6

6.11

2005
of
the

Costing

Chapler Oulline. f
Introduction, Objectives,Job Costing Procedure, Problems and Solutions, Examination
Questions.

Introduction
is of cost ascertainment used in job order industries.
Job costing (OT job order costing) a method
Special
features of
such industries are as follows
(a) Production is against customer's orders and not for stocks.

(b) Each job has its owm characteristics and requires special attention.

(c) The flow of production from one department to another is not unifom. It is the nature of job
which determines the department through which it is to be processed.

Objectives of Job Costing Job Costing is used in

The following are the main objectives ofjob costing: Printing press
1. Cost of each job/order is ascertained separately. This helps in Motor car repair shop
finding out the profit or loss on each individual job. Internor decoration

2. It enables management to detect those jobs which are more Dry cleaning
Painters, etc.
profitable and those which are unprofitable.

3. It the cost of similar jobs undertakenin future. It thus helps

provides a basis for determining
in future production planning.

4. It helps management in controling costs by comparing the actual costs with the estimated
costs.

Job Costing Procedure

The following steps are taken in job costing
:
1. Job number. When an order has been accepted, anindividual job number must be assigned to
each such job so that separate jobs are identifiable at all stages of production. Assignment of job
mumbers also facilitates reference for costing purposes in the ledger and is conveniently short for use
on varnous forms and document.
2. Production order. The Production Control Department then makes out a Production 0rder
thereby authorising to start work
on the copies of are
job. Several production older prepared, the
copies often being in different colours to distinguish
them more easily. These copies arepasse on
to
thefollowing:
 Cost
Accounting
6.2
with the job;
foremen concerned
(i)
All departmental of materials; and
for issuing
() Storekeeper
for an advance
notification of
tools required,

Tool room
(it)
Production Order
Job No..ussses

of the Customer.. s*********************

Name Date...esnenesesaso

L..
Commencement...
e ********************
Bill of Material No..
Date of
*****

Date of Completion... Drawing attached Yes/No.

****

Instructions.. to be used
Special Machines Tools
required
Description
Quantity

(Sign.). ******

Production authorisedby:
Head of Production Control Deptt.

Order for Job

Fig. 6.1. Production
in the production order
6.1. The columns provided
of a Production
Order is givenin Fig. Sometimes orders are accompanied by
Proforma the nature of production. as to which tools and
largely upon instructions
differ widely, depending and detailed
of materials
contain a bill
the blue prints
and
cost sheet.
are to be used. job is the
machinery document under job costing sheet on which
3. Job cost sheet.
The unique accounting to prepare a job cost
for the cost accountant has to
order is the signal
machine time taken. Each concem
Receipt of production and the labour and
of materials used in Fig. 6.2.
he will record the cost of job cost sheet is given
its needs. A simple proforma
cost sheet to suit for each job regardless
design a job
for periods
but they are made out
not specified
Job cost sheets are prepared
and overhead costs
are posted penoal
However, material, labour are
into joDs
of the time taken for
its completion.
to be absorbed
The labour and overhead
cally
to the relevant cost sheet. material,

and the following way of

collected recorded in

(a) Direct materials. Material Requisitions

issued to jobs from store. When copies

or Bill of Materials show the quantities
of these documents reach the
matenals

cost office, they are piceu

nuD
a
showsthejoD
in the "Issues" column. Each requisition
entered in the stores ledger account
which the material is be charged.
to

(6) Direct wages. Wages payable

to workers are calculated on clock cards, job cards, neh
Sheets, whicn si
The summariesof job cards are made on Wages Abstract or Wages Analysis to
etc.
each job. The total of wages chargeable to various jobs
is debited w0
direct wages chargeable to
progress control account. these
)Direct expenses. These can be identified with specific jobs and are directly chargeu
jobs.
JobCosting 6.3

6.11
Job Cost Sheet
Customer.
Job
No..
Date of Commencement...
Date of
Completion.. 2005
Material Cost
Labour Cost
Factory Overhead (Absorbed) s of
Date Material Amount Date Hours
y the
Rate Amt Deptt. HourS Rate Amt
Reg. No.

of
Total Total
Total
Profit/Loss Cost Summary

Price Quoted Materials

Less :Cost Labour

Prime Cost
Profit or Loss Factor overhead

Works Cost
Adm. overhead

Cost of Production

Selling and distribution overhead

Total Cost
Fig. 6.2. Job Cost Sheet

(d) [Link] comprising

of indirect materials, indirect wages and indirect expenses which
cannot be identified with specific jobs are distributed to cost centres. Absorption of overhead by the

jobs passing throughthe cost centres is based upon percentage of direct

wages or direct material cost,
direct labour hours or machine hours, etc. These methods of
absorption have also been discussed in
detail in the chapter on Overheads.

The direct materials, wages and expenses and the overheads absorbed are totalled to give the total
cost.

Completion of [Link] jobs are completed, the cost is transferred to cost of sales account. The
total cost of jobs completed during each period is deducted from the sales to determine the profit or
toss for the period.
 6.4

PROBLEMS AND SOLU

Problem 6.1
to fourjobs of a man
From the following particulars relating
a Job Cost Sheet anufacturer,
eachjob by preparing
ascertain
Job 1 the
Job 2
Direct materials 800
Job 3
1,000
Direct wages 400
500 1,200
Direct expenses 80
100 600

Works overhead is 45% of prime cost and office overhead is

15% on wed. 120
orksCOst.

Solution
Job Cost Sheet
(ComparativeForm)

Particulars Job 1 Job 2 Job 3

Direct materials 800 1,000 1,200

Direct wages 400 500 600
Direct expenses 80 100 120
Prime Cost 1,280 1,600 1,920

dif
Works overhead (45% on prime cost)576 720 864 1008

the Works Cost 1,856 2,320 2,784 24

ma Office overhead (15% of works cost) 278.40

Total cost
348 417.60 487.20
2,134.40 2,668 3,201.60

Rec Problem 6.2

he v

desi The following particulars are extracted

from the books of Krishna Industnes.
1. The estimated material to be
of t
cost of a job is T 5,000. Direct labour cost is expected
expecred
2. In machine a
shop, the job will require hous
cally machining by machine saktn 10
machine Jyothi' for 6 hours.
colle

issue
3. Machine hour rates

4.
Considering only
for
machine Sakthi and machine Jyothi are R 10
machineshop cost, the direct
and

wages in all other shops la

* respectia

amounte

enter 80,000 as against the

factory overhead
whicl 5. Last year, of 48,000.
37
factory cost of all
jobs amounted to 7 2,50,000 as against o nceexpenses
Prepare a quotation which
etc. guarantees 20% profit on selling price. Mat
direct Com,
progre

jobs.
(
 6.11
Job Costing

6.5
Solution 2005
Job Cost of
Sheet
the
Direct materials
Direct wages
5,000
Prime Cost 1,000
Factory overheads (60% of wages)*
Machine cost: 6,000
600
Machine Sakthi
(20hoursat 10)
Machine Jyothi
(6 hours at 200 o of
15)
90 890
Office and Administration Factory Cost
overheads 6,890 thi)
of (15% factory cost)
Cost of
Profit 20% on selling Production 1,034
price (or 25% of 7,924
Price to be quoted cost)*
1,981
9,905
Working Notes
L
Percerntage of factory overhead to direct
wages.
Factory overheads

Direct wages
100 48,000
x 100 60% bsve ly uobtgo
80,000
2.
Percentage of office expenses to
factory cost

Office expenses
0 37,500 x 100- 15%
Factory cost
2,50,000
3. Profit of 20% on price is equal to 25% of total cost.
selling
bf
20% is equal to
20. Thus total cost 100 20
Suppose selling price is
80. Thus 7 100, profit @
20 is 25% of 80. In
profit is 25% of cost of production of 7 7924 i.e. this problem
1981

Problem 6.3
The following direct costs were incurred on Job No. 415 of Standard Radio
Company.

Materials 4,010
Wages:
Deptt. A - 60 hours @ 3 per hr.
B-40hours @ 7 2 per hr.
C 20 hours @ 5
per hr.
Overhead expenses for these three departments were estimated as follows:
Variable overheads:

Deptt. AR 5,000 for 5,000labour hours

BR 3.000 for 1,500labour hours cepa avubes
CR 2,000 for 500 labour hours
Fixed overhe ads:
at 20,000 for 10,000
Estimated normal working hours.
to calculate the cost of Job 415 and calculate the 25% on
You are required price to give profit of
selling price. ([Link]. Madurai)
 6.6 Cot
Aeenwtag
Solution
Joh Cont sheet
n Mo, 419

Direct Materíals
Wages-Dept. A-60hrs,
40hrs,72
C-20hrs,75
3
Variable Ovetheads:
He.
Deptt. A-60 hrs. 1

B-40hus.72
C-20hrs. 74
Fixed Overheads:120 hours
Total Cost
12
Profit-25non Selling Prise
Selling Price

Working Notes:
L Computationof overhead rate
Variable overheads perlabour hom -Overthead 1atu hous
DepartnentA -75,000 5,90 us 21
Departnent B -72,001,500 hs. 72
C 72,000
- kus 74
2 Department

Pized overheads 7 20,0 10,00

price -7 100
kus.
3. Suppose selling

Profit 7
Cont-7 75
25

25
Therefore,
Profit is of cost.

Problem 6.4
From the following particulars, prepaze the Cost Sheet for Job No. 75.

Materials issued for the job 6,000

Direct expenses
500
Productive wages 4,600
Provide 60%% on productive wages forworks oncost and 12h% on works cost for offce oncot
Profit to be realised on the sellíng price 15..

([Link]., S.V. University)

 6.11
ob Costin8

solution
6.7 2005
Job Cost sof
Sheet y the
(JobNo.
75)
Materials
Productive wages
Direct
expenses
6,000
4,600
Works oncost Prime Cost
(60% of 500
productive wages) 0% of
2,760 11,100
Office oncost
(124% on works Works Cost
cost) Delhi)
13,860
Profit
(15% on sales)*
Cost
Production 1,732.50

15,592.50
Sales 2,751.62
Working Note:
18,344.12
Profit of 15% on sales is
equal to 15/85 of cost of
Problem 6.5
production i.e.
15592.50 x
15/85 -7 2751.62.
The
following expenses were incurred for a job
Direct materials during the year ended 31st
December 2012
Direct wages 3,000
rds of
Chargeable expenses 4,000

Factory overheads 1,000

2SS

Selling and distribution overheads 2,000

Administration 2,000
overheads

Selling price for the 3,000

abovejob was 7 18,000.
You are required to
prepare a statement showing the
and an estimated profit eamed for the year 2012 from
price of a job which is to be executed in the job
the year 2013. Df the
chargeable expenses will be Materials, wages and
required of 5,000, 7
7,000 and 7 7
various overhe ads 2,000 respectively for the
job. The
should be recovered on the

(a) Factory overheads as a

following basis while calculating the estimated

percentage of direct wages.

price: ,
Com.)
and

(b) Administration and selling and distribution overhead as a

percentage of factory cost.

([Link]., Bangalore)
 6.8

Cost
Job Cost Sheet
Accountin
for the year ending 31-12-2012

Direct materials

Direct wages
3,000

Chargeable (or direct) expenses 4,000

Prime Cost 1,000

Factory overhead 8.000

Factory Cost 2,000
Administration overhead
10,000
Cost of Production 3,000

Selling and distribution overhead 13,000

Total Cost 2,000
(Cost of Sales)
Profit 15,000

Selling Price
3,000
18,000
Calculation of Rates

L Factory overhead as a percentage of direct wages

Factory overhead 2,000

Direct wages
100
4,000* 100
50
2 Adm. overhead as a percentage of
factory cost
Adm. overhead

cost*1003,000 x 100 =30%

ractory 10,000
3. and

.
Selling dist. overhead as a of factory cost
percentage
Selling and dist. ohd.
100 2,000 x 100 20%
Factory cost -10.000
10,000
Profit as a
percentage of cost of sales or total cost saavo sroiud
Profit

Cost of sales x100 = 3,000 x 100 - 20%

hesluve
15,000

Job Cost Sheet

(Showing Estimated Cost and
Profit in 2013)

Direct materials

Direct wages 5,000

7,000
Chargeable (direct)
expenses
2,000

oFactory overhead Prime Cost 14,000

(50°% of direct
wages) 3,500

Administration overhead Factory Cost 17,500

(30% of Factory Cost) 5,250

Selling and distribution Cost of Production 22,750

overhead (20% of factory cost) 3,500
Profit
(20% of total Total Cost 26,250
cost)
5,250
Selling Price 31,500
 6.11

6.6
job costin The
pnblem use
following oth Dec. 2005
data are
A factory
2012.
obtained
6.9 abourcosts of
pecember, rom its incurred by the
books for
materials
the
Direct 90,000 year
Selingand ended
wages 2,000
Direct 75,000 dist.
overheads 3,000
Factory 45,000 Profit
Administration overheads
a Cost Sheet ndicating the Prime overheads 2,000
Pepare cost. 52,500
Works 3,000
value, cost, 42,000
uks Production basis of 120%% of
received an order
and
be R 1,20,000.
foT anumber cost,Cost
of
60,900
C., 2005.
ied
will direct labour of sales
andthe
to earn the same will cost [Link]
intends rate ([Link]. Delhi)
tory of 75,000. What estimated
have gone up by 15% profit on that
heads The sales shouldbethe direct
materials
ninistration and factory rs
recovers assuming that the price for
Lling and
selli these
NaJes in factory selling and jobs
rates prevailing the distribution overheads as
a
previous year. overheads as a distribution
percentage of
percentageof direct
works
Solutdion cost,
based 42,000
([Link]., 38,000
Mysore)
Cost Sheet 80,000
for the
year-ended 31st 45,600
Dec., 2012 ,25,600
Direct materials
Direct wages

oks and records of

90,000
Factory overheads
PrimeCost
15.000
1,65,000 ork-in-Progress
Administration
overheads Works Cost
45.000
2,10,000
Seling and 30,000
distribution Cost of
overheads Production 42,000 40,000
2,52,000
Profit 4,000
Cost of Sales 52,500 2,000
3,04,500

Sales Value 60,900 The price

lculation of 3,65,400
of the
Rates:
1.
Percentage of loss incured, and
factory over
verheads to 45,000
direct wages ([Link].)
2. 100 60%
75,000
Percentage of
adr
administration
overheads to works 42,000
[Link]
Add:
and cost x
100 20%
15% distribution 2,10,000
increase overheads 52,500
7 7,825
Total
ing and 60,375
dist.
ove
overhead % to works cost
60,735
x 100
49of 2,10,000
28.75%

profit to
to
sales -
sales 00,900
100 16.67% (1/6 of sales or 1/5 of total cost)
3,65.400
 Cost
Accounting
6.10
Job Cost Sheet
Cost and Price ofJobs in 2013)
Estimated
(Statement
showing

1,20,00

Direct materials
Prime Cost 15,000
Direct wages 1,95,000

45,000
overheads (60% of direct labour) Works Cost
Factory 2,40,00

works cost) 48,000

overheads (20% of Cost of Production
Administration 2,88,000

of works cost) 69,000

overheads (28.75%
and distribution Total Cost 3,57,000
Selling

11,400
of cost) Selling Price
Profit (1/5 4,28400

Problem 6.7 2012 and completed on 1st November 20

012
commenced on 10th
October,
Job No. 718 was directly
to thejob was 400. Other informations Wer
were as

used were 600 and labour charged

Materials
follows: is 3.50
the machine hour rate
used for 40 hours;
Machine No. 215 is 74
30 hours; the machine hour rate
used for
Machine No. 169 each; the direct labour
hour rate for weldersis
of 8 hours
Six welders worked
on the job for 5 days
20 paise. for calculating the machine hour or the direct

of the concern not apportioned 7

Other expenditures the period being 20,000.
direct wages for
to 20,000, total
hour rates amounted 718.
([Link].)

cost of Job No.

Ascertain the works

Solution
Job Cost Sheet
Job No. 718 1-11-2012
Date finished

Date started 10-10-2012

Particulars 600
400
Materials
1,000
Labour
Prime Cost

Factory overhead 140

Machine No. 215 (40 hrs. 7 3.50 each)
@ 120

Machine No. 169 (30

hrs. each) @4 48
Welders (6 x 5 x 8 x 0.20) 708
400
Other expenses (100% of direct wages*) 1,708
Works Cost

*Note: Other expenses are charged at 100% of direct wages as calculated below

Other 20,000
expenses x 100- 100 100%
Direct wages 20,000
 Job Costing

6.11
Problem 6.8
Nahar Electricals
Ltd.,
except Job No. [Link] engaged in job work, has
cost sheet on completed all jobs in hand on 30th
40,000 and 30,000 30th Dec., showed
direct materials and direct Dec. z00
business on respectively as having labour
31st Dec., 2005, the been incurred on Job No. 1448. costs or
last day of The costs incurred by the
accounting year, were as
follow
Direct
materials
(Job
1448)
Direct labour
(Job 1448) 2,000
Indirect labour
8,000
Miscellaneous 2,000
factory overhead
It is the
practice of business to 3,000
direct labour cost. make the jobs absorb
Calculate the cost factory overheads on the basis of 120%% of
of
work-in-progress of Job No. 1448 on 31st Dec., 2005.

Solution ([Link]. Delhi)

Cost of
Work-in-Progress of Job No. 1448
as on 31st Dec., 2005

Direct materials
(40,000+2,000)
Direct labour 42,000
(30,000 +8,000)
38,000
Prime Cost 80,000
Factory overhead (38,000 x 120%6)
45,600
Works Cost 1,25,600

Problem 6.9
The following information for the year ended 31-12-2012
a
is obtained from the books and records of
factory.

Completed Jobs Work-in-Progress

Raw materials supplied from stores 90,000 30,000

Wages 1,00,000 40,000
Chargeable expenses 10,000 4,000
Materials transferred to work-in-progress 2,000 2,000
Materials returned to stores 1,000

80% of and office overhead is 25% of factory cost. The price of the
Factory overhead is wages
executed contracts during 2012 was4,10,000.

Prepare (i) Consolidated Completed Jobs Account showing the profit made or loss incurred, and
also (i")
Consolidated Work-in-Progress Account. ([Link].)
 6.10

6.12

Cost
Accounting
Solution

Consolidated Completed Jobs Account

To Materials
90,000 By Sales
Less: Transfer
2,000 4,10,000
Less: Retum 1,000 87,000
To Wages
1,00,000|
To Chargeable
expenses 10,000|

Prime Cost 1,97,000

To Factory overhead
(80% of wages) 80,000
Factory Cost 2,77,000
To Office overheads (25% of factory

cost) 69,250
To Net Profit
63,750

4,10,000o
4,10,000

Consolidated Work-in-progress Account

2005 To Materials 30,000 By Balance c/d 1,35,000

Add: Transfer 2,000 32,000
To Wages
40,000
To Chargeable expenses
4,000
Prime Cost 76,000
To Factory overhead (80% of wages) 32,000
Factory Cost 1,08,000
To Office overheads
(25% of factory cost) 27,000
D
1,35,000
1,35,000
2006 To Balance b/d 1,35,000

Problem 6.10
From the records of a XYZ Ltd. the following budgeted details are available

Direct materials 1,99,000

Directwages:
Machine shop (12,000 hours) 63,000
Assembly shop (10,000 hours) 48,000 1,11,000

Works overhead
Machine shop 88,200
Assembly shop 51,800 1,40,000

Administrativeoverhead 90,000
overhead 81,000
Selling
Distribution overhead 62,100
 Job Costing

Assuming that the 6.13

company follows
(a) Prepare a Scheduleof absorption method of
costing, you are
Overhead Rates from the required to
recovery rates used
under the figures available
(b) Work out a Cost givencircumstances. stating the basis of overhead
Estimate for the
Direct material: following job based on
overhead so
computed.

Directlabour (on the

25kg@ 16.80/kg
Machine
basis of
rate for
[email protected]/kg
shop & Assembly
hourly
Machine shop 30 hours for
shop)
Assembly shop 42 hours

(Adapted)
(a) Cost Sheet for the
period
Direct materials

Direct wages Machineshop

1,99,000
Assemblyshop o ote 63,000

48,000 1,11,000
Works overhead Prime Cost
Machine shop 3,10,000
Assemblyshop 88,200
51,800 1,40,000
Administration Works Cost
overhead 4,50,000
anoaos 90,000
Selling overhead
Cost of Production
pabo do no sdo
5,40,000
Distribution overhead
81,000
62,100
Total Cost
6,83,100
Schedule of Overhead Rates
(i) Works overhead.
Hourly rate-(Overhead amt. Hours)
Machine shop = 88,200+ 12,000 hrs.
+
= 7.35 per hour
Assembly shop = 751,800+10,000 hrs. = 5.18 per hour

(iü) Administrative overhead as a % of works cost = 90,000 x 100 =20%

4,50,000
deoo do

(iti) Selling and distribution overhead as % of works cost = 81,000+ 62,100 x 100 31.80%
hs 4,50,000
Labour hour rates are calculated as under: 0028
Machine shop = 63,000 12,000 hrs. =7 5.25
Assembly shop -? 48,000+ 10,000 hrs. 7 4.80
17Chapler Oulline-
Contract Costing

Introduction, Contract and Job

Points in Contract Costing Distinction; Contract
Costing
Costing, Profit on
Contracts, Problems and Incomplete Contracts, Escalation Procedure, specia
Clause, Cost-plus
Solutions, Examination
Questions.

Introduction
Contract
costing, also known as terminal Contract costing is
costing, is a variant of job in:
costing. Contract means a applicable
big job in which work is done at
site andnot in
factory premises. The cost of each Building
contract is ascertained. construction
method of costing, each contract Thus, in this
is a cost unit and an Road construction
for each contract in the account is
opened
books of contractor to ascertain Bridge construction
profit/loss thereon.
Ship building, etc.
Features of Contract
Costing
Contract costing
usually showsthe following features:.
1. Contracts are
generally of large size and, therefore, a contractor
usually carries out a small
number of contracts at a
particular point of time.
2. A contract
generally takes more than one year to
complete,
3. Work on contracts is carried out at the site of
contracts and not in
factory premises.
4. Each contract undertaken is treated a cost unit.
5. A separate contract account is prepared for each contract in the books of contractor to
ascertain profit or loss on each contract.

6. Most of the materials are specially purchased for each contract. These will, therefore, be
charged from the suppliers
direct invoices. Any materials drawn from the store are charged to
contract on the basis of material requisition notes.
7. Nearly all labour cost will be direct.
8. Most expenses (e.g., electricity, telephone, insurance, etc.) are also direct.
9. Specialist sub-contractors may be employed for say, electrical
fittings, welding work, glass
work,etc.
10. Plant and equipment may be purchased for the contract or may be hired for the duration of
the contract.
11. Payments by the customer (contractee) aremade at various stages of completion of the
contract based on architect's certiicate for the completed stage. An amount, known as
the contractee as
retention money, is withheld by per agreed terms.
 7.2 Cost
Accotum

for to complete the work weta

the contractor failing
12. Penalties may be incurred by
agreed period.

Contract Costing Distinction

and Job Costing
are as follows
Main points of distinction between contract costing and job costing
small. It is well said, 'a job is a small
generally big while
is
1. Contract is job contract
an
contract is a big job.
to number of
2. The number of jobs undertaken at a time are usually large as compared com
ontne
generally much bigger
in size.
because contracts are
to contract
3. In contract costing most of the costs are chargeable direct
accounts,
Under
to such an extent is not
costing, direct allocation possible.

4. Allocation and apportionment of overhead costs is sim pler in contract costing as

compares
job costing.
5. Jobs are usually carried out in factory premises while contract work is done at
site

Contract Costing Procedure

The basic procedure for costing of contracts is as follows

[Link] account. Each contract is allotted a distinct number and a separate account is opened f
each contract.

2. Direct costs. Most of the costs of a contract can be allocated direct to the contract. All such
dire
costs are debited to the contract account. Direct costs for contracts include:
()Materials, (ü) Labour an
supervision, (tiü) Direct expenses, (iv) Depreciation of plant and machinery, (v) Sub-contract costs, et
Indirect Contract debited with overheads which tend to be small in
3. costs. account also
is
relation
to costs. Such basis as a
direct costs are often absorbed on some arbitrary percentage on prime cost, a
materials, or wages, etc. Overheads are normally restricted to head office and storage costs.

4. Transfer of materials or plant. When materñals, plant or other items are transferred from the
contract, the contract account is credited by that amount.
5. Contract price. The contract account is also credited with the contract
price. However, when a
contract is not complete at the end of the financial
year, the contract accountis credited with the value
of work-in-progress as on that date.

6. Profit or loss on contract. The balance of contract account

represents profit or loss which is
transferred to Profitand Loss Account. However, when contract is not
completedwithin the financial year,
only a part of the profit arrived is taken into account and the
remaining profit is kept as reserve to meet
any contingent loss on the incomplete portion of the contract. This is discussed in detail in this
later
chapter.

SPECIAL POINTS IN CONTRACT CoSTING

Some of theimportantpoints in contract
costing are now discussed

Cost of Materials
Materials include (i) materials
specificallypurchased for the contract;
(iü) materials issued from
against material requisition notes. The cost of both these store
types of materials is debited to the contra
Contract Costing

7.3
account.
Materials returned to
store. Whenever
cement,sand,pipes, bricks, materials are issued in excess of
etc.,these are later requírements, asfor instance,
Note which gives the returned to the store
details of the
material returned. Such
accompariedby a Material Retum
account. returned materials are credited to contract
Materials at site. At the end
of each
credited to contract accounting period, value of materials
accountand is carried lying unused at site 1s
forward for
charging aganst the next peniod.
Cost of Labour
All wages of workers
engaged ona particular contract are
of the type of work charged direct to the contract
they perform. When several irespective
contracts are
nomally sectionalised so as to have running at different locations, payroll
separate payroll for each contract. Diffñiculties
1s
encountered when some workers in costing may
may have to move from one site to another when a number of small be
contracts are [Link]
such situations it becomes
allocations can be made. In order to necessary to provide time sheets from which
control labour utilisation
and prevent fraud in the
surprise visits by head office will be
payment of wages,
personnel necessary.

Plant Depreciation
There are two methods of dealing with
different
depreciation of plant in contract account:
(a) Contract account is debited with the cost of the
plant [Link] the end of the year or when the
plant is no longer required, the plant is revalued and
contract account is credited with this revalued or
depreciated figure. In case plantis sold on the
completion of the contract, the contract account is credited
with its sale proceeds. The net effect of the above
debit and credit will be that the contract
account will
stand debited with the amount of
depreciation which is the difference betweenthe value of debited
and value of plant credited. The method is plant
generally used on long contracts which extend over more than
one year becausedepreciated value of the
plant is credited to the contract account and brought down as
an opening balance in the next
period.

(6) Altematively, contract account is simply debited with the amount of

depreciation. It is usual to
use this method when plant is sent to contract
only for a short period. For example, mobile crane or
bulldozer used in a contract may be
charged on this basis.

However, when a plant is hired for a contract, a charge for the hire of the plant is debited to the
contract as a direct expense. HO
Sub-contract Costs
Work are not intermally available,is offered to a sub-
of specialised character, for which facilities
For is caried out by the sub-contractors
contractor. example, steel work,glasswork, painting, etc., usually
who are accountable to the main contractor. The cost of such wozk is charged to the contract account.

Payment based on Architect's Certificate

In case the contract is small, full payment is usually made on the completion of the contract. But in
case of large contracts, it may take more than one year to complete. In such a case, if no paymentis
received until the completion of the contract, the financial resources of the contractor could
surely
become a
system of progress payments is agreed by parties. Inthis system, part
strained. Therefore,

payments of the contract amount are paid from time to time on the basis of certificate issued by the
 7.6 Cost
Accountin

3. When work certified is 1/2 or more but less than 9/10

of
the
contract price, (i.e., 50% to gr
as follows
then the profit to be transferred to P & L Account is computed

Transfer to P&LA/c =Notional profitx

This is shownbel
reduce this amount by cash ratio.
more common practice is to further
Here also a

Cash received
x
Transfer to P&LA/c =Notionalprofit Work certified

the profit to be transferred to P & L A/cmay also ha

Note. When a contract is more than 1/4 complete,
methods:
computed by the following

Work certified
1.
x
Notional profit Contract price

or altermatively

Work certified
2 x xcash ratio
Notional profit Contract price
be calculated on the whole
then the estimated profit should
4. contract is near completion
When Loss Accountis computed by
to Profit and
estimated profit to be transferred
contract. The proportion of
formulas:
any one of the following
Work certified
(a) Estimated pront
Contract price

received
Cash
profit x Work certified
(b) Estimated Work certified
Contractprice

Cost of work to date

*
(c) Estimated pront Estimated total cost of work

Cost of work to date Cash received

x
(d) Estimated profit
Estimated total cost of work Work certified

this should
Contracts. In the event of a loss on uncompleted contracts,
5. Loss on Uncompleted of the
whatever be the stage of completion
be transferred in full to the Profit and Loss Account,

contract.

ESCALATION CLAUSE
in prices or
in this period there may be changes
Contracts generally take long time to complete and
in
in contracts to cover any likely changes tne
materials and labour. Escalation clause is often provided
entitled to suitably enchance tne
labour. Thus, a contractor is
price or utilisation of materials and
if the cost rises beyond a given percentage. The object of this clause is to safeguard tne
contract price is of
of the contractor against unfavourable changes in cost. The escalation clause paricula
interest
where of material and labour are anticipated to increase or where quannuy
importance prices
material and/orlabour time cannot be accurately estimated.
or
Just as an escalation clause safeguards the interest of the contractor by upward revision t

contract price, a de-escalation clause be inserted to look after the interest of

may the contractee.
to downward revision of the contract an
providing price in the event of cost going down beyond agre
level.
Contract
Costing
7.7

COST-PLUS CONTRACTS
Cost-plus contract is a contract
in which the
amount or contract price is ascertained
percentage of
profit to the costs allowed by adding a specified
in the contract. This
agreed upon in those cases where it type of contract terms are
is not
degree of accuracy due to unstable possible to compute the cost in advancewith a
reasonable
conditions of market
undertakes to reimburse the actual prices, labour rates, etc. The
cost of contract contractee
cost may be plus a stipulated
either a fixed amount or a profit. The profit to be
specified added to
for the percentage of cost. The itemsof cost to be
purpose of determining contract included
price are broadly
contractor are usually aqreed upon in advance. The accounts of the
subject to audit by the
contractee.
Cost-plus contracts are
usually entered into for
dam, power house, executing special type of work, like of
newly-designed ship, etc., where cost construction
prefers to give contracts on estimation is difficult. Government often
'cost-plus' terms.
Cost-plus contracts
offer the following
advantages
Tothe Contractor:
1. There is no risk of loss on
such contracts.
2. It protects him from the
risk of fluctuations in
market prices of material, labour, etc.
3. It the work of
simplifies preparing tenders and
quotations.

To the Contractee
The contractee can ensure a fair price of the contract by being entitled to audit the accounts
of the contractor.

The disadvantages
ofcost-plus contracts are

Tothe Contractor:
1. The contractor is deprived of the
advantages which would have accrued due to favourable
market prices.
2. The contractor has to suffer for his own
This is because profit is
a percentage of cost and efficient working
efficiency.
usually based as
resulting in lower cost also leads to lower profits.

Tothe Contractee
1. The contractee has to pay more for the inefficiency of the contractor as a contractor has no
incentive to reduce costs.
2. The price a contractee has to pay is unknown until after the of work.
completion

PROBLEMS AND SoLUTIONS

Problem 7.1
The following expenditure was incurred on a contract of ? 12,00,000 for the year ending
31-12-2012.

Materials 2,40,000

Wages 3,28,000
Plant 40,000
Overheads 17,200
Cash received on accountof the contract to 31st Dec., 2012 was 4,80,000, being 80% of the work
certified. The value of materials in hand wasR 20,000. The plant had undergone 20% depreciation.

Prepare Contract Account. (B. Com., Madurai, Delhi)

 Cost Accounting
7.10

Problem 7.4 2012.

commenced on 1st January
contract which
The were the expenses on a
following
1,10,000
Materials purchased 1,250
the end
Material at site at 15,000
Direct wages 5,000
Plant issued 8,000
Direct expenses when the contract was completed an
1,50,000. It
was duly received
The contract price was and provide 1,000 for depreciation on plant
at 15% on wages
indirect expenses
31-3-2012. Charge account.
the contract account
and contractee's
Prepare

Solution
31-3-2012
FOR THE YEAR ENDING
CONTRACT ACCOUNT

price) 1,50,000

1,10,000 By Contractee's A/c (Contract 1,250

end
To Materials Materials at the
15,000 By end 1,000) 4,000
To Direct wages at the (5,000
8,000 By Plant
To Direct expenses 2,250
To Indirect expenses (15% on 15,000)
5,000
To Plant issued
15,000
To Profit and Loss A/c 1,55,250
1,55,250

THE YEAR ENDING 31-3-2012

CONTRACTEE'SACCOUNT FOR

1,50,000
1,50,000 By Bank
To Contract A/c
1,50,000
1,50,000
to profit and loss account.
entire profit is transfered
Note: As the contract is fully complete,

Problem 7.5 the contractee

a building for 10,00,000,
a contract for the construction of were
Thekedar accepted the amounts spent
90% of work certified by the architect. During the first year,
agreeing to pay

30,000
Material 1,20,000 Machinery
Other expenses 90,000
Labour 1,50,000
or
materials at site were ne
At the end of the year, the machinery was valued at 7 20,000 and
value 5,000. Work certified during the year totalled 4,00,000. In addition work-in-progress
of in the books of Thekead:
at the end of the year had cost R 15,000. Prepare Contract Account
certified
transferred to the Proft
and Lo
show the various figuresof that can be
profit reasonably
ALSo
Account. (B Com., Delhi)
ContractCosting
7.11
olution

Contract Accountforthe
year ending..
Particulars

Particulars
ToMaterials
To Labour 1,20,000 By Work-in-progress:
To 1,50,000 Certified
Machinery 4,00,000
To Other expenses 30,000 Uncertified
15,000
90,000 By Machinery
To Notional Profit c/d at site
20,000
50,000 By Materials at site
5,000
4,40,000
To P &L
A/c 4,40,000
15,000* By Notional
To Reserve Profit c/d 50,000
35,000

50,000 50,000
*Working Notes: Transfer to Profit
andLoss A/c 50,000 x x 90% =7 15,000
Other figures that
may altematively be transferred to P & L A/c may be
computed as follows
1. Notional
profit x =50,000 x% =7 16,667
2. Work certified
Notionalprofit x 4,00,000
Contract price
Cash ratio = 50,000x- x 90% = 18,000
10,00,000

Work certified
3. Notional profit
Contract price
-50,000 x
4,00,000

10,00,000
-7 20,000
Problem 7.6
The BBA Construction
Company undertakes large contracts. The following
contract No. 125 carried out during the particulars relate to
ended on year 31st March, 2012.

Work certified by architect 1,43,000 Wages accrued on 31st March 2012 1,800
Cost of work not certified 3,400 Direct expenditure
2,400
Plant installed at site 11,300 Materials on hand on 31st March 2012 1,400
Value of plant on 31st 8,200 Materials retumed to store 400
March 2012 Direct expenditure accrued on
Materials sent to site 64,500 31st March 2012 200
Labour 54,800 Contract price 2,00,000
Establishment charge 3,250 Cash received from contractee 1,30,000
a Contract Account for the period ending 31st March 2012 and find out the It
Prepare profit.
was decided to transfer 2/3 of the profit on cash basis to Profit and Loss Account.
B.I.s.
(B.B.A., Delhi)
 7.12

Solution

Contract No. 125

Purticulars Account forthe
To year
year
Materials sent ending
ending 31st
To to site Maret
March,
Labour Particulars
To 2012
Establishment 64,500 By Cont
To Direct charge Materials
54,800 By returned
To expenses
,250 By Materialsin hand
Wages accrued Solut
To Direct 2,400
Work-in-Progress
To Plant expenses accrued 1,800
Certified
atsite Parti
To 200 Uncertified
Notional Profit By Plant at
c/d 11,300 site o
To P 18,150|
o
&LA/c 1,56,400

11,000
18,150 x2 1,30,000
By Notional
Profit
b/d
To 1,43,000
To
Reserve

7,150
18,150
Problem 7.7
The Indian
Yamuna for a Construction Co. Ltd. has
one year Corporation. The value of undertaken the
after the
The certified contract is construction of a
following are the completion of the 15,00,000 bridge overth
details as contract, and final subject to
shown in the retention of
books on approval of the
30th June, Corporation
Labour on site 2012.

Materials direct
to site 4,05,000
Materials on
Materials from hand on June
stores 4,20,000 30th, 2012
Wages accrued on
Hire and use
of 81,200 Direct June 30th,
plant 2012
Direct expenses accrued on
expenses 12,100 Works June
not yet 30th2012
General certified at cost
overhead allocated 23,000 Amount
to the certifiedby the
contract
Corporation's
engineer
Prepare (a) Contract
37,100 Cash 110
received on
Balance Sheet. Account, (b) account 8.3
Contractee's
Account, and (c) show
how it would
app

Pe
(BCom,
 7.13
Solution

Contract Account
for the
Purticulars year ending 30th
June, 2012
To Materials direct to Particulars
site
To Materials from store 4,20,000 By Materials on hand
To Labour on site 6,300
81,200 By Work-in-progress
To Hire and use of 4,05,000
plant Certified
To General overhead 12,100 11,00,000
Uncertified
To Wages accrued 37,100 16,500
To Direct
expenses 7,800
To Direct
expenses accrued 23,000
To Notional profit c/d 1,600
1,35,000

To P &L A/c 11,202,80o

11,202,800o
72,000 By Notional Profit
c/d
8,80,000 1,35,000
1,35,000
1,35,000X31.00,000)
To Reserve
63,000
1,35,000
1,35,000

CONTRACTEE'S ACCOUNT
bal
To Comtract
CC
ALE
8,80,000 By Cash
8.80.000
8,80,000
BalanceSheet as on 30th June, 2012
Liabilities

accrued
ARuAssets
Wages Work certified
11,00,000
Direct expenses accrued 1,600 Work uncertified 16,500
11,16,500
Less: Cash received
-8,80,000
2,36,500
Less: Reserve
63,000 1,73,500

Problem 7.8
Modem Contractors have undertakenthe following two contracts on Ist January, 2012:
Contract A Contract B

Materials sent to sites 85,349 73,267

Labour engaged on sites 74,375 68,523
Plants installed at sites at cost 15,000 12,500
Direct expenditure 3,167 2,859
Establishment charges 4,126 3,852
Materials retumed to store 549 632
 Work certified Cowt
1,95,000
Cost of work not certified
4,500
Materials in hand 31st Dec., 2012
1,883
Wages accrued 31st Dec., 2012 Cor
2,400 1,1%
Direct expenditure accrued 31st Dec., 2012 24 2,10
Value on plant 31st Dec., 2012
11,000 19
The contract prices have been agreed
at
A
has been received from the contractees as follows:ContractA
7
2,50,000for contract A and z 2 954
1,80,000 and Cont
Prepare Contract Accounts, Contractees Accountsand show how the
thework
Balance Sheet of the contractor. work-in-proges
[Link].,
Solution eri,

CONTRACT 'A ACCOUNT FOR THE YEAR ENDING

31ST DEC., 2012
Particulars
Particulars
To Materials sent to site
85,349 By Materials to
To Labour (returned stores
To Plant 74,375| By Materials in hand

To Direct
15,000 By Plant in hand
expenditure
To Establishment
3,167 ByWork-in-progress:
charges 4,126 Work
To Wages accrued certified
1,95,000
2,400 Work
To Direct uncertified
expenses accrued 240 4,500
To Notional Profit
c/d 15t
28,275

2,12,932
To Profit & Loss A/c
To 17,400 By Notional Profit b/d
Balance c/d (Reserve)
10,875

28,275
Note. Proportion of profit
transferred to Profit and
formula: Loss Account has been calculatedby the
fil
Cash received
Notional profit
Work ied28,275
certified
1,80,000 -7 17,400
1,95,000

A CONTRACTEE'S
ACCOUNT

Dec. 31, 2012 To

Balance c/d
1,80,000 Dec. 31, 2012 180
By Cash
1,80,000

Jan. 1, 2013
By Balance b/d
ntract
Costing

7.15
CONTRACT'B' ACCOUNT
FOR THE YEAR ENDING
31ST DEC., 2012
rticulars

Materials Particulars

Labour 73,267 By Materials returmed to

store
Plant 68,523 632
By Materials in hand
12,500 1,736
Direct expenditure By Plant in hand
2,859 9,500
Establishment charges By
Work-in-progress:
Wages accrued 3,852 Work certified
1,45,000
Direct expenditure 2,100 Work uncertified
accrued
180 3,000 1,48,000
By Loss transfer to P & L A/c 3,413
1,63,281
1,63,281
B CONTRACTEE'S
ACCOUNT

ec. 31, 2012 To Balance c/d

1,40,000| Dec. 31,
2012 By Cash
1,40,000
1,40,000
1,40,000
Jan. 1, 2013
By Balance b/d
1,40,000
BalanceSheet as on Dec.
31, 2012
iabilities
Assets
Wages accrued (2,400+ 2,100) 4,500 Plant less
Direct expenses accrued (240 + 180) Depreciation (27,500 - 7,000) 20,500
420 Materials in hand
3,619
Profit
on contract A Work-in-Progress
17,400
Contract A
Less Loss on contract B 3,413 13,987 Work certified
1,95,000
Work uncertified
4,500
1,99,500
Less Profit in reserve
10,875
1,88,625
Less Cash received 1,80,000 8,625
ContractB
Work certified 1,45,000
Work uncertified 3,000
1,48,000
Less Cash received 1,40,000 8,000

Problem 7.9
T.K. Construction Ltd. is engaged on two contracts A and B during the year. The following
particulars are obtained at the end
year (Dec. 31)
Contract A Contract B
Date of commencement 1
April September 1

Contract price
6,00,000 5,00,000
Materials issued 1,60,000 60,000
Materials retumed 4,000 2,000
Materials on site (Dec. 31st) 22,000 8,000
 7.16 1,50,000
66,000

labour 25,00
Direct

Direct expneses 80000

expenses 65,000
Establishment
at cost 23,000
Plant installed
(Dec. 31st)
Value of plant certified
4,20,000
not yet
Cost of contact 3,78,000
contract
certified 1108
Value of 2,000
from contractess
Cash recefved
9,000 have
been transfere
?
fees to
Architect's
amounting Aere
materlals (b) Contractee
the períod, Contract Accounts,
During to show: (a) the calculation ofwct
B. You are required showing
contract December31st, clearly
Balance Sheet as on
from

Solution
THE YEAR ENDING 31ST DEC..
CONTRACT 'AACCOUNT FOR
Particulars

Particulars
1,60,000By Materials returned
used to B
To Materials
1,50,000
By Materials transferred
labour
To Direct
66,000 By Stock of materials
To Direct expenses
25,000 By Work-in-progress
To Establishment expenses
15,000 Work certified 4,20,000

To Depreciation on plant
2,000 Work uncertified 23,000
To Architect's fees

60,000
To Balance c/d (Notional Profit)

4,78,000
To P & L A/c 36,000 By Balance b/d

1,35,000
0000t My
1,10,000
To WIP A/c (Reserve) 24,000
60,000

cONTRACT
B ACCOUNT FOR THE YEAR ENDING 31ST DEC..
Particulars
Particulars

To Materials used
60,000 By Materials returned
To Materials from Contract A 9,000 By Stock materials
To Direct labour
To Direct expenses
42,000 By Work-in-progress
35,000 Work certified 1,35,000
To Establishment expenses 7,000 Work uncertified 10,000
14
To Depreciation on plant
6,000
To Architect's fees
1,000| By P & L A/c (Loss on contract)

1,60,000
 A
Balance c/d Contractee's 7.17
Account

3,78,000
By Cash
By Balance
B b/d 3,78,000

Contractee's
Balance c/d Account 3,78,000

1,25,000
ByCash
By Balance 1,25,000
BALANCE SHEET b/d
iabilities (EXTRACTS) AS ON 1,25,000
31ST
DECEMBER ...
Tofit on Contract R..eesceeo*****
A
ess: Loss on FAssets
ContractB 36,000
5,000 Plant
31,000 Less: 1,50,000
0S Depreciation
Stock of
materials 21,000
1,29,000
Contract A
Contract B 22,000
8,000
30,000
Work-in-progress
Contract AA
Work certified
Work uncertified 4,20,000

23,000
Less 4,43,000
Reserve
24,000
Less 4,19,000
Cash received 3,78,000
41,000

Work-in-progress
Contract B
Work certified
1,35,000
Work uncertified
10,000
Less 1,45,000
Cash received
1,25,000 20,000
Problem 7.10
A fim of contractors
undertook three contracts on 1st April, 2011,Ist
2012. On 31st October, 2011 and Ist Jan.,
March, 2012, when their accounts were made up, the
position was as follows :
II
III

Contract price 4,00,000 1,35,000 1,50,000

Materials
72,000 29,000 10,000
Wages 1,10,000 56,200 7,000
Generalexpenses 4,000 1,400 500
Plant 20,000 B,000 6,000
 7.18

Materials on hand 4,000

2,000
Wages outstanding 3,400
1,800
Work certified 2,00,000
80,000
Cash received 1,50,000
60,000
Work uncertified 6,000
4,000 ntrac
General expenses outstanding 600
200
The plants were installed on the respective dates of the contract:
and tio
p. a. Prepare contract accounts. mlat
ce
deprecatitn
rk
Solution cera
Contract Accountsforthe yr. ding 31st March
2012
Contract Contract Contract
II
II
Cortract
n ethe
To Material
72,000 29,000 10,000 By Work-in-progress:
To Wages
1,10,000 56,200 7,000 Certified
To General
expenses 4,000 1,400 500 Uncertified 2,00,00
To Plant
To Wages
20,000 8,000 6,000 By Plant* 6,000

outstanding 3,400 1,800 800 By Materials in hand 18,000

To General
expenses By P&L A/c (loss)
4,000

outstanding 600 200 100

To P& L A/c* 9,000
To Reserve
9,000 1,500
2,28,000 96,600 25,900
2,28,000
Working Notes 9630P
1. On Contract
I, notional
profit is 18,000. Transfer to P & L
A/c is calculated as followS

2.
Notional profit
x
2 Cash ratio =18,000
x3 x
00.000
2,00,000
1,50,000
=R9,000.
Depreciation is calculated from the
3. On Contract respective dates of installationof
II, loss is transferred to
P & L A/c. plant.
4. On Contract
II, work certified is less
than 1/4 of the
profit is kept as reserve. contract [Link] the
entire
amout úh

Problem 7.11

Compute a conservative estimate

of
particulars. profit on a contract
Illustrate at (whichis 80% complete)
P &LA/c. least four methods
of rom t
computing the pront
ua
Total
expenditure
Estimated further
expenditure to
Contract
price
completethe contract
(including
Work certified contingencies

Work not certified

Cash received

Ho
[Link].
 ContractCosting 7.19

Solution:
of Notional
Calculation Profit
7Calculationof Estimated Profit
Work certified
1,00,000 Contract price
Uncertified 1,53,000
8,500 Less:
Expenditure incurred 85,000
1,08,500 Estimated further
Less Expenditure incurred expenditure 17,000 1,02,000
85,000
Notional
profit
23,500
Estimated profit 51,000
Methods of computing the profit to be
transferred to P & L A/c
1. Notional x x
Profit Cash ratio 23,500 81,600
1,00,000 -7 12,784
[Link] Profit
x
23,500 x

-7 15,667
3. Estimated xWork certified
Profit
-x Cash ratio =51.000 1,00,000 81,600
Contract price
1,53,000
-7 27,200
1,00,000
4. Estimated Profitx0tal Cost to date
x 81,600
Estimated total cost Cash ratio =51,000 x85,000 =7 34,680
1,02,000 1,00,000
Problem 7.12
An expenditure ofR 3,88,000 has been
incurred on a
2012. The value of work certified is 7 contract upto the end of 31st
4,40,000. The cost of work December,
estimated that contract will be uncertified is 7
31st 12,000. It is
completed by March, 2013 and an additional
80,000 will have to be incured to expenditure of R
complete the contract. The total estimated
contract is to include a
provision of 2.5 cent for expenditure on the
per contingencies. The contract price
74,00,000has been realised in cash upto 31st is 5,60,000 and
December, [Link] the of
taken to Profit and Loss Account as on 31 st proportion profitto be
December, 2012 under different methods.

([Link]. Hons., Delhi)

Solution
Calculation of Notional Profit
Estimated Profit on Full Contract

Value of work certified

4,40,000 Contract price 5,60,000
Add: Cost ofwork not certified 12,000 Less: Cost to date 3,88,000
4,52,000 Further cost 80,000

Contingencies 12,000
Less Costto date 3,88,000 4,80,000
NotionalProfit 64,000 Estimated profit 80,000

(3,88,000+80,000) x -7 12,000 for

con tingencies.
97.5
 Cose
7.22

Problem 7.14
XY Co. undertook a contract for 7 15,00,000 on an arrangement that 80% of the -
contractee, should
be paid immediately and t=
done as certified by the architects of the

20% be retained until the contract is completed.

7 1,80,000; Wages 7 1,70,000; Car
In 2010, the amounts expended were Materials
Cartage 1,000; Sundy expenses 7 3,000. The work was certiied for 3,75,000 and eos
paid as agreed.
were: Materials 2,20,000, Wages 2,30,000, Caia
In 2011, the
amourntsexpended contract was certifes
2,000 and Sundry expenses 4,000. Three-fourths of the
Cartage
The value of uused and mor
31st December, 2005 and 80% of this received accordingly.
was ascertained at 20,000.
were Materials 1,26,000; Wages 1,70,000; Cart
In2012, the amounts expended was completed
Sundry expenses 3,000, and on 30th June the whole contract
Show how the Contract Account as also the Contractee's Account would appear for e
years in the books of the contractor, assuming that balance due
to him was received on co
the contract. (B. Com

Solution:
Contract Account

ariculaTs
Particulars
2010
To Materials By Work-in-progress: Certifed
1,80,000
To Wages 1,70,000
To Camiage
6,000
To Cartage
1,000
To Sundryexpenses 3,000
To Notional Proft c/d 15,000

3,75,000
To P&L A/c 4,000 By Notional Profñt b/d
x
(15,000x /, 80%)
To Reserve
11,000
15,000
2011
To Work-in-progress: Certified
3,75,000 By Work-in-progress:
Less: Reserve Certified
11,000
3,64,000 Uncertiffed
To Materials
2,20,000
To Wages 2,30,000
To Cariage
23,000
To Cartage
2,000
To Sundry expenses 4,000
To Notional Profit c/d 3,02,000

11,45,000
11
P&LA/c 1,61,067 By Notional Profit b/d 3,02,000
(3,02,000x/,x80%)
Reserve
1,40,933
3,02,000| 3,02,000
012
Work-in-progress:
Certified 15,00,000
11,25,000By Contractee
Uncertified
20,000
11,45,000
ess: Reserve 1,40,933
10,04,067
to Materials
1,26,000
to Wages 1,70,000
fo Cartage 6,000
To Sundry expenses 3,000
To Profit & Loss A/c 1,90,933

15,00,000 15,00,000

Contractee's Account

2010
To Balance c/d 3,00,000 By Cash 3,00,000
2011
To Balance c/d 9,00,000By Balance b/d 3,00,000
By Cash 6,00,000

9,00,000 9,00,000
2012
To Contract A/c 15,00,000| By Balance b/d 9,00,000

By Cash 6,00,000

15,00,000 15,00,000

Problem 7.15

Elite Ltd. was engaged on one contract the year 2012. The contract price was
during 7 2,00,000.
The trial balance extracted from the books on 31st December, 2012 stood as follows

Share capital 40,000

Sundry creditors 4,000
Building 17,000
Cash at bank 4,500
Contract account
Materials 37,500
Plant 10,000
Wages 52,500
Cash received from contractee (80% of certified work) 80,000
Expenses 2,500
1,24,000 1,24,000
 7.24

Of the plant and materials charged to the contract, plant

costing z1
1,500
Cont
h
1,200 were destroyed an accident.

On 31-12-2012,
by
plant costing
7 2,000 was returned to stores and m.
10%
and
TMate
t Com
1,500. Cost ofuncertified work was 1,000. Charge depreciatic
ation on
2012 and Balance plant.
for the Sheetas on 34
Prepare Contract Account
year
2-2012. Pro

Solution [Link] No.

Contract Account for the year ending 31st Dec.. 204
012
Particulars
Particulars

37,500By Plant returned to store

To Materials
To Wages 52,500 (2,000 less 10%
depreciation)
To Expenses 2,500 By Plant at site
10,000 By Plant destroyed
To Plant installed

To Notional c/d
10,350 By Materials lost
profit
By Materials at site
ByWork-in-progress
Certified

Uncertified

1,12,850

To P &L A/c 5,250 By Notional profit b/d

2 2 80,000
10,350
xX 100
To Reserve 4,830 By Notional profit b/d

10,350
Sc
Balance Sheet as on 31st Dec., 2012

Liabilities Assets
Da
Share Capital 40,000 Building
Sundry Creditors 4,000 Bank
Plant in store
Profit and Loss A/c 520 Plant at site

Less: Plant destroyed 1,500 Materials at site

4,020 Work-in-progress:
2ss: Materials lost 1,200 2,820 Certified 1,00,000

1,000
Uncertified
1,01,00
80,000
Less: Cash received
21,000
4,830
Less Reserve

46,820
 Contract Costing
7.25
A Problem 7.16

The is the
following Trial Balance of Construction
No. 303, for the year ended Company engaged on the execution or
31st December, 2012. contac

Dr. Cr.
Contractee's account
(amount received)
Buildings 3,00,000

Creditors 1,60,000
Bank balance 72,000
Capital account 35,000
Materials 5,00,000
2,00,000
Wages
Expenses 1,80,000

Plant 47,000
2,50,000
8,72,000 8,72,000
The work on Contract No. 303
was commenced on 1st
January, [Link] costing 1,70,000
were sent to the site of the contract but
those of 7 6,000 were in an accident. Wages
1,80,000 were paid during the destroyed
year. Plant costing 7 50,000 was used on the
or
contract all through the
year. Plant with a cost of 2 lakhs was used from 1st
returned to the stores. Materials of the cost
January to 30th September and was then
of 4,000 were at site on 31st December,2012.
The contract was for{ 6,00,000 and the
contractee pay 75% of thework [Link] certiffed
was 80% of the total contract work at the
end of 2012. Uncertified work was estimated at 7
31st December,[Link] are 15,000 on
charged to the contract at 25% of wages. Plant is to be
at 10% for the entire
year.
depreciated

Prepare Contract No. 303 Account for the 2012 and make out the Balance Sheet as on 31st
year
December. 2012 in the books of Construction
Company. ([Link]. Hons. Delhi; BBM Bangalore)
Solution:
Contract No. 303 Account for the
year ending 31-12-2012
Particulars
Particulars
To Materials
17.00
1,70,000 By Work certified 4,80,000
50 To Wages 1,80,000 By Work uncertified 15,000
To Expenses P& L
45,000 By A/c (Loss by accident) 6,000
To Depreciation on plant

(5,000+15,000) 20,000By Materials at site 4,000

To Notional profit c/d
90,000

5,05,000| 5,05,000
To P& L A/c (90,000x2/3 x 5/8*) Notional profit
37,500 By b/d 90,000
To Balance (Reserve)
52,500

90,000 90,000
6,10
 7.26

Balance Sheet as on 31st Dec., 2012

Liabilities Assets
Capital 5,00,000Building
Jontr
P&LA/c 37,500 Plant in stores
Less LosSs 6,000 in store
Materials
31,500
Work-in-progress lso
Less Unabsorbed expenses 2,000 Certified

(47,000-45,000) Uncertified

29,500 5S56 Solut

Less: Depreciation
on Plant* 5,000 24,500 Less : Reserve
5255 Partae
Creditors
72,000 Les: Cash
at site To
Materials
3,00,00 To
Plant at site
TO
Bank To
5,96,500 To
To
F
Notes: To
1. The cash To
ratio for computing the profit to be transferred to Profit and Loss AccOunt k
as
5/8 ie, 3,00,000 Cash received bent
It may also be taken as 75% as
4,80,000 Work certified in
given in the
the questio
case, the profit to be transferred to P & L A/c would be =7 90,000 questim.
aa
2 2.
Depreciation on plant has been
has been
charged to
charged
in the
profit
to contract
balance sheet.
only for 9 [Link]
x
2/3 x 75% = At

remainingthres a
To

h Problem 7.17
The following
figures are extracted from the books of a
2012 contactor, for the
Sc year ending 3te L-

Work-in-progress on 31st Dec., 2011

Less :
Advances from contractees 17,00,000
Da Materials
supplied to contracts direct 11,00,000 6,30
Materials issued from
store
1200
Wages
2.10
Working expenses
1,700
Materials returned to
store
30A0
Contracts finished
Work certified 110M

450M
Profit taken to Profit
and Loss Accountupon contracts 3,00M
Administrative
Profit and Loss
expenses (out of which 7 5,000 is completed 2,30.0M

Account) chargeable to
Plant issued
25.0M
Materials returned fom contract to 50,0
Advancesfrom contractees suppliers
9.0
Plant at site
8,00.00

40,0
 8.2

Process Costing
A comparisonof
and Job Costing
process
A
and job costing methods
comparison
will
Cost
Accow

help in the better

costing system. understandina at.
ng od
po
Process Costing
Job
1. Costs are costing
compiled process-wise and cost
per unit Costs are
is the separately ascertained for each
average cost, i.e. the total cost of the
is cost unit. job,
process divided by the number of units
produced.
2. Production is of
standardised and cost
products
units are identical.
Production is of non-standard
3 Production is for stocks. tions and instructions from the
items with
customers.
spe
4. Costs are
computed at the end of a specific Production is against orders from
riod. pe- customers.

Costs are calculated

5. The cost of one when a job is completed.
process is transferred to the
next process in the
sequence. Cost of a job is
6. On account of not transferred to another
job buth
continuous nature of finished stock account.
production,
work-in-progress in the beginning and end
of There
the
accounting is a regular feature. may or may not be t
period work-in-prpgress in
beginning and end of the
7. Cost ocontrol is accounting period.
comparatively easier. This is be-
cause factory
processes and products are stand-
ardised.
Cost control is
comparatively more difficult becau
each cost unit or
job needs individual attention.

Process Costing Procedure

The essential stages
in process costing procedure are
1. The factory is divided into a number of
processes and an account is maintained
process. for eacd

2. Each process account is debited with material

cost, labour cost, direct
allocated or expenses and overhea
D apportioned to the
process.
3. The of a
output process is transferred to the next
finished output of one process in the sequence. In other words
process becomes input of the next
4. The finished process.
output of the last process the final
Goods Account. (i.e. product) is transferred to the inishe

Process I A/c
Dr. Cr.
DI.
Process II

Cr.
A/c Process III A/c Finished Goods A
Dr. Cr. Cr.
Dr.
Input Output Input Output Input Output

Tr.
Tr.

Fig. 8.1. Process

costing procedure
 Process Costing
8.3

Nustration 8.1

Prepare process accounts and calculate total cost of

production from the data given below:
Process X Process Y Process Z
Materials
2,250 750 300
Labour
1,200 3,000 900
Direct expenses:

Fuel
300 200 400
Cariage 200 300 100
Works overheads
1,890 2,580
The indirect expenses 1,875
1,275 should be apportioned on the basis of wages.
(B. Com.)
Solution

Process X Account

To Materials
To Labour
2,250 By Transfer to Process Y 6,140
1,200
To Direct expenses:
Fuel
300
Cariage 200
To Works overhead
1,890
To Indirect expenses*
300
6,140 6,140
Process Y Account

To Tr. from Process X

To Materials
6,140 By Tr. to Process Z
13,720
750
To Labour
3,000
To Direct expenses:
Fuel 200
Camiage 300
To Works overhead
2,580
To Indirect
expenses* 750
13,720 13,720

Process ZAccount
To Tr. from Process Y 13,720 By Transfer to Finished Goods 17,520
To Material
300
To Labour
900
To Direct
expenses:
Fuel 400
Cariage 100
To Works overhead
1,875
To Indirect
expenses 225
17.520 17.520

Note: Indirect expenses of 7 1,275 have been apportioned to processes X, Y and Zin the ratio of
3000: 900 i.e., 4: 10 3 :
respectively.
1200:
 8.4

Cost
Acu
PROCESS LOSSES AND WASTAGES
Pro
In industies which employ process testing, a certain amount of loss of
materials o.
stages of production. Such a loss may arise due to chemical reaction, Occurs
evaporation, inefs So
is,therefore, necessary to keep accurate records of both input and
output. Where loseiñcienn
stage in manufacture, it is apparent that financial loss is
greater. This is because moraocCu
are incured in
processes as products move towards completion stage. and n
Process losses
may by classified into (a) normal, and (b) abnormal.

Normal Process Loss

amount of loss which cannot be
That
avoided because of the nature of
normal
process loss. Such a loss is
quite expected under normal conditions. It is
material or nTo
chemical change, caused by fa
evaporation, withdrawals for tests or
sampling, unavoidable spoiled quantities
Abnormal Process Loss
This type of loss
consists of loss due to pr
down, accident, use of defective abnormal reasons such as

loss which is over materials, etc. Thus it arises due to

carelessness, machine
abnormal factorS and
ur
and above the
normal loss. repres
Accounting procedure for normal and abnormal loss differs.

Accounting Treatment of Normal Loss

It is a
fundamental
costing principle that the
2 production. Normal loss is
to loss of generally determined as a
cost of normal losses
should be borne
by the
weight, say, due to percentage of input. Sometimes
evaporation or chemical action. Since
such aloss is
present, obviously it cannot
have such a is
form of any value. wastage not
scrap, it may have some However, when normal loss is physic
has any value, it is value, i.e. it be sold at some physically present in
credited to the
may
Process Account. This price. Whenever
is illustrated scrapped mate c
below
ustration 8.2
The
following information is
given in respect of
process A.
D Materials
Labour
1,000kg.@ 6
Direct per kg.
expenses 5,000
Indirect
expenses allocated to Process
1,000
A 1,000. Normal
Prepare Process A Account when: wastage 10% of
input
(a) Scrap value of
normal loss is
nil.
(b) Scrap
arising out of normal
has a sale value
of Re. 1
per unit.
Process Costing 8.5

$olution
(a) When scrap value of normal loss is nil.

Process A Account

kg
Particulars Particulars kg
1,000
To Materials 6,000 ByNormal loss 100
ToLabour 5,000 By Transfer to Process B 900 13,000
ToDirect exp. 1,000
ToIndirect exp. 1,000
1,000 13,000 1,000 13,000
Cost per unit = R 13,000 900 units =7 14.44
The normal loss is absorbed
by good production and as a result the cost per urit of
When good
production inflates. there is no los, the cost 13
per unit produced is (i.e. 13,000 +1,000
unts). But when there is a nomal loss, the cost per unit is higher at 7 14.44
(b) When sCTap of normal loss has a sale value of Re. 1
per unit.

Process A Actount

Particulars kg
|Particulars kg
To Material 1,000 6,000 By Normal loss 100 100
To Labour 5,000 By Transfer to Process B 900 12,900
To Direct exp.
1,000
To Indirect exp. 1,000

1,000 13,000 1,000 13,000

Costper unit =7 12,900+ 900 units = 14.33
Whenever any value is realised from the sale of nomal wastage, it reduces the cost to that extent.

Accounting Treatment of Abnormal Process Loss

It has been stated earlier that abnormalloss
due to carelessness, is
accidents, machinebreak-down
and other abnormal reasons. Unlike normal
abnormal loss is not absorbed
loss,
atherit is transferred to by good-production,
Costing Profit and Loss [Link] is becauseif the
to cost of abnormalloss
were fall
upon the good production, the cost thereof will
get dislorted and the information provided
would be misleading. In order to overcome this and also
to disclose the cost of abnormal
loss, the
following procedure may be adopted:

)
(a) Allow for

After
normal loss

considering
following formula:
in the manner
nofmal loss, find out the
described earlier.

cost per unit in that

process. This is done by the

Cost
Total cost Value of normal loss
per unit:
Units introduced Normal - loss units
C) the cost per unit
Multiply (calculated as above) by the number of units of abnormal loss. This
gives the total value of abnormal loss.
(4)Creditthe relevant Process Accountwith the quantity and value of abnormal loss.
 8.6

Cost
6 Accou
(e) The balance figure in the Process Account 1s the
cost 0r good units produced i
This can also be found by
multiplying cost per unit with the number of
inthe
good units prt
(Open 'Abnomal Loss Account' and debit it with the quantity and value af prot
shown in the Process Account. Sale proceeds from abnormal loss are
creditadoma
Loss Account. Any balance left in this account is net loss and
and Loss Account.
ferred to
transferred to cAb
Costing
Nlustration 8.3

units are introduced into a

Fifty
process at a cost of rupee one each. The
total adat
expenditure incured in the Process is 30. Of the units introduced, 10%o are
course of manufacture, these normally spoiled
possess a scrap value of Re. 0.25 each. to an in
units are Owing accident."
produced. You are required to prepare (1) Process Account, and only
(iu) Abnormal Loss
(B. Com. Madras; Hons. Delhi) Ac
co
Solution

P Process Account

Particulars
Units
Particulars Units
To Materials
50
To Expenses 50.00 By NormallossRe. 0.25 each
30.00 By Abnormal loss
5 8.75
By Transfer to next process (B/F) 40 70.0m

50 80.00
2 Cost of
abnomal loss is calculated as follows:
50 80.0

Cost per unit = Total cost - Value of normal loss Rs. 80 1.25
-
Input
78.75= 1.75
Normal loss (in units) Units 50- 5 45
Cost of abnormal loss = Abnomal loss units x Cost
S =5 x 1.75 7 8.75
per unit

Abnormal Loss Account

Particulars

D To Process
A/c
Units
Particulars Units
8.75 BySales Re. 0.25 each 5 1.2
By Profit and Loss A/c
(Balanced figure)
5 8.75
8.7
Abnormal Gain or Effectiveness
The normal
process loss represents the loss that
an would be
estimated figure. The actual loss expected under normal conditions.
may be greater or less than the It
greater than normal loss, it is known as nomal loss. If the actual
abnormal loss. But if
actual loss is less
loss
is obtained which is termed as abnormal than normal loss, a ga
gain or effectiveness. The
in a manner similar to abnormal value of abnormal
loss. It is
shown on the debit side gainis calculat
side of the Abnormal Gain Account. of the Process
Like abnormal Accountand crec
loss, it is
and Loss Account. This is illustrated ultimately transferred to Costing
below. Prou
Process Costing 8.7

Example
Using the figures of Ilustration 8.3 except that actual 47 units, show how the process
output is
will be
account prepared. Also prepare Abnormal Gain Account.

Solution
When nommal output is 45 units and actual
output is 47 units, there is an abnormal gain of 2
units. This is shown in the following account.

Process Account
Rarticulars Units
Particular Urits
To Material 50 50 By
Normal loss 5 1.25
To Expenses 30
To Abnormal gain* 3.50 By Transfer to next
process 82.25
52 83.50
83.50
The value of abnormal
gain is calculated as follows

Rs.80 Rs.1.25
2 units 3.50
50-5units
It should be noted that the method of
valuation of abnormal
gainisthesame as that of abnormal
loss.

Abnormal Gain Account

Particulars Units Particulars

Urits
To Normal loss A/c
(Shortfall
in the sate of By Process A/c 3.50
normal loss) 2 0.50
To Profit& Loss A/c (B.F)
3.00

3.50
Mustration 8.4
A product passes
through three processes A, B and C. The normal
bllows: Process A 3 per cent, wastage of each process is as
Process B- 5 per cent, and Process C 8 per cent.
AWas sold at 25 P. per unit, that of Process B at 50 P. per unit and that of Process CWastage of Process
10,000 units were issued at Re. 1 per
to Process A on 1-4-2004at a cost of Re. 1 unit.
as follows: per urit. The other costs were

Process A B
Process Prooess C
Sundry materials
Labour 1,000 1,500 500
Direct 5,000 8,000 6,500
expenses
Actual
1,050 1,188 2,009
output 9,500 units 9,100 units 8,100 units
repare the Process
Accounts, assuming that there were no
Abnormal Wastage and Abnormal Gain opening or closing stocks. Also give the
Accounts.

(BBM Bangalore Adapted, [Link]., Mysore)

Process Costing 8.9

Abnormal Gain Account

Purticulars Units Particulars Units

To Normal wastage A/c 75 38 By Process B 75 225

in the sale of
(shortfall
Re.
normal wastage
0.50 per unit)
To Profit & Loss A/c (B.F) 187

75 225 75 225

When ontput of a process is partly sold and pardy transferred to the next process
ofa process may be partly sold and partly transferred to the next process
Sometimesthe output
textile of the output of a spinning process may be
for further processing. For example, in mill, part
the
output is passed on the weaving process for further processing. A part of the
sold to
and remaining
so sold will an
output contain element of profit or loss which will be revealed in the Process Account.
But when of is sent to warehouse for sale, it is at cost and does not contain an
part a the output
element of profit or loss.

Ilustration 8.5 S-pines ees

used in buildings. The material
Chemicals Ltd. processes a
patent material is produced in three
consecutive grades- soft,medium and hard.

Process I Process I Process III

Raw materials used 1,000 tonnes

Cost per tonne 200
Manufacturing wages and expenses. 87,500 39,500 10,710
Weight lost (% of input of the process) 5% 10% 20%
Scrap (saleprice 50 per tonne) 50 tonnes 30 tonnes 51 tonnes
Sale price per tonne 350 500 800
Management expenses were 17,500 and selling expenses 10,000. Two third of the output of
I and one half of the
Process output of Process II are passed on to the next process and the balances
are sold. The entire output of Process II is sold.

Prepare the three process accounts and a statement of profit. Make approximations, where neces-
sary. ([Link]. Delhi, Andhra,Bangalore)

Solution
Process I Account

Particulars Tonnes Particulars Tonnes

To Raw materials 1,000 2,00,000 By Weight lost 50

To Mfg.
wages and expenses 87,500 ByScrap 50 2,500
To Profit 300
(B. F.) 10,000 By Sales 1,05,000

By Process II (transfer* 600 1,90,000

1,000 2,97,500 1,000 2,97,500
 8.10
1s calculated
W:
below
to ProcesS
tonnes transfered
Cost of 600 -Scrap value 2,85,000
8.8 cost cess Costing
Total
= 900
tonne
Cost per Units produced
Altermative Method (Illu
ution by
Solutio

Cost of 600
tonnes
2,85,000x
900
600 7 1,90,000

in other processes. Tonne

Particul has been followed Particulars
Similar procedure
1,00
To Unit: To Raw materials
Process II Account
To Sund and wages
To Mfg. exp.
Labo
Tonnes Particulars
To Dire Particulars
LOTm

To Process I transfer
600 1,90,000 By Weight loss
To Mfg. wages and expenses
39,500 By Scrap
V To Profit 13,500 By Sales cost ={2,81,500 2,500 =R2,85
(B/F)
23; otal
By Process II (transfer)
25

600 2,43,000 600

Particu
Particularss
Rs. 2,28,000 I A/c
To Proc Cost
of 255 tonnes. transferred to Process II x 255 tonncs =R To Process

To Sun 510 tonnes 1,14,00

To Mfg. exp. wages
To Lab
To Dire Process III Account
To Abr
Particulars
Tonnes
Particulars
To

lornes
Process II
(transfer) 255
To 1,14,000 By Weight
Manufacturing loss 1
Abn wages and expenses By Scrap
To Profit 10,710
(B.F.) By Sales 155
240
Particulars
255
Partic Notes
1,24,950 255 To Process II A/c

1. Profit in To Mfg. exp. and wages

S To Pr
2. It is
each
process is a
assumed that balancing figure.
weight loss and
To scrap are
Si
normal
To L
To D
Statement of
Profit/Loss
Profit as
per Process I
Profit as
per ProcessI
Profit as 10.00
per Process II Particulars
Total 135M
profit sold
To Cost of goods
Less:
Management Process I
expenses 23,740
Selling
expenses
Net Loss
Pa 17,500
27,50
To
Note: It is 10,000
assumed that
Therefore, 3.70
To these have
been management To Management exp.
charged in expenses and To
to Selling exp.
Profit/Loss selling llocable
Statement. expenses ai
Process Costing
8.11

Solution by Altemative Method (Nlustration8.5)

Process I Account

Particulars Tonnes
Particulars Tonnes
To Raw materials 1,000 2,00,000 By Weight lost 50
To Mfg. exp. and wages 87,500 By Scrap 50 2,500
By Cost of goods sold

transfer to P&L A/¢* 300 95,000

By Process II A/¢ (BF)
600 1,90,000
1,000 2,87,500
Total cost= {2,87,500
-2,500 =R2,85,000; Cost of = 795,000
1,000 2,87,500

goodssold R2,87,000 x
1/3

Process II Account

Particulars Tonnes
Particulars Tonnes
To Process I A/c 600 1,90,000 By Weight lost 60
To Mfg. exp. wages 39,500 By Scrap 30 1,500
By Costs of goods sold
transfer to P&L A/c 255 1,14,000
By Process III A/c 255 1,14,000
600 2,29,5000
600 2,29,500

Process III Account

Particulars
onnes u Particulars Tonnes
To Process II 225
A/c 1,90,000|By Weight loss 51
To Mfg. exp. and
wages 10,710 By Scrap 51 2,550
By Costs of goodssold
transfer to P&L A/c
225
1S 451,2,160
1,24,710 225 1,24,710

Profit and Loss Account

Particulars Tonnes Tonnes

To Cost of
goods sold By Sales Process I 300 1,05,000
Process I 300 95,000 II 255 1,27,500
II 255 1,14,000 III 153 1,22,400
III 153 1,22,160 on
By Net Loss 3,760
To
Management exp. 17,500
To
Selling exp. 10,000

708 3,58,660 708 3,58,660

 Cost
8.12
Accoum

PROFIT
INTERNAL PROCESS Process Costing

Profit)
(Inter-process
to the next
the output of each process Normal wastage

In some businesses,
a practice to charge
it is
to the transferor process.
Tne traisrer prce may be either th
proces
o Realisable
value of wastage

cost but at a price showing

profit is charged with its input.t at CUTe Output
Thus each process Process A A/c.
cost plus a fixed percentage.
market price or has tO bear the losses caused by the effi Prepare
benefits of saving or
no process obtains the cency
price and the of such internal process profit are:
In brief, objects Solution
of the earier processes.
inefficiency with the market prices.
show whether the cost in each process competes
(a) To and economy.
To make each process stand on its own efficiency
(6) maternal
decisions such as to buy a partly processed
rather than Particulars
To assist in making
(c) or to process it further,
or to sell a processed product Raw materials
process work intemally partly To
of complicating the costing records. The compli
Internal process profits have the disadvantage To Direct labour
into the accounts arise from the fact that inter-process profit so introduced rema To Overhead (20% of
tions brought
and For balance she
incuded in the price of process stocks,
finished stocks work-in-progress. 3,000+4,000)
to be reduced to actual cost because a firm cannot make profits by tradi To Abnomal gain @ R 10
purposes such stocks have
with itself.

PROBLEIS AND SOLUTIONs

um

Working Notes: Cost per

M
f
Problem 8.1
Problem 8.3
a Process A at the rate of 7 4 per kg. The direct
to labou From the following
inf
600 kg. materal was charged
of
accounted F 200 and the other departmental
for
expenses amounted to 7 760. The normal loss is 10%
Loss Account:
2 of
input and the net production was 500 kg. Assuming that
process scrap is saleable at R 2 per kg () Input of raw mate
prepare a ledger account of process A the values of normal and abnormal
clearly showing loss.
() Direct material

(C.A. Intar
Solution: (in)
Direct wages
iv) Overheads
S Process A Account () Actual output

Particulars (Vi)
Normal loss
Kg. Particulars
Kg.
(vii) Value of scrap

p-
To Materials
600
D 2,400 By Normal loss 60
To Direct labour
To Other
expenses
200 By
Abnomal loss 40 240 Solution:
760 By Process B A/c (Transfer) 500 3,000

600 3,360 600 ,360

Working Notes ParticularS

Nomal cost
120
Cost per unit = Rs. 3,360 To Input
Normal per unit loe be To Direct material
output
60060 units
Abnormal loss 40 units @ 76 - 240
To Direct wages
To Overheads
Output transferred to Process B - 500 units @ 6-7 3,000
To Abnommal gain

Problem 8.2 @76 p.u.

1,000 units of raw material @ 3 per unit were

*Note: Units o
month. The introduced in Process A
in the
Direct
following
labour cost
additional information is
given about Process A for the month.
beginning o
Overhead expenses
7 4,000
20% of prime Cost p
cost
8.12

Cost
Acto
INTERNALPROCESS PROFIT
(Inter-process Profit)
In some businesses, it is a
practice to charge the output of each process to
cost but at a the ne
price showing profit to the transferor nextp
prOcess. The transfer price
market price or cost a may be eith
fixed
plus percentage. Thus each process is charged with
price and no process obtains the benefits of its in
saving or has to bear the losses caused
inefficiency of the earlier processes. In brief, the
by thto
objects of such internal
(a) To show whetherthe cost in each process proft ar
are:
process competes with the market
(b) To make each process stand on its own prices.
efficiency and economy.
(c) To assist in making decisions such
as to buy a
partly processed material
process work intemally or to sell a rather
Intemalprocess partly processed product oI to process it tha
profits have the of further
tions disadvantage complicating the costing records.
brought into the accounts The coms
arise from the
fact that
included in the inter-process profit so
price of process stocks, finished stocks and introduced
purposes such stocks have to be work-in-progress. For
reduced to actual cost balance
with itself. because a fim cannot make
profits by tr

PROBLEMS AND SOLUTIONS

Problem 8.1
600 kg. of a
material was
charged to Process A at the
accounted 200 and the other
for rate of 4 per kg. The direct lao
of departmental expenses amounted to
input and the net 760. The
production was 500 kg. normal lossis1
prepare a ledger account of Assuming that process scrap is saleable at { 2
process A clearly showing the values of per k
normal and abnormal loss.
Solution : (C.A. In

Process A Account
ParticulaTS
Kg. Particulars
To Materials Kg.
To Direct labour 600 2,400 By Normal loss
200 By Abnormal 60
To Other loss
expenses 40
760 By Process B A/c
(Transfer) 500
600 3,360 3,00

Working Notes 600 3,380

Cost per unit

Abnormal loss
Normal cost

Normal output
40 units @ 6
Rs. 3,360

600

-7240
=6
-120
60units
O000
perunit

O00
Output transferredto Process B 500 units
@6 -7 3,000
2as

Problem 8.2
1,000 units of raw material
@R
3 per unit were
month. The following additional information is introduced in Process
A in the beginning of
Direct labour cost given about Process A
for the
o
month.
Overhead expenses
7 4,000
20% of
prime cost
Process Costing
8.13

Normal wastage 20% of input

Realisable value of wastage
2 perunit
Output
900 units
Prepare Pro cess A A/c.
([Link]. Delhi)

Solution:
Process A Account

Particulars Units Particulars Units

To Raw materials 1,000 3,000 By Normal loss 200 400

To Direct labour 4,000 (20% of 1,000 units)
To Overhead (20% of By Transfer (next process) 900 9,000

To
3,000+4,000)
Abnommal gain @ F 10 100
1,400 @ 10 per unit
1,000

1,100 9,400 1,100 400

Working Notes : Cost per unit= 5,000

Tessup sils pirted
4,000
1000 200
+
-
+ 1400
units
400 Rs.

800
8,000
units
=7 10.

Problem 8.3
From the following information, a Process Account, Abnomal
prepare Gain Account and Normal
LossAccount:
() Input of raw material 840 units @ 40 per unit.
(i) Direct material 7 5,924.
(7m) Direct wages T8,000 oo008
(iv) Overheads 8,000
()Actualoutput 750 units
15%
(vi)

(Vii)

Solution:
Normal loss

Value of scrap per unit

10 [Link] e ime ([Link])

ihto afoeto ziend enli a0eeoog os ot beslosisalhseeve ant

Process Account

Particulars Units Particulars Units

To 840 126
Input 33,600 By Normalloss 1,260
To Direct material
5,924 (15% of 840 units)
To Direct
wages 8,000 By Output @ 7 76 p.u. 750 57,000
To Overheads
8,000
To Abnormal
gain
@76 p.u. 36 2,736
876 58,260 876 58,260
* Note
Units of abnormal gain
-Actual output + Normal loss - Input
-750+ 126 840=36 units
Cost per unit = Rs. 55,524 -1,260 54,264
=7 76
840 126 units 714
 Abnormal Gain Account

Particulars Units
Particular Units
To Normal loss 36 360 By Process A/c
36
o Costing P &LA/C 2,376

36 2,736

Normal Loss Account

Particulars
Units
Particulars Units
To Process
A/c 126 1,260 By Abnormal Gain A/c 36
By Cash (sCTap) 90

126 1,260

P Problem 8.4
126

A product passes
through three processes to completion.
2004 the cost and During the quarter ending 31st N
productionwere as under:
Processes
Total

20 Direct material
84,820
Direct labour 20,000 30,200 34,620
1,20,000 30,000
Direct expenses 40,000 50,00
ho 7,260
Production overhead 5,000 2,260
Normal loss in input 60,000008
Sale of saap
per unit
0008 10% 5%, 10%
So 30
Production in units 750 T60
920 units 870 units 800 units
1000 units of 7 50 per unit were
introduced to process A. There were
in
no stock of materias
Da
work-in-progress any process department at the
beginning or end of the period.
Production overhead is allocated to each
process on the basis of 50% of direct
Prepare process accounts. labour cost.
([Link] Bangalot
Solution

ProcessA Account
Particulars Units
Particulars
Units
To Units introduced
1,000 50,000 By Normal
To Direct materials loss 100 3,00
20,000 By Tr. to Process B
To Direct wages 920 1,19,60
30,000
To Direct (Bal. figure)
expenses 5,000
To Prod. overhead
15,000
To Abnormal Gain* 20 2,600
1,020
1,22,600
1,22,0
1,020
Process Costing
8.15

Value of
abnormal gain
=Rs.1,20,000 3,000
x 20 units =7 2,600
Units 1,000 100
Process B Account
Particulars Units
Particulars Units
To Process A (TI.) 920 1,19,600 By Normal loss 46
To Direct material ,300
30,200 By Abnormalloss 4
To Direct labour 960
40,000 By Process C (TE.) 870 2,08,800
To Direct expenses
2,260
To Prod. overhead
20,000
920 2,12,060
920 2,12,060

Rs. 2,12,060 -2,300

Value of abnomal loss =- x
4 units F 960
Units 920 46
Process C Account
Particulars Units
Particulars Units
To Process B (Tr.) 870 2,08,800 By Normalloss 87 5,220
To Direct material 34,620 By Finished stock A/c 800 3,20,000
To Direct labour
50,000
To Prod. overhead 25,000
To Abnomal gain 17 6,800
887 3,25,220 887 3,25,220

= Rs. 3,18,420 5,220

Value of abnormalgain x 17units =7 6,800
Units 870 - 87

Problem 8.5

Product B is obtained after it passes through three distinct

proceses. The following information is
obtained from the accounts for the week ending 31st October, 2012:
Items Total
Process
I
Direct materials 7,542 2,600 8S 1,980 2,962
Direct wages 9,000 2,000 3,000 4,000
Production overhead 9,000
1,000 units at 3 each were introduced to Process I. There was no stock of material or work-in-

POgress
at the beginning or at the end of the period. The output of each process passes direct to the
ext process
and finally to finished stock. Production overhead is recovered on 100% of direct wages.
The
following additional data are obtained:
Process
Output during the Percentage of normal Value of sCrap
week loss to input per unit
Process I 950 5% 2
Process II 840 10% 4
Process II 750 15% 5
Tepare process cost accountsand abnormal gain or loss accounts. (B.B.M. Bangalore)
 8.16

Solution: Cost
Ac
Process I Account
Rurticulars
Units
7Particulars
To Units introduced
Units
1,000
To Direct materials 3,000 By Normal loss
To Direct wages 2,600 By Process II 50
To Production 2,000 950
overhead (Balance figure)
(100% of direct wages)
2,000
1,000 9,600
1,000
Process II Account
Purticulars
Units
Particulars
To Process I Units
(transfer) 950
To Direct 9,500 By Normal loss
materials
To Direct 1,980 By Abnormal loss 95
wages
M To Production
overhead 3,000 By Process II
(transfer)
15
840
fo 3,000

950 17,480
950
Abnormal loss = Rs.17,480- Rs.380
950-95units 15 units-7 300
20 (7 20 per unit)

Process IlI Account

Particulars
Units
To Process I Particulars

S (Transfer)
To Direct materials
840 16,800 By Normal loss
Units

126
To Direct
wages 2,962 By Finished stock
To Production 4,000 750
overhead
To Abnormalgain 4,000
36
De 1,368
876
29,130
876 29
Abnormal = S.21,762 Rs. 630
gain
840 126 units
x 36
units 7 1,368

Abnormal Loss Account

Particulars
Units
Particulars Units
To Process II
15
300| By Sale of
scrap 15
(@R4per unit)
15
By Costing P&L A/c 2
300
15
Process Costing 8.17

Abnormal Gain Account

Particulars Units Particulars Units
To Normal Loss A/c 36
180 By Process II 36 1,368
(shortfall
in the sale of
normalloss@5 per
unit)
To Costing P &L A/c 1,188

36
1,368 36 1,368

Normal Loss Account

Particulars Units Particulars Units

To ProcessI 50 100 By Cash (sales) 235 930
To Process I 95 380 By Abnormal gain A/c 36 180
To Process II 126 630
271 1,110 271 1,110

Problem 8.6
The output of Process A was 2,500units. Normal loss allowed was 10% of input. Abnormal loss was
200 units.

Material
5 per unit
Labour 4,000
Overheads 3,350
Wastagerealised 7 2.50 per unit
You are required to prepare Process A Account and Abnormal Loss Account. ([Link]. Delhi)

Solution:

The mumber
of
units
of output of process A is given as 2,500 but the number of units of input of
raw materials is not given. It is computed as shown below

Suppose Input =x uits.

Normal Loss (10% of Input) =

Output + Abnormal Loss =9x

10
9x
=2,500 + 200
10
9x 2,700 x 10 27,000

X =
27,000 =3000 units
 Cost
Acco

8.18
Process
A Account
Units
Particulars
Units

@8
Rurticulars Normal loss @7 2.50 300
3,000 15,000 200
4,000 Abnormal loss
[email protected] 78
To Labour 3,350 Output
@ 2,500

3,000
To Overheads
3,000 22,350

Working Notes

Rs. 22,350
- 750
*Costper unit.000 -300 units
21,600
2,700
78

Problem 8.7
of Re.
10,000 units at a cost 1 were is
A three processes, A, B and C.
product passes through
to process A. The other
direct expenses were:
Process A Process B Proce

Sundry materials
1,000 1,500
Direct labour 5,000 8,000
Direct expenses 1,050 1,188
The wastage of Process A was 5%o and Process B 4%. The wastage of process A was sold at Re.

per unit, that of B at Re. 0.50 per unit and that of C at Re. 1.00 per unit. The overhead charges
168% of direct labour. The final product was sold at 7 10.00
per unit, fetching a profit of 20% on si
Find the percentage of wastage in Process C.
(B. Com., Andh

Solution:

S Process A Account

Particulars Units Particulars

Units
To Units introduced
10,000 10,000By Nomal
D To wastage 500
Sundry materials
To 1,000 By Process B (Transfer)
Direct labour 9,500 25,30

To 5,000
Direct
expenses 1,050
To Overheads
8,400
10,000
25,450
10,000 25,4

Process B Account
Particulars
Units
Particulars
To ProcessA
9,500 Units
To
Sundry materials 25,325 By Normal wastage 190
To Direct labour 1,500 By Process C 380
To Direct 8,000 (Transfer) 9,120 49,263
expenses
To Overheads 1,188

9,500
13,440
49,453

9,500 49,453
Process Costing
8.19

Process C Account

Particulars Units Particulars Units

To Process B 9,120 49,263 By Normal wastage 456 456
To Sundry materials
1,480 By Sales 8,664 86,640
To Direct labour
6,500
To Direct expenses ,605
To Overheads 10,920
To Profit
17,328
9,120 87,096| 9,120 87,096
Calculation of percentage of
wastagein Process C
Suppose No. of units of nomal wastage X =
Sales value of waste unit =
R x, i.e., x units
@Re. 1 each
Cost per unit =
7 10 less 20%
=7 8 per unit profit

Total cost =No. of units produced x cost

per unit
=(9120x) x T8
Total cost 8x
Also
=72,960 0s. 9 g..()
Total cost =Cost incurred - Sale value of scrap
-(49,263+1,480+6,500 +1,605+ 10,920)
=69,768 -x x
Thus 69,768 x =72,960 -8x ..(i)

8x X =72,960 69,768
7x 3,192
x =456
Therefore, normal wastage is 456 units at Re. 1 each.
456
Percentage of wastagein Process C = x 100 = 5%.
9,120

Problem 8.8

The product a manufacturing unit passes through two

of distinct processes. From past experience
the incidence ofwastageis ascertained as under
Process A -2%
ProcessB 10%
In case, the percentage of wastage is computed on the number of units
each entering the process
in process A and B are 7
[Link] sales realisation
ofwastage 25 per 100 units and 50 per 100
units
respectively. The following information is obtained for the month of April, 2004
40,000 units of crude material were introduced in process A at a cost of 7 16,000.
Process A Process B
Other materials 16,000 5,000
Direct labour 79,000 8,000
Direct
expenses 8,200 1,500
Output Units 39,000 36,500
Finished product stock in units
1st April 6,000 5,000
30th April 5,000 8,000
 8.20

Value of
stock
per unit on
Process A -7 1.20, Process 1st
Stocksare B -April: 7 1.60 Cost
valued and Acc
Prepare transferred to
respective Process subsequent
Accounts and Stock process at weighted
Solution: Accounts. average cost

Particulars Process A Account

To Units Units
Introduced Particulars
To Other 40,000
materials 16,000
To By Normal Units
Direct abour wastage
To Direct 16,000 By Abnormal 800
wastage
expenses 9,000 By Transfer to 200
Process A
8,200
40,000
49,200
StockA/c @7 1.25
39,000
40,000
To Process A Stock
Stock on 1st Account
f April
To Transfer
@ 1.20 6,000
7,200 By Stock on 30th
from April
Process A A/c 39,000 @1.2433 5,000
48,750 By Transfer to
Process B
A/c@ 1.2433* 40,000
45,000
2 55,950
45,000

h To Process Process B Account

A Stock
To Other 40,000
materials 49,734 By Normal
To Direct wastage A/c
labour 5,000
S To Direct
To Abnomalexpenses 8,000
By Transfer to Process
Stock A/c@ 7 1.728*
B
4,000
36,500 63
Gain A/c 1,500
500 864
40,500
65,098
40,500 65
Process B StockAccount
To Stockon 1st
April 5,000
@7 1.60 8,000 By Stock on 30th
To Transfer from April @@ 8,000
71.171 13
36,500
Process B A/c 63,098 By Finished Stock A/c
33,500 573
41,500
71,098
*Working Notes: Cost per 41,500 71.08
unit is computed as follows:
Process A=
Rs. 49,200 200 49,000
Units 40,000 800 R1.25 per
39,200 unit.
Rs. 64,234 -
Process B 2,000 62,234
Units 40,000
-4,000 36,000T1.728 per unit
Stock valuation at
Process A
Process B
weighted average cost is
55,950+45,000
71,098 +41,500
1.2433 per
-7
computed as follows
unit
1.713 per unit
o
Process Costing 8.21

Problem 8.99

In a factory, the product passes through two processes, A and B. A loss of 5%% is allowed in
Process
A and 2% in Process B, nothing being realised by
disposal of the wastage.
During April 10,000 units of material costing 6 each were introduced in Process A. The other
as follows
costs were
Process A Process B
Materials
6,140
Labour
10,000 6,000
Overheads
6,000 4,600
The output was 9,300 units from Process A. 9,200 units were
produced by Process B which were
transferred to warehouse. 8,000 units of the finished
product were sold T 15 per unit, the selling @
and distribution expenses being R 2 per unit.
Prepare (i) Process Accounts and (i) a Statementof Profit or Loss of the firm for April, assuming
there were no opening stocks of any type. ([Link].)

Solution:
Process A Account
Particulars Units Units
Purticulars
To Materials 10,000 60,000 By Normalloss 500
To Labour 10,000 By Abnormalloss 200 1,600
To Overheads 6,000 By Transfer
to Process B
(@T8 per unit) 9,300 74,400
10,000 76,000 10.000 76,000

Cost per unit =R 76,000 9,500 units 78

Process B Account

Particulars Units Units

Particulars
To Tr. from Process A 9,300 74,400 By Normal Loss 186
To Materials 6,140 By Finished product A/c
To Labour 6,000 ( 7 10* per unit) 9,200 92,000
To Overheads 4,600
To Abnormal
gain A/c 86 860
9,386 92,000 9,386 92,000

Cost per unit 7 91,140 9,114 units = 7 10

Statement of Profit and Loss

Sales 8,000 units @

15 each 1,20,000
Less: Cost of production of 8,000 units @
10 per unit 80,000
Selling and distribution expenses for 8,000 units @ 2 per unit 16,000 96,000
24,000
Less: Abnormal loss in Process A 1,600
22,400
Add: Abnormal
gain in Process B 860
Net Profit 23,260
 8.22

Problem 8.10 Cost

XYZ Ltd, manufactures and sells three chemicals
produced by consecutiva
and Z. In each 2% the
process of weight put in is lost and 10% is
total
scCTaOCesse
andY realised 100 a tonne and from Z R 200 a tonne. The
produc
rap,
with as ducts of the which
follows th from

proce

Sent to
X
warehouse for sale
Passed on the next
25%
The
process 75% 50
following particulars relate to the month of
May: 50%
Materials used (tonnes)
Cost
per tonne of materials 1,000
(R)
Mfg. expenses 120 140
(R)
200
30,800
Prepare an account for
each 25,760
process, showing the cost per tonne
of each
Solution: producte

Process X Account
Particulars
Tonnes
To
Materials
(@ 120) 1,000
Particulars

To
1,20,000
By Loss in
weight
Tonnes

Mfg.
expenses. (2% of 1,000)
30,800
By Scrap
20

100
(10% of
1000)
By Warehouse
(25% of 880)
S 1,000
By Process Y
(transfer)
Z20

1,50,800 660
Working Notes:
1,00

1.
Transfer
to
warehouse 1,50,800 -R

2.
Similar
As the
normal.
calculation

question
has been
is silent
1,000

madein
about the
10,000
20 100 220
tonnes

Process Y.
tonnes 7 35,200.

nature
of loss,it
is
presumed that both t loss and s
Particulars
weg
ProcessY
To Account
ProcessX Tonnes
To (transfer)
Materials
660 7Particulars
To Tonnes
Mfg.
expenses 140
1,05,600
By Loss in
28,000
ByScrap weight (2% of 800) 16

25,760 80
ByWarehouse
352
By Process
800 Z 352
1,59,360 (transfer)

800
Process Costing
8.23

Process Z Account
Particulars Tonnes
Particulars Tonnes

To Process Y 352
(transfer 75,680 By Loss in Weight
(2% of
1,700) 34
To Materials 1,348 1,07,840 By Scrap 170 34,000
To Mfg. expenses 18,100 By Warehouse (transfer) 1,496 1,67,620

1,700 2,01,620
1,700 2,01,620

Problem 8.11
A product passes through three processes-A, and B C. The details of expenses incurred on the
three processes during the year 2012 were as under:
Processes A OCD B
Units introduced
Cost per unit

Sundry materials
000.0e -n
10,000
100

10,000 15,000 5,000

Labour 30,000 80,000 65,000
Direct expenses 6,000 18,150 27,200
Selling price per unit of output 1200 165 250
Management expenses during the year were 80,000and selling expenseswere 50,000. These are
not allocable to the processes.
- -
of the three process was: A 9,300 units, B 5,400 units and C 2,100 units. Two-
Actual output -
thirds of the output of Process A and one-half of the
output of Process B was passed on to the next
process and the balance was sold. The entire output of Process C was sold.
The normal loss of the three processes, calculated on the
input of every process was
Process A - - -
5%, B 15% and C 20%. The loss of Process A was sold at R 2 per unit, that of B at
5 per unit and of Process C at F 10 per unit.

Prepare the three Process Accounts and the Profit and Loss Account. ([Link]. Hons Delhi)

Solution:

Process A Account

Particulars Units Units

Rarticulars
To Units Introduced 500
10,000 10,00,000 By Normal loss 1,000
To Sundry materials 200
10,000 By Abnormalloss* 22,000
To Labour
30,000 By Process B A/c (T.) 6,200 6,82,000
To Direct
expenses 6,000 By Profit & Loss A/c 3,,100 3,41,000
(Cost of goods sold)

10,46,000 10,000 10,46,000

10,000

Cost per unit

10,46,00
= TTnits -1,000
10,000 - 500
10,45,000

9,500
=7110 0
 8.24 Cost
Acco

Cost of abnomal loss

-
200 units@7
@7
110
110
=
=
22,000
T 6,82,000
Transfer to Process B 6,200 units
=3,41,000
Cost of sold 3,100 units @ 7 110
goods

Process B Acount

Particulars
Units Particulars Units

6,2006,82,000 By Normal
loss 930
To Process A A/c
To Sundry materials 15,000 Byy
Process C A/c* ,700
& Loss 4,0

To Labour
To Direct expenses
80,000
18,150
By
|
Profit

(Cost of goods sold)

A/c 2,700
4
To Abnomal gain* 130 19,500
6,330 8,14,650 6,330
B,14

Cost per unit = 7,95,150 -4,650

150
6.200-930units
Cost of abnormal gain 130 units @ 7 150 =19,500
Transfer to Process C 2,700 units @ 150 =F 4,05,000
Cost of goods sold 2,700 units @ 7 150 ={ 4,50,000
Process C Account

ParticularTs Units
Particular Units
To Process B A/c
2,700 4,05,000| ByNomal loss 540 54
To Sundry materials
5,000 By Abnormal loss* 60 13,31
To Labour
65,000 By Profit & Loss A/c 2,100 4,83,01
To Direct expenses
27,200 (Cost of goods sold)

2,700 5,02,200 910 bs A caspo9 2,700 5,02,2

S T5,02,200 - 5,400
Cost per =
unit
2,700 -540 units =230 ec29301g s91139 to zeol Bton
Cost =60 units
of abnormal loss @ 230 =7 13,800
Cost of goods sold
=2,100 units@ F -
230 R 4,83,000

Abnormal Loss Account

aser 9 e
Particulars
Units
Particulars Units
To Process A
A/c 200 22,000
To Process C A/c
By Sale of
Process As
loss 200
60 13,800 By Sale of
Process C's loss 60 600
By Profit & Loss A/c
4,800
260 35,800
260 35,800

Abnormal Gain Account

Particulars
Units
To Normal Particulars Units
loss
(shortfall) 130 650
To Profit and Loss A/c ByProcess B 130 19,500
18,850
130 19,500
130 19,500
Process Costing 8.25

Profit&LossAccount

Particulars Units Units

Particulars
To Process A A/c 3,100 3,41,000 As
By Sales (Proces output
@120) 3,100 3,72,000

To Process BA/c 2,700 4,05,000 By Sales (Process B's

output @ 7 165) 2,700 4,45,500

To Process CA/c 2,100 4,83,000 By Sales (Process C's

output @ 250) 2,100 5,25,000

To Managementexpenses 80,000 By Abnormalgain A/c 18,850

To Selling expenses 50,000 By Net loss 32,450

To Abnomal loss A/c 34,800

7,900 13,93,800 7,900 13,93,800

Note. A similar problem has been an altemative method in lustration 8.5

solved by

EXAMINATION QUESTIONS
Objective Type Questions
True or False ? Give reason is brief.
1. In process costing, normal process loss is transferred to costing P& L Account.
2. Abnormal gain appears on the credit side of the Process Account.

3. Normal process loss does not increase the per unit cost of production.
4. Process costing cannot be used in those companies which are using marginal costing system.
5. Process costing is not suitable for industries manufacturing televisions and washing machines.
Ans. 1. F 2. F 3. F 4.F 5. T
bes
Theoretical Questions
1. What are the main features of process costing ? ([Link]. Calicut)

2. Distinguish betweenjob costing and process costing. ([Link]. Delhi)

3. Explain normal and abnormal wastage and state how they should be dealt with in process cost
accounts. (B. Com. S. V. Univ.)
4. State the characteristics and principles of process costing.
5. Write a short note on abnormal gain in process costing. ([Link]. Delhi)
6. Define normal loss, abnormal loss and abnormal gain. How these are treated in cost accounts?

([Link]. Delhi)

Practical Problemns
1. Prepare relevant accounts in the ledger of Chand & Co. Ltd. from the following

Process I Process II

Indirect material 10,000 13,000

Direct labour 10,000 13,100
Production overheads 20,000t 10,000