Process Costing Questions and Answers

SECTION – A

Question 1.
What is process costing?
Answer:
Process costing is that form of operation costing which is used to ascertain the cost of the product at each process or stage of manufacture where processers are carried on from one process to another where output of one process becomes the input for the next process till the finished product is obtained Example Chemical works textile industries etc.

Question 2.
State the characteristic features of process costing.
Answer:
The characteristics features of process costing are as follows:

The production of goods is continuous.
Costs are allocated process wise for a period.

Question 3.
Name the industries where the process costing can be applied.
OR
Give any two examples where process costing is adopted.
Answer:
Generally, the process costing is applied in the following industries:

Iron and Steel Industries
Automobile Industry
Cement Industry
Chemical Industry

Question 4.
What is normal process loss?
Answer:
Normal process loss is the loss which unavoidable on account of inherent nature of production processes. Such loss can be estimated in advance on the basis of past experience or data. Process loss is shared by usable units.

Question 5.
What is abnormal process loss?
Answer:
Any loss caused by unexpected or abnormal conditions such as plant break-down, sub-standard materials, accidents etc. should be regarded as abnormal loss.
Abnormal loss = Actual loss – Normal loss.

Question 6.
What is normal loss or normal wastage?
Answer:
Normal loss is that loss or wastage which is inevitable in production. In other words, it is that loss or wastage which is unavoidable in a manufacturing process. It is called normal loss, as it expected at normal conditions. As the normal loss or wastage is natural and unavoidable, it should be treated as a part of cost of production. So it should be absorbed by good units produced in the process.

Question 7.
How the abnormal loss is treated in process costing?
Answer:
Units of abnormal loss are given the same accounting treatment as good units – any loss in excess of the predetermined loss.

Question 8.
What is Abnormal gain?
Answer:
Abnormal loss or wastage is that loss or wastage which is in excess of normal or estimated loss or wastage. It arises not due to production process, but is due to some unforeseen or abnormal conditions or factors, such as fire, machine breakdown, negligence on the part of workers, bad design, inefficient management etc.

Question 9.
Distinguish between waste and scrap.
Answer:
Scrap is a material reduce from certain manufacturing operations that has relatively minor recovery value.
Example – Turning, borings, raw dust short length metals etc.

Whereas waste is the portion of a material that is cost in processing and which has no recovery value, material is either cost evaporates or drinks in a manufacturing process. Example – Gases, dust, smoke.

Question 10.
How do you treat the Abnormal waste is process accounts?
Answer:
The abnormal waste is to be debited to separate account called Abnormal wastage account and credited to concerned process Account. In case, abnormal wastage has any scrap value, the value should be credited to abnormal wastage account. The net abnormal loss is the balance in the abnormal loss account is to be transferred to costing P&L Account.

Question 11.
What is joint products?
Answer:
When two or more products are almost equal importance are simultaneously produced from the same raw materials, such products are termed as joint products. Example of joint products are petrol, diesel, Kerosene etc. produced in refining crude oil.

Question 12.
State any three characteristics of joint products.
Answer:
The three characteristics of joint products are:

They are produced simultaneously by a common process.
They are comparatively of almost equal value.
They may require further processing after their point of separation

Question 13.
What is by-product? or What do you mean by By-Product?
Answer:
The term by product is generally used to denote one or more products of relatively small value that are produced simultaneously with a product of greater value. Example of by product are shells from coco beans, cotton seed from cotton etc.

Question 14.
State the difference between joint products and by products.
Answer:
The difference between joint products and by products are:

Joint Product	By Product
1. Joint products are by and large of equal importance	1. Whereas by products are of lesser importance than the main products.
2. Joint products are the main products which are produced as a part of manufacturing programme.	2. By products are incidentally produced in the manufacture of the main product.

Question 15.
What are methods of apportionment of joint costs?
Answer:
The methods of apportionment of joint costs:

Average unit cost method
Physical unit method.
Survey method.
Contribution method.
Contribution method.
Market value method.

Question 16.
What are the two methods of accounting by products?
Answer:
The two methods of accounting by products are:

Non-cost or sales method
Cost methods.

Question 17.
State any four non cost method of accounting by products?
Answer:
The four non cost method of accounting by products are:

Other income or miscellaneous income method.
By products sales added to the main product sales.
By product value deducted from total cost.
Credit of sales value less selling and distribution expenses.

Question 18.
What are the cost methods of accounting for by products?
Answer:

Opportunity or replacement cost method.
Standard cost method.
Apportionment on suitable basis.

Question 19.
What do you mean by inter-process profit?
Answer:
When the process industries transfer the finished goods from one process to another process for next step at a price of above cost, the excess of the transfer price over cost is called inter process profit.

Question 20.
What do you mean by internal process profit?
Answer:
When the output of one process is transferred to a subsequent process at market price or cost price it is called internal process profit.

Question 21.
State any three objectives of internal process profit.
Answer:
The three objectives of internal process profit are:

To show whether the cost in each process completes with the market price
To make each process stand on its own efficiency and economy
To assist in making decisions to buy or to not to buy.

Question 22.
What is equivalent production?
Answer:
Equivalent production represents the production of a process in terms of completed units. Work in progress at the end of an accounting period are, converted into equivalent completed units.
Equivalent completed units = (No. of units of WIP) x (Degree of completion in %)

SECTION – B

Question 1.
Explain features of process costing.
Answer:
The features of process costing are as follows:

The production is continuous.
The product is homogeneous.
The process is standardized.
Output of one process become raw material of another process.
The output of the last process is transferred to finished stock.
Costs are collected process-wise.
Both direct and indirect costs are accumulated in each process.
The total cost of each process is divided by the normal output of that process to find out cost per unit of that process.
Each department or division as separate cost center.

Question 2.
Discuss various application of process costing.
Answer:
The various applications of process costing are as follows:

Sending direct materials, direct labor and overhead costs to departments.
Sending the department costs to the units produced.
It is used for large numbers of identical products that are produced in a continuous manufacturing environment.
It is used for homogeneous and standardized products.
It is suitable for the goods which are stocked and produced continuously.
Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time.
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.
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 a value, process costing allows for this.

Question 3.
Distinguish between job costing & Process costing.
Answer:

Job costing	Process costing
1. Production is as per specific orders	1. Production is for stock i.e. continuous
2. Cost are determined for each job separately	2. Costs are compiled for each process for department on time basis
3. Each job is separate & independent of others	3. Products lose their individual entity as they are manufactured in a continuous flow
4. Cost are complied when a job is completed.	4. Costs are calculated at the end of the cost period.
5. There are usually no transfers from one job to another.	5. Transfer of costs from one progress to to another is made.
6. There may or may not be work-in progress at the beginning or end of accounting period.	6. There is always some work-in-process at the beginning as well as at the end of accounting period.
7. Proper control is difficult.	7. Proper control is easier.
8. It requires more forms and details regarding materials & labour due to the need for the allocation of labour, to so many orders.	8. It requires few forms and less details but a closer analysis of operations is needed.
9. It is suitable where the goods are made to customers order, production is intermittent & customer orders can be identified in the value of production.	9. It is suitable where production is for stock purpose and it is continuous.

Question 4.
State the merits and demerits of process costing.
Answer:
The merits of process costing are as follows:

Costs are being computed periodically at the end of a particular period.
It is simple and involves less clerical work that job costing.
It is easy to allocate the expenses to processes in order to have accurate costs.
Use of standard costing systems in very effective in process costing situations.
Process costing helps in preparation of tender and quotations.
Since cost data is available for each process, operation and department, good managerial control is possible.

The demerits of process costing are as follows:

Cost obtained at each process is only historical cost and are not very useful for effective control.
Process costing is based on average cost method, which is not that suitable for performance analysis, evaluation and managerial control.
Work-in-progress is generally done on estimated basis which leads to inaccuracy in total cost calculations.
The computation of average cost is more difficult in those cases where more than one type of products is manufactured and a division of the cost element is necessary.
Where different products arise in the same process and common costs are prorated to various costs units. Such individual products costs may be taken as only approximation and hence not reliable.

Question 5.
Explain the methods of apportionment of joint costs.
Answer:
The methods of apportionment of joint costs are:

Average unit cost method.
Physical unit method.
Survey method.
Contribution or Gross margin method.
Market value method.
At point of separation.
After further processing.
Net realisable value or Reverse cost method

Average unit cost method: It is the simplest method. The total costs are assessed, yielding an average unit cost with one net profit for the total operation, this method can be applied where profit are common and inseparatable for the joint products and where the resultant products can be expressed in some common unit.

Physical unit method: A physical base such as law materials weights, linear measure volume etc. is applied in apportioning pre separation point costs to joint products. For example if there is 40% units in product x & 60% units in product Y. 4/10 of the cost up to separation point will be charged to X & 6/10 to Y. This method is not suitable where for example one product is gas and another is a liquid.

Survey method: Under this method ail the important factors such as volume, selling price> technical side, marketing process etc. affecting costs are ascertained by means of extensive survey. These ratios should be revised from time to time depending upon the factors affecting production and sales.

Contribution or gross margin method: Under this method the marginal cost of the joint cost is apportioned on the basis of weight or quantity of each product and fixed cost on the basis of marginal contribution made by each of the products. This method provides useful information for taking decisions on maximisation of profit by rearrangement of products and sales mix

Market Value Method: This method of apportioning joint costs to products on the basis of relative value is the most popular and convenient method. The joint costs are split in the ratio of selling price of individual products. This method has two important features.
(a) All joint products tend to have uniform profit margin.

b) Cost of each of the joint product being based on selling price, should there be any change in the selling price of individual joint products,
allocation of total costs between the joint products will have to be made. Market value may mean any of the following:

Market value at separation point.
Market value after further processing.
Net Realisable value or reverse cost method.

Question 6.
Explain the procedure for accounting of by products.
Answer:
Accounting of by-products may be broadly classified into two categories:
(a) Non cost or sales method:
These methods do not attempt to cost by products or its inventory. The following are the main 7 methods. Which are included in this group.

Other income as miscellaneous Income method.
By-products sales added to the product sales.
By products value deducted from total cost.
Credit of sales value less selling and distribution expenses.
Credit of sales value less selling and distribution expenses as well as cost incurred after split off.
Credit of sales value less selling and distribution expenses as well as cost increased after split off and estimated profit or reverse cost method.

(b) Cost methods:
These methods attempt to apportion some of the joint costs to by products. The following methods are included under this category.

Opportunity cost or replacement cost method.
Standard cost method
Apportionment on suitable basis.

Other income or miscellaneous income method:
Under this method, the sales value of by product which is negligible credited to P/L A/c treating it as other or miscellaneous income. By products which are not sold and are in stock are valued at nil value for balance sheet purpose and thus vitiate the valuation of closing stock.

By product-sales added to the main product sales:
Under this method all costs increased on main and by products are deducted from the combined sales of the main product and by product. This method is generally adopted in those cases where either the value of by products is very small or where the by products are sold in the market in the state in which they emerge from the main product. By product in stock are valued at nil value for balance sheet purpose.

By product sales deducted from total cost:
Under this method, sales values of by products are deducted either from production cost or from the cost of sales. The stock in this case will be valued at total cost or cost of sales basis.

Credit of by product value less selling and distribution cost:
Under this method, the selling and distribution costs incurred for selling the by products are deducted from the sales value of by products and the net amount is other credited to process account or in deducted from total cost.

Credit of by product value less selling and distribution costs and costs incurred on by product after split off point:
Under this method selling and distribution costs and cost incurred on further processing the by-products are deducted from the sale value of the by-products and the net amount is credited to the process A/c.

II. Cost Method – Opportunity cost method:
This method is used where by products are utilised in the same undertaking as materials for some other process. The replacement cost i.e. the cost which could have been incurred had the by products being used as materials could have been purchased from the market. The process account is credited with the value of by-products so ascertained.

Standard Cost Method:
A standard cost may be fixed for each product by averaging the cost figures of the previous periods and the process account credited with this standard value.

Apportionment on suitable basis:
If the total value of by products is considerable there actual cost should be ascertained by apportioning, the joint costs upto the point of physical separation. This method is followed where by products are processed.

To dispose of waste materials more profitably or
To utilise the idle plant.

Question 7.
Distinguish between joint products and by-products.
Answer:
The difference between joint products and by-products are:

Joint Products	By-Products
(1) Joint products are more or less of equal commercial value	(1) Whereas by-product are of lesser commercial value.
(2) Joint products are produced together in process	(2) Whereas by-products are pro-from the scrap or discarded materials of the main product.
(3) The production of joint products is not incidental. It is definite.	(3) But the production of by products is just incidental to the main products.

Practical Problems

Question 1.
X Company manufactures a product 2,000 kgs, raw materials at 8 per kg were supplied to Process-I. labour cost amounted to 4,000 and production overhead incurred was 2,000. The normal loss was estimated at 10% and was sold at 2 per kg. Actual production in the process was 1760 kgs. Prepare Process-1 account and value of abnormal loss.

Question 2.
Briefly explain the meaning and treatment of abnormal loss and abnormal gain in process costing. Elaborate with the help of the deatails given. Input units – 1000 units at 100 per unit, normal loss – 10%; output – 950 units.

Question 3.
Prepare abnormal loss A/c of process A from the following details.
Materials – 30,000
Labour – 10,000
Overiieads – 7,000
Inputs (units) – 20,000
Normal loss 10%
Sale of normal wastage per unit – 1
Output – 17,000

Question 4.
In Process A 2000 unit sof raw materials were introduced a cost of 2,00,000.
The other expenditure incurred in the process was 1,20,000 of the units introduced, 5% were cost in weight and the normal loss was 5% which were sold at 8 per unit.
The output process A was only 1825 units.
Calculate the abnormal gain by preparing process A account and value of abnormal gain by showing formula.

Question 5.
A product passes through three distinct process to completion.
The cost book shows the following information.

Particulars	A ( )	B( )	c( )
Material	6,000	3,000	2,000
Labour	5,000	4,000	3,000
Direct expenses	1,000	4,320	1,810

The indirect expenses for the period were 4,800 apportioned on the basis of labour. The by product of B and C process are sold for 290 and 330 respectively. Prepare the process account showing the cost of each process.

Question 6.
100 units of raw material are introduced into process A at a cost of 5 each. Normal wastage is 6% and each waste unit realises 2 actual output was 90 units. Other expenses in the process are: Wages 120 & Overhead 238.
Prepare process A A/c & Abnormal wastage A/C

Question 7.
A product is finally obtained after it passes through three distinct processes. The following information is a available from the records

Particulars	Process I	Process II	Process III	Total
Materials	2,600	2,000	1,025	5,625
Direct wages	2,250	3,680	1,400	7,330
Production overheads	–	–	–	7,330

500 units at 4 per unit were introduced in Process. Production overheads are absorbed as a percentage of direct wages.
The actual output and normal loss of the respective process are given below:
Prepare the Process Accounts and Abnormal Gain/Loss Accounts.

Question 8.
X Ltd. processes a patent material used in building the material is produced in three consecutive processes.
Management expenses were 12,500 and selling expenses 9,500 2/3rds of the output of process I and one-half of the output of process II are passed on to the next process and the balance are sold.
The entire output of process III is sold.
Prepare the three process accounts and a statement of profit.

Question 9.
Product X is obtained after it passes through 3 distinct processes. You are required to prepare Process Accounts, Abnormal Loss and Gain Account.

Question 10.
A Product passes through three processes A,B and C.The normal wastage of each process is as follows:
Process A = 3%, B = 5%, C = 8%
Wastage of process A was sold at 2.50 per unit, that of B at 5 per unit and that of C at 10 per unit. 10,000 units were introduced to process A at 10 per unit, the other expenses were as follows:

	A ( )	B ( )	C( )
Sundry materials	10,000	15,000	5,000
Labour	50,000	80,000	65,000
Direct expenses	10,500	11,888	20,000
Actual output (in units)	9,500	9,100	8,100

Prepare process accounts.

Question 11.
A product passes through three processes for completion. For the month ending 31.3.2009 the following are the details.

Question 12.
The following details are extracted from the costing books.of Chandru Copra Oil Product Ltd, for the year ended 31.3.2017.

Particulars	Crushing	Refining	Finishing
Cost of labour	Process	Process	Process
Electric power	5,500	2,200	3,300
Sundry material	1,320	792	528
Repairs to Plant and Machinery	220	4,400	–
Steam	616	726	308
Factory Expenses	1,320	990	990
Cost of casks	2,904	1,452	484

3200 tonnes of crude oil were produced, 2600 tonnes of oil were produced by the refining process, 2550 tonnes of refined oil were finished for delivery.
Copra sacks sold for 880, 1925 tonnes of copra residue sold for 24,200, loss in weight in crushing 275 tonnes, 500 tonnes of by products obtained from refining process were valued at 14,850.
You are required to show the account of each of the following process concerned for the purpose of arriving at cost per tone of each process.
(a) Crushing process
(b) Refining process and
(c) Finishing process including cashing

Question 13.
A factory is engaged in manufacturing. In the manufacture of main product, 100 units of certain by – product were produced. The value of the by – product was 10 per unit. The product required further processing cost amounting to 300 selling and distribution cost came to 50 Make an estimate of by product cost at the point of split off assuming that average profit earned is 10% on sales.
Solution:
x units Main product
100 units By product
Calculation of By product cost at the point of split off.
Method Reverse cost method.
a. Sale value (100 x 10) 1000
b. Less : profit or sale (10% x 1000) (100)
900
a. Less :
(i) Further cost of processing (300)
(ii) Selling and Dist cost (50)

Question 14.
In a certain period 500 units of main product are produced and 400 units are sold at 50 per unit. The by-product emerging fro product is sold at 1,000. The total cost of production of 500 units is 15,000. Calculate the amount of gross profit after crediting the product value.
(a) to cost of production
(b) to cost of sales.

Question 15.
Calculate the estimated cost of production of by products X & Y at the point of separation from the main product.
Selling expenses amounts to 25% of total works cost i.e. including both pre-separation and post separation works cost. Selling prices are arrived at by adding 20% of total cost i.e. sum of works cost and selling expenses.

Question 16.
In manufacturing the main product, a company processes the identical waste into two by products A & B. From the following data relecting to the product, you are required to prepare a comparative P/L statement showing the individual cost & other details. The total cost upto separation period was 3,10,400.

Question 17.
X Ltd manufactures product ‘A’ which yield two products B and C. In a period, the amounts spent upto the point of separation was 20,600.

	A ( )	B ( )	C( )
Materials	300	200	150
Direct wages	400	300	200
Overheads	300	270	280
	1,000	770	630

Gross sales value of product A, B & C was 15,000, 10,000 and 5,000 respectively. It was estimated that the net profit as a percent’ age of sales in B & C would be 25% & 20% respectively. Ascertain the profit earned on A.

Question 18.
In manufacturing the main product “A”, a company processes the resulting waste materials into two by products B and C. Using the method of working back from sales value to an estimated cost, you are required to prepare comparative P/L statement of three products from the following data. Total cost upto separation was 1,36,000

	A	B	C
Sales ( )	3,28,000	32,000	48,000
Costs after separation	–	9,600	14,400
Estimated net profits as percentage to sales value	–	20%	30%
Estimated selling expenses as % of sales value	20%	20%	20%

Question 19.
In processing a basic raw materials, three joint products X, Y and Z produced. The joint expenses of manufacturing are:
Materials – 10,000
Labour – 8,000
Overheads – 9,000, 27,000
Subsequent expenses are as follows:

Question 20.
Udayrag Co produces A as a main product, B and C as its by products. The following expenses have been incurred for the above products.
Show the method of approtionment of joint expenses and also prepare necessary accounts.