Following are the main forms of process accounts: 1. Simple Process Account 2. Loss in Weight and Sale of Scrap 3. Sale of some Part of Process Production 4. Normal and Abnormal Wastage 5. Abnormal Wastage and Abnormal Effectiveness 6. Oil Refinery Process 7. Bye-Products and their Accounts 8. Joint Product 9. Joint Expenses, Separate Expenses and Bye-Product 10. Statement of Process Costs and a Few Others.
Forms of Process Account
- Simple Process Account
- Loss in Weight and Sale of Scrap
- Sale of some Part of Process Production
- Normal and Abnormal Wastage
- Abnormal Wastage and Abnormal Effectiveness
- Oil Refinery Process
- Bye-Products and their Accounts
- Joint Product
- Joint Expenses, Separate Expenses and Bye-Product
- Statement of Process Costs
- Transfer to Next Process at Cost Plus Profit
- Calculation of Unrealised Profit
1. Simple Process Account
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Under Simple Process Account all direct expenses (materials, labour, expenses) incurred with regard to a particular process are debited in that Process Account. Indirect expenses (i.e. factory overhead, office overhead, selling and distribution overhead), however, need allocation and generally they are allocated to each Process in proportion of direct wages of each process, but any other reasonable basis for the allocation of these expenses may be used according to the nature and the circumstances of the business.
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These indirect expenses are also shown in the debit side of Process Account. In the credit side of Process Account, loss in weight (unit column only), normal loss, abnormal loss, sale of scrap, value of bye-product account, etc. are shown. Then the balance of both sides is ascertained, which is the cost of concerned process. This Cost of Production is divided by the number of units produced to find out the cost per unit.
The Proforma of Simple Process Account is as under:
2. Loss in Weight and Sale of Scrap:
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Generally in process costing, outputs of finished goods are not received equal to the units of inputs. Difference between the units of input and output is called Loss in weight. This loss in weight may be due to evaporation, moisture and careless handling. Such wastage or loss in weight should be credited to the Process Account, only weight will appear in quantity column, nothing will appear in the amount column, as it has no monetary value. It will increase the cost of production.
If the scrap possesses some value, the Process Account should be credited with the value which the scrap would realise on its sale. In the credit side of concerning Process Account quantity should appear in the weight column and its value in the amount column. It will reduce the cost of production.
3. Treatment of Normal and Abnormal Wastage and Abnormal Effectiveness:
i. Normal Wastage:
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Normal wastage means the amount of loss of materials which normally occurs during the course of production. This loss may be due to evaporation, mishandling or due to moisture and the like causes. Every manufacturer learns by experience the amount of loss of materials which normally occurs in the production of a particular type of commodity. This wastage is generally expressed in terms of certain percentage of the units introduced in a particular process of production.
Sometimes the units of normal wastage have a scrap value and they are sold away. In such a case the units of normal wastage should be entered in the column of units on the credit side of Process Account and its sale price should be entered in the amount column on the credit side of Process A/c. In this way the sale price of the normal units of wastage goes to reduce the total cost of the process concerned.
Characteristics of Normal Wastage:
Following are the main characteristics of normal wastage:
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(i) This wastage cannot be controlled.
(ii) It increases the cost of production.
(iii) This wastage is a certain percentage based on past experience.
(iv) The scrap value of this wastage can be obtained or not.
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(v) This wastages is shown in the credited side of Process A/c.
Normal wastage can be explained with the help of an example, as under:
Example:
1,000 units of a thing are being produced and there is a normal wastage in Process No. 1, which is sold at Rs. 5 per unit. The cost of production of that process is Rs. 10,000. In this case, the normal wastage will be of 50 units which could be realised Rs. 250 (i.e. 50 x 5).
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Cost per unit in different situation will be as under:
(a) When there is normal wastage and there could be realised something by selling it:
(b) When there is normal loss and there could not be realised by selling it:
(c) When there is no normal loss:
ii. Abnormal Wastage:
Besides the normal wastage sometimes there are abnormal units of wastage. The abnormal units of wastage have to be found out. This can be done by comparing the normal units of production with the actual units produced in a particular process.
The normal units of production can be found by deducting the normal units of wastage from the total units introduced into a certain process. The formula for this can be expressed as follows –
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Normal Units of Production = Units in Produced minus Units of Normal Wastage.
After having found out the normal units of production, we should compare them with the actual units produced and if the actual units produced are less than the normal units, the difference will give the units of abnormal wastage.
Units of abnormal wastage are entered in the credit side of the Process Account in the column of units.
Now we should proceed to find out the normal cost of units of abnormal wastage. This can be done by dividing the normal cost of process by normal units then multiplying the result by the units of abnormal wastage. For this the following formula is used –
Cost of abnormal wastage can be explained with the help of following formula:
Example:
Production is being done of 1,000 units. Normal wastage of the process is 5% of the total units. Then normal wastage in units will be 50 units. If actual wastage is 60 units, then abnormal wastage in units will be 10 units (i.e. 60 – 50). If total cost of production of the process is Rs. 10,000 and sale price p.u. of normal wastage is Rs. 5, then the valuation of abnormal wastage in terms of rupees will be as under:
Quantity of Normal Production = 1,000 – 50 = 950 Units
Normal Cost Price = (1,000 – 50) × 5 = Rs. 9,750
∴ Normal Cost p.u. = 9,750/950 = Rs. 10.26
∴ Value of Abnormal Wastage = 10.26 × 10 = Rs. 102.6
4. Abnormal Effectiveness:
Sometimes the actual loss in a process is less than was expected on the basis of past experience and hence the units of actual production becomes more than the normal units of production. The difference between actual production and normal production is called abnormal effective or gain.
The units of abnormal effectives are entered in the debit side of Process Account in the unit’s column.
Now we should proceed to find out the normal cost of the units of abnormal effectives. This can be done by dividing the normal cost of the process by the normal units and then multiplying the result by the units of abnormal effectives.
Following formula is used to find out the cost of abnormal gain:
Cost of Abnormal Effectiveness or Gain:
For Closing Normal Wastage Account in Case of Abnormal Effectiveness:
Normal Wastage Account is debited with the total units and values of normal wastage. But in case of abnormal effectiveness, actual wastage is less than normal wastage. Hence, such amount is not realised by selling normal wastage units as it has been shown in the debit side of Normal Wastage A/c. For the deficiency of sale following entry is done –
Valuation of Opening and Closing Stock & Wastage:
Sometimes units of opening and closing stock are given in question but information relating to their valuation is not given, in such a case it is valued on the basis of cost per units of previous process. Opening stock is debited first in debit side of Process A/c and closing stock is credited last in credit side of Process Account. For example – if the cost per unit in Process A is Rs. 5 then the opening and closing stock (units) will be valued at Rs. 5 p.u.
5. Oil Refining Process
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Crushing Process Account, Refining Process Account and Finishing Process Account are prepared in oil refineries. Coconut, copra, mustard, kernel, linseed are used to produce oil, which is debited in Crushing Process Account.
Quantity of raw materials consumed and its value and sundry expenses are debited in Process Account to find out production cost and quantity of production and loss in weight, sale proceed of scrap, residue, bags are credited. Output of Crushing Process Account, Refining Process Account and Finishing Process Account are called crude oil, refined oil and finished oil respectively.
In this connection the following points are to be taken into considerations:
(1) If sale proceeds of coconut residue, coconut bags and coconut sacks, cake copra residue are given in question, these are credited in Crushing Process Account.
(2) If sale of by-products is given in question, it is credited in relevant Process Account.
(3) If output of each process is given in question, first of all quantity column should be calculated. If there is difference, it should be treated as loss in weight and it should be recorded in credit side of concerned Process Account.
(4) Generally finished oil is stored in casks or drums which are called cost of casks or cost of drums. In such a case Finishing Process Account is divided into two parts, first part shows cost of production of finished oil. All expenses relating to finishing process are debited in Finishing Process Account but cost of casks or drums is not debited. Cost of production and cost of drums are debited in second part. Second part of Finishing Process Account shows cost of goods sold.
6. By-Products and its Accounting
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By-products refer to the products of relatively small value which are incidentally and unavoidably produced in the course of manufacturing the main products. For example – in sugar mills, the main product is sugar. But bagasse and molasses of comparatively smaller value are incidentally produced and which are termed as by-products. Other examples of by-products are – oil cake produced in the extraction of edible.
Oil, cotton seed produced in cotton textile industry, etc. These by-products are unavoidably produced and are of secondary value. The sales value of these products is much less as compared to the main product. For example – sales value of by-products bagasse and molasses is much less than that of the main product sugar.
There are two types of by-products:
(i) Those by-products which are sold in their original form without further processing, and
(ii) Those by-products which require further processing in order to be saleable.
Difference between By-Products and Joint Products:
There are no hard and fast rules to distinguish between by-products and joint products. A product may be treated as joint product in one business and the same product may be treated as by-product in another business.
However, the following factors should be considered to determine if a product is a joint product or a by-product:
(a) Relative Sales Value:
If the sales values of all the products are more or less equal, they are treated as joint products. If, however, there are wide differences in the relative sales value of products, the product with the greater sales value is treated as the main product and the products of the lower value are treated as by-products.
(b) Objective of Manufacture:
If the objective of manufacturing is product X, then unwanted products Y and Z be treated as by-products.
(c) Policy of Management:
The management may decide to treat a particular product as the main product and the other products as by-products. Alternatively, it may choose to treat all products as joint products.
By-products should not be confused with waste or scrap. Waste is used to describe a material which has no value or even negative value, if it has to be disposed of at some cost. Examples of waste are – gases, smoke and other unsaleable residues from the manufacturing process.
Scrap is also different from by-products in the sense that it is the leftover part of the raw materials whereas by-products are different from the material which went into the production process. Small pieces of wood left in furniture manufacturer or metal sheet pieces left in utensil manufacture are examples of scrap, whereas minor chemicals, having some value, emerging from a chemical process are classified as by-product. Sale value of scrap is relatively less than that of by-products. However, accounting treatment for scrap and by-products is quite similar.
Accounting for By-Products:
There are various methods of accounting for by-products, which are as follows:
i. Where By-Products are of Small Value:
In such a case it is not practicable to apportion any part of the joint cost to by-products.
The net income realised by the sale of by-products may be treated in any one of the following two ways:
(a) It may be treated as miscellaneous income and credited to Costing Profit and Loss Account.
(b) It may be credited to the Process Account in which the by-product has arisen.
In determining the net income from by-products, the following items should be deducted from the sales value of by-products:
(a) Any selling and distribution expenses incurred in the sale of by-products, and
(b) Any cost incurred in further processing of by-products to make them saleable.
ii. Where By-Products are of Considerable (Greater) Value:
Where by-products are of considerable sales value, it is proper to apportion a part of the joint cost to by-products. Such apportioned cost of by-products is debited to By-product Account and credited to the main Product Account. Any cost incurred in further processing of the by-product is debited to By-product Account. The By-product Account is credited with its sales value and any profit or loss arising out of this account is transferred to Costing Profit and Loss Account.
The apportionment of joint cost to by-products can be done by any of the four methods in costing of joint products.
These methods are:
(1) Sales Value Method,
(2) Physical Units Method,
(3) Average Cost Method, and
(4) Survey Method.
iii. Where By-Products Require Further Processing:
In such a case, the share of by-product in joint cost at the split off point may be arrived at by subtracting the profit and the further processing cost from the realisable value of the products i.e., by using Reverse Cost Method. In case the cost of the by-products at the split off point is small or negligible, it may be treated as per the method –
(i) discussed above, on the contrary, if it is considerable amount, it is treated as per method,
(ii) discussed above; i.e., joint cost is apportioned to by-products.
iv. Where By-Product is Utilised in the Undertaking itself:
In those cases where by-products are used by the company itself as a raw material for some other process, such by-products may be priced at the opportunity cost. The opportunity cost is that cost which would have been incurred had the by-product been purchased from an outside firm.
For example – a company is running a sugar plant, may be utilised in manufacture of paper as raw material. So credit for the cost of the bagasse would be given to the sugar cost at the price which the company would have otherwise paid to buy it from an outside firm for the manufacture of paper.
Joint Expenses, Subsequent Expenses and By-Product:
Joint costs are those costs which are incurred before that stage in manufacture at which the products get separated. On the other hand, subsequent costs are those costs which are incurred after separation point.
By-products are those products which are of relatively small value and are incidentally and unavoidably produced in the course of manufacturing the main product.
If the value of by-product is less, it is sold in market and amount received from sale of by-product is credited in Process Account. But, if the value of by-product is more, it requires separate materials, labour and overheads for further processing.
In such a case separation of costs of main product and by-product is essential so that profit can be calculated. Joint expense is recorded in the debit side of Main Product Account but share of by-product in joint expense is shown in the credit side of Main Product Account and in debit side of By-product Account. Generally, by-product is valued at market price.
The following processes are adopted for apportionment of joint costs:
(I) When Distributed Joint Expenses are Equal to the Joint Expenses Given in Question:
(II) When Distributed Amount of Joint Expenses Exceeds the Amount of Joint Expenses Given in Questions:
Sometimes it is seen that the distributed amount of joint expenses (Main plus by-product) exceeds the actual amount of joint expenses given in question. For example – total distributed amount of joint expenses is Rs. 40,000 whereas the total of actual joint expenses given in question is Rs. 30,000. The difference of these items Rs. 10,000 (i.e., 40,000 – 30,000) is treated as selling and distribution expenses and is apportioned between main product and by-product on the basis of sales ratios.
It is shown in the following table:
7. Transfer to Next Process at Cost
Plus Profit:
Generally, production of one process is transferred to next process at actual cost of the process but sometimes it is transferred to next process by adding a certain percentage of profit. It is done, when production cost is less than market price. In such a case a sum is added to the cost so as to it becomes equal to the market price.
In this regards two things are important to be taken into account:
(1) When percentage of profit is to be charged at cost price. For this the following formula is used to find out profit –
This profit is shown in the debit side of Process Account and inflated price (cost + profit) is shown in the credit side of Process Account.
(2) If profit is to be charged at transfer price then following formula is used to find out profit –
This can be explained with the help of following example, its –
Cost = Rs. 18,000
10% Profit is to be charged on transfer price, then:
This Rs. 2,000 will be shown in debit side of Process Account and Rs. 20,000 (i.e. 18,000 + 2,000) will be shown in the credit side of Process Account as transfer price.
Calculation of Reserve for Unrealised Profit:
When production cost of process one is transferred to next process by adding certain profit, it is included in closing stock too. For this a reserve is created which is deducted from stock and then rest stock is shown in Balance Sheet. If the percentage of profit of every process is equal and opening stock is not given, in such a case the amount of reserve is ascertained with the help of following formula –
