[S10Q3]

Q.3 Smart Processing Limited produces lubricants for industrial machines. Material COX is
introduced at the start of the process in department A and subsequently transferred to
department B. Normal loss in department A is 5% of the units transferred.

In department B, material COY is added just after inspection which takes place when the
production is 60% complete. 10% of the units processed are evaporated before the inspection
stage. However, no evaporation takes place after adding material COY. During the year, actual
evaporation in department B was 10% higher than the estimated normal losses because of high
level of Sulpher contents in natural gas used for processing.

Other details for the year ended December 31, 2009 are as under:

Department A Department B
---------- Rupees ----------
Opening work in process 2,184,000 2,080,000
Material input - 600,000 Litres 17,085,000
- 500,000 Litres 9,693,000
Labour 8,821,000 6,389,000
Overheads 2,940,000 3,727,000

Department A Department B

Completion % Completion %
Litres Conversion Litres Conversion
Material Material
costs costs
Opening WIP 64,500 100 60 40,000 100 60
Closing WIP 24,000 100 70 50,000 100 80

Conversion costs are incurred evenly throughout the process in both departments. The company
uses FIFO method for inventory valuation.

Required:
(a) Equivalent production units
(b) Cost of abnormal loss and closing WIP
(c) Cost of finished goods produced (22)
Smart Processing Ltd [Q-3 Spr-10]
Department A
Quantity schedule Units
Opening WIP 64,500
Input 600,000
Closing WIP (24,000)
640,500
Normal loss [640,500 x 5/105] (30,500)
Output 610,000

Equivalent production Units % ---------- Eq. units ---------

Material Conversion
Opening WIP: 64,500
- Conversion 40% 25,800

Started and completed 545,500 100% 545,500 545,500

[610,000 - 64,500]

Closing WIP: 24,000

- Material 100% 24,000
- Conversion 70% 16,800

569,500 588,100

Cost per unit

Current period cost [8,821,000+2,940,000] Rs. 17,085,000 11,761,000
Units 569,500 588,100
Cost per unit Rs. 30.00 20.00
-
Statement of evaluation
Cost of complete and transferred out units ---------- Rs. ---------
Opening WIP:
b/d 2,184,000
Current period [25,800 x Rs. 20] 516,000 2,700,000

Started and completed [545,500 x (Rs. 30 + Rs. 20)] 27,275,000

29,975,000

Cost of closing WIP Rs.

Material [24,000 x Rs. 30] 720,000
Conversion [16,800 x Rs. 20] 336,000
1,056,000
Department B
Quantity schedule Units
Opening WIP 40,000
Transfer in 610,000
Input 500,000
Closing WIP (50,000)
Normal loss [610,000 x 10%] (61,000)
Abnormal loss [61,000 x 10%] (6,100)
Output 1,032,900
------------------ Eq. units ----------------
Equivalent production Units % Dept A COY Conversion

Opening WIP: 40,000

- Conversion 40% - - 16,000

Started and completed 992,900 100% 992,900 992,900 992,900

[1,032,900 - 40,000]

Abnormal loss: 6,100

- Conversion 60% 3,660

Closing WIP: 50,000

- Material 100% 50,000 50,000
- Conversion 80% 40,000

1,042,900 1,042,900 1,052,560

Cost per unit (for FG & Closing WIP) *

Current period cost [6,389,000+3,727,000] Rs. 29,642,340 9,693,000 10,116,000
Units 1,042,900 1,042,900 1,052,560
Cost per unit Rs. 28.42 9.29 9.61

Rs.
* Dep-A cost
[(610,000 - 67,100) x 54.60**] 29,642,340

**Revised per unit cost of transferred units: Rs.

Total cost of transferred units 29,975,000
Units after normal loss [610,000 - 61,000] 549,000
54.60
Statement of evaluation
Cost of finished goods ---------- Rs. ---------
Opening WIP:
- b/d 2,080,000
- conversion [16,000 x Rs. 9.61] 153,760 2,233,760

Started and completed [992,900 x (Rs. 28.42 + Rs. 9.29 + Rs. 9.61)] 46,984,028
49,217,788

Cost of closing WIP Rs.

Dept A [50,000 x Rs. 28.42] 1,421,000
New material [50,000 x Rs. 9.29] 464,500
Conversion [40,000 x Rs. 9.61] 384,400
2,269,900

Cost of Abnormal loss Rs.

Dept A [6,100 x 54.60] 333,060
Conversion [3,660 x Rs. 9.61] 35,173
368,233