CHAPTER X

PROCESS COSTING
SOLUTIONS TO BUSINESS APPLICATION CASES
Case 1. SAHARA SPORTING GOODS REWORKED UNITS
1.

Direct materials (67 Rs.0.15)

Direct Labour (1 Rs.8)
Overhead (1 Rs.4)
Total cost

Rs.10.05
8.00
4.00
Rs.22.05

2.

Direct materials (67 Rs.0.15)

Direct Labour (1.25 Rs.8)
Overhead (1.25 Rs.4)
Total cost

Rs.10.05
10.00
5.00
Rs.25.05

The rework cost is not attributable to the job, and is not normal, so it should
be assigned to overhead.
3. The price charged is 67 letters Rs.0.50 for a total of Rs.33.50. Note that the
rework is not included in the job cost, so it is not included in the price.
Case 2 MOKSHA COMPANY
1. Molding Department
a. Physical flow schedule:
Units, beginning work in process
Units started in February
Total units to account for

10,000
25,000
35,000

Units completed and transferred out:

Started and completed
From beginning work in process
Units, ending work in process
Total units accounted for

20,000
10,000
5,000
35,000

b. Equivalent units calculation:

Direct
Materials

Conversion
Costs

Units completed
Add: Equivalent units in ending work in process
Total equivalent units

30,000
5,000
35,000

30,000
4,000
34,000

c. Unit cost computation:

Costs charged to the department:
Direct
Materials
Costs in beginning work in process Rs.22,000
35,800
Costs added by department
56,250
Total costs
Rs.78,250

Conversion
Costs
Rs.13,800
103,500
Rs.117,300

Total
Rs.
159,750
Rs.195,550

Unit cost = Unit direct materials cost + Unit conversion costs

= Rs.78,250/35,000 + Rs.117,300/34,000
= Rs.2.2357* + Rs.3.45
= Rs.5.6857
*Rounded
d. and e.
Total costs accounted for:
Cost of goods transferred out (30,000 Rs.5.6857)
Rs.170,571
Costs in ending work in process:
Direct materials (5,000 Rs.2.2357)...................
Conversion costs (4,000 Rs.3.45)....................
Total costs in ending work in process...............
Total costs accounted for.........................................

Rs.11,179*
13,800
24,979
Rs.195,550

*Rounded
Costs to account for:
Beginning work in process.......................................
Costs incurred............................................................
Total costs to account for.........................................
2. Assembly Department
a. Physical flow schedule:
Units, beginning work in process
Units started in February (transferred in)
Total units to account for
Units completed and transferred out:

8,000
30,000
38,000

Rs.35,800
159,750
Rs.195,550

Started and completed

From beginning work in process
Units, ending work in process
Total units accounted for

27,000
8,000
3,000
38,000

b. Equivalent units calculation:

Units completed
Add: Equivalent units in ending
work in process
Total equivalent units

Direct
Materials
35,000

Conversion
Costs
35,000

Transferred
In
35,000

0
35,000

1,500
36,500

3,000
38,000

c. Unit cost calculation:

Costs charged to the department:
Direct
Materials
Costs in beginning work
in process
Rs.
0
62,000
Costs added
39,550
Total costs
Rs.39,550

Conversion
Costs

Transferred
In

Rs.16,800

Rs.45,200

136,500
Rs.153,300

Total
Rs.

170,571
346,621
Rs.215,771 Rs.408,621

Unit cost = Unit direct materials cost + Unit conversion costs +

Unit transferred-in cost
= Rs.39,550/35,000 + Rs.153,300/36,500 + Rs.215,771/38,000
= Rs.1.13 + Rs.4.20 + Rs.5.6782*
= Rs.11.0082
*Rounded
d. and e.
Total costs accounted for:
Units transferred out (35,000 Rs.11.0082).
Costs in ending work in process:
Direct materials........................................ Rs.
0
Conversion costs (1,500 Rs.4.20)........
6,300
Transferred in (3,000 Rs.5.6782).......... 17,035*
Total costs in ending work in process.........
Total costs accounted for..............................
*Rounded

Rs.385,287

23,335
Rs.408,622*

Costs to account for:

Beginning work in process............................
Costs incurred.................................................
Total costs to account for..............................

Rs.62,000
346,621
Rs.408,621*

*Difference due to rounding

*Conversion costs are not broken into direct Labour and overhead
components. Thus, a controlling account for conversion costs is used.
This reflects the practice of some firms which are now combining
overhead and direct Labour costs into one category (often because direct
Labour is a small percentage of total manufacturing costs).
Case 3 HIRAMANI CHANGE IN OUTPUT MEASURE
1.

Hiramani
Mixing Department
Production Report for July
Unit Information
Units to account for:
Units, beginning work in process
Units started
Total units to account for

5
126
131

Units accounted for:

Units completed
Units, ending work in process
Total units accounted for

Physical
Flow
125
6
131

Equivalent Units
Direct
Conversion
Materials
Costs
125
125
6
3
131
128

Cost Information
Costs to account for:
Direct
Materials
Costs in beginning work in process Rs. 120
Costs added by department
3,144
Total costs to account for
Rs. 3,264
Cost per equivalent unit

Rs.24.916*

Conversion
Costs
Total
Rs. 384
Rs.
504
12,288
15,432
Rs.12,672
Rs. 15,936
Rs. 99.00

Rs.123.916

Costs accounted for:

Transferred
Out
Goods transferred out
(125 Rs.123.916)
Ending work in process:
Direct Materials (6 Rs.24.916)
Conversion Costs (3 Rs.99.00)
Total costs accounted for

Ending Work
in Process

Rs.15,490*

Rs.15,490

Total

Rs.15,490*

Rs.149*
149*
297
297
Rs.446 Rs.15,936

*Rounded

2.

HIRAMANI
Tableting Department
Production Report for July
Unit Information
Units to account for:
Units, beginning work in process
Units started
Total units to account for

4,000
200,000
204,000

Units accounted for:

Physical
Flow
198,000

Units completed
Units, ending work in
process
Total units accounted for

6,000
204,000

Equivalent Units
Transferred
Direct Conversion
In
Materials
Costs
198,000
198,000
198,000
6,000
204,000

6,000
204,000

2,400
200,400

Cost Information
Costs to account for:
Transferred Direct
In
Materials
Costs in beginning work
in process
222
Costs added by department
Total costs to account for
Rs.22,156**

Rs.

140 Rs.

Conversion
Costs
32

Rs.

15,490
1,584
4,860
Rs.15,630 Rs. 1,616 Rs.

Total
50

Rs.

21,934
4,910

Cost per equivalent unit

Rs.0.0766* Rs.0.0079*

Rs.0.0245*

Rs.0.1090*

*Rounded
Costs accounted for:
Transferred Ending Work
Out
in Process
Goods transferred out
(198,000 Rs.0.1090)
Ending work in process:
Transferred in (6,000 Rs.0.0766)
Direct materials (6,000 Rs.0.0079)
Conversion costs (2,400 Rs.0.0245)
Total costs accounted for
Rs.22,147**

Rs.21,582

Rs.21,582

Total

Rs.21,582

Rs.460*
46*
59*
Rs.565

460*
46*
59*

*Rounded
**Difference due to rounding

Case 4 Pavapuri Company Physical Units Method, By-Products, and Decision

Making
1.

High-Density
Income Percent
Sales
Rs.5,250100.0%
Less: Joint cost
2,000a
38.1%
Gross margin
Rs.3,250
61.9%
Rs.3,000
33.3%
a

Low-Density
Income Percent
Rs.9,000100.0%
6,000b
66.7%

[375/(375 + 1,125)] Rs.8,000

[1,125/(375 + 1,125)] Rs.8,000

2.

High-Density
Income Percent
Sales
Rs.5,250100.0%
Less: Joint cost
1,500a
28.6%
Gross margin
Rs.3,750
71.4%
Rs.4,500
50.0%

(375/2,000) Rs.8,000
(1,125/2,000) Rs.8,000
c
(500/2,000) Rs.8,000
a

Low-Density
Defective
Income Percent
Income Percent
Rs.9,000100.0% Rs. 25 100.0%
4,500b
50.0%
2,000c

Rs.(1,975)

Previously, defective chips were thrown out and never appeared on the
income statement. The entire joint cost was absorbed by the high-density and
low-density chips. These product lines maintained gross margins well above
the 25 percent limit.
Clearly, the gross margin for the defective chips is negative and doesnt come
close to meeting the Pavapuris requirements. Yet, this result would imply
that Hanu should throw away the chips instead of selling them for Rs.25. This
is a counterintuitive result.
3.

A preferred method is to recognize that the defective chips are a by-product.

One possibility is to treat the Rs.25 revenue from by-product sales as a
reduction in joint cost; then, allocate the remaining joint cost to the main
products as follows:

Sales
Less: Allocated
joint cost
Gross profit
Rs.3,019
a

High-Density
Income Percent
Rs.5,250100.0%
1,994a
38.0%
Rs.3,256
62.0%
33.5%

Low-Density
Income Percent
Rs.9,000100.0%
5,981b

66.5%

(375/1,500) (Rs.8,000 Rs.25)

(1,125/1,500) (Rs.8,000 Rs.25)

An alternative approach is to account for the by-product revenue as Other

income or Revenue from sales of the by-product which would leave the
gross margins for the main products as calculated in Requirement 1.
Case 5 LILAVATI COMPANY
1. Net realizable value of by-product = Rs.2 60,000 = Rs.120,000
Joint cost to be allocated = Rs.2,520,000 Rs.120,000 = Rs.2,400,000
2.
First main product
Second main product
Total
2,400,000

Units
90,000
150,000
240,000

Percent Joint Cost

0.375
Rs.2,400,000
0.625
2,400,000

Allocated
Joint Cost
Rs.900,000
1,500,000
Rs.

Case 6 PADMAPRABHU COMPANY RELATIVE SALES VALUE METHOD

1.
Two Oil
4,546,000
Six Oil
Distillates
Total

Units
300,000

Percent
0.4546*

240,000
120,000
660,000

0.3636
0.1818

Joint Cost
Rs.10,000,000

Allocated
Joint Cost
Rs.

10,000,000
10,000,000

3,636,000
1,818,000
Rs.10,000,000

*Rounded up
2.
Units
Two Oil
300,000
4,000,000
Six Oil
240,000
Distillates 120,000
Total 660,000

Price at
Split-off
Rs.20
30
15

Market Value
at Split-off Percent Joint Cost
Rs.6,000,000 0.4000 Rs.10,000,000
7,200,000 0.4800
1,800,000 0.1200
Rs.15,000,000

10,000,000
10,000,000

Allocated
Joint Cost
Rs.
4,800,000
1,200,000
Rs.10,000,000

Case 7 SUNNY TRAILS NURSERY JOINT COST ALLOCATION

1.

Physical units method:

Red
Drab
Total

2.

Units
150
350
500

Percent
0.30
0.70

Joint Cost
Rs.5,000
5,000

Allocated Joint Cost

Rs.1,500
3,500
Rs.5,000

Market value method:

Red
Drab
Total

Number
of Trees
150
350

Price at
Split-Off
Rs.35
10

Sales Value
at Split-Off
Rs.5,250
3,500
Rs.8,750

Revenue (0.7 500 Rs.35)................................

Less:
Cost of checking seedlings (Rs.5 500)......
Cost of additional Labour..............................
Joint costs.......................................................
Operating income.................................................

Joint
Percent
Cost
60.00% Rs.5,000
40.00%
5,000
100.00%

Allocated
Joint Cost
Rs.3,000
2,000
Rs.5,000

Rs.12,250
Rs.2,500
275
5,000

7,775
Rs.4,475

If Vimalnath undertakes the genetic testing, she will make Rs.4,475 versus the
Rs.3,750 (Rs.8,750 Rs.5,000) she would make selling both red and drab
trees. She should have the trees tested.

Case 8 PADMA CORPORATION

1.

a.
Product
Slices
Sauce
Juice
Feed

Input
270,000
270,000
270,000
270,000

Proportion
0.33
0.30
0.27
0.10

Total
KGS
89,100
81,000
72,900
27,000

KGS
Lost

5,400

Net
KGS
89,100
81,000
67,500*
27,000
264,600

*Net KGS = 72,900 (0.08 Net KGS)

1.08 Net KGS = 72,900
Net KGS = 67,500
b. The net realizable value for each of the three main products is calculated
as follows:
Net
Net
Selling
Separable
Realizable
Product
KGS
Price
Revenue
Costs
Value
Slices
89,100
Rs.0.80
Rs.71,280
Rs.11,280
Rs.60,000
Sauce
81,000
0.55
44,550
8,550
36,000
Juice
67,500
0.40
27,000
3,000
24,000
Rs.142,830
Rs.22,830 Rs.120,000

c. The net realizable value of the by-product is deducted from the production
costs prior to allocation to the main products as follows:
NRV of by-product = By-product revenue Separable costs
= Rs.0.10(270,000 0.10) Rs.700
= Rs.2,000
Costs to be allocated = Joint cost NRV of by-product
= Rs.60,000 Rs.2,000
= Rs.58,000
d. Gross margin for November:
Product
Slices
Sauce
Juice
Total

Net Realizable
Value
Rs.60,000
36,000
24,000
Rs.120,000

Percent
50%
30%
20%
100%

The by-product is not allocated any joint costs.

Joint
Costs
Rs.29,000
17,400
11,600
Rs.58,000

Gross
Margin
Rs.31,000
18,600
12,400
Rs.62,000

2.

Because the gross margin by main product is determined by the arbitrary

allocation of joint product costs, these cost figures and the resulting gross
margin information are of little use for planning and control. The allocation is
made only for purposes of inventory valuation and income determination.