Cost Accounting

4.
1
Overheads
4.1.1 In troduction
4.1.2 Overheads : Meaning and Definition
4.1.3 Classification of Overheads
4.1.3.1 Classification According to Elements
4.1.3.2 Classification According to Functions
4. 1.3.3 Classification According to Behaviour
4.1.3.4 Classification According to Controllability
Review Questions and Answers (Multiple Choice Questions)
4.1.1 :Introduction :
Total Costs of product involves direct costs as well as indirect cost. Direct cost can be
identified with the product manufactured, but indirect cost cannot be identified with the
product manufactured. Such indirect cost is known as overheads.
We have studied that total cost may be classified into direct cost and indirect cost.
The total of all direct costs, i.e. direct material cost, direct labour cost and direct expenses
is known as prime cost, and the total of all indirect costs, i.e. indirect material cost, indirect
labour cost and indirect expenses in termed as overhead costs. Other names of overheads
are : (a) On Cost, (b) Supplementary cost, (c) Non-productive cost etc.
4.1.2 :Overheads : Meaning and Definition:
Overhead is a brief expression for all indirect expenses which can not be charged
directly to a specific job, product or service. These are extra or additional costs incurred in
manufacturing process over and above the prime cost. Thus overhead is the aggregate of
indirect cost, indirect labour cost and indirect expenses which cannot be conveniently
identified with the directly allocated to a particular cost centre or cost object.
Though overheads do not relate to any specific cost centre or cost object but for the
purpose of proper cost ascertainment, these are analysed and apportioned on some suitable
basis. Thus overheads are total cost of indirect material, wages and expenses. So composition
of overhead is as follows :
Overhead = Indirect Material + Indirect Wages + Indirect Expenses
Overhead is defined as under:
(1) "Overhead is the aggregate of indirect material, indirect wages and indire
expenses. '- CIMA, London
(2) "Overheads are those costs which do not result from existen ce of indivvdual
units." - Harper
(3) "Overhead costs are the operating costs of abusiness enterprise which cannol
traced directly to a particular unit of output. ". Blocker and Weltmer
56
Overheads /57
(4) "Overhead may be defined as the cost of indirect materials, indirect labour and
such other expenses, including services as cannot conveniently be charged direct to specific
cost units. Alternatively, overheads are all expenses other than direct expenses.". Wheldon
Thus overhead cost is the total of all indirect expenditure. It comprises those costs
which cost accountant is either unable or unwilling to allocate to particular cost units.
The following are the main features of overheads as an element of cost :
(1) Overhead expenses are indirect.
(2) Overheads are of abstract and invisible character.
(8)Overheads are common to a number of cost units and cOst centres.
(4) Since overheads are not identifiable with any particular cost units, they need to
be distributed to costs centres and cost units.
(5) Overheads are distributed on some reasonable basis.
(6) Distribution of overheads involves exercies of judgment. Therefore charge for
overheads is an approximate charge.
(7) They are both fixed and variable.
(S) They consist of both production and non-production expenses.
4.1.3 : Clasification of Overheads :
In order to have a proper accounting and control, careful classification of overheads is
necessary. Classification of overheads is the process of grouping the various items of
overheads into distinct class or group on the basis of some common characteristics. The
classification of overhe ads depends upon nature of business, size of business and nature of
product produced or service rendered. The overheads can be classified according to:
(1) Elements
(2) Functions
(3) Behaviour
(4) Controllability.
4.1.3.1:Classification According to Elements :
Under this method the overheads are classified under three heads, i.e. (1) Indirect
Material, (ü) Indirect Labour and (iii) Indirect Expenses.
It can be explained asfollows:
(1) Indirect Meterials : It is that part of cost of materials which cannot be directly
charged to the product manufactured and hence the cost of which cannot be allocated but
wnch can be apportioned to, or absorbed by cost centres or cost units. Fuel, Lubricating
Oil, Small Tools, Cotton Waste, Consumable Stores, Nuts and Bolts, Gums etc. are the
examples8.
(2) Indirect Labour:It is the cost of wagesand salaries which cannot be allocated
Wnch can be apportioned to or absorbed by cost centres or cost units. Salary of foremen,
Supervisors, works manager, storekeeper etc. wages of maintenance department, idle time
cOSt, holiday pay, workmen's compension, employer's contribution to provident fund,
overtime wages, wages paid for leaves encashment etc. are the examples.
(8)Indirect Expenses : Allindirect costs other than indirect materials and indirect
labour costs are termed as indirect expenses. These costs cannot be directly identifiedwith
Parucular job, process or work. lather these are common to the cost unit or cOst centre:
DRes or indirect expenses are : rent and rates, depreciation, insurance, lighting and
power, heating expenses, expenses of training of staff etc.
58 / Cost Accounting
4.1.3.2 : Classification According to Functions :

The main groups of overhed on the basis of this
classificaton are as
(1) Production
factory overhead, worksOverheadFactory Overhead: Production overheadfollows :
also knowna
overhead or manufacturing overhead. The
factory overhead is the indirect cost which production
includes indirect
material, indirect labour and indirect factory expenses. Classification overheadto
are They
indirect expenditures incurred in connection with (1) Production According
Functions
Overhead/E.rs.
production operations. Production overheads are on invisible Overhead
part of the finished product. Examples of these
are (i) Indirect wages,(ii) Factory overheads (2) Offfce and Administration
of plant and machinery, (iv) power, (ii) Depreciation Overhead
(vi) Consumable stores, (ii) Lubricants, (v) Cotton waste, (3) Selling Overhead
Idle time, (viii) Insurance of (4) Distribution Overheads
factory building, (ix) Storekeeper expenses, (x)
(2) Office and Repairs and maintance, (xi) Small tools etc.
office administration, Administration Overhead : The cost of
business management and administration expenses paertaining to
head. Office and are included under this
Administration overheads include all such expenses as are
the direction, control and administration function of a connected with
directly production, selling and
to business which are not related with
this head are : distribution function. Items of overheads falling under
() Office rent, (ii) Office
office building and machinery,Salaries, (iii) Office lighting and
(v) Audit fee, (vi) Postage and heating, (iv) Depreciation of
(vii)Bank Charges, (ix)General Telephone,(vii) Legal charges,
(3) Selling Overhead: Selling administration chargesetc.
demand and of overheads are the cost of seeking to create andstimulate
securing orders. The
demand of the product or services andexpenses pertaining to creation and stimulation
to securing orders are termed as of
Items of overheads falling under this head are : (i) Salaries and selling overheads.
(ii) Showroom expenses, (iii)
Advertisement, (iv) commission of sales stafi,
Brokerage, (vii) Expenses regarding general marketTravelling and charges, (v) Bad debts, (vi)
(4)Distribution research analysis etc.
Overhead:It
selling overhead ends regarding is that overhead which is
incurred after a point where
of goods tothe distribution of goods. The expenses
customers are fall under this head. This pertaining to distribution
the marketing cost which is
incurred distribution cost is that portion ot
in storing and saleable
products the customers. Examples are : (i)
to products and in delivering
transport expenses, (ii) Rent of warehouse, (iv) Packing meterial, (ii)Carriage outward and
werehouse employees, (vi) Packing and shipping,Depreciation
(vii)
of warehouse, (v) Salaries ot
finished goods, (ix) Insurance of
warehouse goods etc. Delivery van cost, (vii) Wastage at
4.1.3.3 :
Classification According to Behaviour :
Different overhead costs behave in defferent was when
On the basis of volume of production changes
behaviour, overheads
(a) Fixed overheads, (b) may be classified into:
overheads. Variable overheads and (c) Semi-Variable or Semi-txe
(1) Fixed Overheads :Fixed
with changes in the volume of overheads remain fixed in their nature and do not very
output.
the factory is working or not. Such These are some expenses which must be paid whether
expenses remain constant even ifthe volume ofproduction
Overheads /59
changes, However, it should not be taken in the considerationthat fixed overheads do not
nnge at all. They do increase beyond the output of certain level of capacity. Moreover
though the amount is constant for the period, the cost per unit of proudction varies inversely
hthe volume. Examples of fixed overheds are : (i) rent and rates of building. storehouse,
6) depreciaton of plant and machinery, (i1) salaries,(iv) insurance, (v) stationery etc.
(2) Variable Overheads : Variable overhead tends to very in direct proportion to
cha ngesin the volume of output or turnover. It increases in the same proportion in which
stnutis increased or its vice-versa. Variable overhead per unit is some irrespective of any
level of production.The examples of variableoverhead are :6) Indirect material. () Ind1rect
labour. (ii) Salesmen's commission, (iv) Power, (v) Light, (vi) Fuel, (vii) Spoilage. (vii)
Stores handling. (ix) Overtime,(x) Bad debts, (xi) Carriage outward, (xii) Carriage inward
etc.
(3) Semi-variable Overheads :It is an overhead which is partly fixed and partly
variable. It means that a part of the expenses does not change while the other part of the
same expenses change with change in the volume of output. Semi-variable overheads are
also known as semi-fixed overheads. This type of overhead remain constant up to a certain
level of production and it increased, but not to the proportion of output changes. For example
: ) Repairs and Maintenance, (ii) Telephone bills, (ii) Electricity and Power. (iv)
Depreciation of plant and machinery, (v) Salary to Supervisors, (vi) Commission on Sales,
(viü) Bank charges etc.
4.1.3.4 : Classification According to Controllability :
According to Control, Overhead can be classified as follows :
(1) Controllable Overheads : It is that part of total overhead cost which can be
controlled by an efficient management such as cost of idle time, wastage etc.
(2) Non-Controllable Overheads : It is that part of total overhead cost which cannot
be controlled by the management such as fixed overheads (i) duty or tax imposed by Govt.,
(ü) Loss by removal of Plant, (ii) Loss by fire, (iv) Breakage of machine etc.
Review QQuestions and Answers (Multiple Choice Questions)
(A) Long Answer Questions :
(1) Define 'Overhead'.Give their classification and explain fixed, variable and semi-variable overhead in
detail.
(2) Explain the concept of Overhead'. Explain the classification of overheads according to functions.
(3) Explain the classification of overheads according to behaviour, with examples.
(4) Explain the classification of overheds according to elements with examples.
(5) What do you understand by the term 'Overhead' ? Explain its classification.
(G) Classify the overheads according to functions and variability;and explain in detail-(a) Semi-variable
overheads and (c) Selling and distribution overheads.
(1) Define (a) Production overheads, (b) Selling overhead, (e) Fixed overheads, (d) Variable overheads.
(6) Define Overheads. Explain various classification of overheads.
(B) Short Answer
Questions :
() Classify any eight items of expenses by functions :
(a) Salary paid to salesmen
(b) General Manager's Salary
(c) Supervisory labour
(d) Rent of finished goods warehouse
(e) Depreciation of plant
() Office telephone charges
(g)Consumable stores
60/Cost Accounting
(h) Delivery van expenses
() Factory power
(0) Commission on sales paid to salesmen.
(2) What are offico and administrative overheads? Give five examples.
(3) Deine Overheads.
(4) Explain Fixed, Variable and Semi-variable overhead.
(3) Explain indirect material, indirecct labour and indirect expenses.
(6) Explain the classification of overheads according to functions.
(7) Explain the classification of overheads according to behaviour.
(8) Give five examples of :
() Production overhead
(ii) OfMce overhead
(ii) Fixed overhead
(iv) Variable overhead and
(v) Semi-variable overhead.
(9) Explain the classification of overheads according to
(10) Explain the concept of classification of overheads. elements.
(11) Classify the following expenses by element, function and be
(a) Nuts and Bolts haviour characteristics:
(b) Depreciation of Plant
(c) Rent and Rates
(d) Salaries
(e) Factory Power
() Carriage Outward
(g) Office Rent
(h) Travelling Charges
(i) Idle Time Cost
() Expenses of Training of Staff
(k) Advertisement
(C) Multiple Choice Questions :
(1) The aggregate of indirect material, indirect wages
and indirect expenses is called
(a) Prime Cost
(b) On Cost
(c) Overhead
(d) All the above
(2) The Overhead cost is the total of :
(a) Indirect Expenditure
(b) Direct Expenditure
(c) Fixed Expenditure
(d) Variable Expenditure
(3) Overheads are identifiable with:
(a) Cost Centres
(b)Cost Units
(c) Cost Object
(d) None of above
(4) The following one is not the feature of overheds :
(a) Overhead expenses are indirect
(b) Overhead are of abstract and invisible
character
(c) They are both fixed and veriable
(d) They are identifiable with any perticular cost unit or cost
centre
(5) The Classification of overheads depends upon:
(a) Nature of Business
(b) Size of Business
(c) Nature of Product Produced
(d) All of above
Overheads /61
rial :
(6)
Which one of the following is not the example of indirect mate
(a) Fuel
(b) Lubricating Oil
Bolts
(c) Nuts and Production
(a)Material Purchased for
Which one of the following is not a part of indirect expenses :
(7)
(a) Rent and Rates
(b) Overtime Wages
(c) Depreciation
Power
(d) Lighting and
:
(8)
Which one of the overhead not lies under overheads according to functions
(a) Production Overhead
Overhead
(b) Office and Administration
(c) Fixed Overhead
(d) Distributon Overhead
elements :
(9 Which are of the Overhead not comes under overheads according to
(a) Indirect Materials
(6) Indirect Labour
(c) Indirect Expenses
(d) Selling Overhead
:2:
Estimates, Tenders and Quotations
2.1 Illustration on Estimates, Tenders and Quatations

2.2 Tender Price based on Previous Year's Per Unit Cost
2.2.1 NoChanges in Material & Labour Cost
III. 34, 35
2.2.2 Changes in Material & Labour Cost
II. 36, 37
2.2.3 Changes in all Elements of Cost
IlIi. 38, 39, 40
2.3 When the amount of Materials and Labour required for the tender is given and the
Percentage of Profit is also given. (Tender Price based on Previous Period Overheads)
2.3.1 Without Changes in Overheads
IIl. 41, 42, 43, 44,4S, 46
2.3.2 Changes in Overheads
III, 47
Review Questions :
(A) Long Answer Problems
Ex. 1to 15
(B) Short Answer Problems
Ex. 16 to 31
2.1 Illustrations on Estimates, Tenders and Quatations :

2.2 Tender Price based on Previous Year's Per Unit Cost :
2.2.1No Changes in Material & Labour Cost :
nstration 34 :
The Production data of Stylo Pen Company for March, 2016 was as follows.
40.000
Materials
60,000
Wages 30,000
Works Overhead
14,000
Office Overheads
2,00,000
Sales
The Output was 10,000 Pens during March, 2016 the company wants to quote for 1,500 Pens.
The Manufacturer wants 20% Profit on Total Cost.
74
Estimates, Tenters and Ouotations / 75
Solution:
Cost Sheet
Output : 10,000 Pens
Total Amount Per Pen
Particulars
40,000 4.00
Materials
60,000 6.00
Wages 10.00
Prime Cost 1,00,000
Works Overhead 30,000 3.00
Works Cost 1,30,000 13.00
Office Overheads 14,000 140
Cost of Production / Total Cost I,44,000 14.40
Profit 56,000 5.60
Sales 2,00,000 20.00
Quotation for 1,500 Pens

Per Pen Total Amount
Particulars
4.00 6,000
Materials (4 x 1,500)
6.00 9,000
Wages (6 x 1,500) 10.00 15,000
Prime Cost
3.00 4.500
Works Overhead (3.00 x 1,500) 13.00 19,500
Works Cost
1.40 2,100
Ofice Overheads (1.40 x 1,500) 14.40 21,600
Cost of Production / Total Cost
2.88 4.320
Profit (20% on Total Cost
Quotation Price 17.28 25,920
lllustration 35:
a manufacturer of Electric
The following figures retates to the costing of Usha Fans Private Ltd.'
Fans of uniform size and Quality for the month of June, 2016.
NIL
Completed Stock Ist June, 2016 2,43,000
Completed Stock 30th June, 2016
Stock of Raw Materials Ist June, 2016 60,000
Stock of Raw Materials 30th June, 2016 42,000
9,00,000
Fcatory Wages
Indirect Charges 1,50,000
Materials Purchased 3,90,000
Sales 13,50,000
The number of Fans manufactured during the month was 3,000.
76 /Cost Accounting
Prepare a statement showing the Cost per Fan and the Price to be quoted for 700 Fans to
the same Percentage of Profit as was realised during the month of June, 2016 referred above realise
Identical Costs.
Solution :
Statement of Cost
as uming
for the Month of June, 2016
Output :3,000 Fans

Total Amount
Particulars Per Fan
Opening Stock of Raw Materials on Ist June, 2016 60,000
Add : Materials Purchased
3,90,000
4,50,000
Less : Closing Stock of Raw Materials on 30th June, 2016 42,000
Cost of Materials Consumed
4,08,000 136.00
Add : Factory Wages 9,00,000
Prime Cost
13,08,000 300.00
436.00
Add : Indirect Charges 1,50,000
Cost of Production 14,58,000 50.00
Less : Closing Stock of Finished Goods on 30th June, 2016
486.00
2.43,000 81.00
Cost of Goods Sold 12,15,000 405.00
Profit 1,35,000 45.00
Sales 13,50,000 450.00
Calculation of Profit Percentage :

Percentage of Profit on Sales :
Profit
-x 100
Sales
1,35,000>x100
13,50,000
= 10%
Quotation / Tender for 700 Fans

Per Fan Total Amount
Particulars
95,200
Materials 136 x 700 136.00 2,10,000
Add: Wages 300 x 700 300,00 3,05,200
Prime Cost 436.00 35,000
Add: Indirect Expenses 50 x 700 50.00 3,40,200
Cost of Production 486.00 37,800
Add : Profit (10% on Selling Price) 54,00 378.000
Quotation Price (Tender Price) 540.00

/ 77
Estimates, Tenters and Quotations
Caleulation of Profit:
(10% on Selling Price)
Profit =
TotalCost x Profit Percentage
100 - Profit Percentage
486x 10
= 54.
100 - 10
:
2.2.2 Changes in Materialand Labour Cost
Illustration 36 :
to quote for a contract for supply of 500
On Ist April, 2016 A.W. Faber-Castell (I) Ltd, desires
Statement showing the Price to be quoted to give the
Correction Pens. From the following data Prepare a 31st
Percentage of Net Profit on Sales as was realised during the last three months ending on
same
March, 2016.
50,000
Stock of Materials on lst Janu., 2016 7,000
Stock of Materials on 31st March, 2016 75,000
Purchases of Raw Materials (in last three Months) 1,50,000
Wages 25,000
Indirect Expenses 2,70,000
Sales Nil
Stock of Finished Goods (lst Junu., 2016) 50,000
.Stock of Finished Goods (31st March, 2016)
number of Carrection Pens manufactured during the last three months was 6,000 including
The quality
stock at close of the period. The Correction Pens to be quoted for are of uniform size &
thase in 2016 the
from Ist April,
months ending to 3 1st March, 2016. As
to those manufactured during the three
Wages by 10%.
Cost of Raw Material increased by 15% and
Solution: Cost Sheet
31st March, 2016
for the Period of Ist Janu., 2016 to Output :6,000 Pens
Total Amount Per Pen
Particulars
Raw Materials
50,000
Opening Stock 75,000
Add: Purchases
1,25,000
7,000
Less: Closing Stock 1,18,000 19.67
Materials Consumed
1,50,000 25.00
Wages Prime Cost 2,68,000 44.67
25,000 4.16
Indirect Expenses
78 /Cost Accounting
Works Cost /Cost of Production
Less : Closing Stock of Finished Goods 2,93,000 |
TotalCost 50,000 48.83
Profit 2,43,000 833
40.50
Sales 27,000
2,70,000 450
Calculation of Profit Percentage : 45,00
(Percentage of Net Profit to Sales)
Profit
-x100
Percentage Sales
27,000 x100
2,70,000
= 10%
Quatation for 500 Correction Pens
Per Pen
Particulars Total
Materials 19.67
Add: 15% Increase
3.93
23.60 l1,800
Wages 25.00
Add : 10% Increase 2.50
27.50 13,750
Prime Cost 51.10 25,550
Indirect Expenses 4.16 2,080
Cost of Production / Total Cost S5.26 27,630
Add : Profit (10% on Selling Price) 6.14 3,070
Quotation Price 61.40 30,700
Note : Calculation of Profit (10% on Selling Price) :

Profit =
Total Cost x Profit Percentage
100- Profit Percentage
27,630 × 10
100 - 10
=3,070
Illustration 37 :
The Particulars obtained from the records of M/s Caramel Company for the year 2015 aregiven
for
below, from which you are required to Prepare a Cost Sheet and a Statement Showing esstimatedCost
1.000 units. Which company wants to Supply in the Next Three Months.
Estimates, Tenters and Quotations / 79
Opening Stock :
I,40,000
Raw Materials
20,000
FinishedProducts
Purchases 2,10,000
FactoryWages 3,80,000
Factory Oveheads 70,000
Office Overheads 40,000
Closing Stock :
Raw Materials 19.600
Finished Goods 1,60,000
Sales 7,56,000
At the end of the year the number of units Produced including the Closing Stock and the number
of units Sold was 4,000.
On the basis of the above, the company wanted to supply I,000 units in the next three months to
aCostomer. It is estimated that the Price of Raw Materials and Labour may rise by 15% and 10%
respectively. Assume that the same percentage of Profits on Sales willbe made.
A Solution :
Cost Sheet
Output : 4,000 Units
Total Amount Per Unit
Particulars
Opening Stock of Raw Materials 1,40,000

Add : Purchases 2,10,000
3,50,000
Less : Closing Stock of Raw Materials 19,600
Materials Consumed 3,30,400 82.60
Factory Wages 3,80,000 95.00
Prime Cost 7,10,400 177.60
Factory Overheads 70,000 17.50
Works Cost 7,80,400 195.10
Ofice Overheads 40,000 10.00
Add : Opening Stock of Finished Products 20,000 5.00
8,40,400 210.10
Le : Closing Stock of Finished Products 1.60,000 40.00
Cost of Goods Sold / TotalCost 6,80,400 170. 10
Profit 75,600 18.90
Sales 7,56,000 189.00
Caleulation of Profit Percentage i

(Percentage of Profit to Sales) :
Profit
Percentage Sales
x100
75,600 -x100 = 10%

7,56,000
80/ Cost Accounting
Quotation for 1,000 Units
Per Unit
Particulars
Materials 82.60
15% Increase 12.39
94.99 x1,000 94.99
Factory Wages 95.00 94,990
10% Increase 9.50
104.50 x 1,000 104.50
Prime Cost
199.49 1,1,99,490
04,500
Factory Overheads 17.50
Works Cost
17,500
Ofice Overheads
216.99 2,16,990
10.00 10,000
Cost of Production /Total Cost 226.99 2,26,990
Profit (109% on Selling Price)
2,26,990 x10 = 25,221
Profit = 25.22
100- 10 25.221
Quotation Price 252.21 2,52,221
2.2.3Changes in all Elements of Cost :
Illustration 38 :
Sunbim Ltd. manufactured and Sold 850 LPG Gas Stove in a year ending 31st March, 2016. The
summarised Trading & Profit &Loss Account is as follows.
Particulars Particulars
To Cost of Materials 64,000| By Sales 3,20,000
To Direct Wages 96,000
To Manufacturing Expenses 40,000
To Gross Profit c/d 1,20,000
3,20,000 3,20,000
ToOffice Salaries 48,000| By Gross Profit b/d 1,20,000
To Rent, Rates & Taxes 8,000
To Selling Expenses 16,000
To General Expenses 24,000
To Net Profit 24,000
1,20,000
1.20,000
For the year ending 31lst March, 2016, it has been estimated that :
() Output and Sales will be 1,000 LPG Gas Stove.
(i) Price of Materials will rise 25% on the Previous year's level.
(iii) Wages will rise by 12%.
(iv) Manufacturing Cost will rise in proportion to the combined Cost of Material and Wages
(v) Selling Cost per unit will remain unchanged.

(vi) Other Expenses will remain unaffected by the rise in output.
so as to
Prepare a Cost Statement, showing the Price at which the Gas Stove would be marketed
earn a Profit at 20% on Selling Price.
Cost Sheet
for the year ending 31st March, 2015
Output :850 Gas Stoves
TotalAmount Per Unit
Particulars
64,000 75.29
Materials
Direct Wages 96,000 112.94
Prime Cost 1,60,000 188.23
Works on Cost :
Manufacturing Expenses 40,000 47.06
Works Cost 2,00,000 235.29
Office on Cost
Office Salaries 48,000
Rent, Rates & Taxes 8,000
General Expenses 24,000
80,000 94.12
Selling & Destribution Expenses 16,000 18.82
Total Cost 2,96,000 348.23
Profit 24,000 28.24
Sales 3,20,000 376.47
Statement Showing Selling Price of Gas Stoves

for the year ending 31st March, 2016
Output : 1,000 Gas Stoves
Per Unit| Total Amount
Particulars
Materials 75.29
25% Increase 18.82
94.11 x 1,000 94.11 94,110
112.94
Wages
12% Increase 13.55
126.49 x 1,000 126.49 126,490
Prime Cost 220.60 2,20,600
Works on Cost :
Manufacturing Cost (In Proportion to the combined
55.15 $5,150*
Cost of Materials & Wages)
Works Cost 275.75 2,75,750
Office on Cost
(Unaffected by the rise in Output)
Office Salaries
48,000
80,000 80.00
Cost of Production
Selling & Distribution Expenses (Per Unit remain unchanged)
355.75
18.82
80.000
3,55,750
Total Cost 374.57 18,320
3,74, S70 x 20
3,74,570
100- 20 93.64
Selling Price 468.21 93.643
Note :
4,68,213
Calculation of Manufacturing Cost :
*Manufacturing Expenses has increased in proportion to the Combined Cost of Materials e
Wages.
In the Previous year Manufacturing Cost is 25% of Materials and Wages. Hence with the increaea
in Materials & Wages Manufacturing Expenses will increase in the same proportion.
Percentage of Manufacturing Expenses to Materials + Wages. (In the Previous Year)
40,000
-x100= 25%
1,60,000
Hence in the current year Manufacturing Expenses is also 25% of Materials + Wages i.e.
40,000
-x2, 20, 600
1,60,000
= 55,150
Illustration 39 :
M/s Rahul & Sons Manufactured & Sold 2,000 Telephones in the year 2015. Its summarised
Trading and Profit & Loss Account for the year 2015 is as follows.
Total Output 2,000 Units
Summarised Trading and Profit & Loss Account
To Cost of Materials Consumed 1,20,000 By Sales 6,00,00
To Direct Labour 1,80,000
To Manufacturing Charges 90,000
To Gross Profit C/d 2,10,000
6,00,000 6,00,000
To Administrative Expenses 2,10,000
90,000| By Gross Profit b/d
2,10,000
2,10,000
Quotations / 83
Estimates, Tenters and
2016, it is estimated that (i) The Output and Sales will be 3,000 Telephones. (i1)
For the year rise by 20%,
Material will rise by 25% on the Previous year level, (ii) Wages will
of Material and Wages.
PriceManufacturing Charges willincrease in proportion to the Combained Cost of unaffected bythe
(iv)
Expenses per unit will remain unchanged. (vi) Other Expenses will remain
() Selling
riseinoutput. Telephone will be manufactured in 2016and
Prepare a Cost Sheet showing the Cost at which
of 15% on Selling Price.
priceat which it should be marketed so as to earn Profit
showthe
Solution:
Cost Sheet
for the year 2015
Output : 2,000 Telephones
Particulars
1,20,000 60.00
Cost of Materials 90.00
1,80,000
Direct Wages Prime Cost 3,00,000 150.00
Works on Cost : 90,000 45.00

Manufacturing Charges 3,90,000 195.00
Works Cost
Officed &General Expenses

90,000
Administrative Expenses 30,000
Rent, Rates & Taxes 67.50
135,000
5,25,000 262.50
Cost of Production
Selling & Distribution Expenses 22.50
45,000
Selling Expenses 5,70,000 285.00
Total Cost
Profit 30,000 15.00
Sales 6,00,000 300.00
Note:
3,00,000).
Percentage of Manfacturing Expenses to Materials + Wages (1,20,000 + 1,80,000 =
90,000 x 100 = 30%
3,00,000
Statement Shovwing selling Price of Telephones
for the year 2016
Output : 3,000 Telephone
Per Unit Total Amount
Particulars
Materials 60.00
25% Increase 1S.00
75.00 x3,000 75.00 2.25,000
s4 /Cost Accounting
90.00
Wages
20% Increase 18.00
108.00 x 3,000 108.00
Works on Cost
Prime Cost 183.00
3.5,244.9,000000
Manufacturing Expenses
30% of Materials + Wages i.e. 30% of 2,25,000 + 3,24,000 54.90
Ofce & General Expenses (Unchanged)

Works Cost 237.90 1,7,163,4,770000
Administrative Expenses 90,000
1,35,000 45.00
Cost of Production 282.90 135, 000
8,48,700
Selling & Distribution Expenses
Selling Expenses (Per Unit Unchanged) 22.50
Total Cost 305.40 67,500
9,16,200
Profit :(15% on Selling Price)
9,16,200 x15
= 1,61,682 53.89
100 - 15 1,61,682
Selling Price 359.29
10,77,882
Illustration 40 :
JK Enterprises Ltd. has manufactured and Sold 1,000 Badminton Rackets during the year ended
31st Dec., 2015.
The following is its summarised Trading and Profit & Loss Account for the year ending 31st
Dec., 2015.
To Materials 80,000 By Sales 4,00,000
To Direct Labour 1,20,000
To Factory Overheads 50,000
To Gross Profit c/d 1,50,000
4,00,000 4,00,000
To Salaries 60,000 By Gross Profit b/d 1,50,000
To Distribution Expenses 10,000
1,50,000
1,50,000
year ending 31st Dec., 2016 it is estimated that :
Forthe next
Output and Sales will be 1,200 Rackets.
(a) The Materials will rise by 20% on the previous year level.
of
(b) Price Rate will rise by 5%.
(c) Labour
( ) Factory
Overheads will rise in proportion to the combined Cost of Materials and Wages.
(e) Selling Cost
per unit will remain unchanged.
Distribution Expenses per unit will remain unchanged.
unchanged.
io) Other Expenses willremain
Prepare a Statement showing Production Cost
and Selling Price of I,200 Badminton Rackets so
stofattch
10%Profit on Sales in the year 2016.
Solution:
Cost Sheet
for the year ending 31st Dec., 2015
Output : 1,000 Badminton Rackets
Particulars
80,000 80.00
Materials
1.20,000 120.00
Direct Labour
Prime Cost 2,00,000 200.00
50,000 50.00
Factory Overheads
2,50,000 250.00
Factory Cost
Office Overheads
60,000 60.00
Salaries
10,000 10.00
Rent, Rates & Taxes
20,000 20.00
General Expenses
90,000
Selling and Distribution Expenses

20,000 20.00
Selling Expenses
Distribution Expenses 10,000 10.00
30,000
Total Cost 3,70,000 370.00
Profit 30,000 30.00
Sales 4,00,000 400.00
e: Percentage of Factory Overheads to Materials + Direct Labour

50,000 x 100
2,00,000
= 25%
86 /Cost Accounting
Statement showing Selling Price of Badminton Rackets
for the year ending 31st Dec., 2016
Output :1200 Racket
Per Unit| Total
Particulars
Amount
Materials 80.00
209% Rise 16.00
96.00 x 1,200 96.00
Direct Labour
S% Rise
120.00
6.00
1,15,200
126.00 x 1200 126.00
Prime Cost
Factory Overheads (25% of Cost of Materials + Labour)
222.00 1,2,561.6,240000
(ie. 25% of 2,66,400) 55.50
Works Co_t 277.50 66,600
Office Overheads (Unchanged) 3,33,000
Salaries S0.00
60,000
Rent, Rates & Taxes 8.33 10,000
General Expenses 16.67 20,000
Cost of Production 352.50 4,23,000
Selling & Distribution Expenses (Per Unit Unchanged):
Selling Expenses (20 x 60 x 200) 20.00 24,000
Distribution Expenses (10.00 x 1,200) 10.00 12,000
Total Cost 382.50 4,59,000
4,59,000 x10 = 51,000 S1,000
42.50
100- 10
Selling Price 425.00 5,10,000
2.3 When the amount of Materials and Labour required for the tender is given and the Percenta8
of Profit is also given (Tender Price based on Previous Period Overheads)
2.3.1 Without Changes in Overheads :
lustration 41 :
From the following information youhave to prepare a statement showing.
(a) Prime Cost
(b) Works Cost
(c) Total Cost
(d) Percentage of Works Overheads to Direct Wages
and (e) Percentage of Office and General Overheads to Works Cost. 7,0000
5,40,00
Materials Consumed ,62,000
Direct Wages 1,2,160
Works Overheads
Office & General Overheads
Estimates, Tenters and Quotations /87
aCompany desires to submit a Tender for Manufacturing a Machine for which Materials of
#720and Direct Wages of 600 will be required. Prepare a Tender showing a Tender Price so as to
Profit of 15% on Total Cost.
feath a
Solution:
Statement of Cost
Particulars
Materials Consumed 7,00,000

Direct Wages 5,40,000
(a) Prime Cost 12,40,000
Works Overheads L,62,000
(b) Works Cost 14,02,000
Ofice & General Overheads 1,12,160
(c) Total Cost 15,14,160
(d) Percentage of Works Overheads to Direct Wages :

Work Overheads
x 100
Direct Wages
1,62,000 x 100
5,40,000
=30%
(e) Percentage of office & General overheads to works cost
Office & General Overheads
x 100
Works Cost
1,12,160
x 100
14,02,000
= 8%.
Tender for Machine
Particulars
Materials 720
Direct Wages 600
Prime Cost 1,320
Works on Cost (30% of Wages i.e. 30% of 600) 180
Works Cost 1,500
Ofice &General Overheads (8% of Works Cost i.e. 89% of 1,500) 120
Total Cost 1,620
Profit (15% on Total Cost) (1 5% on 1,620) 243
Tender Price 1,863
lustration 42 :
are rupti Electricals Ltd. manufactures is engaged in Manufacture Coolers and the following details
furnished for the year ended 3Ist Dec., 2015.
4.2
Reconciliation of Cost and Financial Accounts
4 1Reonciliation of Cost Account and Financial Accounts :

Meaning and Concept
42Vecd for Reconciliation
43 Reasons for Difference in Cost and Financial Profit/Loss
42.3.1 Items included in the Financial Account but not in Cost Accounts
4.2.3.2 Items Appearing in Cost Accounts only
4.2.3.3 Different Treatment in Two Accounts, i.e.
Cost Accounts and Financial Accounts
4.2.4 Procedure for Reconciliation
Revieu uestions and Answers (Multiple Choice Questions)
4.2.1 : Reconciliation of Cost Accounts and Financial Accounts :

Meaning and Concept :
Cost Accounts and Financial Accounts are kept separate in a manufacturing concern.
The aims, objects and the methods of maintaining both set of books differ. Cost accounts
disciose cost per unit a job a cost at different stages of completion, while the financial
accounts record all the aspect of a business. Hence there is a discrepancy between the
results shown by the cost accounts and those shown by the financial accounts.
With the reconciliation discrepancies will be detected and the extent of discrepang
ascribe to each cause can be found out. Reconciliation is a verification of the accuracy of
financial accounts.
Reconciliation of cost and financial accounts is a process to find all the reasons behind
disagreement in profit which is calculated as per cost accounts and financial account. Ther
are many items which are shown in the profit and loss account only when we prepared it as
per financial accounting rules. Again there are many items which are shown in costing
profit and loss account only when we calculate profit as per cost accounting. Therefor:
where cOst accounts and financial accounts are separately maintained in two different se
of books. The profit or loss shown by one may not agree with that shown by other. Therefor
it become necessary that periodically the profit or loss shown by the two sets of account
reconciled. A memorandum ofreconcilation is prepared showing the reasons for differerts
between the results disclosed by each system. It is done to check the accuracy as well as*
detect mistakes com mitted in the accounts.
Suppose, we have taken the profit or loss as per cost accounts, we adjust it as P
financial account. In the end of adjustments, we see same profit as per cost and fina
accounts. If we have taken profit as per financial accounts we have to adjust ite ms r
cost accounts. For this purpose we prepared reconciliation statement.
62
Accounts /63
Reconciliation of Cost and Financial
Reconciliation account,
4.2.2: Need for enterprises whero there are no separate cost and financial
I those business arise. But where cost and
financial accounts are
reconciliation does not
the
problems of
is necessary that periodically these two accounts are
maintained separate of each other, it concerned with the same basic transactions,
but
sets of books are
reconciled. Though both disclosed by the later.
the formerdoes not agree with that
o frure of profit disclosed by the results of the two sets
of books is necessary due to
Thus, reconciliation between
reasons : been ommitted to record
and
the following expend1ture item has
income or
(1)) To ensures that no
recovery of overheads.
there is no under - or - over accuracy and relability of cost accounts in order to
(2) To ensure the mathemnatical accounts.
control and to have a check on the financial
have cost ascertainment, cost profit or loss between cost and financial
for difference in
(3) To reveals the reasons
financial
accounts.
reasons for the difference in the profit or loss in cost and
(4) Tofind out the be sure that no mistakes pertaining to
the position clearly and to
accounts and toindicate
accounts have been committed.
facilitate internal control by highlighting the variations causing increase or
(5) To
decrease in profit. and
facilitate co-ordination and co-operation between the activities of financial
(6) To account data.
accounting departments in order to generate correct and reliable
cost regarding overheads, depreciation
policies
(7) Toenable management to formulate
and stock valuation.
to acquaint itself with the reasons for the
(8) To place management in better position
effective internal control.
variation in profits convering the way to more
and Financial Profit/Loss :
4.2.3 : Reasons for Difference in Cost the
between cost and financial accounts may arise due to
Difference in profit or loss
following reasons
but not in Cost Account :
4.2.3.1: Items includes in the Financial Account
(a) Purely Financial Incomes :
Such as:
i) Interest received on bank deposits.
(ii) Interest and dividend an investment.
(ii) Rent receivables.
(iv) Transfer fee received.
(v) Profit on the sale of assets.
(vi) Income Tax refund.
(vi) Commision received.
(vii) Profit on Sale of Invesment.
(ix) Discount received etc.
(b) Purely Financial Charges : books but excluded from
The following expenditure and losses are shown in financial
cost books:
) Interest on Capital
(1) Interest paid on the bank loans and overdrafts.
(iii) Interest paid on mortgages.

(iv) Interest paid on debentures.
(v) Losses on sale of investment.
(vi) Losses on sale of assets.
(vii) Cash discount.
(vii) Income Tax, GST and other taxes.
(ix) Dividends.
(x) Capital Expenditure.
(xi) Expenses of Capital Issue.
(xii) Provision for General Reserve,
(xiii) Losses on revaluation.
Reserve Fund, Sinking Fund etc.
(xiv)Penalties and fines.
(xv) Provision for bad and doubtful debts.
(c) Appropriation of Profit :
The appropriation of profit is again a
Items like : matter which concerns only financial accounts
(i) Dividends.
(iü) Payment of Income Tax.
(ii1) Dividends
Transfer to Reserve.
(iv) Writing off of
(v) PreliminaryExpenses.
Transfer of General Reserve.
(vi) Transfer to Sinking Fund.
(vii) Donations and
Charities etc.
2.3.2 : Items Appearing in Cost Accounts only :
There are certain items which are
They are : included in cost accounts but no in financial accounts.
(i) Notional Interest : i.e.
Interest on capital employed but not
(ii) Notional Salary : i.e. Salary actually paid.
(iii) Notiona Rent: i.e. Charge incharged but not to be actually paid.
1s payable. lieu of rent when premises are
owned and no rent
(iv) Notional
assets still in use. Depreciation
on Assets : i.e.
Depreciation charged on fully depreciated
4.2.3.3:Different Treatment in Two
There are several items of income andAccounts :
the twO sets of
accounts, i.e. the cost accountsexpenditure
such items in two sets of
which are treated differently in
and the financial
in the amounts has to be accounts are different due to the different accounts, The amount of
profit or loss as per these twoascertained and adjusted in order to treatment. The difference
reconcile the respective
(1) Methods of accounts. These items are:
: In cost accounts the Valuation
of Stocks
stock of raw material Different
is valued at cost by
FIF0, Treatment in Two Accounts :
etc. but in LIFO, (1)
average rate (2) Methods of Valuation of Stocks
financial
are valued eighter ataccounts raw materials (3) Difference in Direct Expenses
whichever is less. cost or market price, Methods of Charging Depreciation
(4) Notional Charges
(5) Under/Over Absorption of Overheads
Reconciliation of Cost and Financial Accounts /65
valuation of work-in-progress may also lead to variation. In cost account it may

The
latprime cost or factory cost. The most suitable mode of valuing is at factory cost
valued
be accounts. In financial accounts it may be valued after considering a part of office
cost
inladdministration expenses also.
and accountsthe closing stock of finished goods is valued at cost of production. But
In cost
financial account the closing stock of finished goods is valued at csot price or market
in
whichever is less. Therefore, there is under-valuation or over-valuation of opening
price
stock in cost accounts.
andiclosing of stocks given different results in the two sets of account/
The made of valuation
books.
under-valuation of stock profit is shown below:
The effect of over or
Effect on Profit
Conditions Financial Cost
Account Accounts
Less Profit Higher Profit

Over Valuation of Closing Stock in Cost Account
Higher Profit| Less Profit
Under Valuation of Closing Stock in Cost Accounts
Higher Profit| Less Profit
Over Valuation of Openings Stock in Cost Accounts
Higher Profit
Under V'aluation of Opening Stock in Cost Accounts Less Profit
difference in cost and
(2) Differnece in Direct Expenses : Sometimes there is
wastage or Abnormal gain
financial account in direct expenses also. This due to Abnormal
by excluded in cost
of Time and Material. Abnormal gains and losses may completely
accounts but are recorded in financial accounts.
charged on different
(3) Methods of Charging Depreciation : Depreciation may be
may be charged on the
it
basis in cost and financial accounts. For example in cost accounts
in financial accounts
basis of the life of the machine in terms of production hours, whereas
recognised by the Income Tax
lt may be charged according to written down value method
Act.
interest on capital, rent for own
(4)Notional Charges : Notional Charges such as
they do not appear in
Premises, salary of owner, ete. are included in cost accounts, but
unancial accounts. as there are no actual out flow of cash these items.
accounts,overheads are absorbed
(0) Onder/Over Absorption of Overheads:In cost the financial accounts the actual
Pedetermined rates which are based on past data. In
actual expenses
unount incurred is taken in to account. There arise a difference between the
and the pre-determined overheads charged to product or job.
amount of overheads
overheads are not fully recovered, which means that the called as under
fall is
absorbed in Cost account is less than the actualamount, the short
than that
recovery Or under absorption. If overheads recovered in cost accounts are more
of the actually incurred, it is called over absoption. Thus, both the over and under recovery
may cause the difference in the profits of both the records.
he effect of over/under absorption of overheads on profit is shown below :
66 /Cost Accounting
Conditions
Effect on Profit
Financial
Account
Cost
() Under Absorption of Overhe ads in Cost Account Less Profit
Accounts
Higher Profit
(2) Over Absorption of Overheads in Cost Account Higher Profit Less Profit
4.2.4 : Procedure for Reconciliation :
The following practical steps should be adopted for reconciling of profit/loss as ne
ost records and profitMoss as per financial books:
(1) It there is difference in the profits shown by the cost accounts and financial accounte
First compare every cost account item with financial accounts (Profit and Loss Account
and Balance Sheet) item and find out the difference. We shall not consider those items
which do not have any difference. These points of differencespurely in terms of comparison
between debits and credit of financial and cost records.
(2) After finding out the above difference reconciliation statement by
prepared. It is
always preferable to start to reconciled statement with the balance of profit as per cost
account.
(3) In the balance of profit as per cost account following items should be added :
(1) Overcharges of overheads in cost account.
(ii) Undercharges of income in cost account.
(4) Following items should be deducted :
i) Undercharges of overheads in cost account.
(ii) Overcharges of income in cost account.
After considering all the adjustments once can have profits are per financial accounts
(for cost accounts).
Notes :
(1) In case we start with a loss as per cost account this amount is recorded with a
minus (-) sign and rest of the treatment remains unchanged.
(2) If reconciliation statement is started with profit as per financial
accounts and
ended with profit as per cost accounts the above additions and deductions will be reversed.
(A) Long Answer Questions :
(1) Why is reconciliation of cost and financial account necessary ? Explain the
main reasons of difference
in the net profits shown by the two sets of accounts.
(2) Discuss the causes of difference between costing profit and financial profit. How
reconciled ?
are two profits
(3) Enumarate the various factors which cause difference in the results as
accoun ts.
shown by cost and finan ctal
(4) Explain the items of income of expenditure which are treated differently in cost accounts and
financa
accounts while computing the profit of these two sets.
(5) Why is the reconciliation of cost and financial account
necessary ?
(6) Indicate the reasons. Why is it usually necessary to reconcile the cost and financial accounts o
factory and explain the main sources of difference ?
(7) What do you understand by reconciliation of cost and financial accounts.
(8) accounts
List out 10
?
items, either debit or credit, which appear in financial accounts but do not appear in cos
Reconciliation of Cost and Financial Accounts /67
reconciliation of cost and financial accounts.

Explain the importance of
(9) Mention the items of expenses or income which will appear in one set of account but not the other.
(10) Questions :
Short Answeryou understand by reconciliation of cost and financial accounts.
(B).
do
(1) What three reasons for difference in profits as per cost books and financial books.
(2) Explain included in financial accounts but not in cost accounts.
any ten items which are
(3) State accounts and not in financial accounts.
the items appearing in cost
(4) State
items which are treated differently in cost account and financial accounts.
(5) Statethe
the methods of valuation of stock in cost account and financial account.
(6) Explainthe treatment of charging depreciation in cost account and financial account.
(7) Explain
Notional Charges.
(8) Explain under/over absorption of overheads are treated in cost and financial account.
the
(9) How
(10) What do you mean by notional expenses ? Give three examples.
statement.
What is the need for reconciliation
financial accounts.
a2 Explain the importance of reconciling cost and
Give any four reasons for difference in costing profit and financial profit.
financial profit.
L0Explain the objectives of reconciling cost profit with
valuation of stocks in terms of reconciliation.
/15) Explain the meaning of under valuation and over
reconciliation.
06) Explain the different treatment of items in terms of
cost accounts only.
(17) Name any three items which are included in
reconciled ?
(18) Whv are csot and fnancial accounts
profits.
(19) Name any five items of appropriation of included in the financial account but not in cost
(20) Name any five items of financial income which are
account.
(C) Multiple Choice Questions : facts

to Financial Account means to reconcil one of the following
(1) Reconciliation of Cost Account
between these two sets of account:
(a) Expenses
(b) Income
(c) Profit
(d) None of above
(2) Reconciliation is a verification of the accuracy of :
(a) Cost Accounts
(b) Financial Accounts
(c) Cost & Financial Accounts
(d) Management Accounts
(3) The Statement of reconciliation is prepared to hrk :
(a) Accuracy
(b) Detect Mistakes
(c) 'a' and 'b'
(d) None of above
financial accounts :
(4) following items included in the cost accounts but not in
en One of the
(a) Interest received on bank deposits
(b) Transfer fee received
(c) Cash Discount
(d) Notional Rent cost accounts:
(5) following items included in the financial account but not in
Cn One of the
(a) Notional Interest
(b) Notional Rent
(c) Interest on Bank Loan
(d) Notional Depreciation on assets
68/ Cost Accounting
6 Which one of the following is not the financial charges :
(a) Income Tax Refund
(b) Income Tex, GST and other charges
(c) Interest on Bank Loan
(d) Divide nds
(7) Which one of the following is not the item regarding Appropriation of Profit:
(a) Dividends
(b) Dividends Transfer to Reserve
(c) Transfer to Sinkng Fund
(d) Interest paid on
(S
Mortagages
In cost account the stock of rawv
(a) FIFo
materials is valued at COS by:
(b) Factory Cost
(c) Market Price
(d) Cost of Production
(9) Over valuation of closing stock in cost
cost accounts accounts have one of the following effect on
(a) Less Profit profit shown in
(b) Null
(c) Higher Profit
(d) N.A.
(10) Over valuation of
cost account : opening stock in cost accounts have one of
the following effect on
(a) Less Profit profit shown in
(b) Higher Profit
(c) Null
(d) N.A.
(11) Under valuation of
opening
financial accounts : stock in cost account have one of
the following effect on profit shown in
(a) Higher Profit
(b) Less Profit
(c) Null
(d) N.A.
(12) In cost
account the
(a) Price Cost valuation of work-in-progress be
(b) Factory Cost valued at :
(c) 'a' or b'
(d) Cost of
(13) Production
Abnormal gainsAccounts
(a) Financial or losses are
(b) Cost Account
excluded in one of the following :
(c) 'a' and b'
(d) None of above
Reconciliation of Cost and Financial Books / 107
SpecialPoints in Reconciliation of Cost Accountsand Financial Accounts :

4I Proforma of. Reconciliation Statement :
()1
Reconciliation Statement
for the date of
Particulars
Account XXX
Profit as per Cost
Overcharge of Overheads in Cost Account
Add: (+)
0RUndercharge of Income in Cost Account :
XX
() XX
(ii) XX
(ii) XXX + XXX
XXX
Less : (-) UnderCharge of Overheads in Cost Account
OR Overcharge of Income in Cost Account : XX
(i) XX
(ii)
XX
(i) XXX - XXX
Profit as per Financial Account / Profit as per Profit and Loss Account XXX
is recorded with a minus

Note : In case we start with a Loss as per Cost Account this amount
) sign and rest of the treatment remains unchanged.
3.2 Illustrations of Reconciliation Statement :
be
3.2.1 Statement of Cost, Profit and Loss Account anda Reconciliation Statement is to
prepared:
Ilustration 48 :
From the following Particulars prepare (a) Statement of Cost calculating Works Oncost 25% on
Prime cost, and Office on Cost at 75% on Works Oncost. (b) A Statment of Profit as per Cost Accounts.
(G) Profit &Loss Account in the Financial Books. (d) A Statement Reconciling the Profit shown by the
OSt Accounts with that shown bythe Profit and Loss Account. The Selling Price is fixed at Cost Plus
25%.
Stock 1st January, 2015
Raw Materials 8,000
Finished Product 16,000
Stock 31st December, 2015
Raw Materials 12,000
Finished Product 4,000
Purchase of Raw Materials 48,000
Wages 20,000
Sales 1,30,000
Works Expenses 15,500
Office Expenses 12,200
Cost
Solution : (A) Statement of
31 Dec., 2015
for the year ending
Particulars
8,000
Materials 48,000
Opening Stock of Raw
Purchases 56,000
12,000
Materials
Closing Stock of Raw Cost of Materials
used
44,000
Wages Prime Cost 20,64,000
000
Prime Cost
Factory Oncost 25% of 16,000
(25% of 64,000) 16,000
Works Cost 80,000
Ofice Oncost 12,000
16,000)
75% of Factory Oncost (75% of 12,000
Cost of Production 92,000
(B) Statement of Profit
Particulars
92,000
Cost of Production
16.000
Opening Stock of Finished Goods 1,08,000
4,000
Closing Stock of Finished Goods
Cost of Goods SoldTotal Cost
1,04,000
Profit
26,000
25% Oncost (25% of 1,04,000)
Sales
1,30,000
(C) Profit and Loss Account

1,30,000
To Opening Stock By Sales
Raw Materials 8,000 Closing Stocks 12,000
Finished Goods 16,000 Raw Materials 4,000
To Purchases 48,000 Finished Goods
ToWages 20,000
To Works Expenses (Actual) 15,500
To Office Expenses (Actual) 12,200
To Net Profit 26,300 1,46,000
1,46,000
(D) Reconciliation Statement
31 Dec.. 2015
Particulars
Profit as per Cost Accounts 26,000

Add: Overvalued Expenses or Undervalued Income charged in Cost Accounts
(i) Factory on Cost (16,000 - 15,500) 500
500
26,500
Tot : Undervalued Expenses or Overvalued Income charged in Cost Account
(i) Office Oncost (12,200- 12,000) 200
200
Profit as per FinancialBooks (P & LAccount) 26,300
llustration 49 :
From the following Particulars prepare :
(a) Statement of Cost
(b) Profit and Loss Account in the Financial Books
(c) Reconciliation Statement.

Opening Stock of Finished Goods 2,88,000
Raw Materials Purchased 8,64,000
Stock of Raw Materials at the end 2,16,000
Stock of Finished Goods at the end 72,000
Wages 3,60,000
Calculate Factory Oncost 20% on Prime Cost, Office Oncost at 80% on factory on cost. Actual
Works expenses amounted to 2,27, 150 and office Expenses amounted to 1,85,950. The selling
Price was fixed at 20% above the cost Price.
Solution :
Statement of Cost
Particulars
Purchases 8,64,000
|10,08,000
Closing Stock of Raw Materials 2,16,000
Cost of Materials Consumed 7,92,000
Wages 3.60,000
Prime Cost 11,52,000
Factory Oncost 2,30,400
(20% on Prime Cost) (20% on
11,52,000) 2,30,400
Factory Cost 13,82,400
110 /Cost Accounting
Office Oncost
(80% on Factory Oncost) (80% on 2,30,400) l,84,320
Cost of Production 1.84,320
Opening Stock of Finished Goods 15,2,868,6,010020
Closing Stock of Finished Goods 18,12,54,070020
Cost of Goods Sold /Total Cost
Profit (20% on Cost of Goods Sold) (20% on 17,82,720)
17,3,852,6,152044
Sales
21,39,264
Profit and Loss Account
Particulars
Particulars
To Opening Stock By Sales 21,39,264

Raw Materials 1,44,000| By Closing Stock :
Finished Goods 2,88,000 Raw Materials 2,16,000
To Purchases 8,64,000 Finished Goods 72,000
To Wages 3,60,000
To Work Expenses (Actual) 2,27,150
To Office Expenses (Actuaal) 1,85,950
To Profit 3,58,164
|24,27,264 24,27,264
Particulars
3,56,544
Profit as per Cost Statement
Add : Overvalued Expenses or Undervalued Income in Cost Books
3,250
(i) Works Expenses + 3.250
3,59,794
Less : Undervalued Expenses or Overvalued Income in Cost Books

L.630
(i) Office Expenses - L630
3,58,164
Profit as per Financial Books (P & L Account)
Illustration 50 :
Overheads are 15% of Wo
In aFactory Works Overheads at 60% of Labour Cost and Office
Reconciliation Staie
Cost. Prepare (i) Cost Statement, (ii) Trading and Profit & Loss Account and (iii)
if Total Expenditures of Materials 2,00,000, Wages 1,60,000, Factory Expenses 1,00,00
Office Expenses 65,000. Books
The Closing Stock of Finished Goods valued in Cost Books 52,500 andin Financial
45,200 and Sales are 5,30,000.
lution
: Statement of Cost
Particulars
2,00,000
Materials 1,60,000
Wages Prime Cost 3,60,000
96,000
Wages)
Works Overheads (60% of Works Cost 4,56,000
68,500
Cost)
Ofice overheads (15% of WorksOffice Cost /Cost of Production 5,24,500
52,500
Stock 4,72,000
Less : Closing TotalCost
Cost of goods Sold / S8,000
Profit 5,30,000
Sales
Trading & Profit & Loss Account

Particulars
Particulars
5,30,000
2,00,000 By Sales 45,200
To Materials
1,60,000 By Closing Stock
To Wages 1,00,000
To Factory Expenses (Actual) 65,000
ToOffice Expenses (Actual) 50,200
To Net Profit 5,75,200
5,75,200
Particulars
58,000
Profit as per Cost Books
charged in Cost Books
Add: Overvalued Expenses or Undervalued Income 3,500
(i) Office Expenses 3,500
61,500
in Cost Book
Less : Undervalued Expenses or Overvalued Income charged 4,000
() Factory Expenses 7,300
(ii) Closing Stock 11,300
Account/Financial Books 50,200
Profit as per Profit & Loss
Illustration 51 : prepare (a) Profit and Loss Account. (b) Statement of Cost,
nthe following Particulars, Oncost. (c) A
Office Oncost 75% on factory
StConsatementideringReconciling
Works on Cost at 25% on Prime Cost and A/c. The
Loss
Profits shown by the Cost Account with that shown by Profit &
the
Selling Price is fxed at Co_t: Plus 25%.
112 / Cost Aceounting
Stock Raw Materials IJanu., 2015

Stock Finished Goods 1 Janu., 2015 4000
Stock Raw Materials 31Dec., 2015 8,000
Stock Finished Goods 31 Dec., 2015 6,000
Wages
Works Expenses
24,10,000000
Office Expenses 1750
6,100
Solution:
Statement of Cost
Particulars
Opening Stock of Raw Materials 4,000

28,000
Closing Stock of Raw Materials 6.000
Cost of Materials Consumed
22,000
Wages 10,000
Prime Cost
32,000
Works on cost (25% on Prime Cost) 8,000
Work Cost 40,000
Office on cost (75% on Factory Oncost) 6,000
Office Cost / Cost of Manufacture 46,000
Opening Stock of Finished Goods 8,000
54,000
Closing Stock of Finished Goods 2.000
Total Cost 52,000
Profit 13,000
Sales 65,000
Profit & Loss Account
65,000
To Opening Stock By Sales
Raw Materials 4,000 By Closing Stock :
Finished Goods 6,000
8,000 Raw Materials
To Purchases 2,000
24,000 Finished Goods
To Wages 10,000
To Works Expenses 7,750
To Office Expenses 6,100
To Net Profit 13,150 73,000
73,000
Particulars
13,000
Cost Account
Profit as per Cost Account
Overvalued Expenses or Undervalued Income in 250
Add: (i) Works Oncost 250
13,250
Cost Account
Unervalued Expenses or Overvalued Income in 100
Less:
(i)Ofice Expenses 100
13,150
Profit as Per Financial Accounts
Illustration 52 : of
Engineering Company furnishes the following information regarding the manufacture
Books. Also
Pooja per Cost Books and Financial
Machine Component. You are asked to find out the Profit as of Profit as per
Reconciliation Statement showing Items which are lead to the difference
nrenare the
Books.
Cost Book & Financial
Interest on Overdraft 700
85,000 900
Sales Bad Debts
Materials Purchased 30,000 3,000
6,000 Profit on Sale of Assets
Closing Stock of Materials Selling Expenenses
2,000
25,000 3,000
Direct Wages 5,000 Distribution Expenses
Indirect Wages
2,000
Indirect Expenses
Office Expenses 8,000
Charged in Cost Accounts:
(i) Works Oncost 40% on Direct Wages.
(ü) Selling Expenses 2,500
(iii) Distribution Expenses ? 2,800
(iv) Office Oncost 15% on Works Cost.
Solution :
Cost Statement
Particulars
30,000
Materials Purchased 6000
Closing Stock of Materials 24,000
Cost of Material Used
25,000
Direct Wages Prime Cost 49,000
10,000
Works on cost (40% on Direct Wages)
Works Cost 59,000
8,850
Office Expenses (15% on Works Cost) 67,850
Office Cost / Cost of Production
Sellingand Distribution Expenses :
Selling Expenses
Distribution Expenses
2,500
2,800
Total Cost
Net Profit
Sales 3,\ 315050

85 00%
Profit and Loss Acecount
To Materials Purchased 30,000 By Sales
To Direct Wages
To Indirect Wages
25,000
5,000
By Closing Stock of Materials
By Profit on Sale of Assets
85,6,000000
To Indirect Expenses 2,000 3,00
To Office Expenses 8,000
To Interest on Overdraft 700
To Bad Debts 900
To Distribution Expenses 3,000
ToNet Profit 17,400
94,000 94,000
Particulars
Net Profit as per Cost Statement 11,850
Add : Overvalued Expenses or Undervalued Income in Cost
(i) Works Oncost
Account
3,000
(iü) Office Expenses 850
(ii)Selling Expenses 500
(iv) Profit on Sale of Assets
3.000
7350
19,200
Less : Undervalued Expenses or Overvalued Income in Cost Account
(i) Interest on Overdraft
(i) Bad Debts 700
(üi) Distribution Expenses 900
200 1,800
Profit as per Financial Book (P & 17,400

LAccount)
Tradingand Profit and Loss Aecount and Causes of differences are given :
lustration53;
The Profit and Loss Account of Airtel D.V.D. Manufacturing Ltd. for the year ended 31st March.
follows:
016isas
o Materials Consumed 50,000| By Sales 1,24,000

ToCarriageInwards 1,000
o DirectWages 34,000
To Works Expenses 12,000
Administration Expenses 4,500
To Debenture Interest 1,000
ToNetProfit 15,000
1,24,000 1,24,000
Comparision
The Net Profit shown by the Cost Accounts for the year is 16,270. Upon a detailed
that :
of the two Sets of Accounts it is found
Overhead Charges are as follows:
(a) The Amounts Charged in the Cost Accounts in respect of
4,590, Selling and
Works Overhead Charges 11,500, Office Overhead Charges
Distribution Expenses 6,640.
in respect of Debenture Interest.
(b) No Charge has been made in the Cost Accounts
by the Two Sets of Accounts.
You are required to Reconcile the Profits shown
Solution :
Particulars
16,270
Profit as per Cost Account
Undervalued Income in Cost Accounts
nuu: Overvalued Expenses or 90
() Ofice Overhead 140
() Selling and Distribution Expenses 230
16,500
Accounts
Less: or Overvalued Income in Cost 500
Undervalued Expenses
1,000
() Works Overhaed
1,500
(ii) Debenture Interest
15,000
Profit as per P& LAccounts
120 /Cost Accounting
Less : Undervalued Expenses /Overvalued Income in Cost Books
(i) Factory Overhead
(ii) Selling Expenses 2,224
(iii) Closing Stock of Raw Materials 9,702
6,152
Profit as per P & LA/e 18,078

3.2.3 Per Unit Cost of Materials and Wages are given and
asked to prepare the
33248
Statements.
Illustration 58 :
necessary
The Atlas Cycle Manufacturing Company which
you with the following information for the year endedcommenced business on lst April, 2015 supnlies
31st March, 2016 and asks
Statement showing the Profit per Cycle Sold. you to
Wages and Materials are to be charged at actual Cost
prepare a
Oncost at 75% of Work Oncost is to be charged. Work Oncost at 100%on Wages and Ofice
You are also required to prepare a Statement
with the Profit shown by the Profit & Loss A/lc of Reconciliation the Profit as shown by the Cost Book
Therewere no Cycles in the Stock or in theFinancial Books for the year ending 3Ist March, 2016.
number of Cycles Sold during the year was 800. course of Manufacture on 31st March, 2016.The
Their particulars are as under :
Material per Cycle

Wages per Cycle 480
Selling Price per Cycle 180
Prepare the necessary Statement showing the actual 1,170
were 1,50,500 and Office Expenses Profit for the year if the actual Works Expenses
Solution:
1,04,500.
Statement of Cost
for 31st March, 2016
Particulars Per Unit Amount for

|800 Cycles?
Materials (480 x 800)
Wages (180 x 800) 480.00 3,84,000
180,00 1.44,000
Works Oncost (100% on Wages) Prime Cost 660.00 5,28,000
1.44,000
180.00
Office Oncost (75%% of Works Works Cost 840.00
6,72,000
Oncost) 1,08,000
135.00
TotalCost 975.00
7,80,000
1,56,000
Profit 195.00
9,36,000
Sales 1,170.00
Profit & Loss Account
o Materials (480 x 800) 3,84,000| By Sales (1,170x 800) 9,36,000
o Wages (l180 x 800) 1,44,000|
o Works Expenses 1,50,500
o Office Expenses 1,04,500
o Profit
1,53,000|
9,36,000 9,36,000
Particulars
Profit as per Cost Statement 1,56,000
Add : Overvalued Expenses or Undervalued Income in Cost Statement
(i) Office Oncost 3,500
3,500
1,59,500
Less: Undervalued Expenses or Overvalued Income in Cost Statement
() Works Expenses 6,500
6.500
Profit as per Profit & Loss Ale 1,53,000
llustration 59:
ACalculator Manufacturing Company supplies you the following information and asks you to
prepare a Statement showing the Profit per calculator Sold. Materials and Wages are to be charged at
Actual Cost and Works Oncost at 75% on Wages and Administation Expenses at 30% on Works Cost.
Tou are also required to prepare a Statement Reconciling the Profit as shown by the Cost Account with
ue Profit as shown by the Profitand Loss Account. The number of Calculators Sold during the year
Were 1,620.
The Particulars are as under :
720
Materials per Calculator
240
Wages
1,800
Selling Price per Unit
e actual Works Expenses were 2,89,500 and Adminstration expenses 5,56, 140.
Tepare the necessary Statement showing the actual Profit for the year.
Solution: Statement of Cost
Per Unit
Particulars
Amo1,620untloUnir
720
Materials (1,620 x 720)
Wages (1,620 x 240) Prime Cost
240
960
11,3,86649,30
180 15,55 20%
+ Works Oncost (759% on wages) Works Cost 1,140 2,18,941.68069
Office Oncost
342
Adinistration Expenses (30% on Works Cost)Total Cost 1,482 S,54,040
Profit 318 24,00,840
1,800
5,15,160
Sales
29,16,0
Profit and Loss Account
Particulars
Particulars
To Materials (1,620 x 720) 11,66,400 By Sales

3,88,800| (1,620 x 1,800) 29,16,000
To Wages (1,620 x 240)
To Works Expenses 2,89,500
To Administration Expenses 5,56,140
To Profit 5,15,160
29,16,000 29,16,000
Particulars
5,15,160
Profit as per Cost Statement
Add : Overvalued Expenses or Undervalued Income in Cost Statement
(i) Administration Expenses 2,100
+ 2,100
5,17,260
Less : Undervalued Expenses or Overvalued Income in Cost Statement
(i) Works Expenses 2,100
2,100
5,15,160
Profit as per Profit & Loss Account
When Causes of Difference are given :
lustration 63:
The Net Profit of PAUL Manufacturing Ltd. appeared at 64.377 as per Financial records tor
31st March, 2016. The Cost Books, howerver showed a Net Profit of 86,200
period. A Scrutiny of the figures from both the Sets of
forthe same Accounts revealed the following
facts.
Works Overhead under-recovered in Costs 1,560

Administrative Overhead over-recoverd in Costs 850
Depreciation Charged in Financial Account 5,600
Depreciation recovered in Costs 6,250
Interest on Investments not include in Cost 4,000
Loss due to Obsolescence Charged in Financial Accounts 2,850
Income Tax provided in Financial Account 20,150
Bank Interest and Transfer Fees in Financial Books 375
Stores Adjustments (Credit in Financial Books) 237
Loss due to Depreciation in Stock Values (Charged in Financial Accounts) 3,375
Prepare a Statement showing the Reconciliation between the figures of Net Profit as per Cost
Accounts and the Net Profit shown in the Financial Books.
Solution :
Particulars
Net Profit as per Cost Accounts 86,200

A00: Overvalued Expenses/Undervalued Income in Cost Accounts
0) Administration Overhead 850
650
(ii) Depreciation
(iii) Interest on investment 4,000
375
(iv) Bank Interest and Transfer Fees
(v) Stores Adjustments 237
6,112
92,312
Account
Less : UndervaBued Expenses /Overvalued income in Cost 1,560
(i) Works Overhead 20,150
(ii) Income Tax 2,850
(iii) Loss due to Obsolescence
3,375|
(v) Loss due to Depreciation in Stock Values
27,935
Net Profit as per Financial Books 64,377
Illustration 64 :
From the following prepare a Reconciliation Statement.
(i) Net Profit as per Financial Book 1,28,755

(ii) Net Profit as per Cost Book 1,72,400
(ii) Works Overhead Under Recovered in Cost Account 3,120
(iv) Administrative Overhead Over Recovered in Cost Account 1,700
(v) Depreciation Charged in Financial Book 11,200
(vi) Depreciation Charged in Cost Account 12.500
(vii) Interest Received but not included in Cost Account 8,000
(vii) Obsolescence Loss Charged in Financial Record 5,700
(ix) Income Tax Charged in Financial Book 40,300
(x) Bank Interest Credited in Financial Books 750
(xi) Store adjustment (Credited in Financial Book) 475
(xii) Depreciation of Stock Charged in Financial Books 6,750
Solution:
Particulars
Net Profit as per Cost Accounts 1,72,400
Add : Overvalued Expenses/Undervalued Income in Cost Accounts
(i) Depreciation 1,300
(üi) Administrative Overhead 1,700
(iii) Interest Received 8,000
(iv) Bank Interest 750|
(v) Stores Adjustments 475|
12,225
1,84,625
Less : Undervaiued Expenses/Overvalued Income in Cost Accounts
(i) Works Overhead
() Loss by Obsolescence 3,120]
(iii) Income Tax 5,700|
(iv) Depreciation in Stock Value 40,300
6,750
55,870
Net Profit as per Financial Books 1,28,755
|llustration 65 :
From the following figures prepare a Reconciliation Statement
(i) Net Profit as per Costing Record 33,380
Net Profit as per Financial Record 31,890
Factory Expenses Under Recovered in Costing 2,850
(iv) Administration Overheads Recoverd in Excess 2,125
Depreciation Charged in Financial Books 1,830
(v)
1.975
(v) Depreciation Recovered in Costing 225
(vii) Interest Received but not included in Costing
300
(viii) Income Tax provided in Financial Books
115
(ix) Bank Interest Credited in Financial Books
210
(x) Stores adjustment (Credited in Financial Books) 430
(xi) Depreciation of Stock Charged in Financial Accounts
600
(xii) Dividends appropriate in Financial Accounts
130
(xiii) Loss due to Theft and Pilferage provided in Financial Books
Solution :
Particulars
33.380
Profit as per Costing Books
Add : Overvalued Expenses/Undervalued Income in Cost Books
2,125
(i) Administration Overheads Recovered in Excess
145
(i) Depreciation 225
(iii) Interest Received
115
(iv) Bank Interest
210
(v) Stores Adjustment
2.820
36,200
Less : Undervalued Expenses/Overvalued Income in Cost Books 2,850

(i) Factory Overheads 300
(iü) Income Tax
600
(ii) Dividends
430
(iv) Drepreciation of Stock 130
(v) Loss due to Theft and Pilferage
4,310
Profit as per Financial Books 31,890
5.1
Process Costing
. M
5. I. I P,,ocess Cost.mg : ean i·ng and
: .
Concept
5.1.2 Process Cos ting : Clw rac teri stic s
5.1.3 Process Cos ting P,·oced ure
5 1 4 P,·o cess Losses and Wastages
. . 5.1.4.1 Nor mal Los s/ Nor mal Wastage
5.lA .2 Abn orm al Los s/A bno rma l Wa
stage
5.1.5 Jo int Products and By Products
5.1 .5.1 B: Products
5.1.5.2 Join t Products
5 1 6 Difference between Join t Produc
ts and By Pro duc ts .
5.1. 7 Methods of Ass ign ing Join t Cos ts/
Accoun~ing for ~oi nt Costs . M thoi
. . 5 1 7 1 Market Price (Value) at Spl
it Off Poi nt I Poi nt of Sep ara tion e
5:1.· 7:2 Market Val ue After Fur ther Pro
cessing Me tho d
5_1_7.3 Net Rea lisable Value Met hod
·
5.1. 7.4 Phy sica l Uni t Met hod
5.1. 7. 5 A verage Uni t Cos t Met hod
5. 1. 7. 6 Sur vey Met hod
5.1. 7. 7 Ma rgin al Cost Met hod
a Review Questions and Answers (Multip
le Choice Que stio ns)
5.1. 1: Process Co stin g: Me ani ng

and Co nce pt :
Process Costing is a method of costing tha
t app lies to ma nuf act urin g concerns whe
the input of raw material in the first pro re
cess on dep artm ent pas ses thro ugh nex
or department successively, so tha t the out t processes
put of pre vio us pro ces s bec om es the inp
next process , and the finished product bein
g the out put of the last pro ces s. The
ut of theI
stage cannot be completed unless the pre follO\VI ng
vious stag e is com ple ted . It me ans the
activity is depend upon the completion of sub sequ ent
pro ced urin g acti vity , i.e. pro udc tion
process or dep artm ent to the nex t unt moves frolll
il final completion occurs. Eac h pro
some par t of the total operati on and tran ces s peforU1 5
sfer s its com ple ted pro duc tion to the
where it becomes inp ut for furt her process nex t process,
ing. The com ple ted pro duc tion of the
is transfer red to the finished goods accoun last process
st t. In this situ atio n tota l cos t and cost
each age is determined. For this purpos per unit at
e process cos ting me tho d is bei ng use
costing is that, aspect of operation costing d. Process
which is use d to asc erta in the cos t of
of each ?roces s or stag e of man ufa ctu the product
re. This met hod is app lied in ind ust
production flo ws from the r aw mat eria ries where th:
l to the fini she d pro duc t con tinu ous
process to ano ther . These are called pro ly from on
cesses. In suc h cas e it is des irab le to
find out the
70
Process Costing I 71
duction at the end of each process, so that the expenditure incurred at different
st
co of P;~roduction, can be ascertained. Under this method th e re m ay be production of
st,itgesd~ictorjoint product with a main product. The records a r e also maintained to account
by-pro roduct or joint product. Thus, it is a method of casting u sed to determine the csot of
~ bv·P .
or d·uct at each process, operation or stage of manufacture.
pro Below are given some definitions of process costing.
(l) Kohler : "Process costing as a method of cost accounting whereby costs are charged
processes or operations and averaged over units produced."
to (2) Wheldon : "Process cositing is a method of costing used to ascertain the cost of
product at each process, operation or stage of manufacture. " .
(3) CIMA : "The Costing method applicable where goods or services result from a
sequence of Mntinuous or repetitive operations or processes. Costs are a veraged over the
units produced during the period."
In this way, process costing refers to method of cost accounting which costs are
accumulated fro each separate and independent but inter-related process. Process costing
is used in the process account, where the output of first process become the raw material of
the next process. The account of the receiving process is debited with the cost of transfer in
addition to the cost or" other materials, labour, direct expenses and indirect expenses, if
any added to that process. The process account is credited with the sale of value of scrap ,
waste or residue etc; and the net cost of output of the process is transferred to next process.
The net cost of the last process is transferred to finished goods account.
This method of costing is used in those industries where mass p roduction of identical
units is undertaken on a continuous basis and finished products are subj ected to a number
of production stages called ,>rocesse 1)efore completion. The following is the !illustrative
list of industries where process costing is applied :
(1) Cotton textiles, (2) Electronic Manufacturing , (3) Oil Refinary, (4) Chemicals, (5)
Sn p, (6) Boxes, (7) Distillation, (8) Food Products, (9) Coke, (10) Paint, ink a nd varnis h ,
(11) Biscuits, (12) Canning, (13) Paper, (14) Milk Dairies, (15) Steel, (16) Rubber, ( 17)
Cement, (18) Electricit,·. (19) Gas, (20) Mines, (21) Sugar, (22) fanning, (23) Glass, (2-l)
Screws, Bolts and Rivel.:::;, (25) Flour etc.
5 2
-1. : Process Costing: Charac teristics:
(l) The Production is continuous and the final product is the r esult of sequence of
Processes. ·
~!) Each plant is divided in to distinct process centres each processing a single product.
) Costs are accumulated processwise
WTh . .
(S) e products are homogeneous and standardized.
(6) ~he product is processed in a specific sequence of operations.
&equenc hfe output of each process is transferred to the next process in a continuous
e o op .
(7) Th erations unt_il completions.
total Proc e co st per un'it produced is the average cost which is calculated by 'ividing the
ess cost b th .
(8) Th -- . Y e number of umts produced.
Pr0c e finished d
ess in 8 · pro uct except last process becomes the raw material for the next
(9) 'rh:quence and that of the la st process is transferred to the finished goods account.
sequen-ce 0 f . . ..
operat10ns or processes 1s s pec1f1c and pre determined.
72 I Cost Accounting
(10) Some loss of mater ial 111 proces s due to chemi cal action , evapo raf
unavo idable .
ion etc. ~
(11) Proce ssing of a raw mate ri a ls give rise to t he produ ction
of se rvera l d
These severa l produ cts produ ced from the sam e raw mater ial may be pro Ucts
terme d as by-prod ·
or joint produ cts .
Ucte
(12) For each proces s, a sepe rate accou nt is maint ained in which record
. . . s relatin
its proce ssing costs mcw·r e d are mamt. .
am prope r 1y . gto
(13) The proces s cost centre s are clearly defind and all cost relatin g
to each process
cost centre is accu mulat ed.
(1 4) Since the produ ction is contin uous in nature , there will be closin
g work-i n-progress
which must be valued separa tely.
5. 1.3 : Pro cess Costi ng Proce dure :
The princi ple stages in process costin g proced ure are :
(1) The factor y is divide d into a numb er of proces ses and an accou nt is
maint ained for
each proces s.
(2) Each proces s accou nt is debite d with mater ial cost, labou r cost,
direct expenses
and overh eads alloca ted or appor tioned to the proces s.
(3) The proces s accou nt is credit ed with the sale value of scrap, waste
or r esidue etc.
(4) The net cost of the outpu t of a proces s (Total Cost • Sale
Value of Scrap) is
transf erred to the next proces s in the sequen ce. In other words , finish
ed outpu t of one
proces s becom es input of the next proces s.
(5) The finish ed outpu t of the last proces s (net cost of the last proces
s) i.e. the final
produ ct is transf erred to the finish ed goods accou nt.
5.1.4 : Proce ss L o sses and Wast ages :
There are many types of waste a nd scrap which arises during manu factur
ing process
such as loss of mater ial due to chemical r eactio n, evapo ration , leakag
e etc. If residual
mater ial is havin g no sale value or it is not physic ally availa ble it is known
as waste but it
is having a sale value it is k n own as scrap.
Such loss of mater ial can be classif ied as (i) Norm al Loss or Norm al Wasta
ge and (ii)
Abnor mal Loss or Abnor mal Wasta ge.
5.1.4. 1: Norm al Loss/ N o rm a l Wast age:
It is the loss which is unavo idable a nd very m uch expec ted in norma
l condit ions 8~
inher ent in the manu factur ing proces s. If s uch loss is wit hin the limit
it is called norroal
proces s loss or norma l wasta ge . It arises becau se of natu re of th e m ateria
l or pr ocess such
as by leakag e, evapo ration , shrink age, break age etc. It a lso includ es
units wit hdraw ls for
tests or sampl ing and unavo idable spoile d quant ities.
The norma l loss is credit ed to pr ocess accou nt only in terms of qua n
tity a nd in the
colum n of amou nt nothin g is menti oned.
Howe ver, when norma l loss is physic ally presen t in t he form of scr a
p, it maY ha~:
some value, i.e . it may be sold at some price. Wh eneve r scr a pped m a terial
has a ny value I
is credit ed to the proces s accou nt. Th e normal loss is absor bed by good
produ ction and as ll
result t h e cost per unit of good produ ction infl ates.
>
_ .4.2: Abnorn:iaI Loss or Abnormal Wastage:

51
This loss arises due to abnormal factors s uch as corelessness , machine breakdown,
accident, use of defective material, negligence, bad designing etc. This typ e of process loss
is avoidable and controllable and generally caused by abnormal as unexpected conditions.
"Any loss caused by any unexpected or abnormal conditions, in excess of the margin
anticipated for normal process loss should be regarded as abnormal process loss."
It has been stated earlier that abnormal loss is due to abnormal rea sons. Unlike normal
loss, Abnormal Loss is not absorbed by good production, rather it is transferred to Costing
Profit and Loss Account. This is because of it the cost of abnormal loss wer e to fall upon the
good production, the cost there of will fluctuate and the inform a tion provided would be
misleading. The cost of abnormal loss should be debited to Abnormal Loss Account a nd
credited to Process Account with quantity and cost thereof.
The value of abnormal loss is calculated with the following formula :
Normal Cost of Normal Output

Value of Abnormal Loss = Normal Output x U nits of Abnorm al Losses
The balance of the abnormal loss is debited to costing profit a nd loss account.
5.1.5 : Joint Products and By Products :
When from a common manufacttH ing operation or process of a single input, two or
more output are obtained, depending upon the relative importance of the products , they
are referred to as 'Joint Products or By Products' such products are common in chem ica l,
extractive, dairy and agricultural product industries. For example, in oil indus tries wh en
crude oil is processed petrol, diesel, kerosene, lubricants etc. are obtained . Simal ary, in
sugar manufactur ing, industries molasses is also produced alongwith s ugar .
In such cases, one product cannot be produced without the production of other product
or products and tJ,. managemen t has no control over the ratio in which the differen t e nd
products come out of the process. The products arising out of the process can be classified
into : (i) By Products and (ii) Joint Products.
5. 1.5.1 : By Products :
The term 'By Products' refers to those multiple products that h ave significant sales
value relevant to those of major products and which results incide ntally from the
manufacture of the main product, and also precessing is aimed in their direction.
CIMA has defined by product as "Output of some value produced incidentially in
manufacturi ng something else (main product)."
By products are secondary products which are not planned in production but emerge
from the manufactur e of the main product. Products carry lesser commercial importance
and value compared to main product. They are either a net realisable value or an unusable
value which is relative ly low in comparison with the saleable value of the main products.
Thus, if the value of the product is so small that it have no effect on the decisions to
~roduce or not to produce the entire product group it is a by product. Similarly by product
18
an output of manufactur ing process which adqs a relatively small amount to the total
lllarket value of all outputs.
Examples of By products are as follows :
1111
, 74 / Co~A ccounUng
lndu stry Basi c Prod ucti on By Prod ucts

( 1) Oil Refm ery Rcfln d O il S urph e r , C h e mica l, Ferti lizer
(n ) Cot t on Cott.o n Cott on Seed el(; \
( 1n ) ~ ug.w Mill Sugn r Mola sses, Baga sse
( \\') nan·y Butt.er , Pan eer Butte r-Mi lk
( \" )
S oap Soap G lyce rin \
(n ) Cok e M a lnng Coke Gas , Benz el, Tar
Feat ures of B y Prod uct :
( 1) Thes e are prod uced simu ltane ou s with main prod ucts.
(11) Prod uctio n of by prod ucts is just incid
en tal t o the prod uctio n of m ain prod uct.
(111 , T h eir saleb le or usab le valu e is relat
ively less.
(1, ·) By Prod uct p l a y much less rolr in man
ageri al decis ion-m akin g.
(Y) Gen erall y furth er costs are not incu rred
on by prod ucts.
5 .1 .5 .2 : Join t P rodu cts :
Join t Prod ucts are t he prod ucts prod uced joint ly from
the same basic m ateri al m
defin ite prop ortio ns by the same proce ss, relat ively
, are of equa l signi fican ce and value
Join t prod ucts repre sent two or more prod ucts sepa rated
in the caus e of the sam e p roces sim
op e ratio ns, usua lly requ iring furth er proce ssing , each
prod uct bein g in such prop ortior
that n o s ingle prod uct ca n be desig nated as a majo r prod
uct. It is not nece ssar y that thesE
or m or e prod ucts s hou ld be entir ely diffe rent in natu re.
They may even be diffe rent grades
of the s ame prod uct. CIM A has defin ed joint prod uct
as, "Two or more prod ucts sepa rated
in proc essin g each havi ng a su;/i cient h igh sale value to
meri t recogn ition as a main prod uct.
Usua lly joint p rodu cts requ ire furth er proce ssing after
their poin t of sepa ratio n . Before
thes e joint ly prod uced p rodu cts are sepa rated they do
not have sepa rate iden tity and the
cost incu rred are a lso comm on to them all. Afte r
these joint prod ucts are sep a rated,
a dditi onal costs may or may not be incu rred to make
the m salea ble .
Exa mple s of j oint prod ucts are :
Indu stry Basi c Mat eria l Join t Prod ucts
Diary Mik Skim Milk , Butt er, C urd e t c.
Coal Proc es sing Coal Coke , Sulp hate , L ight Oil, Benz ol, Gas etc.
Suga r S uga rcan e Suga r, Suga r C ubs
Oil Refin ary Crud e Petro leum Gaso line , Dies el, Lubr ican ts, Liqu id
P etrol e um Gas, Napt ha, Para ffin, Coal Tar
Ke rose n e, Fuel Oil, Asph at Avia tion Gas.
Gold Mini ng
Gold , Silve r, Copp er
Cha ract erist ics of Join t Prod ucts :

(I) Join t Prod ucts are prod uce d from same bas ic raw
mate rial.
(2) Befo re sepa ratio n poin t they are prod uce d simu
ltane ousl y.
(3) Till sepa ratio n they have no sepa rate iden tity.
(4) Man ufac turin g proc esses are comm on.
(5) All cost are comm on till s e para tion.
(6) A ll j oint prod uct s have s ig nific a n t valu e.
Process Costing 1 75
(7) They are saleable. Aft~r separat_ion, additional costs may be incurred on some of
r all of them for converting them mto a saleable or an improved product
the)]l o .
· 6 : Difference between Joint Products and By Products:
5
.l· The following are the main points of difference between the two :
(1) Objective_: . . . .
⇒ Obtammg the Jomt product 1s the main objective of an industry.
⇒ Obtaining by product is secondary objective.
(2) Production :
⇒ The Joint products are produced simultaneously.
⇒ By products emerge incidentally of manufacturing t he main product.
(3) Relationship :
⇒ Exists a direct relationship among joint products.
⇒ It may not be true in case of by product.
(4) Control :
⇒ Greater degree of control can be exercised in joint products.
⇒ It is not possbile to excerise utmost control in by products.
(5) Value :
⇒ Joint products are almost equal value which is significant.
⇒ By products are of relatively small or negligible value.
5.1.7: Methods of Assigning Joint Costs/Accounting for Joint Costs:

Assigning joint costs for joint products mean the apportionment of join costs to each
of the joint product. For accounting purposes, each joint product is treated as an individual
product after split off point. A separate account is opened for each joint product. All
apportioned joint costs and costs after separation are debited to this account . The cost
accounting of joint product involves the apportionment of the total joint costs amon g joint
products. Thus joint costs up to the split off point allocated on some quitable basis a nd
when all the joint products become individual products the further processing costs a re
allocated directly to each product. Followig are the main method of apportionment of joint
cost over joint products.
5.1.7.1: Market Price (Value) at Split off Point/Point of Separation Method :
Split off point or separation point, refers to tha t stage in manufacturing operations at
which the product get separated a nd become separately identifiable. For example, when
butter and skimmed milk get separated.
Under this method price of each joint product at split off/separation point is ascertained.
Joint costs are apportained to joint products in the ra tio of their sales value at separation
point.
5,1.7.2: Market Value After Furthe'r Processing Method :
In this method, market values of Joint Products after further processing are used as
the basis for apport ion ing joint costs. Market value is a hypothetical ma rket value a nd
higher than sales value at spli t-off point. Th8 merit of the method is that market price of
saleable pr odtlcts arc easily ava ila ble. But this met hod is however unfair where fmth er
76 I Cost Accounting
processing costs of production are disproportionate or whe n all the joint products are
subject to further processing. not
5.1.7.8: Net Reliasable Value Method:
Under this method joint costs are opportioned in the ratio of net realisable va}
point products at the split· off pomt.
· The net rea1198 . ca lcu Iate d by deductin I.leh0t
· bl e va l ue 1s
. d . gt e
further process cost from the sale value after f urt h er processing an apportion the foint
costs in the ratio of net realisable value.
5.1. 7.4 : Physical Unit Method :
Under this method. the cost of joint products is determined by opportioning total joint
cost on the basis of the physical output (units) of each joint proudct at the split off point.
Any processing loss is also apportioned over the product on the same basis. This method is
suitable where the physical units of joint products are same. These physical may be unita
litres, pounds, kilos, tones, gallons etc. This method is useful where further processin~
costs are incurred disproportionately. But, should not be applied where the physical unita
of joint products are different and where costs have no relationship to the physical volume
of individual products, for example one product is gas and antoher is liquid.
5.1.7.5: Average Unit Cost Method:
In this method, the joint cost is opportioned to the joint products by computing the
aver age unit cost of the product units. The average unit cost is computed by di vi Jing the
total manufacturing cost by the total number of units produced of all the products. Thus :
Total Joint Costs

Average Cost Per Unit= - - -- - -- - - - - - - - -
. Total No. of Units of Joint Products
This method is useful where all the proucts produced are uniform in nature with each
other in all the aspects. This method is not useful where the physical units of joint products
are different in nature say one in kilogram and other in litre.
5.1. 7.6 : Survey Method :
This method opportions
. · o f th e resul ts
the .joint cost .to various products, on the b as1s
of a survey or technical evaluation. In this survey, various factors l'k lli
· k · di d d . 1 e vo1ume, se ng
pnce, mar etmg process etc. are stu e an pomts or weights are as · d h
.
Cos ts are apport 10ne d th b · f h • h signe to eac product.
on e as19 o sue we1g ts or points.
5.1. 7. 7 : Marginal Cost Method :
This method uses the technique of marginal costing in which joint
in to two parts (i) Variable Cost and (ii) Fixed Costs. The variable joint costs are segregated
on the basis of weight or quantity of each product and fixed costs a coeta are opportioned
ratio of contribution made by prtoducts. This method used only when re 0 PP0 rtion d · th
d . e m e
and fixed joint costs are available. etaiJs of variable
lf.P
Process Costing / 77

Answer Questions : .
(A)~~)• Describe process costing and gi~e its salien_t features. To whi~h indus trieR t h is method a pplied ?
) What is process costing accounting ? Explain the process costing procedure .
2
< ) Explain normal loss, abnormal loss and state how they should be de lt with in process cost account.
~!) Explain the nature of joint products and by products. Distinguis h betwee n joint products a nd by
products. .
(5) Explain briefly the various method of apportionment of joint costs. Which method do you conside r
best?
(6) What are the various methods of accounting for joint products ? Briefly expl ai n each of the methods .
(7) Explain the meaning and concept of process costing, and give the salient feature of the system. For
which kinds of industries is process costing suitable ?
(8) Define loss and wastage, and explain the effect of them on the asertaiment of cost of a n a rticle.
(9) Define Normal wastage and Abnormal wastage and .explain the effect of each of them on the
ascertainment of cost of an article.
(10) What is 'by product' ? How should it be treated in ascertainment of the cost of the main product.
(11) Define and explain the term 'Joint Products' and 'By Products.'
(12) Enupiarate the methods which may be employed in costing 1joint products.'
(13) Explain normal wastage and abnormal wastage.
(14) What do you understand by process costing ? Describe the characteristics of it.
(15) Distinguish between (i) Wastage and Loss, (ii) Joint Products and ' By Products.'
(16) Explain the accounting treatment of joint products.
(17) Explain briefly the methods of accounting of joint costs.
(B) Short Answer Questions :
(1) What is joint product? How it is different from by products.
(2) Define normal loss and abnormal loss.
(3) Define normal loss.
(4) Distinguish between the joint products and by products.
(5) Explain (i) Market Price (Value) at split off point method, (ii) Market Value after further processing
method, (iii) Physical unit method of assigning joint costs for joint products.
(6) Explain any three methods of accounting for joint costs. ·
(7) Explain the general characteristics of process costing.
(8) What _do you understand by normal and abnormal wastage of material in the procei-s of production .
(9) Explam any two methods of accounting of joint cost.
(10) Ex_p~ain (i) Market Price (value) at split off point method and (ii) Physical unit method of accounting
of Jomt cost.
(11) Give five names of such industries in which process costing is suitable.
(12) What ia ment by process costing. ·
(13) Distinguish between Normal wastage and Abnormal wastage.
0 4) Write on Loss and Wastage in Process Costing.
05) What is ment by process losses and wastn~c .
(lG) What is ment by Normal and Abnormal wastage.
0 7) How will you find out the value of Abnormal wastage?
(C) M
ultiple Choice Que■ tion1 :
(1) Following one is a method of costing that applies to manufacturing concerns where th · t f
raw te · 1 · h ti e mpu o
m~ r1a m t e rst process passes through next processes succeS&ively :
(a) Umt Costing D
(b) Proce11 Costine ~
(c) Contract Costing D
(d) Marginal Costing D
78I CostAccountlng
. . h th
(2) Followin g one u:1 t c mo od of coRling used on the cost
.
account ing where the out
proceR~ bccomCA t,hc rnw mntcrin l of the n~xt process . Put of th
e ri.,
(n) Contrnc t Costmi;(
(b) ll nit Cmit in~ 0
(c) Standn1·d CoRlintt 0
li1
(d) Proc-eR!I CoBUn1
(3) 1'hl' pl'O<'e!IIR nccount iR credited with tho Rn lc of volue of :
' 0
(I\) ScrRp
(b) WAt1te 0
(c) Re111due D
(d) All o( above It'.!
(4) Followin g one iR the lndustt·y whero process costing cannot be applie d :
(a) ChemicA ls D
(b) Biscuits D
(c) Cement D
(d) Conatru ctlon It'.!
(5) The loss of materia l is classifie d in one of the followin g number
(a) Two It'.!
(b) Four O
(c) Five □
(d) Three □
(6) The loas which is unavoid able and very much expecte d in normal conditio ns is called
:
(a) Abnorm al LoH liZI
(b) Normal Lo88 O
(c) 'a' and 'b' □
(d) None of above □
(7) The normal loss is credited to process account in terms of:
(a) Amount □
(b) Quanti ty 0
(c) A.mount and Quantit y O
(d) None of above 0
(8) The 'scrap' is credited to process account in terms of:
(a) Quantity □
(b) Amount □
(c) Quanti ty and Amoun t 0
(d) Per Unit □
<9) The Losa arises due to carelesa ness, machine break down etc is called .
(a) Normal Lou ·
O ·
(b) AnormaJ LoH if
(c) 'a' and 'b'
(d) Abnorm al Gain a
□
(10) The balance of the abnorm al loaa is debited to .
(a) Profit and Lou Account □ ·
(b) Co■tins Proftt and Lo11 A DI
(c) Tradinc Account ccount iu
(d) Balance Sheet □
a
(JI) The Product . which have either a net re l'
aaleable value of the main prod t . · tbl
• ••able value or an unusab le value relative ly low witb
. (a) Co-prod uct UC aa called :
(b) Joint Product □
(c) By Produc t □
(d) All of above iJ
a
b · called
pro du cts pro du ce d joi ntl y fro m the sam e asi s ma ter ial by gie sam e proces s is
(1Z) (a) By Pr od uc t
(b) Co -Pr od uc t ~
(c) Jo in t Pr od uc t □
All of ab ov e cts aft er further
ma rke t val ue of joi nt produ
(d)
as~ ign ing joi nt cos ts the
(IS) Un de r ~n e of the
me tho d of ing joi nt cos t :
processi ng ar~ us ed as the bas1_s for ap po rti on □
at sp ht off po int
(a) Ma rke t Pr ice (V alu e) tho d Ii'.!
fu rth er pr oc es sin g me
(b) M ar ke t Va lue af te r □
rea lis ab le va lue me tho d
(c) Ne t □
(d) Ph ysi cal un it me tho d joi nt cos ts is app ort ion ed to
the joi nt products by
me tho ds of Ac cou nti ng for
() ) Un de r on e of the un its :
4
co mp uti ng the av era ge un it co ~· of the pro du ct D
(a) Su rve y Me tho d a
l Co st Me tho d D
-
(b) Ma rgi na
Me tho d 0
(c) Ph ysi cal Un it
•t M eth od
(d) Av er aJ e Un it Co
Process Costing/ 151
. Points in Process Costing :

1
specaa1
'- 1118
of Process Account :
I,
profor
Process Account
Units Particulars Units

Particulars
" "
xx
apening Stock xx xx By Loss in Weight xx
fo . By Nonnal Loss/Wastage xx xx
fo rransfer from Previous
process xx xx By Abnonnal Loss xx xx
To Direct Materials xx xx By Sale of Scrap xx xx
To Direct Wages xx By Sale of By-Product xx xx
To Direct Expenses xx By Transfer to Warehouse xx xx
To Indirect Expenses xx By Transfer to Next Process/
To Other Expenses xx Transfer to Finished Goods Ne xx xx
To Abnormal Gain xx xx By Closing Stock xx xx
XXX XXX XXX XXX
2. Normal Loss :
Normal Loss means the Loss of Material which is inherent in the Manufacturing Operation or in
the Nature of Material and cannot be eliminated. Such Losses can be estimated in advance on the basis
of past Experience. The Sales value of the Nonna) Loss, if any is Credited to the Process Account and a
corresponding Debit will be made to the Cash Account.
3. Abn~ ss (Abnormal Wastage) :
0"bnormal Loss means the Loss in excess of the Nonnal Loss. Abnormal Loss is caused by
Unexpected or Abnormal Conditions. Abnormal Loss is over and above Normal Loss. Thus,
Abnormal Loss =Actual Loss - Normal Loss.
Abnormal Loss is not borne by Finished Output of the Process, and hence transferred to Costing
Profit & Loss Account. The Cost of Abnormal Loss should be Debited to Abnormal Loss Account and
Credited to Process Account with Quantity of Cost thereof.
Abnormal Loss is valued just like good units are valued. The value of Abnonnal Loss is calculated
as follows.
Particulars Units
Units entered xx
"
xx (Total Debit Side)
Less : Loss in Weight/Sale of By-Product / Normal Loss - xx - xx
Normal Cost of Normal Output XXX XXX
. After finding the Normal Cost of Normal Output calculated as above, the value of Abnormal Loss
18 calculated as follows :
Normal Cost of Normal Output
Cost ofAb normal Loss/Wastage= . x Units of Abnormal Wastage
Normal Output (Umts)
I 152 / Cost Accountin g
Specimen of Abnormal Loss Account:
Abnormal Loss / Wastage Account
Particulars Units Particulars
To Process Ale xx xx By Cash

xx
(Sal e of Scra pe of Abnormal
Loss /Wastage Units@
Normal Wastage Sold )
By Costing P & L A/c (Los s)
XXX XXX
-4. Abnormal Effectives or Gains:

lf the Actual Loss is less than the Normal Loss
, the goods unit s Prod uced in excess are call d
"Abnormal Gain ." lt implies that Abnormal Gain
is the excess of Actu al Production over expect:d
Production. the value of Abnormal Gain is ascertain
ed in the same way as the value of Abnormal Loss
Firs t find the Normal Cost of Normal Outp ut
as calculated in Abnormal Loss. The value ~
'Abnormal Gain ' is calculated as follows : 0
Cost of Abnormal Effectives or Gai ns =
~;,.,,,~ormal Cost of Nonna! _output
/ _,, - - - - - - - - - -
,/,,,,. x Units of Abn ormal Effectives
Nonna! Output (Units)
Specimen of Abnormal Gain A~t fut :
/ .Atfuormal Effectives/Gain Accoun t
/
Particulars Units " Particulars Units f
To Nonna! Loss/Wastage A/c xx xx By Process Ale
(Scrap Value @ Normal xx xx
Wastage Sold)
To Costing Profit & Loss Ne
xx
XXX XXX
XXX Xll
4.2 Illu strations on Process Costing:

4.1.1 Simple Proc ess Accounts :
Ulustratiion 75 :
A Product passes through three Process of Prod
uction. The Output of Preceding Process is
transferred to the Next Process. Assuming that the
Output was 1,000 units. Prepare the Process Acco
'A', 'B' & 'C' indicating also the Unit Cost per unit unlS
Process. under each element of Cost and the Output in e
Process Process
'A' '8'
f.
Raw Materials
Labour "
10,000 "
8,000 2,r:JfJ
sOO
Direct Expenses 5,000 600
1,500 500
200
Process' A' Account

Cost per Total Cost per Total
Unit Amount Particulars Unit Amount
particulars
"
10.00
"
10,000 By Output
" "
lb RaW Materials
16.50 16,500
5.00 5,000 (Transferred to Process
fo t,abOur
1.50 1,500 'B' Ale)
To Direct Expenses
16.S0 16,500 16.50 16,500
-
Process 'B' Account

Particulars Unit Amount Particulars Unit Amount
(") (") (") (")
To Process 'A' Ale 16.50 16,500 By Output 25.60 25,600

(Transfer from Process (Transferred to Process
'A' Ale) 'C' Ale
To Raw Materials 8.00 8,000
To Labour 0.60 600
To Direct Expenses 0.50 500
2S.60 25,600 25.60 25,600
-
Process 'C' Account

- Cost per Total Cost per Total
(") (") (") ( ")
To Proeess 'B' Ale 25.60 25,600 By Finished Goods Ne 28.60 28,600

<Transfer from Process
'B'AJc)
To Ra ·
t W Materials 2.00 2,000
0
Labour 0.80 800
Ton·irect Expenses
0.20 200
28.60 28,600 28.60 28,600
154 / Cost Accountlna
4.2.2 Simple Proress Accounts (Total Indirect Expenses given) :
Illustration 76 :
From the undennention ed figures prepare Process Accounts indicating th e Cost per Unit and the
Total Cost. The Production wns 500 units during Jonuory. 20 16.
Process 'I ' ProceH 'II' Pr0<:ess , ,
111
"
'
" I
Materials
Labour
4,000
2,000
2,000
1,500
80() '
500
DireC't Expenses 500 1,430 20()
Indirect Expenses amounted in all " 1,600. These are to be allocated on the basis of Labour.
Solution ;
Process 'I' Account
Production : 500 Units
Cost per Total Cost per -
Total
To MateriaJs 8.00
" "
4,000 To Output
"
14.60
-"
7,300
To Labow- 4.00 2,000 (Transferred to
To Direct Expenses 1.00 500 Process 'II' A/c)
To Indirect Expenses 1.60 800*
(AIJocated on the basis
of Labour)
14.60 7,300 14.60 7,300
Process II Account
To Process 'I' Ale

"
14.60
"
7,300 By Output
" "
12,830
25.66
'J'A/e) ' Ill' Ale.
To Materials 4.00 2,000
To Labour 3.00 1,500
To Direct Expenses 2.86 1,430
(AJlocated on the
basis of Labour)
25.66 12,830 25.66 12,~
Process 'III' Account

Cost per Total Coi1t per Total
rarticulan Unit Amount Particulars Unit Amount
"
25.66 12,830
" By Finished Goods A/c.
"
29.06
"
14,530
~•JJ'A/C
fo (Trll15fer from Process
•n' Ale)
1.60 800
fO Materials
1.00 500
fol,aboUI'
(Allocated on the basis
of Labour)
29.06 14,530 29.06 14,530
Notes:
Allocation of Indirect Expenses :
Indirect Expenses have been Allocated in the ratio of Direct Labour i.e. 2,000 : 1,500 : 500 i.e. in
lhc ratio of 4 : 3 : 1.
Process 'I' :
8 1,600
4x 1,600
4 ? = 800
8
Process 'II' :
8 1,600
3x1,600
3 ? = 600
8
Process 'III' :
8 1,600
?
}X ),600
8 -
OR
200
Total Labour Charges (Wages) = 2,P00 + 1,500 + 500 = 4,000

Total Indirect Expenses - 1 600
Allocatcd m· the Process : '
Process 'I' :
4,000 : 1,600
2,000 . 2,000 x I, 600
(Labour of.
?
4,000 = 800
Process ' I')

Process 'II' :
4,000 : 1,600
1,500 . J,500x 1,600
? = 600
(Labour of· 4,000
Proeess ' II')
Process 'Ill' :
4,000 : 1,600 500x 1,600
? 4, 000
= 200
500
(Labour of
Process ' Ill' ) 1,600
Illustration 77 :
An Article passes through three Processes o f Manufacture. From the following figures, show th
Cost of each of the three Proceses during the month of March, 2016. e
Process No. l Process No. 2 Process No.
3
Materials Used
"
15,400
"
8,400 '
7,000
Direct Labour 8,400 4,480 1,120
Direct Expenses 2,800 2,240 840
The Indirect Expenses are assumed to ~ 7,000, per month and is to be apportioned on the basis
of Direct Labour. The number of Articles Produced during the month was 280.
Solution :
Process No. 1 Account
Output : 280 Articles

Particulars Article Amount Particulars Article Amount
To Materials Used
"
55.00
"
15,400 By Output
"
110.00 30,800
'
To Direct Labour 30.00 8,400 {Transferred to
To Direct Expenses 10.00 2,800 Process No. 2 Ale
To Indirect Expenses 15.00 4,200* -
110.00 30,800 11 0.00 30,8~
Process No. 2 Account

0 utput : 280 Articles
Cost per Total TotJI
Cost per
Particulars Article Amount Amount
Particulars Article
t
To Process No. 1 Ale
"
110.00
" " 4g,160
30,800 By Output 172.00
(Transfer from Process
(Transferred to
No. I Ale)
Process No. 3 Ale)
To Materials Used 30.00 8,400
To Direct Labour 16.00 4,480
To Indirect Expenses 8.00 2,240*
172.00 48,160 ~ -
172.00
...ill
f Proce,, Co,ting / 157
Process No. J Account

Output : 280 Articles

Particulan Article Amount Particulars Article Amount
"
-
To ]>roeess No. 2 A/c
"
172.00
"
48,160 By Finished Goods Ale
"
206.00 57,680
No. 2 Ale)
To Material Used 25.00 7,000
To Direct Labour 4.00 1,120
206.00 57,680 206.00 57,680
Notes:
Allocation of Indirect Expenses :
Indirect Expenses have been allocated in the ratio of Direct Labour :
Total Labour Charges = 8,400 + 4,480 + 1, 120 = 14,000
Total Indirect Expenses = 7,000
Process 1 :
14,000 7,000 8,400x 7,000
8,400 ? 14,000
= 4,200
Process 2:
14,000 7,000 4,480 X 7,000
4,480 ? = 2,240
14,000
Process J:
14,000 7,000
l,120x7,000
1,120 ? = 560
14,000
7,000
Illustration 78 :
From the undennentioned figures prepare Process Accounts indicating the Cost of Process and
the Total Cost. The Production was 480 units during the week.
Total Process 'A' Process 'B' Process 'C'
Materials
"
8,800 6,000 "
2,000 800
Wages 13,600 3,200 8,000 2,400
Direct Expenses 4,920 1,040 2,880 1,000
27,320 10,240 12,880 4,200
. Indirect Expenses amounting to~ 3,400 should be apportioned on the basis of Wages. No Work
in Progress or Process Stocks existed at the beginning or at the end of the week.
Solutio n:
Process 'A' Accoun t
O utput : 480 U .
nits
Cost per Total Cost per
Particu lars Unit Amount Particu lars Tot.1
Unit
Amou1t
" "' "
To
To
Mater ials
Wages
12.50
6.67
6,000
3,200
By Output
(Transferred to Process
23.01 '
11,040
To Direct E>--penses 2.17 1,040 '8' Ale)
To Indirect Expens es 1.67 800
(Appor tioned on the
basis of Wages)
Total Wages = 13,600
. . 13,600 : 3,400
3,200 : ?
3, 200 X J, 400
=800
13, 600 .
23.01 11,040 23.01 11,040
Process 'B' Accoun t

Output : 480 Units
Particu lars Unit Amoun t Particu lars Amount
Unit
~ ~
To Process ' A'Afe 23.01 11,040 By Output

~
54.02 25,9
"
(Transf er from Process (Transf erred to Process
'A' Ne
'C' A/e)
To Materia ls 4 . 17 2,000
To Wages 16.67 8,000
To Direct Expens es 6.00 2,880
To Indirect Expens es 4.17 2,000
(Appor tioned on the
basis of Wages)
13,600 : 3,400
8,000 ?
8, 000 X 3, 400
= 2,000
13,600
54.02 25,920 54.02 2~

Process 'C' Account
O utput : 480 Units
Cost Per Total Cost Per Total
To process ' B' A/c

"
54.02
"
" "
64.02 30,720
(fr. from Process 'B' Ale)
To Materials 1.67 800
To Wages 5.00 2,400
To Indirect Expenses 1.25 600
(on the basis of Wages)
13,600 : 3,400
2,400 ?
2, 400 X 3, 400 =600
13, 600
64.02 30,720 64.02 30,720
.
Olustration 79 :
A Product passes through three distinct Process to completion . The Output of Proceding Process
is transferred to the Next Process.
The Output for the week is 1,000 Tons. The following Expenses were incurred.
Process 'A' Process '8 ' Process 'C'
Direct Material
Wages
1,00,000 " "
20,000 "
10,000
50,000 80,000 70,000
Direct Expenses 40,000 30,000 20,000
Total Indirect Expenses during the week were " 20,000.
Solution:
Process 'A' Account
Output : 1,000 Tons
Particular s Ton Amount Particular s Ton Amount
-
To Direct Material
"
100
"
1,00,000 By Output
"
195
"
1,95,000
To Wages 50 50,000 (Transferre d to
To Direct Expenses 40 40,000 Process ' B' Ale)
To Indirect Expenses 5 5,000
(Apportioned on the
basis of Wages)
2.00,000 : 20,000
50,000 : ?
~ -
2,00,000 - 5,000
195 1,95,000 195 1,95,000

Process '8' Account
Output : 1,000 i ons
Cost per Total Cost per
Amount Particulars To~,
Particulars Ton Ton
Arnount
To Process ' A' Ale

'"
195
'
1,95,000
" By Output
"
333
t
3,33,ooo
'A. Ale) ' C' Account)
To Direct Material 20 20,000
To Wages 80 80,000
To Direct Expenses 30 30,000
2,00,000 : 20,000
80,000 ?
80,000 x20,000 = 000
8
2,00,000 '
333 3,33,000 333 3,33,000
Process 'C' Account

Output : 1,000 Tons
Cost per Total Cost per Tobi
Particulars Ton Amount Particulars . Ton Amount
To Process ' B' Ale

'" "
3,33,000
" "
4,40,000
333 By Finished Goods Ale 440
{Transfer from Process
'B' Ale)
To Direct Material 10 10,000
To Wages 70 70,000
To Direct Expenses 20 20,000
2,00,000 : 20,000
70,000 ?
70,000x20,000 = ,000
7
2,00,000
440 4,40,000 440 4,4~
1ustration 80 :
ti prepare Process Accounts in the Ledger of Mis Komal and Co. Ltd. from the following :
Manufacturing Refining Finishing
Process Process Process
~ ~ ~
Material 3,000 2,000 750
Wages 1,500 2,500 1,000
Direct Expenses 800 400 300
Raw Material Worth ~ 12,000 were issued to Process ' A' . Indirect Expenses amounted to
t 8,000 in the Factory out of which~ 2,000 is attributed to this Product. There was no Stock at the end
in any Process. During the Month of Sept., 2016 the Finished Product was 200 kgs.
Solution:
Manufacturing Process Account
Output : 200 Kgs
Cost per Cost per
Particulars Kg Amount Particulars Kg Amount
~ ~ ~ ~
To Raw Materials 60.00 12,000 By Output 89.50 17,900

To Material 15.00 3,000 (Transfer to Refining
To Wages 7.50 1,500 Process Ale)
To Indirect Expenses 3.00 600
5,000 : 2,000
1,500 : ?
2,000 x I, 500
=600
5,000
89.S0 17,900 89.S0 17,900
Refining Process Account

Output : 200 Kgs
Cost per Cost per
To Manufactwing Process Ale "

89.50
"
17,900 By Output "
119.00 "
23,800
(Transfer from (Transfer to Finishing
Manufacturing Ale) Process Ale)
To Material 10.00 2,000
To Wages 12.50 2,500
To Indirect Expenses 5.00 1,000
5,000 : 2,000
2,500 .· ?.
~x2,000
= 1,000
5,000
119.00 23,800 119.00 23,800
l62 / Cost Accoun ting
Finishin g ProceH Accoun t
Output . 20
. Ok
Cost per
Cost per ~
Particu lars Kg Amoun t Particulars
Kg
To Refinin g Process Ale

"
11 9.00
"
23,800 By Finished Goods A/c "
Arnou111
t
131.25
(Transf er From 26,2so
Refinin g A/c)
To Materia l 3.75 750
To Wages 5.00 1,000
To Direct Expens es 1.50 300
To Indirect Expens es 2.00 400
5,000 : 2,000
1,000 : ?
1, 000 X 2, 000
=400
5, 000
131.25 26,250 131.25 26,250
Illustration 81 :
A Drug Manufa cturing Compan y Process through three distinct Process es. Raw Material,
Labour
and Other Factory Expense s incurred on each of the Process are given below.
Proces s' A' Process 'B' Process 'C'
Raw Materia ls " " f

1,000 850 400
Labour 500 600 700
Factory Expense s 250 350 800
The Overhe ad Expense s for the period amount ed to " 3,600. Assumi ng that the Output
was
1,000 kg. Show the Process Accounts 'A', 'B' & 'C'.
Solutio n:
Process 'A' Accoun t
Output : 1,000 kg.
Cost per Cost per
Particu lars Kg Amount A111ouDI
Particu lars Kg
" " " "

2,150
To Raw Materia ls 1.00 1,000 By Output 2.75
To Labour 0.50 500 (Transferred to Process
To Factory Expens es 0.25 250 •B' Accoun t)
To Overhe ad Expens es 1.00 1,000
(on the basis of
Labour Charge s) .
S00x3 ,600 = l,OO0
~
1,800 ~
2.75 2,750 2,75

r Process Costing / 163
I Process 'B' Account
I
Output : 1,000 kg.
- Cost per C ost per
To Process ' A' Account

"
2.75
"
2,750 By Output
"
5.15
"
5,750
(Transfer from (Transferred to Process
Process ' A' Account) 'C' Account
To Raw Materials 0.85 . 850
To Labour 0.60 600
To Factory Expenses 0.35 350
To Overhead Expenses 1.20 1,200
(on the Basis of
Labour Charges)
600x3, 600
= 1,200
1,800
5.75 5,750 5.75 5,750
Process 'C' Account

Output : 1,000 kg
Cost per .. Cost per
To Process 'B • Account

"
5.15
"
" "
9.05 9,050
'B' Account)
To Raw Materials 0.40 400
To Labour 0.70 700
To Factory Expenses 0.80
' 800
To Overhead Expenses 1.40 1,400
(on the basis of Labour
Charges)
700 x 3,600
= 1,400
1,800
9.05 9.050 9.05 9.050
4,2.3 Apportioned of Indirect Expenses and Sale of By-Product and Residue :
Illustration 82 :
A Particular brand of Phenyle passes through three important Processes. During the month of
October, 2016, 600 Dozens Bottles are Produced. The Cost Books show the fo llowing information.
~2.5 Sale of Scrap :
Scrap:
Scrap is that residue or cut o'ffs of Material ~om c~rtain manufact~ring Processes that hss relative!
minor recovery value. the Process should be Credited with the value which the Scrap would realise on i~
Sale. In the Credit side to the concerning Process Accounts Quantity of Wastage should appear in th
Units column and its value in the amount column. If no value is recovered from such Scrap it should~
treated like loss in Weight.
Illustration 85 :
The Production of manufacturing concern passes throught two distinct Processes Viz : 'X' and
' Y' and then to Finished Stock. It is ascertained that in each Process 5% total in is Lost and I 0% is Scrap
which Sold for ~ 120 and ~ 230 per ton respectively. The Process figures are as follows.
Process 'X' Process 'Y'
Material Consumed (Units) 1,000 90
Cost of Material per ton(~) 150 230
Manufacturing Wages (~) 25,000 15,000
Manufacturing Expenses (~) 6,000 8,000
Prepare Process Cost Accounts, showing the Cost put of each Process and the Cost per ton. •
Solution:
Process 'X' Account
Particulars Tons Amount Tons Amount

Particulars
To Materials Consumed 1,000

"
1,50,000 By Loss in Weight 50
".
(1,000 Tons x 150) (5% of Units put in)
To Manufacturing Wages 25,000 (5% of 1,000)
To Manufacturing Expenses 6,000 By Sale of Scrap JOO 12,000
(10% of Units put in)
( I 0% of 1,000)
(100 Tons x 120)
By Process 'Y' Ale 850 1,69,000
1,69,000
Per Ton =
850
'°
= 198.82 -
1,000 1,8 1,000 1,000 1,s1,oQ.~
d
Process 'Y' A/c

Tons Amount Tons Amount
- " By Loss in Weight 47

".
To Process 'X' Ale 850 1,69,000
To Materials Consumed 90 20,700 (5% of Units put in)
(90 Tons x 230) (5% of 940)
15,000 By Sale of Scrap 94 21 ,620
To Manufacturing Wages
To Manufacturing ( 10% of Units put in)
Expenses 8,000 (10%of940)
(94 Tons x 230)
By Finished Goods Ale 799 l,91 ,080
1,91 ,080
Per Ton =
799
= "' 239.15
940 2,12,700
940 2,12,700

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4.

4.1.3.2 : Classification According to Functions :

Estimates, Tenders and Quotations

2.1 Illustration on Estimates, Tenders and Quatations

2.1 Illustrations on Estimates, Tenders and Quatations :

Quotation for 1,500 Pens

Output :3,000 Fans

Calculation of Profit Percentage :

Quotation / Tender for 700 Fans

Quotation Price (Tender Price) 540.00

Quatation for 500 Correction Pens

Note : Calculation of Profit (10% on Selling Price) :

Opening Stock of Raw Materials 1,40,000

Caleulation of Profit Percentage i

75,600 -x100 = 10%

(v) Selling Cost per unit will remain unchanged.

Statement Showing Selling Price of Gas Stoves

Works on Cost : 90,000 45.00

Officed &General Expenses

Ofce & General Expenses (Unchanged)

Selling and Distribution Expenses

e: Percentage of Factory Overheads to Materials + Direct Labour

Materials Consumed 7,00,000

(d) Percentage of Works Overheads to Direct Wages :

Tender for Machine

4 1Reonciliation of Cost Account and Financial Accounts :

4.2.1 : Reconciliation of Cost Accounts and Financial Accounts :

(iii) Interest paid on mortgages.

valuation of work-in-progress may also lead to variation. In cost account it may

Less Profit Higher Profit

reconciliation of cost and financial accounts.

(C) Multiple Choice Questions : facts

SpecialPoints in Reconciliation of Cost Accountsand Financial Accounts :

is recorded with a minus

(B) Statement of Profit

(C) Profit and Loss Account

Profit as per Cost Accounts 26,000

Opening Stock of Raw Materials 1,44,000

To Opening Stock By Sales 21,39,264

Less : Undervalued Expenses or Overvalued Income in Cost Books

Trading & Profit & Loss Account

Stock Raw Materials IJanu., 2015

Opening Stock of Raw Materials 4,000

Profit & Loss Account

Sales 3,\ 315050

Profit as per Financial Book (P & 17,400

o Materials Consumed 50,000| By Sales 1,24,000

Profit as per P & LA/e 18,078

Material per Cycle

Particulars Per Unit Amount for

Profit & Loss Account

Profit and Loss Account

To Materials (1,620 x 720) 11,66,400 By Sales

Works Overhead under-recovered in Costs 1,560

Net Profit as per Cost Accounts 86,200

(i) Net Profit as per Financial Book 1,28,755

Less : Undervalued Expenses/Overvalued Income in Cost Books 2,850

5.1. 1: Process Co stin g: Me ani ng

_ .4.2: Abnorn:iaI Loss or Abnormal Wastage:

Normal Cost of Normal Output

lndu stry Basi c Prod ucti on By Prod ucts

Cha ract erist ics of Join t Prod ucts :

5.1.7: Methods of Assigning Joint Costs/Accounting for Joint Costs:

Total Joint Costs