Costing Methods

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 Process Costing Illustration
Illustration: M.A Chemical Ltd. Processes a range of products including a
detergent “Washo” which passes through three processes before
completion and transfer to the finished goods warehouse. During Aril,
data relating to this product were as shown below:
1 2 3 TOTAL
Rs. Rs. Rs. Rs.
Basic Raw Materials (10,000 units) 6,000 - - 6000
Direct material added in the process 8,500 9,500 5,500 23,500
Direct Wages 4,000 6,000 12,000 22,000
Direct Expenses 1,200 930 1,340 3,470
Production Overhead 16,500
(Production Overhead is absorbed as a % of direct wages)

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 Process Costing Illustration
1 2 3 Units Units
Units
Output 9,200 8,700 7,900
% % %
Normal Loss in process 10 5 10
Rs. Rs. Re.
All loss has a scrap value 0.2 0.5 1
There was no stock at the start or at end in any process
Required:
Prepare the following process accounts:
• Process 1
• Process 2
• Process 3
• Abnormal Loss
• Abnormal gain

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 Process Costing Illustration
MA Chemicals Ltd

Process 1 A/C

    Unit Unit Cost Total Cost       Unit Unit Cost Total Cost

                     

  Rs. Rs.   Rs. Rs.

Input 10,000 0.60 6,000 Output Process 2 9,200 2.50 23,000

Materials     8,500 Normal Loss 1,000 0.20 200

Direct Wages     4,000      

Direct Expense     1,200      

Prod. Overheads (W-
1)     3,000      

Abnormal Gain 200 2.50 500      

           

10,200 23,200 10,200 23,200

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 Process 2 A/c
    Unit Unit Cost Total Cost       Unit Unit Cost Total Cost
                     
  Rs. Rs.   Rs. Rs.
From Process 1 9,200 2.5 23,000 Process 3 8,700 5 43,500
Materials     9,500 Normal Loss 460 0.5 230
Direct Wages     6,000 Abnormal Loss 40 5 200
Direct Expenses     930      
Overheads     4,500      
           
           
9,200 43,930 9,200 43,930

Process 3 A/c
    Unit Unit Cost Total Cost       Unit Unit Cost Total Cost
                     
  Rs. Rs.   Rs. Rs.
Input 8,700 5 43,500 Output 7,900 9 71,100
Materials     5,500 Normal Loss 870 1 870
Direct Wages     12,000      
Direct Expense     1,340      
Prod. Overheads     9,000      
Abnormal Gain 70 9 630      
         
8,770 71,970 8,770 71,970
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 ABNORMAL LOSS

    Unit Unit Cost Total Cost       Unit Unit Cost Total Cost

                     

  Rs. Rs.   Rs. Rs.

Process II 40 5 200 Cash 40 0.5 20

      P & L a/c - - 180

      -    

40   200 40   200

ABNORMAL GAIN

    Unit Unit Cost Total Cost       Unit Unit Cost Total Cost

                     

  Rs. Rs.   Rs. Rs.

Normal Loss 200 0.2 40 Process 1 200 2.5 500

Normal Loss 70 1 70 Process 2   9 630

    1,020 70    

270   1,130 270   1,130

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W-1) Production overhead Rate:

Estimated production overhead/estimated direct wages

Rs. (16500/22000) = 0.75

Overhead applied:

Process 1 (4000 * 0.75) 3000

Process 2 (6000 * 0.75) 4500

Process 3 (12000 * 0.75) 9000 7

W-2) Unit Cost:
Process 1 Process 2 Process 3
Rs. Rs. Rs.
Total Cost 22,700 43,930 71,340

Less: Recovery
of sale value
of normal loss 200 230 870
     
Normal Cost (A) 22,500 43,700 70,470

Input 10,000 9,200 8,700

Less: W loss 1000 460 870
Normal Output (B) 9,000 8,740 7,830

Unit Cost (A/B) 2.50 5.00 9.00

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W-3) Normal loss A/c
Unit Total Unit Total
    Unit Cost Cost       Unit Cost Cost

                     

  Rs. Rs.   Rs. Rs.

Process 1 1,000 0.20 200 Abnormal gain 250 0.20 50

      Cash 750 0.20 150

Process 2 460 0.50 230 Cash 460 0.50 230

      Abnormal gain 70 1.00 70

Process 3       Cash 800 1.00 800

870 1.00 870      

         

2,330 1,300 2,330 1,300

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 Process Costing Illustration
Illustration:
Zain manufacturer uses process costing to determine
total cost of production and unit cost of production.
During January 2013, it started 15000 units in
production department – A, 1,000 units were lost in
the process-Normal. 10,000 units were transferred to
department-B and 4,000 units remained in the work-
in-process inventory at the end of the month, which
were 100% complete as to materials and 50%
complete as to labor and factory overhead.

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 Process Costing Illustration

The cost charged to department- A in January

2013 were as follows:
Rs.
Material 42,000
Labor 15,000
Factory O.H. 24,000
Required:
a) Prepare Cost of Production Report for
department- A for the month of January, 2006
b) Prepare process account.
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 Material Labour Overhead
Input: Units Output: Units Units Units Units
15,000 Transferred 10,000 10,000 10,000 10,000
Lost Normal 1,000 - - -
CWIP 4,000 4,000 2,000 2,000
EPU 15,000 14,000 12,000 12,000 Total (Rs.)
42,000 15,000 24,000 81,000
Unit Cost   3 1.25 2 6.25

Transferred 30,000 12,500 20,000 62,500

CWIP   12,000 2,500 4,000 18,500
42000 15000 24000 81000
Note: Normal loss is part of production cost.

Process - A
Units Rs. Units Unit Cost Rs.
Units   15,000          
Material   42,000 Dep-B 10,000 6.25 62,500
Labour   15,000 NL 1,000 - -
Overhead   24,000 WIP 4,000   18,500
         
  81,000       81,000
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 Process Costing Illustration

Illustration: Burq soap Co. produces a detergent

which requires processing in four
departments. The following information
relates to department 1:
Unit put into process 60,000
Units transferred to dept.2 54,000
Units still in process at the end
(90% Completed as to materials,
60% Complete as to labor & FOH) 4,000
Units lost in the process (normal) 1,200
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 Process Costing Illustration
Cost charged to the department: Rs.
Materials 87,600
Labor 28,600
Factory Overhead 45,760

There was no beginning Work-in-process inventory

Required:
Prepare Cost of Production Report for department
no. 1 14
 Process Costing Illustration
Input Output Material Labour O/H
Units Started 60,000 Dep-2 54,000 54,000 54,000 54,000
N.Loss 1,200 - - -
Abnormal 800 800 800 800
CWIP 4,000 3,600 2,400 2,400
60,000 EPU 58,400 57200 57200 Total
Rs. Rs. Rs. Rs.
Cost Added 87,600 28,600 45,760 161,960
Unit Cost 1.5 0.5 0.8 2.8
Cost Accounted For Rs. Rs. Rs. Rs.
Transfer 81,000 27,000 43,200 151,200
N.loss - - - -
Ab. Loss 1,200 400 640 2,240
CWIP 5,400 1,200 1,920 8,520
87,600 28,600 45,760 161960

Assumed loss resulted at the end pf process - Inspection

stage
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 Operating Costing
Used in Service oriented organizations like:
• Road transport companies
• Railways
• Airways
• Shipping Companies
• Electricity companies
• Steam service
• Hospitals
• Cinemas
• Canteens
• Hotels
• School & Colleges
• Local authority
• Personnel department in a factory

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 Operating Costing
Characteristics:
• Unique Services
• Large proportion invested in Fixed assets and
comparatively less working capital
• Distinction between fixed cost and variable
cost important because economies and scale
of operations affect the cost per unit of
service rendered

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 Operating Costing
The selection of a suitable cost unit (unit of
service) may sometimes prove difficult. The
cost units may be of the following two types:
• Simple Cost Unit
• Composite Cost Unit

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 Operating Costing
• Simple Cost Unit:
Undertaking Cost Unit
Transport Per Kilometer; or
per passenger
School or College Per Student
Hospital Per bed
Canteen Per cup of tea;
Per meal
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 Operating Costing
• Composite Cost Unit:
Undertaking Cost Unit
Transport Per-passenger-km
Per-ton-km
Hospital Per bed per day
Cinema Per seat per show
Electricity Per kilowatt hour

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 Operating Costing
Transport Costing objects:
• Fixing Carriage rates (goods or passengers)
• Deciding the hire charges of vehicles
• What should be charged against departments
• Cost of own motor vehicle Vs. alternate form
of transport
• Maintenance Cost of one vehicle Vs. other

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 Operating Costing
• Determination of Number of Cost Units:
Illustration: Firstflight Transport Co. runs four
lorries between two towns which are 50 kms
apart. The seating capacity of each bus is 50
passengers and actual passengers carried are
80% of the seating capacity. All the 4 buses
run on 25 days in the month and each bus
makes one round trip per day.

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 Operating Costing
Solution:
Passengers kilometers=
No. of Capacity Actual Round No. of
Lorries Distance of each Capacity trip days
Lorry Utilized
4 * 50 * 50 * 80% * 2 * 25

= 400,000 passenger kilometers

Total cost per month 1.6 Million
Total revenue 2.4 Million
Cost per passenger per km = 4
(Revenue per passenger per km)

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 Operating Costing
• Compilation of costs:
Costs are classified and accumulated under
the following heads:
• Standing Charges
• Garage rent
• License fees and taxes
• Insurance
• Drivers’ wages
• Depreciation
• Administrative Costs
• Interest on capital

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 Operating Costing
• Standing or fixed charges These are constant costs
and are incurred irrespective of the basis of mileage run. Such
costs, therefore, should not be allocated to specific journeys
on the basis of mileage. Some of these costs are direct or
traceable fixed costs and can be allocated to specific vehicles.
Other such costs are suitably apportioned to each vehicle.
Opinions differ as to whether depreciation is to be regarded
as a fixed cost or a variable cost. It is thus sometimes regarded
as a variable or running cost and sometimes as a fixed cost.
Interest on capital might also be included in fixed charges.

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 Operating Costing
• Running or variable charges: Petrol/diesel oil,
lubricating oil, Tyres and tubes, repairs and
maintenance, drivers’ wages. These costs vary
more or less in direct proportion to mileage
and so a cost per mile may be computed.
• Wages of drivers, conductors and cleaners are
sometimes regarded as running or variable
costs if payment is according to distance or
trips.
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 Operating Costing
• Illustration: A vehicle costs Rs. 650,000 and its life is estimated at 5 years,
after which its residual value is estimated at Rs. 200,000. Standing charges per
annum are estimated at following figures: Insurance Rs. 65000, License Rs. 13000,
and Administration overheads Rs. 350,000.

Fuel costs Rs. 400 per gallon and based on an estimated kilometers of 30,000 per year
the cost of lubricants is Rs. 12000. The estimated consumption of fuel is 20 miles
per gallon. A set of tyre costs Rs. 26,000 and their expected mileage is 10000. The
driver is paid Rs. 5000 per week of 44 hours and is entitled to a fortnight’s paid
holiday per annum.
The company’s contribution towards national Insurance Scheme is Rs. 1000 per week.
It is estimated that the vehicle will run 250 days per annum and depreciation is
regarded as a running cost. Repairs over the life of the vehicle are estimated at Rs.
150,000.
(a) Compute figures which may be used as a basis for quoting, if the company adds
10% to the total cost for profit.
(b) Prepare a quotation for a journey of 100 Km and return, assuming no return load
and a total time of two days. 27
 Operating Costing
Operating Cost Sheet
Standing Charges per Annum Rs.

Insurance 65,000
License 13,000
Administration Overheads 350,000
Driver's wages, (52+2) weeks
@ Rs.5000 (to include holiday relief) 270,000
Other costs, 52 weeks @ Rs.1000 (Con
tribution to NHIF) 52,000
750,000
Kilometers covered per annum 30,000
(A) Standing charges per km 25
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 Operating Costing
Running Charges per kilometre Rs.

Depreciation 3.00
(650,000-200000)/(5*30,000)

Fuel (400 / 20) 20.00

Tyres (26000 / 10,000) 2.60

Lubricants (12000 / 30,000) 0.40

Repairs (150000)/(5*30000) 1.00

(B) Running Cost per Kilometer 27.00

Total cost per kilometer (A + B) 52.00

Standing charged per day

(750000 / 250) 3,000 29

 Operating Costing
  Quotation for journey

Standing charges for 2 days (Rs. 3000 * 2) 6,000

Running charges for 200 km (Rs. 27 * 200) 5,400

Operating cost of journey 11,400

Add Profit (10% of cost) 1,140

Quotation Price 12,540

     

*Note: Standing charges have been charged on the basis of number of

days as it would be corrected to include them on kilometre basis. 30