PROCESS AND OPERATION COSTING
Question 1 Explain the meaning of process costing and
Question 1 Explain the meaning of process costing and its features ?its features ?
Answer:-
Answer:-
Process Costing = Method of costing used when material has to pass through two or more processesProcess Costing = Method of costing used when material has to pass through two or more processes for being converted into a final product e.g. crude oil industries.for being converted into a final product e.g. crude oil industries.Features:-Features:- 1.
1. A separate A/c for each process is opened & all expenditure of that process is charged to that process A/c A separate A/c for each process is opened & all expenditure of that process is charged to that process A/c 2.
2. The output of one process becomes input of next process.The output of one process becomes input of next process. 3.
3. All the processes are standardised. All the processes are standardised. 4.
4. Costs are collected process-wise.Costs are collected process-wise. 5.
5. The output of last process becomes finished goods.The output of last process becomes finished goods. Question 2 Explain Operation costing? OR
Question 2 Explain Operation costing? OR “Operation costing is“Operation costing is defined as refinement of Processdefined as refinement of Process costing.” Explain it?
costing.” Explain it?
Answer:- Operation Costing:
Answer:- Operation Costing: Method under which cost are ascertained for eachMethod under which cost are ascertained for each operationoperation involved in involved in manufacturing of goods. It is refinement of process costing. At the end of each operation, the unit operation cost manufacturing of goods. It is refinement of process costing. At the end of each operation, the unit operation cost is computed by dividing total operation cost by total output.
is computed by dividing total operation cost by total output.
Question 3 Explain Treatment of Normal Process Loss, Abnormal Process Loss And Abnormal process Question 3 Explain Treatment of Normal Process Loss, Abnormal Process Loss And Abnormal process Gain In Cost Accounting ?
Gain In Cost Accounting ?
Answer :- Normal Process Loss
Answer :- Normal Process Loss = unavoidable loss which occurs due to inherent nature of materials &= unavoidable loss which occurs due to inherent nature of materials & production process (can be estimated in advance on basis of past experience). It may be normal waste, normal production process (can be estimated in advance on basis of past experience). It may be normal waste, normal scrap, normal spoilage, normal defectives.
scrap, normal spoilage, normal defectives. Treatment in Costing:
Treatment in Costing: Cost of normal loss is absorbed by goods units by inflating cost per unit.Cost of normal loss is absorbed by goods units by inflating cost per unit. Abnormal Process Loss
Abnormal Process Loss = Loss in = Loss in excess of Nexcess of Normal ormal loss (due to loss (due to carelessness of carelessness of workers, machineworkers, machine breakdown) (cannot obviously be estimated in advance.
breakdown) (cannot obviously be estimated in advance. Treatment in Costing:
Treatment in Costing: The cost of an abnormal loss units is equal to the costThe cost of an abnormal loss units is equal to the costof a good units. Treated as lossof a good units. Treated as loss Normal
Normal Loss Loss Abnormal Abnormal LossLoss occurs
occurs due due to to inherent inherent nature nature occurs occurs due due to to abnormal abnormal reasonsreasons Can
Can be be estimated estimated in in advance. advance. Cannot Cannot be be estimated estimated in in advance.advance. Normal
Normal waste waste / / scrap scrap / / sponlage sponlage /defectives. /defectives. Abnormal Abnormal waste waste / / scrap scrap / / spoilage spoilage /defectives./defectives. Treated
Treated at at Cost Cost of of production production Not Not Treated Treated at at Cost Cost of of productionproduction Loss
Loss borne borne by by good good units units Loss Loss charged charged to to costing costing P&LP&L Abnormal Process Gain
Abnormal Process Gain == when actual output is more than expected outputwhen actual output is more than expected output or or when actual losses are less when actual losses are less than normal loss
than normal loss Treatment in Costing:
Treatment in Costing: cost of abnormal gain is equal to cost of good units. Cost of abnormal gains is not treatedcost of abnormal gain is equal to cost of good units. Cost of abnormal gains is not treated as recovery of cost of production.
as recovery of cost of production.
Abnormal Loss
When
When actual actual loss loss is is more more than than normal normal loss. loss. When When actual actual loss loss is is less less than than normal normal loss.loss. Its
Its cost cost is is debited debited to to costing costing P&L P&L A/c. A/c. Its Its cost cost is is credited credited to to costing costing P&L P&L A/c.A/c. Question 4 Explain costing of equivalent production units ?
Question 4 Explain costing of equivalent production units ? Answer :-
Answer :- when mfd is continuous activity & at end of accounting period, there is some production units which iswhen mfd is continuous activity & at end of accounting period, there is some production units which is semi-finished. Semi-finished means their percentage of completion with regard to material, labour, overheads is semi-finished. Semi-finished means their percentage of completion with regard to material, labour, overheads is not 100%. Such incomplete production units known as work-in-progress. Such WIP is valued in terms of not 100%. Such incomplete production units known as work-in-progress. Such WIP is valued in terms of equivalent production units. Equivalent units = Units of WIP X Percentage of work completed
equivalent production units. Equivalent units = Units of WIP X Percentage of work completed Question 5 Distinguish between job
Question 5 Distinguish between job costing and process costing?costing and process costing? Job
Job Costing Costing Process Process CostingCosting Production
Production is is special special order order based based Production Production is is continuous.continuous. Each
Each job job is is different different Each Each product product is is homogenous homogenous & & standardised.standardised. Cost
Cost centre centre is is job. job. Cost Cost centre centre is is process.process. Cost
Cost are are ascertained ascertained for for each each job job separately. separately. Cost Cost are are ascertained ascertained for for each each process process separately.separately. Job costs
Job costs are calculated are calculated when when job is job is complete. complete. Process costs Process costs are calculated are calculated at end at end of each of each process.process. May
May or or may may not not be be WIP. WIP. Always Always be be WIP.WIP. Usually no
Usually no transfers transfers from from one jone job to ob to another. another. Output Output of of one one process process is trais transferred nsferred to neto next process xt process as as input.input. Question 6 What is inter-process profit? State its advantages and disadvantages?
Question 6 What is inter-process profit? State its advantages and disadvantages? Answer :-
Answer :- Sometimes output of one process is transferred to the next process not at cost but at market value or Sometimes output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost & the transfer price is known as inter-process cost plus a percentage of profit. The difference between cost & the transfer price is known as inter-process profits. In such case, transferor process makes profit.
profits. In such case, transferor process makes profit. Advantages
Advantages::
To check whether cost of production under a process competes with its market price.To check whether cost of production under a process competes with its market price.
Each process becomes profit-centre.Each process becomes profit-centre. Disadvantages:
Disadvantages:
The use of inter-process profits involves complication.The use of inter-process profits involves complication.
The system shows profits which are not realised because of stock not sold out.The system shows profits which are not realised because of stock not sold out.
Joint Products & By-Products
Joint Products & By-Products
Question 1 Discuss in brief Joint
Question 1 Discuss in brief Joint products, By-products and Co-products ?products, By-products and Co-products ?
Answer :-
Answer :-
JPJP = two or more products of almost equal value which are produced in natural proportions (This = two or more products of almost equal value which are produced in natural proportions (This proportion can’t be changed by mgt)proportion can’t be changed by mgt) simultaneously from same material in same process. e.g. in case of oil simultaneously from same material in same process. e.g. in case of oil refining, JP are kerosene, petrol, diesel etc.
refining, JP are kerosene, petrol, diesel etc. BP
BP = product of relatively small value emerged incidentally in mdf main product e.g. in case of Rice mill, Rice is = product of relatively small value emerged incidentally in mdf main product e.g. in case of Rice mill, Rice is main product & Husk is by-product.
main product & Husk is by-product. CP =
CP = two or more products (Not of almost equal value) which are not necessarily produced in natural proportionstwo or more products (Not of almost equal value) which are not necessarily produced in natural proportions (This proportion can be changed by mgt), not necessarily from same raw material, not necessarily in same (This proportion can be changed by mgt), not necessarily from same raw material, not necessarily in same process e.g. wheat & gains are produced in 2 separate farms with separate cultivation process.
process e.g. wheat & gains are produced in 2 separate farms with separate cultivation process. Question 2 Distinguish between Joint
Question 2 Distinguish between Joint products and By-products? OR Distinguish between joint productproducts and By-products? OR Distinguish between joint product and Co-product?
JP
BP
JP
BP
Almost equal value.
Almost equal value. Relatively small value.Relatively small value. Produced
Produced simultaneously. simultaneously. Emerge Emerge incidentally incidentally in in manufacturing manufacturing main main product.product.
Mgt is free to treat all products produced as JP or one product as main product & other product as by-product. Mgt is free to treat all products produced as JP or one product as main product & other product as by-product.
JP CP
JP CP
Produced in natural proportions which cannot be Produced in natural proportions which cannot be changed by mgt
changed by mgt
Not produced in natural proportion & proportion can be Not produced in natural proportion & proportion can be changed by mgt.
changed by mgt. Using
Using same same raw raw material. material. Not Not necessarily necessarily using using same same raw raw material.material. Produced
Produced simultaneously simultaneously in in the the same same process. process. Not Not necessarily necessarily be be produced produced in in same same process.process. Almost equal value.
Almost equal value. Not necessarily be of equal value.Not necessarily be of equal value. Question 3 Discuss briefly methods
Question 3 Discuss briefly methods of apportionment of joint-cost into joint-products ?of apportionment of joint-cost into joint-products ? Answer :-
Answer :- Methods of Apportioning joint costs over Joint Products Methods of Apportioning joint costs over Joint Products Method
Method Joint Joint Costs Costs are are apportioned apportioned on on the the basis basis of of --- Physical
Physical unit unit method method Physical Physical volume volume of of JPs JPs at at spilt spilt off off point point (Not (Not suitable suitable when when cost cost has has no no relation relation toto physical volume of JPs)
physical volume of JPs) Average unit
Average unit costcost average cost per unit ( AC p.u.=average cost per unit ( AC p.u.=