cost Method,
  • FIFO,
  • LIFO and
  • Weighted Average Method.

These are discussed one by one:

 Average Cost Method

According to this method opening inventory of work-in- progress and its costs are merged with 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.

This method is useful when prices fluctuate from period to period. The closing valuation of work-in-progress in the old period is added to the cost of the new period and an average rate obtained which tends to even out price fluctuations. In calculating the equivalent production opening units will not be shown separately as units of opening work-in-progress are taken to be included in the units completed and transferred.

FIFO Method

According to this method, the units first entering the process are completed first after taking into consideration the percentage of work to be done and shown separately in the statement of  equivalent production. Thus the units completed during a period would consist partly of 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 opening inventory which is based on the cost of previous period. This method is satisfactory when prices of raw materials and rates  of direct labour and overheads are relatively stable.

Work-in-progress at the end of the period becomes the opening work-in-progress for the next period; the closing work- in- progress will be valued at costs ruling during the new period, while the opening work-in- progress will be valued at costs ruling during the old period. Thus, where costs are more or less  the same in  each period, this system is adequate.

 

Last in First-out (LIFO) Method

According to this method, units lastly entering in the process are first to be completed. This assumption will definitely have a different impact on the cost of completed units  and  closing inventory of work in progress. The completed units will be shown at their current cost and the closing inventory of work-in-progress will continue to appear at the cost of opening inventory of work-in- progress along with current cost of work in progress, if any.

Weighted Average Method

When two or more dissimilar products are manufactured in the same process, a simple average process cost may give misleading results. In such a case, a close study of production and costs of each type of product is required to be made and  the  relative importance of one as compared to others should be indicated in terms of points to be used as a common denominator.

In order to find out the cost of production under weighted average method, statements of weighted average production in terms of points and cost for each type of product should be prepared. The computation of weighted average process cost sheet will be easy, if due consideration to weights or points are given.

Illustration

From the following details prepare statement of equivalent production, statement of cost, statement of evaluation and Process Account by following average cost method:

Opening WIP (2000 Units)

Materials (100% Complete) Rs. 7,500

Labour (60% Complete) Rs. 3,000

Overhead (60% Complete) Rs. 1,500 Units introduced into the process – 8,000

There are 2,000 units in the process. The stage of completion is estimated to be:

Materials 100% Complete

Labour 50% Complete

Overhead 50% Complete

8,000 units are transferred to the next process The Process costs for the period are:

Materials: Rs. 1,00,000

Labour: Rs. 78,000

Overheads: Rs. 39,000

Statement of Equivalent Production

Production Units Materials Labour &

Overheads

%

Completion

Equiv.

Units

%

Completion

Equiv.

Units

Finished        &

Transferred

8,000 100 8,000 100 8,000
Closing WIP 2,000 100 2,000 50 1,000
Total 10,000 10,000 9,000

 

Statement of Cost

Material (Rs.) Labour (Rs.) Overheads (Rs.)
Cost of Opening WIP 7,500 3,000 1,500
Cost incurred during the process 1,00,000 78,000 39,000
1. Total Cost 1,07,500 81,000 40,500
2. Equivalent Units 10,000 9,000 9,000
3.  Cost       per      unit (1/2) 10.75 9.00 4.50
4.  Total      Cost     per unit 24.25

 

Statement of Evaluation

a) Value of output transferred
8,000 units at Rs. 24.25 1,94,000
b) Value of Closing WIP
Materials 2,000 @ 10.75 21,500
Labour 1,000 @ 9.00 9,000
Overheads 1,000@ 4.50 4,500 35,000
Total 2,29,000

 

Process Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Opening WIP 2,000 12,000 By Finished Stock transferred to               next

process

8,000 1,94,000
To Materials 8,000 1,00,000 By WIP A/c 2,000 35,000
To Labour 78,000
To Overheads 39,000
Total 10,000 2,29,000 Total 10,000 2,29,000

From the following details prepare statement of equivalent production, statement of cost, statement of evaluation and Process Account by following FIFO method:

Opening WIP (2000 Units)

Materials (100% Complete) Rs. 5,000

Labour (60% Complete) Rs. 3,000

Overhead (60% Complete) Rs. 1,500 Units introduced into the process – 8,000

There are 2,000 units in the process. The stage of completion is estimated to be:

Materials 100% Complete

Labour 50% Complete

Overhead 50% Complete

8,000 units are transferred to the next process The Process costs for the period are:

Materials: Rs. 96,000

Labour: Rs. 54,600

Overheads: Rs. 31,200

 

Statement of Equivalent Production

Production Units Materials Labour & Overheads
%

Completion

Equiv. Units %

Completion

Equiv. Units
Opening WIP 2,000 40 800
Completely processed during         the period (8,000

– 2,000)

6,000 100 6,000 100 6,000
Closing WIP 2,000 100 2,000 50 1,000
Total 10,000 8,000 7,800

 

Statement of Cost 

Cost incurred during the period

Rs.

Equivalent Production (Units) Cost Per Unit (Rs.)
Materials 96,000 8,000 12
Labour 54,600 7,800 7
Overheads 31,200 7,800 4
Total 1,81,800 23

 

Statement of Evaluation

Opening WIP (Current Cost) Rs. Rs.
Materials
Labour—— 800 units @ Rs. 7 5,600
Overheads—— 800 units @ Rs. 4 3,200 8,800
Closing WIP
Materials—— 2,000 Units @ Rs. 12 24,000
Labour—— 1,000 units @ Rs. 7 7,000
Overheads—— 1,000 units @ Rs. 4 4,000 35,000
Units completely processed during the period—— 6,000 units @ Rs. 23 1,38,000
Total 1,81,800

 

Process Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Opening 2,000 9,500 By      Finished 8,000 1,56,300
WIP Stock
transferred to
next process
(9,500+8,800+
1,38,000)
To Materials 8,000 96,000 By WIP A/c 2,000 35,000
To Labour 54,600
To Overheads 31,200
Total 10,000 1,91,300 Total 10,000 1,91,300

 

From the following information for the month of May 2016, prepare process cost accounts for Process II by using FIFO method to value equivalent production

 

Direct     Materials     added     in    Process     II (Opening WIP) 2000    units    @    Rs. 25,750
Transfer from Process I 53,000 units @ Rs. 4,11,500
Transfer to Process III 48,000 units
Closing stock of Process II 5,000 units
Units scrapped 2,000
Directs material added in Process II Rs. 1,97,600
Direct Wages Rs. 97,600
Direct overheads Rs. 48,800

 

Degree of completion:

 

Opening

Stock

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

 

Solution

Statement of Equivalent Production

Production

Units Material A Material B Labour & Overheads
%

Completi on

Equiv. Units %

Complet ion

Equiv. Units %

Completio n

Equiv. Units
Opening WIP 2,000 20 400 40 800
Completely processed during        the period (48,000                       –

2,000)

46,000 100 46,000 100 46,000 100 46,000
Normal Loss (2,000+53,00 0-5,000)*5% 2,500
Closing WIP 5,000 100 5,000 70 3,500 50 2,500
55,500 51,000 49,900 49,300
Abnormal

Gain

500 100 500 100 500 100 500
55,000 50,500 49,400 48,800

 

Statement of Cost

Cost incurred during the period

Rs.

Equivalent Production (Units) Cost Per Unit (Rs.)
Material – A

Transfer from Process I

4,11,500
Less:      Scrap      Value      of Normal Loss (2,500*3) (7,500)
4,04,000 50,500 8
Material – B 1,97,600 49,400 4
Labour 97,600 48,800 2
Overheads 48,800 48,800 1
Total 7,48,000 15

 

Statement of Evaluation 

Opening WIP (for completion) Rs. Rs.
Material – B 400 units @ Rs. 4 1,600
Wages—— 800 units @ Rs. 2 1,600
Overheads—— 800 units @ Rs. 1 800 4,000
Closing WIP
Material A—— 5,000 Units @ Rs. 8 40,000
Material B—— 3,500 Units @ Rs. 4 14,000
Wages—— 2,500 units @ Rs. 2 5,000
Overheads—— 2,500 units @ Rs. 1 2,500 61,500
Units completely processed during the period———– 46,000 units @ Rs. 15 6,90,000
Abnormal Gain 500 Units @ Rs. 15 7,500

 

Process II Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Balance b/d 2,000 25,750 By     Normal Loss 2,500 7,500
To    Process     I 53,000 4,11,500 By    Process 48,000 7,19,750
A/c III A/c
(6,90,000     +
4,000           +
25,750)
To D. Materials 1,97,600 By    balance c/d 5,000 61,500
To D. Wages 97,600
To Overheads 48,800
To       Abnormal Gain 500 7,500
Total 55,500 7,88,750 Total 55,500 7,88,750

 Following information is available regarding process X for the month of May 2016 Production Record:

Units in Process as on 01.05.2016

(All materials used; 25% complete for labour and overhead)

4,000
New units introduced 16,000
Units completed 14,000
Units in process as on 31.5.2016

(All materials used; 33.33% complete for labour and overhead)

6,000

 

Cost Record:

Work in Process as on 01.05.2016 Amount Rs.
Materials 6,000
Labour 1,000
Overhead 1,000

 

Cost during the month Amount Rs.
Materials 25,600
Labour 15,000
Overhead 15,000

 

Presuming that Average Cost method of inventory is used, prepare:

  1. Statement of Equivalent Production
  2. Statement showing cost for each element
  3. Statement of Apportionment of Cost
  4. Process cost account for Process A

 

Statement of Equivalent Production

 

Production Units Materials Labour & Overheads
%

Completion

Equiv. Units %

Completion

Equiv. Units
Completed 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33.33 2,000
Total 10,000 20,000 15,000

 

Statement showing cost for each element

(All figures in Rs.)

Particulars Materials Labour Overhead Total
Cost of Opening WIP 6,000 1,000 1,000 8,000
Cost incurred during the month 25,600 15,000 15,000 55,600
Total Cost (A) 31,600 16,000 16,000 63,600
Equivalent Units (B) 20,000 16,000 16,000
Cost per equivalent unit (‘C)= (A/B) 1.58 1.00 1.00 3.58

 

Statement of Apportionment of Cost

Particulars Rs. Rs.
Value of output transferred (A) (14,000 units @ Rs. 3.58) 50,120
Value of Closing WIP
Material – 6,000 units @ Rs. 1.58 9,480
Labour – 2,000 units @ Rs. 1 2,000
Overheads – 2,000 units @ Rs. 1 2,000 13,480
Total Cost 63,600

 

Process X Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To Opening WIP 4,000 8,000 By Completed units 14,000 50,120
To Materials 16,000 25,600 By     Closing WIP 6,000 13,480
To Labour 15,000
To Overheads 15,000
Total 20,000 63,600 Total 20,000 63,600

Exercise

Choose the correct option(s) for the following questions:

(Answers are highlighted in bold) 

  1. Total costs incur in a production process is divided by total number of output units for calculating the
  • cost of indirect labor
  • cost of direct labor
  • cost of direct material
  • unit costs
  1. Costs that are incurred in last department where product has been processed and will be carried to next department  where further processing will be done are called
  • partial work costs
  • transferred-in costs
  • transferred-out costs
  • weighted average costs
  1. Costing method which calculates per equivalent unit cost of all production related work done till calculate date is classified as
  • weighted average method
  • net present value method
  • gross production method
  • average value method
  1. If beginning work in process equivalent units are 2500 units, work done in current period equivalent units are 3800 units and ending work in process equivalent units are 5000 then complete equivalent units in current period are
  • 1800 units
  • 1500 units
  • 1300 units
  • 1500 units
  1. Equivalent units of production are equal to the
  • units completed by a production department in the
  • number of units worked on during the period by a production department.
  • number of whole units that could have been completed  if all work of the period had been used to produce whole units.
  • identifiable units existing at the end of the period in a production department.

True or False:

  1. Process costing is most appropriate when manufacturing large batches of homogenous products. (True)
  2. Equivalent units are computed to assign costs to partially completed units (True)
  3. The FIFO method combines beginning inventory and current production to compute cost per unit of production. (False)
  4. The weighted average costing method assumes that units in beginning inventory are the first units transferred. (False)

 

Full BBA Notes All Semester 

Montey Parjapati


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