Process Account

7/29/2019 Process Account

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COST ACCOUNTING

Meaning

Cost accounting is concerned with recording, classifying and summarizing costs for

determination of costs of products or services, planning, controlling and reducing such

costs and furnishing of information to management for decision making. Cost accounting

provides various information to management for all sorts of decisions. It serves multiple

purposes on account of which it is generally indistinguishable from management

accounting or so-called internal accounting. cost accounting is the process of accounting

for costs from the point at which its expenditure is incurred or committed to the

establishment of the ultimate relationship with cost units. In its widest sense, it embraces

the preparation of statistical data, the application of cost control methods and the

ascertainment of the profitability of the activities carried out or planned.

Objectives of Cost Accounting

a. Determining Selling Priceb. Determining and Controlling Efficiencyc. Facilitating Preparation of Financial and Other Statementsd. Providing Basis for Operating Policy


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Elements of Cost

Direct Cost

a) Direct Material Cost b) Direct Labour Cost c) Direct expenses cost

Indirect Cost

a)Overheads

Methods of Costing

i. Job Costing: - The system of job costing is used where production is not highlyrepetitive and in addition consists of distinct jobs so that the material and labor

costs can be identified by order number.

ii. Contract Costing: - Contract costing does not in principle differ from job costing.A contract is a big job whereas a job is a small contract.

iii. Cost Plus Costing: - In contracts where in addition to cost, an agreed sum orpercentage to cover overheads and fit is paid to a contractor, the system is termed as

cost plus costing.

iv. Batch Costing: - This method is employed where orders or jobs are arranged indifferent batches after taking into account the convenience of producing articles..

v. Process Costing: - If a product passes through different stages, each distinct andwell defined, it is desired to know the cost of production at each stage.

vi. Operation Costing: - Operation costing is a further refinement of processcosting.The industry in which mass or repetitive production is carried out. The

industry in which articles have to be stocked in semi-finished stage to facilitate the
http://www.svtuition.org/2010/07/elements-of-cost.htmlhttp://www.svtuition.org/2010/07/elements-of-cost.html


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vii. Unit Costing: - In this method, cost per unit of output or production is ascertainedand the amount of each element constituting such cost is determined.

viii. Operating Costing:- This system is employed where expenses are incurred forprovision of services such as those tendered by bus companies, electricity

companies, or railway companies

ix. Departmental Costing: - The ascertainment of the cost of output of eachdepartment separately is the objective of departmental costing.

x. Multiple Costing:- Under this system, the costs of different sections of productionare combined after finding out the cost of each and every part manufactured


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INTRODUCTION OF PROCESS COSTING

Process costing is a form of operations costing which is used where standardized

homogeneous goods are produced. This costing method is used in industries like

chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the

assembly type of industries also. It is assumed in process costing that the average cost

presents the cost per unit. Cost of production during a particular period is divided by

the number of units produced during that period to arrive at the cost per unit.

Process costing is appropriate for companies that produce a continuous mass of like units

through series of operations or process. Also, when one order does not affect the

production process and a standardization of the process and product exists.

However, if there are significant differences among the costs of various products, a process

costing system would not provide adequate product-cost information. Costing is generally

used in such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic,

glass, and food.


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MEANING

PROCESS

A Process means a distinct manufacturing operation or stage. In process Industries, the

raw material goes through a number of processes in a sequence before the finished product

is finally produced. For example, production of coconut oil involves the following distinct

processes:-1)copra crushing 2)refining and 3)finishing.

PROCESS COSTING: -

Process costing is a method of costing is used to find out the cost of the product in each

process. According to CIMA, London-it is that form of operation costing where

standardized goods are produced.

PROCESS COST:-

According to CAS-1, when the production processes is such that goods are produced from

a sequence of continuous or repetitive operations or processes, the cost incurred during

period is considered as process cost.


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FEATURES OF PROCESS COSTING

i. The output consists of products which are homogenous.ii. Production is carried on in different stages having a continuous flow.

iii. The input will pass through two or more processes before it takes the shape of theoutput.

iv. The output of each process becomes the input for the next process until the finalproduct is obtained, with the last process giving the final product.

v. If there is a stock of semi-finished goods, it is expressed in terms ofequivalent units

vi. The total cost of each process is divided by the normal output of thatprocess to find out cost per unit of that process.

vii. The output of a process is transferred to the next process generally at cost to theprocess. It may also be transferred at market price to enable checking efficiency of

operations in comparison to the market conditions.

viii. Normal and abnormal losses may arise in the processes


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ADVANTAGES OF PROCESS COSTING

i. Process can be collected and determined for even a short period like a day, a weekor a month.

ii. Process costing is much simple, easy and less expensive method of costing ascompared to other methods.

iii. Being a simple system to establish and operate, Process Costing facilitates greatercontrol of the management over costs, wastage etc.

iv. Since the processes and product are standard, it is easy to make decision regardingpricing, quotation ,tenders etc.

DISADVANTAGES OF PROCESS COSTING

i. It does not give a detailed analysis of the costs.ii. Process costing gives only historical costs which are not useful for forecast of

future trends etc.

iii. Process costing is based on average cost method, which is not thatsuitablefor performance analysis, evaluation and managerial control.

iv. Work-in-progress is generally done on estimated basis which leads toinaccuracy in total cost calculations.

v. The computation of average cost is more difficult in those cases wheremore than one type of products is manufactured and a division of the cost

element is necessary.

vi. Where dif fer ent p rod uct s ari se in t he sa me pr oces s and commoncosts are prorated to various costs units. Such individual products costs may

be taken as only approximation and hence not reliable.


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Why Company Use It?

Managers need to maintain cost control over the manufacturing process. Process

costing provides managers with feedback that can be used to compare similar

product costs from one month to the next, keeping costs in line with projected

manufacturing budgets.

Products are manufactured in large quantities, but products may be sold in smallquantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two

at a time (eggs, cookies), etc.

A company may manufacture thousands or millions of units of product in a givenperiod of time.

A fraction-of-a-cent cost change can represent a large dollar change in overallprofitability, when selling millions of units of product a month. Managers must

carefully watch per unit costs on a daily basis through the production process, while

at the same time dealing with materials and output in huge quantities.

Materials part way through a process (e.g. chemicals) might need to be given avalue, process costing allows for this. By determining what cost the part processed

material has incurred such as labor or overhead an "equivalent unit" relative to the

value of a finished process can be calculated.

Product costs must be transferred from Finished Goods to Cost of Goods Sold assales are made. This requires a correct and accurate accounting of product costs per

unit, to have a proper matching of product costs against related sales revenue.


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ACCOUNTING PROCEDURE

i. Separate Process A/C:- The entire manufacturing operation is divided intoseparate stages or processes. Each process of production is treated as a distinct cost

centre. A separate Process Account is opened to record the cost incurred in each

process.

ii. Debit side of process A/C:- Each Process Account is charged with the expensesdirectly incurred for that process and plus its share of the overheads. The Process

Account is debited with the direct and indirect expenses (material, wages and

overheads) pertaining to that process.

a. Material: The raw material, sundry materials and stores required for a process areissued directly from the stores against Material Requisition Slip. In addition, the

cost of units transferred from the earlier process, if any, also appears on Debit side

of the Process Account.

Usually, the distinction between Direct Materials and Indirect Materials is not

significant in process costing.

b. Labour: Wages paid to workers directly employed in a process are debited to theProcess Account (through Payrolls).like Material, the distinction between Direct

and Indirect Labour is not important in Process Costing.

Indirect Labour expenses (e.g. managers salaries) may, if necessary, be debited on

the basis of ratio of direct wages.

c. Expenses: The expenses directly related to the directly related to the process suchas repairs of machinery ,power etc. are debited to the respective process account.

iii. Credit Side of Process A/c(sale value of residue): The process Account iscredited with the sale values of residue etc.


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iv. Net Cost of Process: The Net Cost of the output of the process (Total Cost less

Sale Value of Residue) is transferred to the next process.

v. Average Unit Cost: The Net Cost is divided by the number of Units produced todetermine the Average Cost Per Unit in that process.

vi. Find out Normal loss: To fix the percentage of Normal Loss on the basis oftechnical studies or past experience.

PRO-FORMA: 1

PROCESS ACCOUNT

Particulars Units Rate Rs. Particulars Units Rate Rs.

To Op. stock

To Materials

To Labour

To OH

To Abnormal gains

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

By Normal loss

By Abnormal loss

By output transfer

to next process

By Cl.bal. WIP

xx

xx

xx

xx

-

xx

xx

xx

-

xx

xx

xx


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VALUATION OF WORK-IN-PROGRESS

Meaning of Work-in-Progress:

Since production is a continuous activity, there may be some incomplete production at the

end of an accounting period. Incomplete units mean those units on which percentage of

completion with regular to all elements of cost (i.e. material, labour and overhead) is not

100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-

Progress is valued in terms of equivalent or effective production units.

Meaning of equivalent production units :

This represents the production of a process in terms of complete units. In other words, it

means converting the incomplete production into its equivalent of complete 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. The principle

applies when operation costs are apportioned between work in progress and completed

units.

Equivalent units of work in progress = Actual no. of units in progress x

Percentage of work completed

Equivalent unit should be calculated separately for each element of cost (viz. material,

labour and overheads) because the percentage of completion of the different cost

component may be different.


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Accounting Procedure:

The following procedure is followed when there is Work-in- Progress

Find out equivalent production after taking into account of the process losses, degree of

completion of opening and / or closing stock.

Find out net process cost according to elements of costs i.e. material, labour and

overheads.

Ascertain cost per uni t of equivalent production o f each element of cost separately by

dividing each element of costs by respective equivalent production units.

Evaluate the cost of output finished and transferred work in progress

The total cost per unit of equivalent units will be equal to the total cost divided by

effective units and cost of work-in- progress will be equal to the equivalent units of

work-in- progress multiply by the cost per unit of effective production. In short the

following from steps an involved.

Step 1 prepare statement of Equivalent production

Step 2 Prepare statement of cost per Equivalent unit

Step 3 Prepare of Evaluation

Step 4 Prepare process account

The problem on equivalent production may be divided into four groups.

a. when there is only closing work-in-progress but without process lossesb. when there is only closing work-in-progress but with process lossesc. when there is only opening as well as closing work-in- progress without process

losses

d. when there is opening as well as closing WIP with process losses.


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Situation a :

Only closing work-in-progress without process losses :

In this case, the existence of process loss is ignored. Closing work-in-progress is converted

into equivalent units on the basis of estimates on degree of completion of materials, labour

and production overhead. Afterwards, the cost pr equivalent unit is calculated and the same

is used to value the finished output transferred and the closing work-in-progress

Situation b:

When there is closing work-in-progress with process loss or gain.

If there are process losses the treatment is same as already discussed in this chapter. In case

of normal loss nothing should be added to equivalent production. If abnormal loss is there,

it should be considered as good units completed during the period. If units scrapped (normal

loss) have any reliable value, the amount should be deducted from the cost of materials in

the cost statement before dividing by equivalent production units. Abnormal gain will be

deducted to obtain equivalent production.

Situation c:

Opening and closing work-in-progress without process losses.

Since the production is a continuous activity there is possibility of opening as well as

closing work-in-progress. The procedure of conversion of opening work-in-progress will

vary depending on the method of apportionment of cost followed viz, FIFO, Average cost

Method and LIFO.


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(1)Format of statement of Equivalent Production :Input Output Equivalent

Particulars Units Particulars Units Material Labour Overheads

% Units % Units % Units

Opening xx Units xx xx xx xx xx

Units xx Normal xx -- -- -- --

Abnormal xx xx xx xx xx

xx Equivalent xx xx xx xx xx xx Xx

(2) Statement of cost per Equivalent Units :

Element of costing Cost

Rs.

Equivalent

Units

Cost per

Equivalent

Material Cost (Net) Xx Xx Xx

Labour Cost Xx Xx Xx

Overheads Cost Xx xx Xx

xx Xx

(3) Statement of Evaluation

Particulars Element of

cost

Equivalent

Units

Cost per

equivalent

Cost

Rs.

Total

Cost

Units completed Material xx xx xx

Labour xx xx xx

Overheads xx xx xx Xx

Closing WIP Material xx xx xx

Labour xx xx xx


Abnormal Loss Material xx xx xx

Labour xx xx xx



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Methods of valuation of WIP

FIFO METHODFIFO method assumes that the work on the opening stock is completed first, before the materials

put into the process during the current period are taken up. The units completed during the process

being usually more than the opening stock, it is assumed that no units from the opening WIP will be

left incomplete and so none of them will find place in the closing WIP. In FIFO method, the

procedure of calculation of equivalent unit is different as the units competed from the opening WIP

and from current production have to be accounted for seperatly.

Evalution of method

FIFO system is neither suitable nor rational when spoiled units are involved becoz a aaportionment

of such unit between the opening inventory and current production is not possible

FIFo method is more suitable from the point of view of control as the past and current costs are

separated.

The FIFO method is, therefore, not much used in practice. Whenever used, it is applied to the last

process from where the finished product emerges.


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WEIGHTED AVERAGE METHODUnder this method, total costs in the process are divided by the total equivalent units produced by

the process to ascertain the costs per equivalent unit. Total costs of the process mean the total of the

current production costs and cost of the opening WIP. According to this method, the cost of the

opening WIP is added to the cost incurred in the current period and average cost worked out. It

should be noted that in calculating the equivalent units under the weighted average method, the

work done in the past is treated as if done in the current period. The closing WIP under this method

is made of the average costs of opening WIP and current production.

EXAMPLE

The following details are given for the textile factory for a month of march 2010

Opening WIP 5000 units

Materials (100% completed) Rs. 18750

Labour (60% completed) Rs. 7500

OH (60% completed) Rs. 3750

Unit introduced into the process 17500 units

Unit transferred to the next process 17500 units

Process cost for the month

Material Rs. 250000

Labour Rs. 195000

OH Rs. 97000

Cl. WIP

(Degree of completion : Mat- 100%, Lab- 50%, OH- 50%)

Prepare the process A/C, show the relevant working on the basis of Weighted Average Cost.


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SOLUTION:

PROCESS A/C

Particulars Units Rs. Particulars Units Rs.

To op. stock 5000 30000 By output Trf. to

next process

17500 474809

To input 17500 250000 By Cl. stock 5000 97691

To Labour 190000

To OH 97500

22500 567500 22500 567500

Statement of equivalent production

Input Particular output Material Labour Overheads

Units Units % EU % EU % EU

5000 Op.stock

17500 Input

introduced

17500 100 17500 100 17500 100 17500

Closing

Stock

5000 100 5000 50 2500 50 2500

22500 22500 22500 20000 20000


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Statement of cost per equivalent units

Particulars Cost Equivalent units Cost per units

Op. stock material 18750+250000

=268750

22500 11.9444

Labour 202500 20000 10.125

Overheads 101250 20000 5.0625

Statement of Evaluation


cost

Equivalent

Units

Cost per

equivalent units

Cost

Rs.

Units completed Material 17500 11.9444 474809

Labour 17500 10.125

Overheads 17500 5.0625

Closing WIP Material 5000 11.9444 97691

Labour 2500 10.125

Overheads 2500 5.0625


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PROCESS LOSSES AND GAINS

In many process, some loss is inevitable. Certain production techniques are of such a nature

that some loss is inherent to the production. Wastages of material, evaporation of material is

un avoidable in some process. But sometimes the Losses are also occurring due to

negligence of Labourer, poor quality raw material, poor technology etc. These are

normally called as avoidable losses. Basically process losses/ gains are classified into:

Normal Loss

Abnormal Loss

Abnormal gain

1. Normal Loss:

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and

production process under normal conditions. It is normally estimated on the basis of past

experience of the industry. It may be in the form of normal wastage, normal scrap, normal

spoilage, and normal defectiveness. This may be dueto reasons such as evaporation,

testing or rejects. It may occur at any time of the process.

Normal Loss =No of units of normal loss: Input x Expected percentage of

The cost of normal loss is a process. If the normal loss units can be sold as a crap then the

sale value is credited with process account. If some rectification is required before the

sale of the normal loss, then debit that cost in the process account. After adjusting the

normal loss the cost per unit is calculates with the help of the following formula:

Cost of good unit:

Total cost increasedSale Value of Scrap

InputNormal Loss units


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2. Abnormal Loss:

Any loss caused by unexpected abnormal conditions such as plant breakdown,

substandard material, carelessness, accident etc. such losses are in excess of

pre-determined normal losses. This loss is basically avoidable. Thus abnormal

losses arrive when actual losses are more than expected losses. The units of

abnormal losses in calculated as under:

Abnormal Losses = Actual LossNormal Loss

The value of abnormal loss is done with the help of following formula:

Value of Abnormal Loss:

Cost of process increaseScrap Value of normal Loss x Units of abnormal loss

Input unitsNormal Loss Units

Abnormal Process loss should not be allowed to affect the cost of production as it

is caused by abnormal (or) unexpected conditions. Such loss representing the cost

of materials, labour and overhead charges called abnormal loss account. The sales

value of the abnormal loss is credited to Abnormal Loss Account and the balance is

written off to costing P & L A/c.

PRO FORMA : 2 Abnormal Loss A/c.

Dr. Cr.


To Process A/c. xx xx By Bank xx xx

By Costing P & L xx xx

xx xxx xx xx


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Example : (Normal loss and Abnormal loss)

Product A passes through 3 processes and in April 2011 the following information is obtain

in respect of Process II:-

Opening stock 2800 unit Rs. 1200

Comparising Rs. 700 for material, Rs. 1580 for labour and Rs. 350 for OH

(Degree of completion Material- 60%, Labour- 40% and OH- 40%)

Transfer for Process I 14000 unit Rs. 0.20 each

Transfer to process III 12000 unit

Direct Material added in process II Rs. 1560

Direct labour Rs. 2000

Production OH Rs. 4400

Unit scrap (total normal wastage ) 2000

Unit scrap realised Rs.0.40each

Closing stock 2800 units

(Degree of completion Material- 80%, Labour- 60%, OH- 60%)

Normal loss during production is 10% of unit transferred from the earlier process

Prepare Process II A/C for April 2011 during the statement of Equivalent Production Cost

Per Unit and Evalution.


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Solution:

PROCESS A/C


To Op. Bal. 2800 1200 By Normal loss 1400 560

To Trf. from Process I 14000 2800 By Abnormal loss 600 470

To Material 1560 By output Trf. to

process III

12000 9350

To Labour 2000 By Cl. stock 2800 1580

To OH 4400

16800 11960 16800 11960

a) Statement of equivalent productionInput Particular output Material I Material II Labour Overheads

Units Units % EU % EU % EU % EU

2800 Op.stock 2800 40 1120 60 1680 60 1680

14000 Trf. from

process I

9200 100 9200 100 9200 100 9200 100 9200

Normal loss 1400

Closing Stock 2800 100 2800 80 2240 60 1680 60 1680

Abnormal loss 600 100 600 100 600 100 600 100 600

16800 16800 12600 13160 13160 1316


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b) Statement of cost per equivalent units

Particulars Cost Equivalent units Cost per units

Material I 2240 12600 0.19

Material introduced 1560 13160 0.12

Labour 2000 13160 0.15

Overheads 4400 13160 0.33

c) Statement of EvaluationParticulars Element of

cost

Equivalent

Units

Cost per

equivalent units

Value Cost

Rs.

Opening balance Material II 1120 0.1185 133

950Labour 1680 0.1519 255

Overheads 1680 0.3343 562

Current input Material I 9200 0.1778 1636

7199Material II 9200 0.1185 1090Labour 9200 0.1519 1397

Overheads 9200 0.3343 3076

Abnormal loss Material I 600 0.1778 107 470

Material II 600 0.1185 71

Labour 600 0.1519 91

Overheads 600 0.3343 201

Closing stock Material I 2800 0.1778 498

Material II 2240 0.1185 265

Labour 1680 0.1519 255

Overheads 1680 0.3343 560


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3. Abnormal Gains:

The margin allowed for normal loss is an estimate (i.e. on the basis of

expectation in process industries in normal conditions) and slight differences are

bound to occur between the actual output of a process and that anticipates. This

difference may be positive or negative. If it is negative it is called ad abnormal

Loss and if it is positive it is Abnormal gain i.e. if the actual loss is less than the

normal loss then it is called as abnormal gain. The value of the abnormal gain

calculated in the similar manner of abnormal loss. The formula used for abnormal

gain is:

Abnormal Gain

Total Cost incurredScrap Value of Normal Loss x Abnormal Gain Unites

Input units Normal Loss Units

The sales values of abnormal gain units are transferred to Normal Loss Account

since it arrive out of the savings of Normal Loss. The difference is transferred to

Costing P & L A/c. as a Real Gain.

PRO FORMA: 3 Abnormal Gain A/c.

Dr. Cr.

Particulars Units Rs. Particulars Units Rs.To Normal Loss xx xx By Process A/c. xx xx

To Costing P & L xx xx

xx xx xx xx


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Example: - ( abnormal gain )

The following data pertains to process I for the month of January 2010 in Sun Ltd.

Opening WIP 1500 unit Rs.15000

(Degree of completion material 100%, labour and overhead 33 1/3%)

Input of material directly in process I 18500unit Rs.52000

Direct labour Rs.14000

Overhead Rs.18000

Closing WIP 5000 unit 18000 units

(Degree of completion mat90%, labour and OH -30%)

There is normal loss of 10% of the total input i.e. opening WIP + Units input in the

process, which released Rs 2 per unit as scrap.

Unit transferred to the next process were rs 15000.

Required to prepare process A/c giving details working as to the calculation of equivalent

unit for each of the cost elements and valuation of WIP transferred to the next process,

closing WIP and abnormal element if any all in this factor the process 1 for the given

month.


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SOLUTION: PROCESS A/C


To Op. Bal. 1500 15000 By Normal loss 2000 4000

To Material 18500 52000 By output Trf. to

process III

15000 99000

To Labour 14000 By Cl. stock 5000 18000

To OH 28000

To Abnormal gains 2000 12000

22000 121000 22000 121000

b)Statement of equivalent productionInput Particular output Material Overheads Labour

Units Units % EU % EU % EU

1500 Op.stock input

materials

1500 - 0 66 2/3 1000 66 2/3 1000

18500 Directly in

process I

13500 100 13500 100 13500 100 13500

Normal loss 2000 - - -

2000 Abnormal

gains

- 100 (-2000) 100 (-2000) 100 (-2000)

22000 22000 16000 14000 14000


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c) Statement of cost per equivalent unitsParticulars Cost Equivalent units Cost per units

Material 52000 16000 3.00

Labour 14000 14000 1.00

Overheads 28000 14000 2.00

d)Statement of Evaluation


cost

Equivalent

Units

Cost per

equivalent units

Value Cost

Rs.

Opening balance Material - 3 -

3000Labour 1000 1 1000

Overheads 1000 2 2000

Current input Material 13500 3 40500 81000

Labour 13500 1 13500

Overheads 13500 2 27000

Abnormal gains Material I 2000 3 6000 12000

Labour 2000 1 2000

Overheads 2000 2 4000

Closing stock Material I 4500 3 13500 18000

Labour 1500 1 1500Overheads 1500 2 3000


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Abnormal Gains A/C

Dr. Cr.

Particular Rs. Particular Rs.

To Normal Loss A/C 4000 By process I 12000

By Costing P/L A/C 8000

12000 12000

Normal Loss A/C

Dr. Cr.

Particular Rs. Particular Rs.

To Normal Loss A/C 4000 By Abnormal Gain A/C 4000

4000 4000


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INTER PROCESS PROFITS:

Normally the output of one process is transferred to another process at cost but

sometimes at a price showing a profit to the transfer process. The transfer price

may be made at a price corresponding to current wholesale market price or at cost

plus an agreed percentage. The advantage of the method is to find out

whether the particular process is making profit (or) loss. This will help the

management whether to process the product or to buy the product from the market.

If the transfer price is higher than the cost price then the process account will show

a profit. The complexity brought into the accounting arises from the fact that

the inter process profits introduced remain a part of the prices of process stocks,

finished stocks and work-in-progress. The balance cannot show the stock with

profit. To avoid the complication a provision must be created to reduce the stock at

actual cost prices.

This problem arises only in respect of stock on hand at the end of the period

because goods sold must have realized the internal profits. The unrealized profit in

the closing stock is eliminated by creating a stock reserve. The amount of stock

reserve is calculated by the following formula.

Stock Reserve = Transfer Value of stock x Profit included in transfer price

Transfer Price


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For Example :-

A certain product passes through 3 process before it is completed. The outpu of

each process is charge to the next process at price that gives profit of 20% on the

transfer price. The output of process 3 is transfer to finished stock on the same

basis. There was no WIP at the start of the year and assume nil overheads. The

following data is available for the year 2012

Particular Process I Process II Process III F.G

Direct Mat. 4000 6000 2000 -

Direct Wages 6000 4000 8000 -

St. on 31/12/12 2000 4000 6000 3000

Sales during 2012 36,000

Prepare process I, II, and III A/c and workout the stock reserve adjusted from the

B/S.


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SOLUTION

Process I

Particular Total

Rs.

Cost Rs. Profit

Rs.

Particular Total

Rs.

Cost

Rs.

Profit Rs.

To D mat. 4,000 4,000 - By transfer

to process II

10,000 8,000 2,000

To D wages ,6000 6000-

10,000

10,000 -

(-) Cl.st. 2000 2000 -

8,000 8,000 -

(+) Profit 2000

2000

10,000 8000 2000 10,000 8000 2000


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Process II

Particular Total

Rs.

Cost Rs. Profit

Rs.

Particular Total

Rs.

Cost Rs. Profit

Rs.

To transfer

from

process I

10,000 8,000 2,000 By

transfer to

process II

20,000 14,400 5,600

To D mat. 6000 6000 -

To D

wages

4,000 4,000 -

20,000 18,000

2000

(-) Cl.st. 4000 3600 400

16,000 14,400

1,600

(+) Profit

25 %

4000 - 4000

20,000 14,400 5,600 20,000 14,400 5,600


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Process III

Particular Total

Rs.

Cost Rs. Profit

Rs.

Particular Total

Rs.

Cost

Rs.

Profit

Rs.

To transfer

from

process II

20,000 14,400 5,600 By

transfer to

process II

30,000 19,520 10,480

To D mat. 2000 2000 -

To D

wages

,8000 8000 -

30,000 24,400

5,600

(-) Cl.st. 6000 4880 1120

24,000 19,520

4480

(+) Profit

20%

6000 - 6000

30,000 19,520 10,480 30,000 19,520 10,480


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Finished Stock A/c

Particular Total

Rs.

Cost Rs. Profit

Rs.

Particular Total

Rs.

Cost

Rs.

Profit

Rs.

To transfer

from

process III

30,000 19,520 10,480 By sales 36,000 17,568 18,432

(-) Cl.st. 3000 1952 1048

27,000 17,568 9432

(+) Profit 9000 - 9000

36,000 17,568 18,432 36,000 17,568 18,432


35/37


36/37


37/37

Documents

Process Account