Question

Question 2

Tame Food Delights Limited produces cat food for the retail market. The production process

involves two stages: mixing and baking. Manufacturing costs comprise of materials, which are

added at the start of the process, and conversion costs (labour and overheads), which are

incurred evenly throughout production. The following details relate to the mixing process for

the month of May:

Degree of completion                        Cost ($)

Opening WIP (39,000 kgs)

- Materials                                                                   100%                                       67,350

- Conversion costs                                                      60%                                         12,045

Materials input and Costs incurred

- Materials (630,000 kgs)                                                                                           837,900

- Conversion costs                                                                                                      396,240

Normal spoilage 5% of materials input

Output 615,000 kgs

Closing WIP (22,500 kgs)

- Materials                                                                   100%

- Conversion costs                                                      80%

Required:

1. Briefly outline the circumstances where process costing may be suitable as a method of valuing production.

                                                                                                                       

(b) For the month of May prepare the mixing process account using:

(i) The first in first out (FIFO) method of valuing inventory.                       

(ii) The weighted average (WA) method of valuing inventory.                    

In relation to process costing, give TWO reasons why the weighted average method valuing inventory may be preferable to the FIFO method

Answer 1

Process costing is a method of costing where cost is assigned to different processes to identify the cost related to different processes and evaluate accordingly.

a) The circumstances where process costing is suitable are as follows :-

• When the production function is divided into different processes, cost centers and departments and each product is process through 2 or more processes or departments.
• When the product produced is homogeneous nature and specific allocation of cost is not possible.
• When output of one process becomes the input for another process.
• When each process is important for the final output and adds value to the product.

b) (i) FIFO Method

Process Account - FIFO Method
Particular	Qty	Amount	Particular	Qty	Amount
To Opening WIP	39000	79395	By Normal Loss (630000*5%)	31500	0
Material - 67350			By Finished Goods (WN 3)	615000	1270335
Conversion Cost - 12045			Material - 873750
			Conversion Cost - 396585
To Production Cost	630000	1234140	By Closing WIP ( WN 4)	22500	43200
Material (630000 Kgs) - 837900			Material - 31500
Conversion Cost - 396240			Conversion Cost - 11700
Total	669000	1313535	Total	669000	1313535

Working Note - 1
Calculation of Equivalent Production
Particular		Material	Conversion Cost
Opening WIP	39000	0%	0	40%	15600
Production during the year ( 630000-5%)
Completed (630000-5%-22500) - 576000	576000	100%	576000	100%	576000
Uncompleted - 22500	22500	100%	22500	80%	18000
Total Equivalent Production ( Qty)			598500		609600

Working Note - 2
Calculation of Cost per unit	Material	Conversion Cost
Total Cost	837900	396240
Equivalent Production	598500	609600
Cost per Unit	1.40	0.65

Working Note - 3
Calculation of Cost of Finished Goods	Material	Conversion Cost
	Qty	Per unit	Total	Qty	Per unit	Total
Opening WIP - Opening Cost	39000	-	67350	23400	-	12045
Opening WIP - during the year cost				15600	0.65	10140
Subtotal	39000		67350	39000		22185
Produced during the year	576000	1.40	806400	576000	0.65	374400
Total	654000		873750			396585

Working Note - 4
Calculation of Cost of WIP
Produced during the year	Qty	Completion %	Rate p/u	Total
Material	22500	100%	1.4	31500
Conversion Cost	22500	80%	0.65	11700
Total				43200

(ii) Weighted Average Method

Process Account - Weighted Average Method
Particular	Qty	Amount	Particular	Qty	Amount
To Opening WIP	39000	79395	By Normal Loss (630000*5%)	31500	0
Material - 67350			By Finished Goods (WN 3)	615000	1269975
Conversion Cost - 12045			Material - 873300
			Conversion Cost - 396675
To Production Cost	630000	1234140	By Closing WIP ( WN 4)	22500	43560
Material (630000 Kgs) - 837900			Material - 31950
Conversion Cost - 396240			Conversion Cost - 11610
Total	669000	1313535	Total	669000	1313535

Working Note - 1
Calculation of Equivalent Production
Particular	Qty	Material	Conversion Cost
Opening WIP	39000	100%	39000	100%	39000
Production during the year ( 630000-5%)
Completed (630000-5%-22500) - 576000	576000	100%	576000	100%	576000
Uncompleted - 22500	22500	100%	22500	80%	18000
Total Equivalent Production			637500		633000

Working Note - 2
Calculation of Cost per unit	Material	Conversion Cost
Opening Cost	67350	12045
During the year Cost	837900	396240
Total Cost	905250	408285
Equivalent Production	637500	633000
Cost per Unit	1.420	0.645

Working Note - 3
Calculation of Cost of Finished Goods	Material	Conversion Cost
	Qty	Per unit	Total	Qty	Per unit	Total
Opening WIP	39000	1.420	55380	39000	0.645	25155
Produced during the year	576000	1.42	817920	576000	0.645	371520
Total	615000		873300			396675

Working Note - 4
Calculation of Cost of WIP
Produced during the year	Qty	Completion %	Rate p/u	Total
Material	22500	100%	1.420	31950
Conversion Cost	22500	80%	0.645	11610
Total				43560

Weighted average method has its own advantaged\s which makes it more preferable than FIFO, such as -

• It does not requires the one to one corelation of goods produced and goods sold, which is practicallly expensive in case of homogeneous goods.
• Weighted average coting method avreage out the effect of inflation whereas FIFO method will reflect high profits during inflation and low profits during deflation.