Study of Process Accounting potato chips manufacturing Industry

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 Mr. Gajanan Wader

External Examiner

Vice Principal 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 Father’s Name: B.B.S

M COM PART I

1890

Surname: YADAV

Subject: Advanced Cost Accounting Topic for the Project: “Study of Process Accounting potato chips manufacturing Industry”

Mark Awarded 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)

Signature

CONTENTS

SL.NO.

PARTICULAR

PAGE NO.

Concept of process costing

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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

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6

Methods of process costing in work in process.

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1

7

• Weighted average method

10

• FIFO method

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Comparison between FIFO and weighted average method

13

of process costing 8

Practical aspect of process costing in potato’s chips

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manufacturing industry 9

Conclusion

20

10

Comment

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Job order costing - work is broken into auto mechanics, carpenters, painters, print jobs; each job is tracked separately shops, computer repair Process costing - a large quantity of auto assembly plants, hot dog manufacturing, identical or similar products are mass any large mechanized production facility produced 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.

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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)

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Format of process costing

3


Flow of cost in process costing system

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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.

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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.

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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 Percent Complete

Shaping and Milling Department Work in process, May 1

Units

Materials

Conversion

200

55%

30%

Units started in production during May

5,000

Units completed in May and transferred to the next

4,800

100%*

400

40%

department

100%* 25%

Work in Process, May31 *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 Units transferred to the next department

Materials 4,800

Conversion 4,800

Work in Process, May 31 400 units × 40% 400 units × 25% Equivalent units of production

160 100 -------4,960 =====

-------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 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%

Materials

Conversion

90 **4,600

140 **4,600

160 -------4,850 =====

Equivalent Units of Production

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.

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Step 2 -Prepare a statement of costs per equivalent unit

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Step 3 -Prepare a statement of evaluation

Step 4 -Prepare the Process 2 accounts

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 PEELING AND WASHING •

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

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For potato chip processing raw potatoes are prewashed and stones removed to protect damage from your processing equipment.

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The APS (Abrasive Peeling System) is the next step in preparing the potatoes for slicing and frying.

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The peeler features adjustable peeling and brushing levels improving product yield and the high speed virtually eliminates water consumption.

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

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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.

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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.

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The potato slices are hen rinsed one more time and conveyed for more effective removal of surface water before entering the fryer.

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FRYING •

The frying process is the most important operation in the processing of potato chips.

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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.

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

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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.

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

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PRODUCT HANDLING

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Once flavored, product is ready to be packaged.

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It offers processors a simple, reliable electromagnetic option for conveying, virtually eliminating maintenance.

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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.

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

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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 whatif 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.

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•

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.

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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.

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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.

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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.

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