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Module 10

Product and
Process Costing

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Product & Process
Costing
Introduction
Product costing
Job costing
Process costing
Cost Sheet
Costing Procedure
Loss treatment
Equivalent units
Operation costing
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Product Costing
Financial Accounting
Product costs are used to value
inventory and to compute cost
of goods sold.
Cost and Managerial
Accounting Product costs are
used for planning, control,
directing, and management
decision making
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Product Costing
The product costs for a
manufacturing firm include only
the costs necessary to
complete the product.
The product inventory for a
manufacturing firm is treated
as an asset until it has market
value and is sold.
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Product-Costing types

Process Job
Costing Costing

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Product-Costing types
Process Job
Costing Costing

Used for production of small,


identical, low cost items.
Mass produced in automated
continuous production process.
Costs cannot be directly traced to
each unit of product.
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Process Job
Costing Costing

Process cost applications:


Refinery
Steel
Paper mill
Ready-made garments
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Process Job
Costing Costing

Used for production of large,


unique, high-cost
items.
Built to order rather than
mass produced.
Many costs can be directly
traced to each job.
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Process Job
Costing Costing

Job Manufacturing:
Products manufactured in
very low volumes or one at a
time.
Batch Manufacturing:
Multiple products in batches
of relatively small quantity.
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Process Job
Costing Costing

Typical job cost applications:


Special-order printing
Building construction
Designer costumes
Tailor-made Garments

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Process Job-Order
Costing Costing

Also used in service industry


or by professionals
Customized software
Repair shop
Law / CA firms
Doctors
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Job Costing in Non-
manufacturing Organizations:

THE JOB

Cases Missions

Programs Contracts

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Job Costing

Usually Cost sheet is prepared


to record and report the
costs.
It may be prepared for a job or
for some period.

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COST SHEET For June
Total Per
Particulars Cost Unit
Direct Material
Opening Stock of
Raw Material
Add: Purchase
Less: Closing stock
of Raw material
Direct Labour
Direct Expenses
Prime Cost
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Total Per
Particulars Cost Unit
Add: Factory
Overheads
Works Cost
Add: Opening Work
in Progress
Less: Closing Work
in Progress
Factory Cost

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Total Per
Particulars Cost Unit
Add: Office and
Administration Exp
Cost of Production
Add: Opening stock
of Finished Goods
Less: Closing stock
of Finished Goods
Cost of goods Sold
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Total Per
Particulars Cost Unit
Add: Selling and
Distribution Exp
Cost of Sales
Add: Profit
Sales

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Loss

Loss of material is inherent during


certain production processes.
There are two types of material losses
viz. (i) Normal Loss (ii) Abnormal Loss.
Normal Loss: It is defined as the loss
of material which is inherent in the
nature of work. Such a loss can be
reasonably anticipated from the nature
of material, Nature of operation, the
experience and technical data.
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Abnormal Loss: It is defined as the
loss in excess of the pre determined
loss. This type of loss may occur due
to carelessness of workers, a bad
plant design or operation etc.

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Process Costing

Usually Process Accounts are


prepared for some period to
record and report the costs.

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Process Costing

The cost of each process


comprises the cost of:
1. Direct Material
2. Direct Labour
3. Direct Expenses
4. Production Overheads

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From the following data prepare
process a/c of 1, 2 and 3.
The output of each process is
treated as input for next
process. Direct Costs are:
Pr 1 Pr 2 Pr 3
Material 70000 15000 30000
Wages 38000 40000 25000
Expenses 11000 12000 15000

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Factory overheads of Rs. 40000
to be apportioned on the basis
of wages paid. There was no
opening or closing stock.
15000 units have been
introduced in 1st process and
the output and normal loss for
each process are as follows:

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Normal
Output Loss
Process 1 14550 3%
Process 2 13500 6%
Process 3 13300 2%

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Solution
Process 1 A/c
Total Particul Total
Particular Units Cost ar Units Cost
Normal
Material 15000 70000 Loss 450 0
Transfer
to
Wages 38000 14550 133757
Process
1
Other
11000
Expenses
Factory
14757
Overheads

15000 133757 15000 133757


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Process 2 A/c
Total
Total Particul Unit Co
Particular Units Cost ar s st
Transfer from Normal
14550 133757 873 0
Process 1 Loss
Abnorm
Material 15000 al 177 2799
Loss

Transfer 1350 2134


Wages 40000
to Pr2 0 92

Other
12000
Expenses
Factory
15534
Overheads
1455 2162
14550 216291
0 91
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Process 3 A/c
Total Total
Unit Particu Unit
Particular Cos Co
s lar s
t st
Transfer from 1350 21349 Normal
270 0
Process 1 0 2 Loss

Finished 133 2947


Material 30000
Stock 00 52

Wages 25000

Other Expenses 15000


Factory
9709
Overheads
Abnormal Gain 70 1551
1357 29475 135 2947
0 2 70 52
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Equivalent Units

Thus, in Process Costing

Cost per unit = Cost/Output Units

What can be done when partially


produced units remain in stock ?

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Equivalent Units

To ascertain the cost of each


completed unit it is necessary to
ascertain the cost of work in
progress in the beginning and at
the end of the process. Hence the
method of converting partly
finished units to equivalent finished
units is used.
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Equivalent production means
converting the incomplete
production units into their
completed units.
Equivalent completed units=
{Actual number of units in the
process} X {percentage of work
completed}

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Conversion + direct material
applied: The term equivalent unit
cost refers to conversion and
direct-material applied to physical
units after adjusting the stage of
completion.

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Physical and equivalent units equal
in completed batch: If a batch of
goods has been completed, the
number of physical units and
equivalent units will be the same.

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Work-in-Process only partially
completed: The units in ending
Work-in-Process Inventory are
only partially completed and may
be in different stages of
production.

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Example: 100% of materials may
be present in the product, but
only 50% of the conversion work
(labor and overhead) may have
been done.

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Conversion costs added
continuously: Conversion costs
are usually added continuously
throughout the process.

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Example: If 100 units are 60%
of the way through the
process, 60 equivalent units
have been produced. Notice
that none of the units are
completedthe firm is said to
have done the work equivalent
to manufacturing 60 finished
units.
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Direct material added at
specific points: Direct materials
are usually added at discrete
points in the process in text
problems.

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Consider when material added:
When considering materials,
determine at what point the
ending in-process costs are
and evaluate whether or not
the materials have been
added.

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Once added 100% complete: If
added, the units are 100%
complete with respect to
materials; if not, the units are
0% complete.

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Unit cost based on equivalent
units: When computing the
cost of a unit, the related
calculations are based on
equivalent units, not physical
units.

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The procedure states fully-
completed units on the same
measurement scale as
partially-completed units, thus
avoiding the addition
(combination) of "apples and
oranges."

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Next divide costs by equivalent
units: Next, the cost of direct
materials and conversion is
divided by the proper number
of equivalent units for each of
these production elements.

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Operation Costing

It is a refinement of process
costing. It is used in service
industries.

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