# Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 20, 21, & 22
PROCESS COSTING SYSTEM
Practice Question
Q. 1
Mini Soap Manufacturing unit completed and transferred out 600 soaps to department-11 at the
end of the week. In department-11 500 soaps completed and transferred out. Units which were
still in process 100 (100% material, Conversion cost 60%).
Rs.
540
Following costs were incurred by department-11:
Direct Material
150
Direct Labor
112
168
430
970
Required: Prepare cost of production report
Cost of Production Report
Department-II
I-Quantity Schedule:
600
Unites completed and transfer to
next department
500
Units still in process
100
600
II-Cost Accumulated in the Department / Process:
Rs.
540
Direct Material
150
Direct Labor
112
168
430
970
III-Calculation of Equivalent Units Produced:
(100% of completed units + % of units in process)
Units completed in department-I = 500 + 100 = 600
Direct Material:
500+(100x100%)
= 600
Direct Labor  :
500+(100x60%)
= 560
F.O.H
:
500+(100x60%)
= 560
IV- Unit Cost:
As to Previous department:
Total cost / Number of Equivalent units produced = 540 / 600 = 0.90
As to Direct Material:
150 / 600 = 0.25
As to Direct Labor:
112 / 560 = 0.20
As to F.O.H:
135 / 900 = 0.15
1.65
V- Apportionment of the Accumulated Cost:
Cost of units transferred to the next department
No of completed units x Total cost per unit:
500
x
1.65
=
825
Units in process:
Cost of preceding department 100 x 0.9
=
90
Direct Material
100 x 0.25
=
25
139
Cost & Management Accounting (MGT-402)
VU
Direct Labor
60 x 0.20
=
12
F.O.H
60 x 0.30
=
18
145
970
Q. 2
Mini Soap Manufacturing unit started to incurring cost in first department for 1000 soaps. At the
end of the week 600 soaps were completed, 300 still in process and 100 units lost. 100% of direct
material had been incurred but 75% conversion cost was yet incurred on the incomplete work.
The detail of costs incurred by the department:
Rs.
Direct material 500
Direct labor
225
135
Required: Prepare cost of production report
Cost Of Production Report
Department-I
I-Quantity Schedule:
Units started in process
1000
Units completed in the department
600
Units still in process
300
Units Lost (Normal)
100
1,000
II-Cost Accumulated in the Department / Process:
Total
Rs
Direct Material
500
Direct Labor
225
F.O.H
135
860
III-Calculation of Equivalent Units Produced:
Direct material 600+ (300x100%)
= 900
Direct labor
600+ (300x75%)
= 825
F.O.H
600+ (300x75%)
= 825
IV- Unit Cost:
Direct material
500/900
= 0 .555
Direct labor
225/825
= 0.27272
F.O.H
135/825
= 0.163636
0.992
V- Apportionment of the Accumulated Cost:
Cost of units transferred to the next department
600
x
0.992
595
Work in process:
Direct Material
300 x 0.5555 = 167
Direct Labor
300 x 0.2727 = 61
F.O.H
300 x 0.16363 = 37
265
860
140
Cost & Management Accounting (MGT-402)
VU
Normal Loss in First Department.
Loss of units during manufacturing process is, in many industries, a normal condition. This loss
may be due to unavoidable spoiled work or wastage, evaporation or shrinkage etc. In other words,
normal loss represents the lost units expected to arise even under efficient operating conditions.
Such a loss is inherent in manufacturing operations and cannot be avoided, for this reason; cost of
normal loss is absorbed by the good units produced. It has the affect of increasing unit cost of
good output. Total cost of the department is not divided by all units processed, instead. It is
divided only by the good units produced.
Practice Question
During the month of January 2006 direct materials worth Rs. 300,000 were issued to produce
26,000 units of finished product. Direct labor to process these materials totaled Rs. 110,000 and
factory overhead Rs. 55,000. During the month processing of 20,000 units were completed and
these units were transferred to next department, whereas, 1,000 units were lost during processing
(the loss is regarded as normal). All of the direct materials had been issued for the units in process
at the end of month, but these units were only 40% converted. Cost of Production Report for the
month 'based on above inforn1ation is given below:
Ginza Beauty products
Department I
Cost of Production Report
For the Month of January, 2006.
Quantity Schedule
Units started in process
26,000
Units transferred to next department
20,000
Units still in process
5,000
(100% materials, 40% labor & FOH)
Units lost in process
Normal loss
1,000
26,000
Cost accumulated to Department
Total
Units
Rs.
Rs.
Direct materials
300,000
12
Direct labor
110,000
5
55,000
2.50
Total cost to be accounted for
465,000
19.50
Cost Apportioned
Transferred to next department
(20,000 units x Rs. 19.50)
Rs. 390,000
Rs.
Work in process ending inventory:
Direct materials (5000 units x Rs. 12.00)
60,000
141
Cost & Management Accounting (MGT-402)
VU
Direct labor (5000 units x 40% x Rs. 5.00)
10,000
FOH (5000 units x 40% x Rs. 2.50)
5,000
75,000
465,000
Whenever, normal loss occurs in the first department, it requires no separate calculation. Number
of units so lost is ignored while computing equivalent production. The result is a decrease in
equivalent production quantity (the denominator) and an increase in unit cost.
In the above cost of production report, equivalent production of department I include 20,000
completed units plus 5,000 units in work in process ending inventory adjusted for their stage of
completion.
Normal Loss in Departments Subsequent to the First.
It is stated earlier that cost of normal loss is absorbed by the good units produced and this is done
by omitting lost units from equivalent production quantity. Same procedure applies when units are
lost during processing in a department subsequent to the first.
However, here an adjustment in unit cost from preceding department is also necessary. In the above report
total cost of Rs. 390,000 received from department I was for 20,000 units. Out of these 20,000
units, 500 units were lost. Now total cost of Rs. 390,000 applies only to 19,500 remaining good
units. This decrease in number of units will cause an increase in unit cost from preceding department.
In department 2, after the lost units have been taken into account, unit cost from department I
come to Rs. 20.00 (i.e. Rs. 390,000 + 19,500 units). This increase of Rs. 0.50 (i.e. Rs. 20.00 less Rs.
19.50) is called adjustment for lost units.
The adjustment for lost units can be computed by anyone of the following two methods. For the
purpose of explanation assume the following:
Assembling department received from cutting department 32,000 units at a total cost of
Rs.120,000 resulting in a unit cost of Rs. 3.75. During processing in assembling department 2,000
units were lost. The lost units are considered as normal.
First Method: Firstly find unit cost received from preceding department after adjustment for lost
units and then deduct it from the unit cost before adjustment; the difference is adjustment per unit.
Unit cost after adjustment is calculated by dividing total cost from preceding department by good
units left after the loss.
Computations are illustrated as follow:
Rs
Rs. 120,000/30,000 units
4.00
3.75
0.25
Second Method: Find total cost of lost units at which they are received by the department. This
total cost is now to be absorbed by the remaining good units. How much cost is to be absorbed by
each good unit is computed by dividing remaining good units into total cost of lost units. The
resulting figure is adjustment per good unit.
These computations are explained as follows:
Cost of lost units accumulated upto preceding department
2,000 units x Rs. 3.75
Rs. 7,500
Adjustment per unit Rs. 7.500/30,000 units
Rs. 0.25
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