The Hindu Business Line : Costing through three processes

THE production in a manufacturing company passes through three distinct processes, I, II and III. The output of each process is transferred to the next process and the output of process III is transferred to finished goods stock. The normal wastage in each process and the realisable value of the same are given in Table 8.

The details of cost data and output for a month are as shown in Table 9.

Process I was fed with 40,000 units of input costing Rs 3,20,000. There were no opening or closing work-in-progress.

Prepare the process accounts for the month.

The Process I A/c is given in Table 10.

Cost per unit = total cost - value of normal scrap / input quantity - normal quantity

= 5,60,000 - 1,400 / 40,000 - 2000 = 5,58,600 / 3,8000 = Rs 14.70 per unit

This rate is applied to output. 38,000 x 14.70 = Rs 5,58,600

The Process II A/c is presented in Table 11.

Cost per unit = 6,98,600 - 2,128 / 38,000 - 2,660 = Rs 19.707753

This rate is applied to output and abnormal loss.

Abnormal loss = 740 x 19.707753 = Rs 14,584

Output = 34,600 x 19.707753 = Rs 6,81,888

Process III A/c is shown in Table 12.

Cost per unit = 7,09,888 - 3,460 / 34,600 - 3,460 = Rs 25.896852 per unit

This rate is applied to output and abnormal gain.

Output = 32,000 x 25.896852 = Rs 8,28,699

Abnormal gain = 860 x 25.896852 = Rs 22,271

Note: A similar problem was asked in the June 1996 ICWA (Inter) examination.

Contribution analysis

A COMPANY manufactures and sells two standard products X and Y using the same raw material, labour and identical machines. Further particulars are given in Table 13.

Labour and materials are available according to requirements. But machine capacity cannot be increased immediately and the available capacity has been fully utilised by the current production plan.

Required: Current contribution analysis; profit currently earned by the company; alternative production plan, if any, more profitable to the company; and profit expected to be earned under the suggested plan.

i) The current contribution analysis is presented in Table 14.

ii) The profit currently earned by the company is shown in Table 15.

iii) The current machine capacity utilisation is as follows:

Product X: 15,000 x 0.5 = 7,500 machine hours

Product Y: 12,000 x 0.75 = 9,000 machine hours

Total machine hours (fully utilised) = 16,500

There are two key factors, that is, one is machine capacity and the other, market demand. Product X gives higher contribution per machine hour (first rank). Hence, product X is to be manufactured fully to the extent of maximum demand of 18,000 units and balance machine hours are to be utilised for manufacturing product Y. Then, the alternative production plan will be as follows:

Product X: 18,000 x 0.5 = 9,000 machine hours

Product Y: 10,000 x 0.75 = 7,500 machine hours (balance)

Total = 16,500 machine hours

iv) The profit expected to be earned is shown in Table 16.

Note: There will be increase in profit by Rs 10,000 because of the alternative production plan as suggested.

Flexible budgeting

A NEWLY established manufacturing company has an installed capacity to produce 1,00,000 units of a consumer product annually. However, its practical capacity is only 90 per cent. The actual capacity utilisation may be substantially lower, as the firm is new to the market and demand is uncertain. The budget (Table 17) has been prepared for 90 per cent capacity utilisation:

Prepare budgets at 60 per cent, 70 per cent and 80 per cent levels of capacity utilisation giving clearly the unit variable cost, the unit fixed cost and the total costs under various heads at all the above levels.

The budgets at 60, 70 and 80 per cent levels of capacity are shown in Table 18.

(Suggested answers to the December 2003 ICWA (Stage 1) paper on cost and management accounting.)

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