A

PROJECT

ON

“Study of Process Accounting potato chips manufacturing Industry”

In the subject Advanced Cost Accounting

SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR SEMESTER-I OF

MASTER OF COMMERCE

BY

SUNITA KUMARI YADAV

MCOM PART-I AND ROLL NO- 1890

UNDER THE GUIDANCE OF

Mr. GAJANAN WADER

YEAR 2012-2013

DECLARATION BY THE STUDENT

I, SUNITA KUMARI YADAV student of M COM PART-I Roll Number 1890 hereby

declare that the project for the paper Advanced Cost Accounting titled

“Study of Process Accounting potato chips manufacturing Industry”

Submitted by me for semester-I during the academic year 2012-2013, is based on actual work

carried out by me under the guidance and supervision of Mr. Gajanan Wader

I further state that this work is original and not submitted anywhere else for any examination.

Signature of Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on

“Study of Process Accounting potato chips manufacturing Industry”

Submitted by SUNITA KUMARI YADAV student of M COM Part-I.

This project is original to the best of our knowledge and has been accepted for internal

assessment.

Internal Examiner External Examiner Vice Principal

Mr. Gajanan Wader Prof. A.N. Kutty

PILLAI’S COLLEGE OF ARTS, COMMERCE & SCIENCE

Internal assessment: Project 40 Marks

Name of Student Class Division Roll

Number.

First Name: SUNITA KUMARI

M COM

Father’s Name: B.B.S

PART I 1890

Surname: YADAV

Subject: Advanced Cost Accounting

Topic for the Project: “Study of Process Accounting potato chips

manufacturing Industry”

Mark Awarded

Signature

DOCUMENTATION

Internal Examiner

(Out of 10 Marks)

External Examiner

(Out of 10 Marks)

Presentation

(Out of 10 Marks)

Viva and Interaction

(Out of 10 Marks)

TOTAL MARKS (Out of 40)

CONTENTS

SL.NO. PARTICULAR PAGE

NO.

1

Concept of process costing

1

2 Feature of process costing 5

3 Advantage of process costing 6

4 disadvantage of process costing 7

5 Concept of work in process in process accounting 8

6 Methods of process costing in work in process. 9

• Weighted average method 10

• FIFO method 11

7 Comparison between FIFO and weighted average method

of process costing

13

8 Practical aspect of process costing in potato’s chips

manufacturing industry

16

9 Conclusion 20

10 Comment 21

Job order costing - work is broken into

jobs; each job is tracked separately

auto mechanics, carpenters, painters, print

shops, computer repair

Process costing - a large quantity of

identical or similar products are mass

produced

auto assembly plants, hot dog manufacturing,

any large mechanized production facility

Each cost accounting system gathers and reports on the same information. The method used

depends on the needs of the business.

Process Costing traces and accumulates direct costs, and allocates indirect costs, through

a manufacturing process. Costs are assigned to products, usually in a large batch, which

might include an entire month's production. Eventually, costs have to be allocated to

individual units of product.

� The importance of process costing

Costing is an important process that many companies engage in to keep track of where their

money is being spent in the production and distribution processes. Understanding these costs

is the first step in being able to control them. It is very important that a company chooses the

appropriate type of costing system for their product type and industry. One type of costing

system that is used in certain industries is process costing that varies from other types of

costing (such as job costing) in some ways. In Process costing unit costs are more like

averages, the process-costing system requires less bookkeeping than does a job-order costing

system. So, a lot of companies prefer to use process-costing system.

1

� When process costing is applied?

Process costing is appropriate for companies that produce a continuous mass of like units

through series of operations or process. Also, when one order does not affect the production

process and a standardization of the process and product exists. However, if there are

significant differences among the costs of various products, a process costing system would

not provide adequate product-cost information. Costing is generally used in

such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, and

food.

� Costing procedure

For each process an individual process account is prepared. Each process of production is

treated as a distinct cost centre.

• Items on the Debit side of Process A/c.

Each process account is debited with –

a) Cost of materials used in that process.

b) Cost of labour incurred in that process.

c) Direct expenses incurred in that process.

d) Overheads charged to that process on some pre determined.

e) Cost of ratification of normal defectives.

f) Cost of abnormal gain (if any arises in that process)

• Items on the Credit side:

Each process account is credited with

a) Scrap value of Normal Loss (if any) occurs in that process.

b) Cost of Abnormal Loss (if any occurs in that process)

2

� Format of process costing

3

� Flow of cost in process costing system

4

Process Costing Method is applicable where the output results from a sequence of continuous

or repetitive operations or processes and products are identical and cannot be segregated.

Process Costing enables the ascertainment of cost of the product at each process or stage of

manufacture.

The following features may be identified with process costing:

1. The output consists of products which are homogenous.

2. Production is carried on in different stages (each of which is called a process) having a

continuous flow.

3. Production takes place continuously except in cases where the plant arid machinery is shut

down for maintenance etc. Output is uniform and all units are Identical during each process.

It would not be possible to trace the identity of any particular lot of output to any lot of input.

4. The input will pass through two or more processes before it takes the shape of the output.

The output of each process becomes the input for the next process until the final product is

obtained, with the last process giving the final product.

5. The output of a process (except the last) may also be saleable in which case the process

may generate some profit.

6. The input of a process (except the first) may be capable of being acquired from the outside

sources.

7. The output of a process is transferred to the next process generally at cost to the process. It

may also be transferred at market price to enable checking efficiency of operations in

comparison to the market conditions.

8. Normal and abnormal losses may arise in the processes.

5

The primary advantage of process costing is the ease and simplicity of accounting.

Process Costing is a simple and direct method of cost ascertainment that collects the

overall costs from each department and ignores costs related to specific jobs within a

department. This reduces the volume of data, and makes data collection easy and quick.

The analysis is likewise simple and straightforward, and does not require any specialized

skills other than normal accounting skills.

The uses of process costing extend to help establish effective control over the production

process.

Process costing:

• Allows budgeting of uniform output and usage costs as standard costs, making it

possible to track deviations from such standard costs with ease. It becomes possible

to track the inefficiency or discrepancy to a specific process or department without

checking each department or process.

• Facilitates easy and accurate tracking of inventory.

Process costing makes it easy to obtain and predict the average cost of a product, allowing

accurate estimates to customers.

Compared to other costing methods, such as activity based costing, process costing is

inexpensive and does not drain the organization's time and resources.

6

Process costing is ideally suited for homogeneous products, and fails to provide an

accurate estimate of product costs when a single process produces many items or different

versions of a same item. It also remains suitable only for bulk process works and not for

customized orders. Apportionment of joint costs to diverse products may lead to irrational

pricing decisions in such cases.

While process costing enables budgeting standard costs, the costs obtained are historic

and not current, and their use for managerial decision-making remains limited.

Process costing makes it easy to offer estimates or quotations; it deviates from the

standard product, or allowing options for any value-added service. Process costing also

helps to fix standard costs of production, the accumulation of all costs and transferring

them to units as average costs raise the possibility of concealment of inefficiencies in

process. Process costing makes evaluation of the efficiency of individual processes or

productivity of an individual worker difficult.

7

What is Work in Progress?

In accounting, a work in progress (WIP) account is an inventory account that includes goods

that are in the process of being produced but are not yet finished. This account represents the

costs of resources that have been used but not yet turned into completed products. The work

in progress account, also referred to as work in process, is one of the inventory accounts

commonly used to track the flow of costs in a production process. Other common inventory

accounts include raw materials and finished goods. Inventory accounts are reported as current

assets on the company’s balance sheet. These accounts are used for internal analysis as well

as external financial reporting.

Cost of Goods Manufactured Calculation

The cost of goods manufactured in a fiscal period can be computed using cost data relating to

the work in progress account. Simply start with the beginning balance of the work in progress

account, add the costs of resources transferred into the account during the relevant period,

subtract the ending balance of the work in progress account for that period, and you will get

the cost of goods manufactured for that period.

Cost of Goods Manufactured = Beginning Balance + Transfers In – Ending Balance

Flow of Costs

Costs that are represented in the work in progress account include direct materials, direct

labor, and manufacturing overhead. As work proceeds in a production process, costs flow

from the raw materials inventory account, into the work in progress inventory account, and

then into the finished goods account. All of these costs are represented as current assets in

inventory accounts on the balance sheet. Once the finished goods are sold, the associated

costs are transferred to the cost of goods sold account on the income statement.

8

Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

Just-in-Time and WIP

The work in progress account represents a cost to the company. These costs are storage costs

and obsolescence costs. Holding inventory is costly – it takes up storage space and requires

supervisory monitoring. The longer goods are held in storage, the higher the risk of these

goods becoming obsolete and therefore decreasing in value. Just-in-time inventory system

strives to minimize the amount of inventory held in the work in progress account, thereby

reducing the costs associated with holding inventory.

Equivalent Units of Production:

Definition and Explanation of Equivalent Units of Production:

After materials, labor and overhead costs have been accumulated in a department, the

department's output must be determined so that unit cost can be computed. A department

usually has some partially completed units in its ending inventory. It does not seem

reasonable to count these partially completed units as equivalent to fully completed units

when counting the department's output. These partially converted units are mathematically

converted into an equivalent number of fully completed units. In process costing this is done

by using the following formula:

Equivalent Units = Number of partially Completed Units × Percentage of Completion

Equivalent units of production for a period can be calculated in two different ways

1. Weighted Average method

2. First in First Out (FIFO) method

9

Equivalent Units―Weighted Average Method:

Weighted Average method blends together units and costs from the current period with units

and costs from the prior period. In a weighted average method the equivalent units of

production for a department are the number of units transferred to the next department of

finished goods plus the equivalent units in the department's ending work in process inventory.

Example:

Following is the data from Shaping and Milling department, one of the departments at Five

Star Company

Shaping and Milling Department Percent Complete

Units Materials Conversion

Work in process, May 1

Units started in production during May

Units completed in May and transferred to the next

department

Work in Process, May31

200

5,000

4,800

400

55%

100%*

40%

30%

100%*

25%

*It is always assumed that units transferred out of a department are 100% complete with

respect to the processing done in that department.

Note that the May1 beginning Work in Process is 55% complete with respect to materials

costs, and 30% complete with respect to conversion costs. This means that 55% of the

materials costs required to complete the units in the department has already been incurred.

Likewise, 30% of the conversion cost required to complete the units has already been

incurred.

Since Five Star's work in process inventories are at different stages of completion in terms of

amounts of materials cost and conversion cost that have been added in the department, two

equivalent unit figure must be completed. The equivalent units computations are shown on

next page.

10

Shaping and Milling Department Materials Conversion

Units transferred to the next department

Work in Process, May 31

400 units × 40%

400 units × 25%

Equivalent units of production

4,800

160

--------

4,960

=====

4,800

100

--------

4,900

=====

Note from above computations that units in the beginning work in process inventory are

ignored. The weighted average method is concerned only with the fact that there are 4,900

equivalent units for conversion cost in ending inventories and in units transferred to the next

department―the method is not concerned with the additional fact that some of this work was

accomplished in the prior periods.

Equivalent Units―First-in-First-Out (FIFO) Method:

• The FIFO method of costing issued materials follows the principle that materials used

should carry the actual experienced cost of the specific units used.

• The methods assume that materials are issued from the oldest supply in stock and that

the cost of those units when placed in stock is the cost of those same units when

issued. However, FIFO costing may be used even though physical withdrawal is in a

different order.

• The computation of equivalent units under FIFO method differs from weighted

average method in two ways.

• First the units transferred out figure are divided into two parts. One part consists of

the units from beginning inventory that were completed and transferred out, and the

other part consists of the units that were both started and completed during the current

period. Second full consideration is given to the amount of work expended during the

current period on units in the beginning work in process inventory as well as units in

the ending inventory.

11

• Thus, under the FIFO method, it is necessary to convert both beginning and ending

inventories to an equivalent unit basis. For the beginning inventory, the equivalent

units represent the work done to complete the units; for the ending inventory, the

equivalent units represent the work done to bring the units to a stage of partial

completion at the end of the period ( the same as with the weighted average method).

The formula for computing equivalent units of production is more complex under

FIFO method than under weighted average method.

Formula for Calculating Equivalent Units―FIFO method:

Equivalent Units of Production = Equivalent units to complete beginning inventory* + Units

started and completed during the period + Equivalent units in ending work in process

inventory

*Equivalent units to complete beginning inventory = Units in beginning inventory × (100% −

Percentage completion of beginning inventory)

Or, the equivalent units of production can also be determined as follows:

Equivalent Units of Production = Units transferred out + Equivalent units in ending work in

process inventory − Equivalent units in beginning inventory.

Example:

To illustrate the FIFO method, Refer again the data of shaping and milling department

of Five Star Company.

Shaping and Milling Department Materials Conversion

Work in Process May 1: 200 units × (100% − 55%)*

200 units × (100% − 30%)*

Units started and completed in May

Work in process, May 31: 400 units × 40%

400 units × 25%

Equivalent Units of Production

90

**4,600

160

--------

4,850

=====

140

**4,600

100

--------

4,840

=====

*This is the work needed to complete the units in the beginning inventory.

**(5,000 units started) − (400 units in the ending work in process) = 4,600 units started and

completed. The FIFO method assumes that the units in the beginning inventory are finished

first.

12

Assuming at the month end there are now part-completed bars (work-in-progress). Assuming

also that he stopped charging staff for the bars that they had eaten. The data for Process 2 was

as follows:

For questions that include WIP, we need to calculate equivalent units. First, we need to

choose the method of valuing WIP. In an exam, use the first in first out (FIFO) method if the

percentage completion of each element of opening WIP is given. Use the weighted average

(WA) method if the value of each element of opening WIP is given. [Note that the two

methods give different valuations for the closing WIP.]

PROCESS COSTING (JUNE 2011)

In the weighted average method, no distinction is made between units of opening inventory

and new units introduced to the process during the accounting period.

Step 1- Prepare a statement of equivalent units. Note that opening inventory units count as a

full equivalent unit of production when the weighted average cost system is applied.

13

Step 2 -Prepare a statement of costs per equivalent unit

14

Step 3 -Prepare a statement of evaluation

Step 4 -Prepare the Process 2 accounts

15

� PEELING AND WASHING

• The first step in processing snack foods is preparation of the raw

product.

• For potato chip processing raw potatoes are pre-

washed and stones removed to protect damage

from your processing equipment.

• The APS (Abrasive Peeling System) is the next step in

preparing the potatoes for slicing and frying.

• The peeler features adjustable peeling and brushing levels improving product yield and the

high speed virtually eliminates water consumption.

• The innovative SWS (Slice Washing System) combine slicing with gentle washing.

• Featuring a counter-flow wash system, fresh water consumption is reduced by 40% or more

and lowers the content of starch and proteins in the oil.

• An optional CBS (Continuous Blanching System) features a cross circulation water bath to

ensure even blanching of each slice. By evenly blanching each slice, lower sugar content is

achieved creating a more uniform color chip after frying. This offers greater flexibility in the

style of potatoes you use to process your chips.

• The potato slices are hen rinsed one more time and conveyed for more effective removal of

surface water before entering the fryer.

16

FRYING

• The frying process is the most important operation in the processing

of potato chips.

• ZFS (Zonal Frying System) ensures even frying by adding and

extracting oil through several inlets and outlets. This allows

controllable and more uniform temperature profiles along fryer and

minimizes oil volume.

• Potato slices are separated in the front end of the fryer system.

• The FIST and Zonal Flow systems combine to provide the lowest

possible FFA (Free Fatty Acid) values. To maintain high quality oil and to achieve even heat

transfer, the fryer is equipped with an outer frying oil circulation system. A continuous oil

filter, circulation pump, and heat exchanger combine to supply and maintain the freshest oil.

• LFS (Low Fat System) fat content can be reduced by as such as 35% over typical levels. This

innovative, proprietary high temperature steam process reduces product fat content and

preserves the recovered oil quality.

SORTING

• Once fried, the crispy potato chips are ready for inspection to ensure a quality packaged

product. The Guardian Sorter scans for defects and tonal variations such as green and black

spots on the finished product.

FLAVORING

• The potato chips are now ready for flavoring. From highly viscous oils to hydroscopic

coatings.

• Technology improved seasoning yield by controlling seasoning to real-time product flow.

17

PRODUCT HANDLING

• Once flavored, product is ready to be

packaged.

• It offers processors a simple, reliable

electromagnetic option for conveying,

virtually eliminating maintenance.

• Place bags of dried chips or flour in

card board cartoons to protect them

from light

WEIGHING AND LABELLING

• Now the product is weigh and distributed in the market.

• Label product to state source, date of manufacture and expiry date (after six months).

18

19

Accounting has not lost its purpose at all. In order to achieve aggressive target cost

reductions and continuously improve business processes, cost management

ownership should be driven down to lower levels in organizations and linked to the

processes that deliver the outputs. The purpose of process cost management is to

support management’s decisions and provide modeling tools to help evaluate

alternative products and process designs. Process costing can be viewed as a what-

if analysis tool to model new opportunities. It also ties financial goals to quality

and process improvement objectives. Management uses it as a tool to make

strategic decisions about resources. Finally Process costing can also help make

investment decisions by estimating the cost savings from different process and

showing which projects should be given priority.

In conclusion, potato chip Management has gone from concerns about product

costing to the broader issue of improving competitiveness. Process costing helps

improve competitiveness by providing methods for evaluating the impact of

product and process cost drivers on resource spending. It’s concerned with the

relationship between processes of an organization, resources, and cost drivers and

lets managers find the spending impact of what-if scenarios.

20

• Process costing is used in situations where homogeneous products or services are

produced on a continuous basis. Costs flow through the manufacturing accounts in

basically the same way in a process costing system as in a job-order costing system.

However, costs are accumulated by department rather than by job in process costing.

• In process costing, the equivalent units of production must be determined for each

cost category in each department. Under the weighted-average method, the equivalent

units of production equals the number of units transferred out to the next department

or to finished goods plus the equivalent units in ending work in process inventory.

• The equivalent units in ending inventory equals the product of the number of partially

completed units in ending work in process inventory and their percentage of

completion with respect to the specific cost category.

• Under the weighted-average method, the cost per equivalent unit for a specific cost

category is computed by adding the cost of beginning work in process inventory and

the cost added during the period and then dividing the result by the equivalent units of

production.

• The cost per equivalent unit is then used to value the ending work in process

inventory and the units transferred out to the next department or to finished goods.

• Costs are transferred from one department to the next until the last processing

department. At that point, the cost of completed units is transferred to finished goods.

21