PROJECT REPORT

ON

PROCESS COSTING

M.COM – I ADVANCED ACCOUNTANCY

2015 - 2016

SUBMITTED BY

KAVITAKE CHHAYA LAXMAN

ROLL NO –A/24

PROJECT GUIDE

PROF. ROHAN GAIKWAD

SUBJECT: ADVANCED COST ACCOUNTING

People’s Education Society’s

DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS

WADALA, MUMBAI- 400 031.
 ACKNOWLEDGEMENT

I hereby acknowledge all those who directly or indirectly helped me to draft the project
report. It would not have been possible for me to complete the task without their help
and guidance. It is my great privilege to thank Dr. Ambedkar College of Commerce
and Economics.

First of all I would like to thank the principal Dr. S.R. Kamble and the coordinator
Prof. Sanjay H. Khaire who gave me the opportunity to do this project work. They also
conveyed the important instructions from the university from time to time. Secondly, I
am very much obliged of Prof. Rohan Gaikwad for giving guidance for completing the
project.

I am thankful to all those persons who co-operated with me. They not only rendered
time out of their busy scheduled but also answered my queries without hesitation.

I must mention my hearty gratitude towards my family, other faculties and friends who
supported me to go ahead with the project.

Place: MUMBAI

Date:

(Signature):
 People’s Education Society’s

DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS

WADALA, MUMBAI- 400 031.

CERTIFICATE

This is to certify that, Miss. Kavitake Chhaya Laxman of M.Com - I

Advanced Accountancy Semester I (2015-2016) has successfully completed
project on Process Costing under the guidance of Prof. Rohan Gaikwad

(Principal) (Co-ordinator)

(Project Guide ) (External Examiner)

 DECLARATION

I Miss. Kavitake Chhaya Laxman the student of Dr. Ambedkar College of

Commerce & Economics, studying in M.Com – I Advanced Accountacny
(Semester I), hereby declare that I have completed the project report on
Process Costing in the academic year 2015 – 2016.

The information submitted is genuine and practical to the best of my

knowledge.

Place: ______________

Kavitake Chhaya Laxman

( Roll No.A/24)
 Index

SR. NO CONTENTS PAGE

NO.

1 INTRODUCTION 1
 MEANING 2
 APPLICABILTY 3-4
 ADVANTAGES & DISADVANTAGES 5
 PROCESS CSTING & JOB COSTING

2 COSTING PROCEDURE – SIMPLE PROCESS

 ACCOUNTING PROCEDURE 6–7
 WORKSHEET – PRO – FORMA PROCESS 8
ACCOUNT

3 WASTE AND LOSSES

 MEANING 9 – 11
 ACCOUNTING FOR LOSSES 12
 WORKSHEET – CALCULATIONS FOR NORMAL 13
LOSS ETC. 14
 PROFORMA – JOURNAL ENTRIES 15
 PROFORMA – PROCESS A/C 16 - 19

4 VALUATION OF WORK – IN – PROCESS

 EQUIVALENT UNITS 20
 STEPS IN CALCULATION OF EU & UC 21 – 23
 FLOW OF COSTS – AVERAGE OF FIFO 24 – 25
 AVERAGE METHOD 26 – 28
 FIFO METHOD
29
 ILLUSTRATION
 ELEMENT-WISE COST OF WIP
29 – 30
 EVALUATION OF METHODS 31 – 32
  PROCESS LOSSES/GAINS

5 CASE STUDY – VOLANT TEXTILE MILLS LTD 33 - 42

 iNTRODUCTION

 MEANING
1) Process : A Process means a distinct manufacturing operation or stages. In Process
Industries, the raw material goes through a number of processes in a sequence
before the finished product is finally produced. For example production of coconut
oil involve the following distinct processes:
(1) COPRA CRUSHING (2) REFINING AND (3) FINISHING.

2) Process Costing: Process costing is method of costing used to find out the cost of
the product in each process. wheldon has defined process costing as “a method of
costing used to ascertain the cost of the product at each stage or operation of
manufacture …..”According to CIMA, London-“it is that form of operation costing
where standardized goods are produced”

3) Process Cost: According to CAS – 1 when the production process is such that
goods are produced from a sequence of continues or repetitive operation or
processes, the cost incurred during a period is considered as process cost.
 APPLICABILITY AND NECESSITY

Process Costing is applicable to several mining , manufacturing and public utility

industries, e.g. mines and quarries producing minerals and ores; industries producing
textiles , chemicals, soap, paper, plastics, alcohol, refined oil, electricity, gas and so on.

It becomes necessary to apply process costing to the Industries belonging to any of the
following categories:

 ONE PRODUCT, MANY PROCESSES: A factory may produce a single

item through a number of processes or departments. it becomes necessary to
find out the cost of each process or department separately to control wastage
etc.

 MANY PRODUCTS, MANY CYCLES: A bakery can use the same

equipments to produce either bread or cakes. it may produced only bread in one
cycle and change over to production of cakes in the next cycle. each cycle is
treated as a separate process so as to find out the cost of the item produced in a
particular cycle or process.

 MANY PRODUCTS, SAME PROCESS: an oil refinery can obtain many joint
products such as refined oil, gas, steam etc. in the same process. Process
Costing is employed to ascertain the individual cost of each such product.
 [A] ADVANTAGES

(1) PERIODICAL DETERMINATION OF COSTS: Process costs can be

collected and determined for even a short period like a day, a week or a month. In
Job Costing, on the other hand, costs can be collected and determined only after
the job is complete, which may take months or evens years.

(2) SIMPLE AND CHEAP: Process costing is much simple, easy and less expensive
method of costing as compared to other methods. There is no need for an elaborate
system of identifying the direct costs of a job or a batch.

(3) MANAGERIAL CONTROL: Being a simple system to establish and operate,

process costing facilitates greater control of the management over costs, wastage
etc.

(4) STANDARD PROCESS AND PRODUCTS: Since the processes and products
are standard, it is easy to make decisions regarding pricing, quotations, tenders etc.
 [B] DISADANTAGES

(1) NO DETAILED ANALYSIS: Process Costing does not give a details analysis of
the cost as (i) it emphasizes the period rather than the unit or the product, and (ii) it
gives an average cost rather that the specific cost of the product.

(2) HISTORICAL COSTS: Process Costing gives only historical costs which are not
useful for forecast of future trends etc.

(3) ESTIMATES: The determination of percentages of normal loss, wastage,

distribution of costs over by – products and joint products, valuation of work in
progress involve estimate based on arbitrary decision of the management.
 PROCESS COSTING V/S JOB COSTING

NO. PROCESS COSTING JOB COSTING

1. It is period costing i.e. costs of all It is specific costing; i.e. cost of job
processes during a period are is ascertained till it ends, whatever
ascertained. the time it takes.

2. Cost unit is each process. Cost unit is the job order.

3. Direct costs are much more than Costs are directs as well as indirect.
indirect.

4. It normally involves work - in - It may not involve work - in –

process. progress.

5. Cost of one process is transferred Cost of each job is separate.

to next process.
 Costing PROCUDER – SIMPLE PROCESS

Accounting Procedure

The accounting prouder in process costing is as follows:

1. Separate Process A/c: the entire manufacturing operation is divided in to

separate stages or process. each process of production is treated as a distinct cost centre
a separate process account is opened to record the cost incurred in such process.

2. Debit side of Process A/c: each process account is charged with the expenses
directly incurred for that process and plus its share of the overheads. the process
account is debited with the direct and indirect expenses ( material, wages and
overheads) pertain to that process.

a) Material : the raw material, sundry material and stores required for a
process are issued directly from the stores against a material
requisition slip. in addition, the cost of units transferred from the
earlier process, if any , also appears on the debit side of the process
account.
b) Labour : wages paid to workers directly employed in a process are
debited to the process account. like material, the distinction between
direct and indirect labour is not important in process costing. Indirect
labour expenses (e.g. manager`s salary) may, if necessary, be debited
on the basis of ratio of direct wages.
 c) Expenses : the expenses directly related to the process such as
repairs of machinery, power etc. are debited to the respective process
account. Indirect expenses are apportioned over and absorbed by
various processes on a suitable basis such as ratio of material costs,
labour costs or prime costs.

3. Credit side of Process A/c : The Process account is credited with tha sale value
of residue etc.

4. Net cost of Process : The net cost of the output of the process (total cost less
sale value of residue) is transferred to the next process. the cost of each process is thus
made up of (i) cost brought forward from previous process and (ii) net cost of material,
labour and overheads added in the process less sale value of residue. the net cost of the
last process is transferred to finished goods account.

5. Average Unit Cost : The net cost is divided by the number of units produced to
determine the average cost per unit in that Process.
 PRO-FORMA PROCESS ACCOUNT

A PRO-FORMA PROCESS ACCOUNT WOULD APPEAR AS FOLLOW:

Dr. Process Account Cr.

Particulars Units Rate Particulars Units Rate

To Transfer
By Sale of
from (1)
Residue
Earlier Process

To Material
By Transfer to
next process /
To Wages
finished
goods
To Expenses

To Overheads
 WASTE AND LOSSES

MEANING

A manufacturing process is likely to give rise to some waste and losses. let us
first be clear about the exact meaning of these terms – viz waste and losses.

 Waste : It represents the portion of basis raw materials lost in processing

having no recoverable value. Waste may be visible - remnants of basis raw
materials – invisible; e.g. disappearance of basic raw materials through
evaporations, smoke etc. normal waste is absorbed in the cost of net output ,
whereas abnormal waste is transferred to the costing profit and loss account.

 Spoilage : It is the term used for materials which are badly damaged in
manufacturing operations, and they cannot be rectified economically and hence
taken out of process to be disposed of in some manner without further
processing. Spoilage may be either normal or abnormal. Normal spoilage costs
are included in costs either charging the loss due to spoilage to the production
 order or by charging it to production overhead so that it is spread over all
products.

 Salvage : It signifies those units or portions of production which can be

rectified and turned out as good units by the application of additional material,
labour or other service. For example, some mudguards produced in a bicycle
factory may have dents; or there may be duplication of page or omission some
pages in a book. Defectives arise due to sub-standards materials, bad –
supervision, bad – planning, poor workmanship, inadequate – equipment and
careless inspection.

 Rectification : In the case of articles that have been spoiled, it is necessary

to take steps to salvage/reclaim as much of the loss as possible. For this purpose
: (i) all defective units should be sent to a place fixed for the purpose ;(ii) these
should be dismantled ;(iii) goods and serviceable parts should be separated and
taken into stock;(iv) parts which can be made serviceable by further work should
separated and sent to the workshop for the purpose and taken in to stock after the
defects have been removed; and (v) parts which cannot be made serviceable
should be collected in one place for being melted or sold.

 Scrap : It has been defined as the incidental residue from certain types of
manufactures, usually of small amount and low value, recoverable without
further processing. Scarp may be treated in cost accounts in the following ways:-
 I. Where the value of scrap is negligible, it may be excluded from costs. In other
words, the cost of scrap is borne by good units and income scrap is treated as
other income.

II. The sale value of scrap net of selling and distribution cost is deducted from
overhead to reduce the overhead rate. A variation of this method is to deducted
the net realizable value from material cost. This method is followed when
scraps cannot be aggregated job or process-wise.

III. When scrap is identifiable with a particular job or process and its value is
significant, the scrap account should be charged with full cost. The credit is
given to the job or process concerned. The profit or loss in the scrap acc ount, on
realization, will be transferred to the costing profit and loss account.
 CAS – 6

The provision of CAS – 6 (Material Cost) relating to scrap, waste, etc. are as follows
–

 Scrap : Scrap means discarded material having some value in few cases and
which is usually either disposed of without further treatment (other than
reclamation and handling) or reintroduced into the production in place of raw
material.
 Waste : Waste means material los during production or storage due to various
factors such as evaporation, chemical reaction, contamination, unrecoverable
residue, shrinkage, etc., and discarded material which may or may not have value.
 Spoilage : Spoilage means production that does not meet with dimensional or
quality standards in such way that it cannot be rectified economically and sold for a
disposal value.
 Marketable scrap : The production process may generate marketable
scrap or waste. Realized or realizable value of scrap pr waste shall be credited to the
cost of production.
 Reprocessed scrap : In case, scrap or waste does not have ready market
and it is used for reprocessing, the scrap or waste value is taken at a rate of input
cost depending upon the stage at which such scrap or waste is recycled. The
 expenses incurred for making the scrap suitable for reprocessing shall be deducted
from value of scrap or waste.

 ACCOUNTING FOR LOSSES

Actual Basis : -

In this case, the actual sale value of scrap, spoilage or defectives is credited to the
process account. Thus amount of loss ( cost less sale value) relating to defective units
is wholly charged to the process account. This means that the amount of loss is
absorbed by or spread over the good units. However, losses are of two types, normal
loss and abnormal loss. Normal loss denotes the unavoidable or uncontrollable loss
.Abnormal loss on the other hand, denotes the avoidable or controllable loss. In actual
basis , no distinction is made between normal and abnormal loss. Hence in this
method, the cost per unit may vary from period to period. This vitiates or distorts the
unit costs of process.

Normal Basis : -

The normal basis of scrap accounting seeks to * enable the management to control
avoidable costs by distinguishing between the normal loss and the abnormal loss, and
avoid variations in unit costs due to change in amounts of scrap. In this method of
scrap accounting the figure of normal loss for each process is fixed on the basis of past
experience or technical data. Any loss above this figure is treated as abnormal loss.
Any loss below this figure is treated as abnormal gains. Normal loss is treated as
normal cost of production. Normal loss is treated as normal cost of production. But
 cost of abnormal loss or gain is taken out from the process account. The net financial
loss on account of abnormal loss is debited to the costing profit and loss account. The
account of abnormal Gains is credited to the costing profit and loss account.

 Worksheet : Calculation For Normal Loss Etc.

Steps What is to be How is it to be calculated

calculated

1. Normal Loss = Input x % of Normal Loss

2. Normal Output = Input – Normal Loss

Normal Cost
3. Unit Cost
= ------------------------
Normal Output

Cost of Process – Sale Value of Normal Loss

= --------------------------------------------------------------
Input – Normal Loss

4. Abnormal Loss = Normal Output – Actual Output

Or
Abnormal Gains

5. Cost of Actual Output = Unit Cost X Units of Actual Output

 6. Cost of Abnormal Loss = Unit Cost X Units of Abnormal Loss

7. Cost of Abnormal Gains = Unit Cost X Units of Abnormal Gains

 Proforma Journal Entries

NO. Entry Amount

1. Normal Loss Account Dr. Sales Value of Normal Loss
To Process….Account

2. Next Process Account Dr. Cost of Good Output

To Process….Account
3. Abnormal Loss Account Dr. Cost of Abnormal Loss
To Process….Account
4. Process …….. Account Dr. Cost of Abnormal Gain
To Abnormal Gains Account
5. Actual Sale Dr. Units of Normal Loss x Sale Price
To Normal Loss Account
6. Cash / Debtor Sale Value of Abnormal Loss
To Abnormal Loss Account
7. Abnormal Gain Account Dr. Sale Value of Abnormal Gain
To Normal Loss Account
8. Costing P & L Account Dr. Cost – Sale Value of Abnormal
To Abnormal Loss Account Loss
 9. Abnormal Gain Account Dr. Cost of Abnormal Gains – Sale
To Costing P & L Account Value of Abnormal Gains

 Proforma Process Accounts { NORMAL BASIS }

Process A Accounts ( Normal Loss )

Dr. C r.
Particulars Units Rate Particulars Units Rate

To Material b/f
By Normal Loss A/c
To Direct Material

To Direct Wages By Transfer to next

process
To Direct Expenses

To Overheads

Process B Accounts ( Abnormal Loss )

Dr. C r.
Particulars Units Rate Particulars Units Rate
To Material
By Normal Loss A/c
To Direct Material

To Direct Wages By Transfer to next

process
To Direct Expenses

To Overheads

Process C Accounts ( Abnormal Gain )

Dr. C r.
Particulars Units Rate Particulars Units Rate

To Transfer from
By Normal Loss A/c
(1) Earlier Process

To Direct Material
By Transfer to next
To Direct Wages process

To Direct Expenses

To Overheads

Normal Loss Accounts

Dr. C r.
Particulars Units Rate Particulars Units Rate
To Process A/c A
By Actual Sale A
To Process A/c B
By Actual Sale B
To Process A/c C
By Actual Sale C

By Abnormal Gain
A/c

Abnormal Gain Account

Dr. C r.
Particulars Units Rate Particulars Units Rate

To Normal Loss A/c

By Process A/c C

To Costing Profit &

Loss A/c

Abnormal Loss Account

Dr. C r.
Particulars Units Rate Particulars Units Rate

To Process B ( Cost )
By Actual Sale B

By Costing Profit &

Loss A/c

Notes:

1.Quantity Reconciliation

Particulars Process A Process B Process C

Input (i) xx xx Xx
xx xx xx
Less : Normal Loss
Xx xx xx
= Normal Production (ii)
xx xx xx
 Actual Production - xx -

Abnormal Loss xx

Abnormal Gain

Sale of Scrap (i – ii)

Normal Cost
2.Unit Cost = ----------------------
Normal Output

Cost of Process – Scrap Value of Normal Loss

2.Unit Cost = ------------------------------------------------------------------
Input - Normal Loss

 VALUATION OF WORK –IN-PROCESS

EQUIVALENT UNITS

We have studies earlier how work - in-progress is valued in case of Units Costing
or Contract Costing. Let us now study how work-in-process is valid in case of process
costing. In the process industries there is likely to be partly competed units at the end
of accounting period that will be carried to the next accounting period. Such units of
unfinished work are in different stages of completion .Hence they cannot be taken as
 full units for the purpose of calculation of units costs. Let us consider the following
example:

Dr. PROCESS Cr.

Particulars Units Rs. Particular Units Completio Rs.
n
To Material 40,000 50,000 By Transferred 30,00 100%
to Process B 0
To Labour 10,000
By Closing
To 10,000 Work-in-process 50%
Overhead 10,00
0
40,000 70,000 40,00 70,00
0 0

The problem now is-how to compute the units cost of the output ? If we simply divided
Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value both the completed units at
the same rate. Therefore , the unfinished units should be converted into completed
units. In the above examples, 10,000 partly finished units on which 50% of the work
has been completed are equivalent to 5,000 fully completed units. on which Such
incomplete units so computed in term of completed units are knows as equivalent
units. The total output or production in terms of completed units is 30,000 + 5,000 =
35,000. Now we can divided the input cost Rs.70,000 by Produced units 35,000 to get
the Units cost of Rs. 2.the output transferred to process B can be valued at Rs. 60,000
(30,000 x 2). The work-in-process can be valued at Rs. 10,000 (5,000 x 2).

 STEPS IN CALULATION OF EQUIVALENT UNITS AND UNIT COST

The calculation of the equivalent units and cost of output transferred to process B will
be worked out as follows:

Step 1 : Reconcile Input and Output

We should consider the physical flow of production – the units of input and output. In
the above example, Input is 40,000 units and output is (i) 30,000 units transferred to
process B and (ii) 10,000 units of closing work –in –process. The total output of
40,000units agrees with the total input of 40,000 units. However, the output is not all
of fully competed units. To make the output and input comparable, we must convert
the production into Equivalent Units.

Step 2 : Calculate Equivalent Units.

Completed units = 30,000
Work-in-process units = 10,000 at 50%competion = 5,000
Equivalent Units = 35,000
Step 3 : Calculate Total Cost of Material, Labour and Overhead
50,000 + 10,000 + 10,000 = Rs.70,000

Step 4 : Calculate Cost of each Equivalent Unit

Cost per Equivalent Units Rs.70,000 / 35,000 = Rs. 2.
Step 5 : Calculate Cost of production and cost of Work –in-process
Cost of production transferred = 30,000 x Rs.2 = Rs.60,000
Cost of work-in-process = 10,000 x 50% x Rs.2 = Rs.10,000
=Rs.70,000
This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).
 Illustration 5 : (Work- Sheet Format : Only Closing Stock of WIP)
The above steps can be presented in a more refined format as shows below which can
be used by the students for problem involving only closing work-in-process.

Solution:
[A] EQUVIVALENT UNITS (EU)
Particular Qty. Reconciliation Equivalent Units [EU]

Input Output Material [M] Labour [L] Overheads [O]

% EU % EU % EU
 1. Fresh Units Introduced 40,000
2. Fresh Units Completed 30,000 100 30,000 100 30,000 100 30,000
3. Closing WIP 10,000 50 5,000 50 5,000 50 5,000

Total Units of [A] 40,000 40,000 35,000 35,000 35,000

[B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total
1.Cost incurred during the process 50,000 10,000 10,000 70,000
2.Less: Sale of Normal Scrap -- -- -- --
Total Cost [B] 50,000 10,000 10,000 70,000
Equivalent Units [A] 35,000 35,000 35,000
Cost Per EU[C =B + A] 1.43 0.29 0.29 2.00

[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total (Rs.)
1.Finished Units Tfd.to Next Process 30,000 2.00 60,000
2.Closing Work-in-process
- Material 5,000 1.43 7,143
- Labour 5,000 0.29 1,429
- Overheads 5,000 0.29 1,428 10,000
Total Cost [B] Apportioned 70,000

 FLOW OF COST – AVERAGE OR FIFO

When there are no opening W-I-P units as in the example above, valuation of closing
W-I-P is simple (see Para 6.3 below). In such cases, the entire closing W-I-P comes out
of the current cost and is valued accordingly, However, when there is opening stock of
work -in-process, the production completed during the period comes out of(i) units
completed out of the opening stock of WIP; and (ii) units started and completed in the
process in the current period. The cost of units completed out of the opening stock of
WIP will include partly the cost carried over from the previous period .Since the input
have different costs, the problem arises of which rate to use for valuation of the output.
The unit cost such situation, may be calculated under either of the two method, viz, (i)
the weighted average cost method or (ii) the first -in, first out (FIFO) method.

 AVERAGE METHOD

Under the Average Method, Total cost in the process is divided by the Total equivalent
units produced by the process to ascertain the cost per equivalent unit. Total costs of
the process mean the total of the current production costs and the cost of the opening
work-in-process. Total Equivalent Units produced by the process mean the total of the
units completed during the period and Equivalent Units of work performed on the
opening and closing work-in-process. According to the Average Method (or, more
accurately, the Weighted Average Method), the cost of the opening work –in-process is
added to the cost incurred in the current period and average cost worked out. It should
be noted that in the calculating the equivalent units under the weighted average
method, the work done in the past is treated as if done in the current period. The
closing WIP under this method is made of the average costs of opening WIP and
current production.

 FIFO MEHTOD

The method is based on the assumption that the materials in process moves on a first-
in, first-out basis. FIFO method assumes that the work on the opening stock is before
the materials put into the process during the current period are taken up. The units
completed during the process being usually more than the opening stock, it is assumed
that no units from the opening work-in-process will be left incomplete and so none of
them will find place in the closing work –in-process. Under the FIFO method, the cost
of work completed in a period are worked out in two parts. i.e. separately for (a)
 opening work-in-process competed, and (b) units started and completed in the period.
Under the FIFO method, cost of closing WIP is based on the cost of the current
production only. In the FIFO method, the procedure of calculation of equivalent units
is different as the units competed from opening work-in-process and from current
production have to be accounted for separately.

 ILLUSTRATIONS
Let us consider the following example to understand the procedure of valuation under
these two methods.

Illustration 6: (Average)
Process A Period : September, 2003
Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000
Units brought into process- 50,000.
Cost incurred
- Material Rs. 60,000
- Labour Rs. 25,000
- Overheads Rs. 15,000

Transfer to process: 40,000 Competed units (entirely competed production)

Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the value of
closing W-I-P.
Solution:
Step 1: Quantity Reconciliation:
Particulars Units Particulars Units
Opening work-in-process(40%) 10,000 Units completed 40,000
Units started 50,000 Closing work-in-process(75%) 20,000
60,000 60,000

Step 2: Computation of equivalent units:

Particulars Units
Units competed 40,000
Closing work-in-process (75%) 15,000
Equivalent Units 55,000

It should be noted that in calculating the equivalent units under the weighted average
method, the work done in the past is taken to have been done in the current period.
Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000.
Step 4: Cost per equivalent unit = Rs. 1,10,000 ÷ 55,000 = Rs. 2
Step 5: Cost competed units transferred to process = 40,000×Rs.2 = Rs. 80,000
Cost of closing work-in-process = 20,000 × 75% × Rs.2 = Rs. 30,000
Rs. 1, 10,000
 [Average Method]

[A] EQUVIVALENT UNITS (EU)

Particular Qty. Equivalent Units [EU]
Reconciliation
Input Output Material [M] Labour [L] Overheads [O]
% EU % EU % EU
1. Opening Work-in-Process 10,000
2. Fresh Units Introduced 50,000
3. Units Tfd. to Next Process 40,000 100 40,000 100 40,000 100 40,000
4. Closing Work-in-Process 20,000 75 15,000 75 15,000 75 15,000
Total Units of [A] 60,000 60,000 55,000 55,000 55,000

[B] COST PER EU [CPEU]

Particulars Material Labour Overheads Total
1.Cost of Opening WIP 10,000 -- -- 10,000
2.Cost incurred during the process 60,000 25,000 15,000 1,00,000
Total Cost [B] 70,000 25,000 15,000 1,10,000
Equivalent Units [A] 55,000 55,000 55,000
Cost Per EU[ C =B + A] 1.27 0.45 0.27 2.00

[C] COST APPORTIONMENT

Particulars EU CPU Rs. Total (Rs.)
1.Finished Units Tfd.to Next Process 40,000 2.00 80,000
2.Work-in-process Closing Stock
- Material 15,000 1.27 19,091
- Labour 15,000 0.45 6,818
- Overheads 15,000 0.27 4,091 30,000
Total Cost [B] Apportioned 1,10,000

The Process Account will be shown as follows:

 Dr. Process A Account Cr.
Particulars Units % Rs. Particulars Units % Rs.
Work-in- Transferred to
process(b/f) 10,000 40% 10,000 Process B 40,000 100% 80,000
Material 50,000 60,000 Work-in-
Labour 25,000 process(c/f) 20,000 75% 30,000
Overhead 15,000
60,000 1,10,000 60,000 1,10,000

 ELEMENT – WISE COST OF WIP

Normally, It may be necessary to work out the unit process cost for each element of
cost separately because material, labour and overhead may be in different stage of
completion in the work-in-process inventory. All materials are usually you issued input
and into the process in the beginning itself. Therefore, the closing work-in-process in
 generally taken as 100% compete in so far as the materials elements is concerned. For
materials added at the end of the process, the percentage of completion will be zero.

 EVALUATION OF METHOD
[1] Average Method:
(1) The weighted average method is simpler of the two and is widely used in practice

(2) But, Average method mixes up the costs in different period and does not correctly
reflect the extent of change of costs from period to period.

[2] FIFO Method:

(1) FIFO method is more suitable from the point of view of control as the past and
current costs are separated.

(2)FIFO method is, however ,complicated and tracing out the costs in to two parts from
process to process become tedious, particularly when the number of processes in many.

(3) FIFO system is neither suitable nor rational when spoiled units are involved
because apportionment of such units between the opening the inventory and current
production is not possible.

[3] When choice Becomes Unnecessary

The difference in the result obtained by the two method would not be signification or
would disappear all together If :

(1) There is no opinion inventory, and so the question of first –in, first-out does not
arise at all.
 (2) Opening inventory very small, compared to the fresh units introduce in the
process.
(3) The stage of completion of opening inventory is not sufficiently advance so that
the previous costs have practically no effect on current costs.
(4) There is not much difference in costs from period to period.

 PROCESS LOSSES/ GAINS

(1) Meaning: In many process, the physical quantity of output is found to be less than
that of the input, the difference being attributable to wastage, spoilage, shrinkage,
evaporation etc. occurring in course of manufacture. In order to compute connect cost
per unit. The units entering a process must be reconciled with the output coming out of
the process, and the loss units, as they are called, must be analyzed to determine the
factor leading to the loss. If a product passes through several processes, the lost units
will have an effect not only on the unit cost of the process in which they arise but also
on the cost of the subsequent processed on the cumulative unit cost of the final output.

(2) Normal Loss: Units may be lost at beginning of a process, during a process, or at
the end of a process. The treatment of normal spoilage costs in process accounts
depends upon the stage at which the spoilage (rejection or loss) is assumed to occur.

(i) At Beginning: When normal spoilage occurs at the beginning of a process, it

is assumed that the lost units never entered in the process. In the Computation of
equivalent units, the normal spoilage units are ignored with in the result that the cost of
spoilage in charged to the production units competed and to abnormal spoilage, if a ny ,
as well as the to the closing work-in-process.

(ii) At End: If the normal spoilage occurs at the end of a process, as is more
common, the spoiled units are taken into account for computing equivalent units so
that to cost of normal spoilage in charged only to the good units produced as well as to
abnormal spoilage, if any, but no amount is charged to the closing work-in-process.
The usual practice is to determined the cost of normal spoilage separately add it back
to the cost of good units produced. If the spoiled units can be sold scrap, the scrap
value is credited to the process account as the cost of the spoilage or loss.

(3) Abnormal Loss: Abnormal spoilage of defective work may arise in a process due
to unforeseen factors. The cost of such abnormal loss in not include in the cost of the
process but the average cost of the lost units is charge to an Abnormal Loss Account
which is credited with the scrap and closed by transfer to the Profit and Loss Account.
Thus, in computing the value of abnormal loss, scrap value of the abnormal lost units
will be ignored but in working out the loss for charging to Profit and Loss Account,
this will be taken into consideration.

(4) Abnormal Gains: Sometime, when the actual loss in process is less than the
anticipated loss, the difference between the two is considered to be abnormal gain. The
value of the abnormal gain is calculated in the same way as described above for
abnormal loss and is credited to an Abnormal Gain Account which is ultimately closed
by transfer to the Profit and Loss Accounts. The scrap value of the normal anticipated
loss in the process where abnormal gain occurs is credited to the process account with
the result that the net debit to the process is the cost of abnormal gains less the value of
scrap for the normal loss.

Case Study on Volant Textile Mills Ltd.

Textiles: The word 'textile' is from Latin, from the adjective textilis, meaning 'woven',
from textus, the past participle of the verb texere, 'to weave'.

Textile industry in India

The Textile industry in India traditionally, after agriculture, is the only industry that has
generated huge employment for both skilled and unskilled labour in textiles. The textile
industry continues to be the second largest employment generating sector in India. It offers
direct employment to over 35 million in the country. In 2010, there were 2,500 textile
weaving factories and 4,135 textile finishing factories in all of India.

About the unit

Volant Group is promoted by the Somani family, which has a textile manufacturing
background since the year 1932 in Mumbai, India.

Volant is a multi-divisional textile manufacturing company having its facilities located at

Solapur. The scope of its business includes yarn dyeing, weaving, woven fabric processing,
knit processing, finishing and designing with state-of-the-art infrastructure.

Volant has also taken a 3 years management contract an open end (OE) spinning plant for
cotton yarn there by having better control on the quality of yarn.

Date of Establishment: 1993

Market Capital: 49.4703 (Rs. in Millions)
Management Details: Chairperson - Rajesh Somani
MD - Anantvikram Somani
Business Operation: Textile - Spinning

Registered Office address: Ansa Industrial Estate,Saki Vihar Road,Saki Naka,

Andheri (E),Mumbai 400072.

Company History
Volant Textile Mills Ltd. incorporated in 1994, is a 100% Export Oriented Unit
manufacturing cotton and bleached grey fabrics. The weaving unit comprises of- 36 nos.
Sulzer machines - Model PU 130 ES 120 E10 D1 having 130' reed space. 5 nos of these
Sulzer machines are with batching motion, 6 nos. Sulzer machines – Model PU 130
having 130” reed space with Dobby, 10 nos. Somet Rapier SM93 Model Looms having
90” reed space with Jacquard 1344 hooks, High Speed wrapping machine from
Benninger India Ltd. Twin sow-box sizing machine with synchro-four system from Amba
Machine Works Pvt. Ltd.

Weave - direct humidification plant from LTG, Germany

Inspections, checking, roll & bale packaging equipments

Generator plant for full capacity requirement

It has exported to all major markets of the world like Australia, Bangladesh, EEC, Hong
Kong, Israel, Nigeria, Russia, Taiwan, USA. The company follows the American 10 point
grey inspection In 2008, the promoters have made payment to SASF for buy back of
7,50,000 Equity shares at par, as per terms of the negotiated settlement the Company had
entered into with SASF on September 27, 2006.

The Company added 6 Sulzer weaving machines with Dobby and 10 Jaquard weaving
machines, commercial production of which started on October 09, 2008. The addition of
machines was with reference to proposed Draft Rehabilitation scheme which has been
submitted to the Operating Agency for bringing about Viability for the Company.

Products:

1. Fancy Shirting
2. Fibres & Acrylic Waste
3. Fabrics
4. Fabrics Lumps
5. Scrap
 Processes involved in Manufacturing

Spinning

Weaving

Dyeing +Printing

Finishing

1. Spinning - Spinning is a process of making or converting fibre materials into yarns.

Since few centuries ago, spinning have been known as a process of converting raw
materials (fibre) such as cotton and wool into yarns for making textile fabric or products.

Fibres cannot be used to make clothes in their raw form. For this purpose, they must be
converted into yarns. The process used for yarn formation is spinning.Drawing pulls the
staple lengthwise over each other. As a result longer and thinner slivers are produced.
After several stages of drawing out, the sliver is passed to the spindles where it is given its
first twist and is then wound on bobbins. 'Roving' is the final product of the several
drawing-out operations. It is the preparatory stage for the final insertion of twist. Till now,
enough twist is given for holding the fibres together but it has no tensile strength. It can
break apart easily with a slight pull.

2. Weaving - Weaving is a method of fabric production in which two distinct sets

of yarns or threads are interlaced at right angles to form a fabric or cloth.
Cloth is usually woven on a loom, a device that holds the warp threads in place while
filling threads are woven through them. A fabric band which meets this definition of cloth
(warp threads with a weft thread winding between) can also be made using other methods,
including tablet weaving, back-strap, or other techniques without looms.
The way the warp and filling threads interlace with each other is called the weave. The
majority of woven products are created with one of three basic weaves: plain weave, satin
weave, or twill. Woven cloth can be plain (in one colour or a simple pattern), or can be
woven in decorative or artistic designs.
In order to interlace the warp and weft yarn, there are three operations which often called
primary motions are necessary:

 Shedding- The process of separating the warp yarn into two layers by
raising the harness to form an open area between two sets of warps and
known as shed.

 Picking- The process of inserting the filling yarn through the shed by the
means of the shuttle less while the shed is opening.

 Beating- The process of pushing the filling yarn into the already woven
fabric at a point known as the fell and done by the reed.

3. Dyeing & Printing - Dyeing is the process of adding colour to textile products
like fibres, yarns, and fabrics. Dyeing is normally done in a special solution containing
dyes and particular chemical material. After dyeing, dye molecules have uncut chemical
bond with fibre molecules. The temperature and time controlling are two key factors in
dyeing.The common dyeing process of cotton yarn with reactive dyes at package form is
as follows:
1. The raw yarn is wound on a spring tube to achieve a package suitable for dye
penetration.
2. These softened packages are loaded on a dyeing carrier's spindle one on another.
3. The packages are pressed up to a desired height to achieve suitable density of
packing.
4. After dyeing, the packages are unloaded from the carrier into a trolley.
5. The packages are then dried to achieve the final dyed package.

Textile printing is the process of applying colour to fabric in definite patterns or designs.
In properly printed fabrics the colour is bonded with the fibre, so as to resist washing and
friction. In printing, wooden blocks, stencils, engraved plates, rollers, or silkscreens can
be used to place colours on the fabric. Colorants used in printing contain dyes thickened to
prevent the colour from spreading by capillary attraction beyond the limits of the pattern
or design.

4. Finishing - In textile manufacturing, Finishing refers to the processes that convert

the woven or knitted cloth into a usable material and more specifically to any process
performed after dyeing the yarn or fabric to improve the look, performance, or "hand"
(feel) of the finished textile or clothing.
Some finishing techniques such as bleaching and dyeing are applied to yarn before it is
woven while others are applied to the grey cloth directly after it is woven or knitted. Some
finishing techniques, such as fulling, have been in use with hand-weaving for centuries;
others, such as mercerisation, are by-products of the Industrial Revolution.
YARN DYEING

Equipped with State-of-the -Art dyeing machinery from Thies

German, for Yarn and Beam dyeing capacity of 6 mt / day.
KNIT PROCESSING

The Knit Processing capacity is 12 mt / day with finest machines. We

are equipped with HT Fabric Dying machines from Sclavos, Greece. Relaxed Dryer from
Santex, Switzerland. Baloon Padder from Bianco, Italy and a Compacter from Tubetex,
USA
FABRIC PROCESSING

Processing capacity of about 40,000 meters per day. The machines

include Jigger Dyeing, Monforts Stenters (one having Stork coating attachment), Muzzi
Sanfor, Hansa Calender and Teesta Packaging, using leading European technology .
 In the Books of Textile Mills Ltd.
Process Accounts

(Approx. Figures)
Dr. Process No. 1 A/c. Cr.
Particulars Unit Rs. Particulars Units Rs.
To Material @ 5000 5000000 By Normal Loss 250 12500
Rs.1000 (sale of Scrap)
To Wages 200000 By Weight Loss 250 --
To Expenses 162500 By Process 1 Stock 4500 1350000
A/c. (@ 300 per ton)

5000 1362500 5000 1362500

Dr. Process No. 1 Stock A/c. Cr.

Particulars Unit Rs. Particulars Units Rs.
To Process 1 4500 1350000 By Bank ( @ 320 ) 1500 480000
A/c.
To Costing 30000 By Process No.2 3000 900000
Profit & Loss A/c.
A/c.

4500 1380000 4500 1380000

Dr. Process No. 2 A/c. Cr.
Particulars Unit Rs. Particulars Units Rs.
To Process 1 3000 900000 By Normal Loss ( 150 7500
A/c. @ Rs.50 )
To Wages 150000
To Expenses 54000 By Weight Loss 300 --
By Process 2 Stock 2550 1096500
A/c. ( @ Rs.430 )
3000 1104000 3000 1104000

Dr. Process No. 2 Stock A/c. Cr.

Particulars Unit Rs. Particulars Units Rs.
To Process 2 2550 1096500 By Bank
A/c.
To Costing P 25500 ( sale @ 450 ) 1275 573750
& L A/c.
162500 By Process 3 A/c. 1275 548250

2550 1222000 2550 1222000

Dr. Process No. 3 A/c. Cr.

Particulars Unit Rs. Particulars Units Rs.
To Process 2 1275 548250 By Scrap 255 12750
Stock A/c.
To Wages 35000 By Weight Loss 255 --
To Expenses 18550 By Process 3 Stock 765 589050
A/c.

1275 601800 1275 601800

Dr. Process No. 3 Stock A/c. Cr.
Particulars Unit Rs. Particulars Units Rs.
To Process 3 765 589050
A/c.
To Costing 22950 By Bank ( sale @ 765 612000
P & L A/c. 800 )

765 612000 765 612000

Dr. Costing Profit & Loss A/c. Cr.

Particulars Rs. Particulars Rs.
To Management Expenses 52500 By Process 1Stock A/c. 30000
To Selling Expenses 40000 By Process 2 Stock A/c. 25500
To Interest on Capital 10000 By Process 3 Stock A/c. 22950
By Net Loss 24050
102500 102500
Conclusion
The researcher has observed the following points:

 Process costing is used in situations where homogeneous products or services

are produced on a continuous basis.
 To compute unit costs in a department, the department's output in terms of
equivalent units must be determined.
 Volant Group is promoted by the Somani family, which has a textile
manufacturing background since the year 1932 in Mumbai, India.
 It has a multi divisional textile manufacturing company having its facilities
located at Solapur.
 The scope of its business includes yarn dyeing, weaving, woven fabric
processing, knit processing, finishing and designing with state-of-the-art
infrastructure.
 This company is operational from the year 1993.
 Raw materials used include cotton, silk, wool, flax, polyester, dyes, chemicals
and auxiliaries.
 The processes involve spinning, weaving, dyeing, printing and finishing.
 Volant has also taken a 3 years management contract on an open end spinning
plant for cotton yarn there by having better control on the quality of yarn.