1. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 1 Product and Process Costing Module 10

2. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 2  Introduction  Product costing  Job costing  Process costing  Cost Sheet  Costing Procedure  Loss treatment  Equivalent units  Operation costing

3. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 3 Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Cost and Managerial Accounting Product costs are used for planning, control, directing, and management decision making Product Costing

4. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 4 The product costs for a manufacturing firm include only the costs necessary to complete the product. The product inventory for a manufacturing firm is treated as an asset until it has market value and is sold.

5. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 5 Process Costing Job Costing

6. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 6 Process Costing Job Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. Product-Costing types

7. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 7 Process cost applications: v Refinery v Steel v Paper mill v Ready-made garments Process Costing Job Costing

8. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 8 F Used for production of large, unique, high-cost items. F Built to order rather than mass produced. F Many costs can be directly traced to each job. Process Costing Job Costing

9. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 9 F Job Manufacturing: Products manufactured in very low volumes or one at a time. F Batch Manufacturing: Multiple products in batches of relatively small quantity. Process Costing Job Costing

10. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 10 F Typical job cost applications: v Special-order printing v Building construction v Designer costumes v Tailor-made Garments Process Costing Job Costing

11. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 11 F Also used in service industry or by professionals v Customized software v Repair shop v Law / CA firms v Doctors Process Costing Job-Order Costing

12. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 12 Contracts Missions Programs Cases THE JOB Job Costing in Non- manufacturing Organizations:

13. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 13 Job Costing Usually Cost sheet is prepared to record and report the costs. It may be prepared for a job or for some period.

14. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 14 COST SHEET For June Particulars Total Cost Per Unit Direct Material Opening Stock of Raw Material Add: Purchase Less: Closing stock of Raw material Direct Labour Direct Expenses Prime Cost

15. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 15 Particulars Total Cost Per Unit Add: Factory Overheads Works Cost Add: Opening Work in Progress Less: Closing Work in Progress Factory Cost

16. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 16 Particulars Total Cost Per Unit Add: Office and Administration Exp Cost of Production Add: Opening stock of Finished Goods Less: Closing stock of Finished Goods Cost of goods Sold

17. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 17 Particulars Total Cost Per Unit Add: Selling and Distribution Exp Cost of Sales Add: Profit Sales

18. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 18  Loss of material is inherent during certain production processes.  There are two types of material losses viz. (i) Normal Loss (ii) Abnormal Loss.  Normal Loss: It is defined as the loss of material which is inherent in the nature of work. Such a loss can be reasonably anticipated from the nature of material, Nature of operation, the experience and technical data.

19. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 19  Abnormal Loss: It is defined as the loss in excess of the pre determined loss. This type of loss may occur due to carelessness of workers, a bad plant design or operation etc.

20. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 20 Usually Process Accounts are prepared for some period to record and report the costs.

21. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 21 The cost of each process comprises the cost of: 1. Direct Material 2. Direct Labour 3. Direct Expenses 4. Production Overheads

22. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 22 From the following data prepare process a/c of 1, 2 and 3. The output of each process is treated as input for next process. Direct Costs are: Pr 1Pr 2Pr 3 Material700001500030000 Wages380004000025000 Expenses110001200015000

23. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 23 Factory overheads of Rs. 40000 to be apportioned on the basis of wages paid. There was no opening or closing stock. 15000 units have been introduced in 1st process and the output and normal loss for each process are as follows:

24. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 24 Output Normal Loss Process 1145503% Process 2135006% Process 3133002%

25. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 25 Process 1 A/c ParticularUnits Total Cost Particul arUnits Total Cost Material1500070000 Normal Loss 4500 Wages 38000 Transfer to Process 1 14550133757 Other Expenses 11000 Factory Overheads 14757 15000133757 15000133757

26. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 26 Process 2 A/c ParticularUnits Total Cost Particul ar Unit s Total Co st Transfer from Process 1 14550133757 Normal Loss 8730 Material 15000 Abnorm al Loss 1772799 Wages 40000 Transfer to Pr2 1350 0 2134 92 Other Expenses 12000 Factory Overheads 15534 14550216291 1455 0 2162 91

27. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 27 Process 3 A/c Particular Unit s Total Cos t Particu lar Unit s Total Co st Transfer from Process 1 1350 0 21349 2 Normal Loss 2700 Material 30000 Finished Stock 133 00 2947 52 Wages 25000 Other Expenses 15000 Factory Overheads 9709 Abnormal Gain701551 1357 0 29475 2 135 70 2947 52

28. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 28 Thus, in Process Costing Cost per unit = Cost/Output Units What can be done when partially produced units remain in stock ? Equivalent Units

29. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 29 To ascertain the cost of each completed unit it is necessary to ascertain the cost of work in progress in the beginning and at the end of the process. Hence the method of converting partly finished units to equivalent finished units is used. Equivalent Units

30. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 30 Equivalent production means converting the incomplete production units into their completed units. Equivalent completed units= {Actual number of units in the process} X {percentage of work completed}

31. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 31  Conversion + direct material applied: The term equivalent unit cost refers to conversion and direct-material applied to physical units after adjusting the stage of completion.

32. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 32  Physical and equivalent units equal in completed batch: If a batch of goods has been completed, the number of physical units and equivalent units will be the same.

33. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 33  Work-in-Process only partially completed: The units in ending Work-in-Process Inventory are only partially completed and may be in different stages of production.

34. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 34  Example: 100% of materials may be present in the product, but only 50% of the conversion work (labor and overhead) may have been done.

35. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 35  Conversion costs added continuously: Conversion costs are usually added continuously throughout the process.

36. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 36  Example: If 100 units are 60% of the way through the process, 60 equivalent units have been produced. Notice that none of the units are completed—the firm is said to have done the work equivalent to manufacturing 60 finished units.

37. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 37  Direct material added at specific points: Direct materials are usually added at discrete points in the process in text problems.

38. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 38  Consider when material added: When considering materials, determine at what point the ending in-process costs are and evaluate whether or not the materials have been added.

39. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 39  Once added 100% complete: If added, the units are 100% complete with respect to materials; if not, the units are 0% complete.

40. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 40  Unit cost based on equivalent units: When computing the cost of a unit, the related calculations are based on equivalent units, not physical units.

41. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 41 The procedure states fully- completed units on the same measurement scale as partially-completed units, thus avoiding the addition (combination) of "apples and oranges."

42. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 42 Next divide costs by equivalent units: Next, the cost of direct materials and conversion is divided by the proper number of equivalent units for each of these production elements.

43. Management Accounting Dr. Varadraj Bapat, IIT Mumbai 43 It is a refinement of process costing. It is used in service industries.