Module-3

11/2/2025

Marginal Costing
Nature and Scope- Applications-Break even charts and Point, Decision-
making (all types with full problems) Differential Cost Analysis,
Advantages and Disadvantages of Marginal Costing Process Costing:
introduction to Process Costing, Cost accumulation in process costing
(Problems).

SUJATHA S.L
Assistant Professor
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

Marginal Costing / variable cost

Marginal Cost is an additional cost of producing an additional unit of product. It is the total of all
variable cost. It is composed of all direct costs & variable cost.

Marginal Cost is defined by CIMA as “the amount at any given volume of output by which
aggregate costs are changed if the volume of output is increased or decreased by one unit.”
Marginal Cost also means Prime Cost plus Variable Overheads.

Marginal costing is “the ascertainment of marginal costs and of the effect on profit of changes in
volume or type of output by differentiating between fixed costs and variable costs.

Features of Marginal Costing:

The main features of Marginal Costing may be summed up as follows:

1. Appropriate and accurate division of total cost into fixed and variable by picking out
variable portion of semi variable costs also.
2. Valuation of stocks such as finished goods, work-in-progress is valued at variable cost only.
3. The fixed costs are written off soon after they are incurred and do not find place in product
cost or inventories
4. Prices are based on Marginal Cost and Marginal Contribution.
5. It combines the techniques of cost recording and cost reporting.

Advantages or Merits or Applications of Marginal Costing:

1. Marginal costing system is simple to operate than absorption costing because they do not
involve the problems of overhead apportionment and recovery.
2. Marginal costing avoids, the difficulties of having to explain the purpose and basis of
overhead absorption to management that accompany absorption costing. Fluctuations in
profit are easier to explain because they result from cost volume interactions and not from
changes in inventory valuation.
3. It is easier to make decisions on the basis of marginal cost presentations, e.g., marginal
costing shows which products are making a contribution and which are failing to cover their
avoidable (i.e., variable) costs. Under absorption costing the relevant information is difficult

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

to gather, and there is the added danger that management may be misled by reliance on unit
costs that contain an element of fixed cost.
4. Marginal costing is essentially useful to management as a technique in cost analysis and
cost presentation. It enables the presentation of data in a manner useful to different levels of
management for the purpose of controlling costs. Therefore, it is an important technique in
cost control.
5. Future profit planning of the business enterprises can well be carried out by marginal
costing. The contribution ratio and marginal cost ratios are very useful to ascertain the
changes in selling price, variable cost etc. Thus, marginal costing is greatly helpful in profit
planning.
6. When a business concern consists of several units and produces several products and
evaluation of performance of such components can well be made with the help of marginal
costing.
7. It is helpful in forecasting.
8. When there are different products, the determination of number of units of each product,
called Optimum Product Mix, is made with the help of marginal costing.
9. Similarly, optimum sales mix i.e., sales of each and every product to get maximum profit can
also be determined with the help of marginal costing.
10. Apart from the above, numerous managerial decisions can be taken with the help of marginal
costing, some of which, may be as follows: -
(a) Make or buy decisions,
(b) Exploring foreign markets,
(c) Accept an order or not,
(d) Determination of selling price in different conditions,
(e) Replace one product with some other product,
(f) Optimum utilization of labour or machine hours,
(g) Evaluation of alternative choices,
(h) Subcontract some of the production processes or not,
(i) Expand the business or not,
(j) Diversification,
(k) Shutdown or continue,
Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

Limitations of Marginal Costing

1. The separation of costs into fixed and variable present’s technical difficulties and no
variable cost is completely variable nor is a fixed cost completely fixed.
2. Under the marginal cost system, stock of finished goods and work-in-progress are
understated. After all, fixed costs are incurred in order to manufacture products and as
such, these should form a part of the cost of the products. It is, therefore, not correct to
eliminate fixed costs from finished stock and work-in-progress.
3. The exclusion of fixed overhead from the inventories affects the Profit and Loss Account
and produces an unrealistic and conservative Balance Sheet, unless adjustments are made
in the financial accounts at the end of the period.
4. In marginal costing system, marginal contribution and profits increase or decrease with
changes in sales volume. Where sales are seasonal, profits fluctuate from period to
period. Monthly operating statements under the marginal costing system will not,
therefore, be as realistic or useful as in absorption costing.
5. During the earlier stages of a period of recession, the low profits or increase in losses, as
revealed in a magnified way in the marginal costs statements, may unduly create panic
and compel the management to take action that may lead to further depression of the
market.
6. Marginal costing does not give full information. For example, increased production and
sales may be due to extensive use of existing equipment (by working overtime or in
shifts), or by an expansion of the resources, or by the replacement of labour force by
machines. The marginal contribution fails to reveal these.
7. Though for short-term assessment of profitability marginal costs may be useful, long
term profit is correctly determined on full costs basis only.
8. Although marginal costing eliminates the difficulties involved in the apportionment and
under and over-absorption of fixed overhead, the problem still remains so far as the
variable overhead is concerned.
9. With increased automation and technological developments, the impact on fixed costs on
products is much more than that of variable costs. A system which ignores fixed costs is
therefore, less effective because a major portion of the cost, such as not taken care of.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

10. Marginal costing does not provide any standard for the evaluation of performance. A
system of budgetary control and standard costing provides more effective control than
that obtained by marginal costing.

Absorption Costing
Absorption costing refers to a method of costing to account for all the costs of manufacturing.
The management uses this method to absorb the costs incurred on a product. The costs
include direct costs and indirect costs.

Difference between Absorption Costing & Marginal Costing

Absorption Costing Marginal Costing

Both fixed and variable costs are considered Only variable costs are considered for
1
for product costing and inventory valuation. product costing and inventory valuation.
Fixed costs are charged to the cost of
production. Each product bears a reasonable Fixed costs are regarded as period costs.
2 share of fixed cost and thus the profitability of The profitability of different products is
a product is influenced by the apportionment judged by their P/V ratio.
of fixed costs.
Cost data are presented in conventional
pattern. Net profit of each product is Cost data are presented to highlight the
3
determined after subtracting fixed cost along total contribution of each product.
with their variable cost.
The difference in the magnitude of opening
The difference in the magnitude of
stock and closing stock affects the unit cost of
4 opening stock and closing stock does not
production due to the impact of related fixed
affect the unit cost of production
cost.
In case of absorption costing the cost per unit In case of marginal costing the cost per
reduces, as the production increases as it is unit remains the same, irrespective of
5
fixed cost which reduces, whereas, the the production as it is valued at variable
variable cost remains the same per unit. cost

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

Tools and Techniques of Marginal Costing

1. Contribution: In common parlance, contribution is the reward for the efforts of the
entrepreneur or owner of a business concern. From this, one can get in his mind that
contribution means profit. But it is not so. Technically or in Costing terminology,
contribution means not only profit but also fixed cost. That is why; it is defined as the
amount recovered towards fixed cost and profit.
i. Contribution = Sales -Variable Cost
ii. Contribution = Profit + Fixed Cost
2. Profit -Volume Ratio (PV Ratio)
It is also called as Contribution to Sales ratio. It is used to measure the profitability of the
company. Contribution is the excess of sales over variable cost.

Sales − Variable Cost

PV Ratio = { } ∗ 100
Sales

Contribution
PV Ratio = { } ∗ 100
Sales

Changes in Profit
PV Ratio = { } ∗ 100
Changes in Sales

Changes in Profit
PV Ratio = { } ∗ 100
Margin of Safety (MOS

3. Variable Cost (VC)

Variable Cost (VC) =Sales * (1-PV Ratio)

Variable Cost (VC) =Sales – Contribution

4. Fixed Cost

Fixed Cost =Sales*PV Ratio -Profit

Fixed Cost = Profit -Contribution

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

5. Break Even Point (BEP)

The break-even point is the point at which total cost and total revenue are equal,
meaning there is no loss or gain

5.1 Break Even Point (BEP) in Units

Fixed Cost
BEP(𝑢𝑛𝑖𝑡𝑠) =
Selling price per unit − Variable cost per unit

Fixed Cost
BEP(𝑢𝑛𝑖𝑡𝑠) =
Contribution price per unit

5.2 Break Even Point (BEP) in Volume (₹)

Fixed Cost
BEP(₹) =
PV Ratio
Fixed Cost
BEP(₹) = { } ∗ Selling price per unit
Selling price per unit − Variable cost per unit

Fixed Cost
BEP(₹) =
1 − Variable cost per unit
{ }
Selling price per unit

6. Sales at desired profit

 In units
Fixed Cost + Desired Profit
Sales at DP (𝑢𝑛𝑖𝑡𝑠) =
Selling price per unit − Variable cost per unit
 In Rupees
Fixed Cost + Desired Profit
Sales at DP (𝑅𝑢𝑝𝑒𝑒𝑠) =
PV Ratio

7. Margin of Safety (MOS)

MOS = Actual Sales – Break Even Sales
Profit
MOS =
PV Ratio

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

PROBLEMS

1. Calculate BEP in units & volume selling price per unit ₹20, variable cost per unit ₹12 per
unit & fixed cost ₹1,00,000.
2. Company produces & sold 10,000 units for ₹1,00,000, VC/unit ₹7.5 & fixed cost ₹2,00,00.
Compute PV Ratio, BEP in units & volume.
3. Following information are given: Sales ₹2,00,000, VC ₹1,20,000 & fixed cost ₹30,000.
Calculate
i. BEP in units & volume
ii. New BEP if selling price is reduced by 10%
iii. New BEP if VC is increased by 10%
iv. New BEP if FC is increased by 10%
4. Fixed cost ₹4,00,000, SP/unit ₹20, VC/unit ₹12.
i. Calculate BEP in units & rupees & estimate the impact of the following on BEP
 10% increase in fixed cost
 10% increase in variable cost
 10% decrease in fixed cost
 10% increase in fixed cost but 10% decrease in variable cost
ii. Indicate the number of units to be sold to earn a profit of ₹50,000
iii. Indicate the profit should be made to earn a profit of ₹1,00,000
iv. What will be the selling price per unit if BEP is brought down to 25000 units?

5. From the following data calculate

i. BEP in units & rupees
ii. Number of units that must sold to earn a profit of ₹1,20,000
iii. How many units have to be sold to earn s net income of 15% of sales
SP ₹40 per unit, VC ₹22 per unit, variable selling cost per unit ₹3, fixed
selling overhead ₹1,60,000 & fixed factory overhead ₹20,000

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

6. Fixed cost ₹1,00,000, variable cost ₹10 per unit. Estimated sales during the year ₹2,00,000 at
10000 units. Calculate
i. BEP in units & rupees
ii. PV Ratio
iii. Margin of Safety
iv. What will be the selling price per unit if BEP brought down to 2500 units?
v. What will be the sales to earn a profit earned 10% of sales?
vi. Indicate the number of units to be sold to earn a profit of 40,000 units
vii. Indicate the profit should be made to earn the profit of ₹50,000.

7. Sales & profit figures for 2022-23 are given below

Year Sales Profit

2022 ₹1,50,000 ₹20,000
2023 ₹1,70,000 ₹25,000
Calculate: -
i. PV Ratio
ii. BEP in rupees
iii. Sales required to earn a profit of ₹40,000
iv. MOS at a profit of ₹50,000
v. What should be the profit when the sales of ₹2,50,000

8. Assume the cost structure & selling price remains the same in period I & II. Find out
i. PV ratio
ii. BEP
iii. Profit when sales of ₹1,00,000
iv. Sales required to earn a profit of ₹20,000
v. MOS in period II

Year Sales Profit

I ₹1,20,000 ₹9,000
II ₹1,40,000 ₹13,000

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

9. A company has annual fixed cost of ₹14,00,000. In 2022 sales amounted to ₹60,00,000 as
compared with ₹45,00,000 in 2021 & profit in 2022 was ₹4,20,000 higher than 2021
i. At what level of sales does the company break even
ii. Determine the profit or loss on forecast sales value of ₹80,00,000

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

Decision Making Problems

 Product Mix Decision
1. From the following particulars find the most profitable product mix & prepare a statement of
profitability of that product mix
Particulars Product A Product B Product C
Units budgeted to be produced & sold 1800 3000 1200
Selling price per unit (₹) 60 55 50
Direct material required per unit (Kg) 5 3 4
Direct labour per unit (hrs) 4 3 2
Variable Overhead (₹) 7 13 8
Fixed Overhead (₹) 10 10 10
Cost of direct material per kg (₹) 4 4 4
Direct labour hour per rate (₹) 2 2 2
Maximum possible units of sale 4000 5000 1500
All the three products are produced from the same direct material using the same type
of machines & labour. Direct labour which is key factor is limited to 18600 hours.

2. A company manufactures three products. The budgeted quantity, selling price & unit costs
are as under
Particulars A B C
Raw materials (at ₹20 per kg) 80 40 20
Direct wages (at ₹5 per hour) 5 15 10
Variable overheads 10 30 20
Fixed overheads 9 22 18
Budgeted production (in units) 6400 3200 2400
Selling price per unit (₹) 140 120 90
Required: -
(i) Present a statement of budgeted profit & set optimal product mix
(ii) Determine the profit if the supply of raw materials is restricted to 18400 kg
(iii) Determine the profit if the supply of labour hour is limited to 19,000 hours.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

3. Super India Ltd., is producing three products X, Y & Z. the data for the three products is
given below

X Y Z
Particulars
5000 units 2000 units 3000 units
Maximum capacity direct material
₹40 ₹10 ₹30
@₹10 per kg
Other variable cost ₹36 ₹25 ₹10
Selling price ₹100 ₹50 ₹60
Fixed costs (unavoidable) ₹20,000 ₹15,000 ₹10,000
Calculate the best product mix in each of the following 3 independent cases: -
(i) Total availability of raw material is limited to 18,000 kgs
(ii) Under a trade agreement the firm cannot produce more than 7,500 units of the three
products taken together
(iii) Total sales value of the three products cannot exceed ₹6,50,000

4. SLS Ltd., is manufacturing 3 household products P, Q & R selling them in a competitive

market. Details of current demand, selling price & cost structure are given below
Particulars P Q R
Expected demand (units) 10000 12000 20000
Selling price per unit (₹) 20 16 10
Variable cost per unit (₹)
Direct materials (₹20/kg) 6 4 2
Direct Labour (₹15/hour) 3 3 1.5
Variable overheads 2 1 1
Fixed cost per unit (₹) 5 4 2
The company is frequently affected by acute scarcity of raw material & high labour
turnover. During the next period, it is expected to have one of the following situations.
(a) Raw material available will be only 12100 kgs
(b) Direct labour hours available will be only 5000 hours
(c) It may be possible to increase sales of any one product by 25% without any additional
fixed costs but by spending ₹20,000 on advertisement. There will be no shortage of
material or labour.
Suggest the best production plan in each case & the resultant profit that the company would
earn according to your suggestion.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

5. A manufacturing company produces & sells 3 products P, Q & R. it has an available machine
hour capacity of one lakh hours, interchangeable among the 3 products. Presently, the
company produces & sells 20,000 units of P & 15000 each of Q & R respectively. The unit
selling price of the three products are ₹25, ₹32 & ₹42 for P, Q & R respectively. With this
price structure & the aforesaid sales mix, the company is incurring loss. The total
expenditure, exclusive of fixed charges (presently ₹ 5 per unit) is ₹13.75 lakhs. The unit cost
ratio amongst the products P, Q & R is 4:6:7. Since the company desires to improve its
profitability without charging its cost & price structures, it has been considering the
following 3 mixes so as to be within its total available capacity
Mix -I Mix -II Mix -III
Products
(in units) (in units) (in units)
P 25,000 20,000 30,000
Q 15,000 12,000 5,000
R 10,000 18,000 15,000

You are required to compute the quantum of loss now incurred & advise the most
profitable mix which could be considered by the company.
 Replacement of a product /Sales mix
6. A multi-product company provides the following costs & output data for the last year
Products
Particulars
X Y Z
Sales mix 40% 35% 25%
Selling price (₹) 20 25 30
Variable cost per unit 10 15 18
Total fixed cost ₹1,50,000
Total sales ₹5,00,000
Calculate profit & BEP for present sales mix.
The company proposes to replace product Z by product S. Estimated cost & output data are
Products
Particulars
X Y S
Sales mix 50% 30% 20%
Selling price (₹) 20 25 28
Variable cost per unit 10 15 14
Total fixed cost ₹1,50,000
Total sales ₹5,00,000
Analyse the proposed change & suggest what decision the company should take.
Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

 Selling Price Decision

7. The accounts of a company are expected to reveal a profit of ₹14,00,000 after charging
fixed costs of ₹10,00,000 for the year ended 31st December, 2024. The selling price of the
product is ₹50 per unit & variable cost per unit is ₹20.
Market investigations suggest the following responses to the price changes:
Alternatives Selling price reduced by Quantity sold increased by
I 5% 10%
II 7% 20%
III 10% 25%
Evaluate these alternatives & state which of the alternatives, on profitability consideration,
should be adopted for the forthcoming year.
 Export Order
8. Due to industrial depression, a plant is running at present 50% of its capacity. The
following details are available
Cost of production per unit
Direct material ₹2
Direct labour ₹1
Variable overhead ₹3
Fixed overhead ₹2
Production per month 20,000 units
Total cost of production ₹1,60,000
Sale price ₹1,40,000
Loss ₹20,000
An exporter offers to buy 5000 units per month at the rate of ₹6.50 per unit & the company
hesitates to accept the offer for fear of increasing it already large operating losses.
Advice whether the company should accept or decline this offer.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

 Decision about mechanism

9. Management of manufacturing unit is considering extensive modernization of the factory
through progressive mechanization which would result in improve productivity & reduced
strength. Through negotiations with the union, it was agreed that for every 1% increase in
productivity, workers would be paid 0.5% incentive wages. It was also agreed that through
voluntary retirement the staff strength would be reduced to 300 from the present level of 400.
The following further comparative data available before & after the proposed mechanization:
Before After
Mechanization Mechanization
No. of articles produced per month 50,000 48,000
Fringe benefits 50% of wages
Wages paid per month ₹4,00,000
Sales per month ₹24,00,000
PV Ratio 25%
Based on the above data, you are required to work out the annual financial
implications of the proposal.
 Discontinue of a product line
10. Pee kay Ltd., is engaged in 3 district lines of production. Their production cost per
unit & selling price are as follows
Particulars A B C
Production (units) 3000 2000 5000
Material cost (₹) 18 26 30
Wages (₹) 7 9 10
Variable Overhead (₹) 2 3 3
Fixed Overhead (₹) 5 8 9
Total Cost 32 46 52
Selling price 40 60 61
Profit 8 14 9
The management wants to discontinue one line & give you the assurance that production in two
other lines shall rise by 50%. They intend to discontinue the line which produces articles “A” as
it less profitable
a) Do you agree to the scheme in principle? If so, do you think that the line
which produces “A” should be discontinued.
b) Offer your comments & show the necessary statements to support your
decision.
Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

 Add (OR) drop product

11. A company is considering dropping product B from its line because accounting statements
shows that product B is being sold at a loss
Income Statement
Particulars Product -A Product -B Product -C Total
Sales Revenue 50,000 7,500 12,500 70,000
Direct Material 7,500 1,000 1,500 10,000
Direct Labour 15,000 2,000 2,500 19,500
Indirect Manufacturing Cost
7,500 1,000 1,250 9,750
(50% of direct Labour)
Total Cost 30,000 4,000 5,250 9,750
Gross Margin on Sales 20,000 3,500 7,250 39,250
Selling & administrative
12,500 4,500 4,000 21,000
expenses
Net income (loss) 7,500 -1,000 3,250 9,750

Additional Information
 Factory overhead cost are made up of fixed costs ₹5,850 variable costs of ₹3,900.
Variable costs by products are: product A-₹3,000, B-₹400 & product C- ₹500
 Fixed costs & expenses will not be changed if product B is eliminated
 Variable selling & administrative expenses to the extent of ₹11,000 can be traced to the
product as follows: A-₹7,500, B-₹1,500 & C-₹2,000
 Fixed selling & administrative expenses are ₹10,000
What is your decision for dropping product B?

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

 Make or buy
12. Auto parts ltd has an annual production of 90,000 units for a motor component. The
component’s cost structure is as follows
Particulars Amount
Materials ₹270 per unit
Labour (25% fixed) ₹180 per unit
Expenses: -
Variable ₹90 per unit
Fixed ₹135 per unit
Total ₹675 per unit

(a) The purchase manager has an offer from a supplier who is willing to supply the
component at ₹540. should the component be purchased & production stopped?
(b) Assume the resources now used for this component’s manufacture are to be used to
produce another new product for which the selling price is ₹485.
In the letter case the material price will be ₹200 per unit. 90,000 units of this product can
be produced on the same cost bases as above the labour & expenses. Discuss whether it
would be advisable to divert the resources to manufacture the new products, on the
footing that the component presently being produced, be purchased from the market.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

PROCESS COSTING
Process costing is that aspect of operation costing which is used to ascertain the cost of
the product at each process or stage of manufacture. This method of accounting used in
industries where the process of manufacture is divided into two or more processes. The
objective is to find out the total cost of the process and the unit cost of the process for
each and every process. Usually the industries where process costing used are textile, oil
industries, cement, pharmaceutical etc.
 Features/Characteristics of Process Costing
a) Production is done having a continuous flow of products having a continuous flow
of identical products except where plant and machinery is shut down for repairs etc.
b) Clearly defined process cost centers and the accumulation of all costs by the cost
centers.
c) The maintenance of accurate records of units and part units produced and cost
incurred by each process.
d) The finished product of one process becomes the raw material of the next process or
operation and so on until the final product is obtained.
e) Avoidable and unavoidable losses usually arise at different stages of manufacture
for various reasons.
f) In order to obtain accurate average costs, it is necessary to measure the production at
various stages of manufacture as all the input units may not be converted into
finished goods.
g) Different products with or without by-products are simultaneously produced at one
or more stages or processes of manufacture. The valuation of by-products and
apportionment of joint cost before joint of separation is an important aspect of this
method of costing.
h) Output is uniform and all units are exactly identical during one or more processes.
So, the cost per unit of production can be ascertained only by averaging the
expenditure incurred during a particular period

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

 Process Costing verses Job Costing

Job Costing Process Costing
(i) The form of specific order costing which That form of costing which applies where
applies where the work is undertaken to standardised goods are produced and
customer’s special requirements. production is in continuous flow, the
products being homogeneous.
(ii) The job is the cost unit and costs are Costs are collected by process or
collected for each job. department on time basis and divided by
output for a period to get an average cost
per unit.
(iii) Losses are generally not segregated. Normal losses are carefully
predetermined and abnormal losses are
segregated.
(iv) Overheads are allocated and apportioned Units pass through the same processes.
to cost centers then absorbed by jobs, in Overheads are apportioned to processes
proportion to the time taken. on some suitable basis, sometimes, pre-
determined rates may be used
(v) Joint products / By-products do not usually Joint products/By-products do arise and
arise in jobbing work. joint cost apportionment is necessary.
(vi) Standard costing is generally not suitable The standardised nature of products and
for jobbing work. processing methods lends itself to the
adoption of standard costing.
(vii) Work-in-progress valuation is specific and For WIP valuation operating costs have to
is obtained from analysis of outstanding be spread over fully complete output and
jobs. partially complete products using the
concept of equivalent units.
(viii) Each job is separate and independent of Products lose their individual identity as
others. Costs are computed when a job is they are manufactured in a continuous
complete. flow. Costs are calculated at the end of
cost period.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

(ix) There are usually no transfers from one job Transfer of costs from one process to
to another unless there is a surplus work or another is made, as the product moves
excess production. from one process to another.
(x) There may or may not be work-in-progress There is always some work-in-process at
at the beginning or end of the accounting the beginning as well as at the end of the
period. accounting period.
(xi) Proper control is comparatively difficult as Proper control is comparatively easier, as
each product unit is different and the the production is standardised and is more
production is not continuous. stable.
(xii) It requires more forms and details. It requires few forms and less details.

Problems on Process Costing

1. Prepare process cost accounts from the following
Process
Items Total
I II III
Direct Material 4,40,000 3,60,000 60,000 20,000
Direct Wages 80,000 20,000 40,000 20,000
Direct Expenses 1,00,000 60,000 ---- 40,000
Production overhead incurred is ₹1,60,000 & is recovered on 200% of direct wages. Production
during the period was 20,000 units. There was no opening or closing work-in progress.

2. Prepare process accounts & calculate total cost of production from the data given
below
Process
Particulars
X Y Z
Materials 2,250 750 300
Labour 1,200 3,000 900
Direct Expenses
Fuel 300 200 400
Carriage 200 300 100
Works Overhead 1,890 2,580 1,875
The indirect expenses ₹1,275 should be apportioned on the basis of wages.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology
Strategic Cost Management 22MBAFM303

3. From the following figures show the cost of three processes of manufacture. The production
of each process is passed on to the next process immediately on completion.
Process Process Process
A B C
Wages & materials ₹30,400 ₹12,000 ₹29,250
Works Overheads ₹5,600 ₹5,250 ₹6,000
Production in units 36,000 37,500 48,000
Stock on 1st July, 2024 --- 4,000 16,500
Stock on 31st July, 2024 --- 1,000 5,500

4. The finished product of a manufacturing company passes through three processes, viz.,
I, II and III. The normal wastage in each process is 5%, 7% and 10% for the processes I,
II and III respectively (calculated with reference to the number of units fed into each
process). The scrap generated out of wastage has a sale value of 70 paise per unit, 80
paise per unit and Rupee 1 per unit in the process I, II and III respectively. The output of
each process is transferred to the next process and the finished output emerges from the
process III and transferred to stock. There was no stock of work-in-progress in any
process in a particular month. The details of cost data for the month are given below:
Processes
Particulars
I II III
Material Used (₹) 1,20,000 40,000 40,000
Direct Labour cost (₹) 80,000 60,000 60,000
Production expenses (₹) 40,000 40,000 28,000
Output in units (actual) 38,000 34,600 32,000
Process I was fed with 40,000 units of raw input at cost of ₹3,20,000.
Prepare the process accounts.

Sujatha S.L
Department of MBA
Bangalore Institute of Technology