Process Costing

A product passes through three process., P1, P2 and P3, the expenses for the month of June are
as follow
P1 P2 P3
Rs. Rs. Rs.
Material 1,500 2,250 750
Labour 7,500 12,000 9,750
Expenses 1,575 1,425 3,015
Other information:
Normal wastage 3% 6% 10%
Scrap value (per unit) Re.0.25 0.50 1.00
Output (units) 14,250 13,650 12,012

15,000 units of materials were introduced in process PI at Re.0.10 per unit. Prepare process
amounts and other necessary accounts.

Questions on Over & Under Absorption

1. The budgeted working conditions for a cost centre are as follows:

Normal working hours per week 42 hours

Number of machines 14
Normal weekly loss of hours on maintenance 5 hours per machine
No.of weeks worked per year 48
Estimated annual overheads Rs.1,24,320
Estimated direct wage rate Rs.4 per hour
Actual results in respect of 4 weeks period are:
Wages incurred Rs. 9,000
Overheads incurred Rs.10,200
Machine hours produced 2000
You are required to calculate:
a) The overhead rate per machine hour
b) The amount of under or over absorption of wages and overheads.

SOLUTION:

Normal working hours for the year = 48 weeks * 42 hours * 14 machines =28224 hours
Less: Loss of hours due to maintenance=48 weeks * 5 hours* 14 machines = 3360 hours
Effective working hours = 24864 hours

Estimated overheads per year Rs. 124320

 a) Machine Hour rate (Rs.124320/24864 hrs) Rs.5

Overhead absorbed = 2000 hrs @Rs.5/hr Rs.10000

Less: Overhead incurred Rs.10200
Under absorbed Overhead Rs.200

b) Wages absorbed = 4 weeks * 42 hours * 14 machines * Rs.4 Rs.9408

Less: waged incurred Rs.9000
Over-absorbed wages Rs.408

2. XYZ Ltd. uses a historical cost system and applies overhead on the basis of pre-
determined rates. The following are available from the records of the company for the
year ended 31st March, 2014.

Rs.

Manufacturing overhead incurred 8,50,000

Manufacturing overhead applied 7,50,000
Work-in-progress 2,40,000
Finished goods 4,80,000
Cost of goods sold 16,80,000
Apply two methods for disposal of under absorbed overhead showing the implications
of
each method on the profit of the company.

SOLUTION:
Manufacturing overhead – actual Rs.8,50,000
Manufacturing overhead – applied Rs.7,50,000
Under absorbed overhead Rs.1,00,000

Methods of disposal:
Method I – Supplementary rate method: under absorbed amount of OH of Rs.1,00,000 is added
to cost of sales, WIP and finished goods in the ratio calculated as follows:

Unabsorbed Overhead * 100 =100000/240000+480000+1680000=(100000/2400000)*100=

4.16667%
Total cost
 Particulars Amount Under absorbed OH Total
WIP 2,40,000 (240000*4.16667%)10000 2,50,000
Finished goods 4,80,000 (480000*4.16667%)20000 5,00,000
Cost of goods sold 16,80,000 (1680000*4.1667%)70000 17,50,000
Total Cost 25,00,000
Effect on profit: the profit will reduce by Rs.70,000 because of increase in the cost of sales
which is debited to Profit & Loss A/c on the other hand, Rs.30,000 will be credited to P&L A/c
on account of increase in the value of closing stock of WIP & PG. Thus, the net effect of using
this method is that profit for the year will be reduced by Rs.40,000..

Method II – the entire amount of under-absorbed manufacturing OH may be carried forward to

the next year if it is presumed that such under-absorption has arisen due to cyclical or seasonal
fluctuations. In such case, the profit of the current year will then be based on pre-determined OH
and remain unaffected.