Cost Accounting 2011

BAHRIA UNIVERSITY 1

Cost Accounting 2011

COST ACCOUNTING REPORT ON TAPAL TEA Submitted To: Sir Danish Iqbal DATE: 19/12/2011 CLASS: BBA - 3(B) GROUP MEMBERS: Adil Bashir Arsalan Ahmed Asif Abdul Majeed Damani Bilal Ahmed M. Haroon Amil

BAHRIA UNIVERSITY 2

Cost Accounting 2011

ACKNOWLEDGEMENTS

We would like to thank Mr. Danish Iqbal for giving us the opportunity of working on this report on Tapal. This report has enabled us to apply all that we studied in class and gave us the chance to enhance our knowledge. We are also really thankful to Mr. Anis Memon (Payroll Manager), Tapal Tea Pvt Ltd, Pakistan, who provided us with priceless information required for the making of this report. We are thankful to him for giving us time from his busy schedule.

BAHRIA UNIVERSITY 3

Cost Accounting 2011 TABLE OF CONTENTS

S.NO

CONTENT

PAGE No. 5 6 6 7-9 10 11-12 13 14 15 16-20 21

1.

Tapal Introduction/History Mission Statement Vision Tapal Products Product Description (Tapal Danedar) Process Flow / Production Procedure Costing Methology Labour Cost of Production Report (Department 1) Explanation Cost of Production Report (Department 2)
Explanation

2.
3. 4. 5. 6. 7. 8. 9. 10. 11.
12. 13. 14. 15. 16. 17.

21-23 23 24 25 27 28

Cost of Production Report (Department 3)

Explanation Cost of Goods Manufactured Starement Cost of Goods Sold Statement Income Statement

BAHRIA UNIVERSITY 4

Cost Accounting 2011 TAPAL - AN OVERVIEW

INTRODUCTION
Tapal is a well known name in Pakistan. In 1947, it started business as a Tea leader and so celebrated its 55th anniversary in 2002. The first retail was through a shop in Jodia Bazaar and now has more various retail outlets around the city.

The journey of Tapal's remarkable success is the combined efforts of three dynamic generations of the Tapal Family. Tapal started out as a family concern under the personal supervision of its founder, Adam Ali Tapal. The company continued to grow under the management of the founder's son, Faizullah A. Tapal. Currently it is managed by the founders grandson, Aftab F. Tapal who has continued to give further strength to the foundations of quality laid down by his family.

Making a modest beginning over half a century back, today Tapal has become the largest, 100% locally owned Tea Company in the country. It has modern tea blending and packaging factory, warehouses equipped with state-of-the-art equipment and a team of highly dynamic professionals headed by Aftab Tapal himself. Tapals Family Mixture (the mixture of tea & dust). He was the first to invent the highly successful brand Danedar Leaf Blend. In December 1997, Tapal Tea became the first Pakistani Tea Company to earn the ISO-9001 certification: a symbol of the highest international quality standards. Again in December 2000, Tapal acquired the ISO-9001: 2000 certification, making it one of the first few companies in the world to achieve this milestone. In addition to the standard requirements, the ISO-9001: 2000 certification system includes requirements for environment improvement, concepts of TQM (continuous improvement) with major emphasis on consumer requirements and satisfaction.

Tapals success has left many astounded. No magic formula however, lies behind its growth other than hard work, dedication and of course unique blends and better quality.

BAHRIA UNIVERSITY 5

Cost Accounting 2011

MISSION STATEMENT

To satisfy our stake holders as a guiding principle in our principle be a benchmark for quality, creativity and ethical values.

VISION
To provide value and quality to our consumers, our aim is constantly to provide world class service for our customers, deliver value for our products and make Tapal a great place to work for our employees. We aim to have a reputation for innovative thinking in the areas that matter to our customers. To become a global brand. To be an innovative, marketing and research oriented company.

BAHRIA UNIVERSITY 6

Cost Accounting 2011

PRODUCTS
Tapal Family Mixture TapalDanedar Tapal Tea Bags TapalMezban TapalChenak TapalTezdum Tapal Shades Of Green Tapal Ice Tea TapalGulbahar Tapal Special

TAPAL FAMILY MIXTURE

A unique combination of high-grown Kenya leaf and dust tea, Tapal Family Mixture is the pride of Tapal. Developed in 1947, it created a completely new category in the tea market.. It is the blend that started the Tapal success story and many other companies followed Tapal in introducing similar blends.

BAHRIA UNIVERSITY 7

Cost Accounting 2011

MEZBAN PREMIER DUST

A full-flavored dust that delivers high quality at a very economical price, Mezban Premier Dust is the blend for consumers who prefer tea with a strong flavor & taste. Mezban has become a favorite amongst household consumers as well. It is the most popular brand of tea in Sindh. The name of the brand itself is a characterization of the typical hospitality that is inherent to and a matter of pride for the people of Sindh.

CHENAK DUST

Highly popular in Sindh, Chenak is known for its extra strong flavor, color and taste. As a result of these features and high quality of tea it is No.1 in its category.

TAPAL SPECIAL TEABAGS

The unique flavor of high grown leaves especially selected from the finest tea gardens in the world make Tapal Special Teabags a treat at any time. The combination of an extra strong blend with the convenience of environmental friendly metal-free tea bags has made Tapal Special an instant hit with consumers.

BAHRIA UNIVERSITY 8

Cost Accounting 2011

TAPAL JASMINE GREEN TEA

Tapal Jasmine Green Tea is the most recent addition to Tapal Brands. Tapal Jasmine Green Tea is blended to perfection using the finest tea leaves and specially selected Jasmine to give a refreshing experience of light taste . It is available in metal-free tea bags specially enveloped for extra freshness.

TAPAL ICE TEA

Tapal wants to increasingly cater to this market and it is doing so with the launch of Tapal Ice Tea. Tapal Ice Tea is not a new product however it is a first of its kind in Pakistan.

BAHRIA UNIVERSITY 9

Cost Accounting 2011 PRODUCT DESCRIPTION

TAPAL DANEDAR

Tapal Danedar remains a favorite around the country with its grape-nutty appearance, rich golden color and strong refreshing taste. In fact its popularity is such that other companies have launched their own versions of this blend, but Tapal remains the original and ultimate Danedar because of its unique color, and taste. Today, TapalDanedar enjoys the position of the "No.1 Tea Brand" in Pakistan.

PRICE
BRANDS
Danedar

WEIGHTS
950gm 450gm 190gm

PRICES

Rs. 600 Rs. 300 Rs. 99

BAHRIA UNIVERSITY 10

Cost Accounting 2011

PROCESS FLOW / MATERIALS FLOW

Raw Material SriLanka Kenya India China Mauritius Malaysia Tunisia Warehouses Production Department Blending Packaging Warehouses KHI HYD SUK MUL LHR ISL

The plant caters to the needs of the entire country. The plant has the following types of products; Family Mixture Danedar Ice Tea Mezban Green Tea

ACQUISITION OF RAW MATERIAL:

The character and quality of tea is greatly affected by soil, altitude, weather conditions, method of manufacturing and its origin, hence, our tea experts travel frequently to various tea producing countries across the world to source the best possible tea to create Tapals powerful brands.

BAHRIA UNIVERSITY 11

Cost Accounting 2011

In this regard Tapal imports Tea from the following countries:

Kenya Sri Lanka (Ceylon) Bangladesh Burundi China India Indonesia Mozambique Madagascar Rwanda Uganda Zimbabwe

TEA TASTING & SELECTION

In Tapal, professional tea tasters taste, select & procure teas from various tea producing countries for blending & packaging. This is highly specialized job, which demands skill and talent, develop over the years of exposure and experience.

BLEND RECIPES
Art of blending goes with the skill of tasting. Our tea experts vigilantly select teas, which produces desired blend quality. They prepare various blend recipes, having different varieties to meet our global based consumers requirement. Blends are designed to be of good character having flavour of seasonal Ceylon tea and the pungency, strength & brightness of African and other origin teas. A comparison of taste is made against a benchmark blend for each Tapal blend to ensure uniformity and consistency in quality. To guarantee a best cup of tea, during the process of tea selection, sourcing and blending every tea component is examined at least five times before it reaches to valued consumers. Tapals full capacity of tea blending is 250 Tons/day.

BAHRIA UNIVERSITY 12

Cost Accounting 2011

WAREHOUSES

It has 6 warehouses at Karachi, Lahore, Islamabad, Multan, Sukkur, Raiwind. Four of the warehouses are owned whereas two are rental. The warehouses support each other or balance by shifting the finished goods among themselves to rule out the possibility of surplus or shortages. If any unit is not performing up to the mark, the others make sure that it does not disrupt smooth operations. It can hold 15 days of inventory. Capacity of Warehouses: 800 tons max. at KHI 200 tons max. at HYD 200 tons max. at SUK 100 tons max. at MUL 400 tons max. at RWD 50 tons max. at ISL

COSTING METHODOLOGY:
Tapal is using process costing methods to determine the cost for internal management. Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Tapal assigns cost to products, usually in a large batch, which includes an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow.

BAHRIA UNIVERSITY 13

Cost Accounting 2011 LABOUR:

~ STAFF
Contractual staff 600-700

~Working Hours:
8 Hours shift

~Wages:
Are based on as per set by Govt. of Pakistan (7000)

~Incentives
No Incentives are given to contractual labor force

~Over time Bonuses:

Are given as 50% of their salary

BAHRIA UNIVERSITY 14

Cost Accounting 2011

COST OF PRODUCTION REPORT

DEPARTMENT # 1
Tapal Tea Pvt LTD Testing Department Cost of Production Report For the Month of September, 2011 Quantity Schedule: Units started in process Units transferred to next department Units still in process (all materials - 1/2 labor and FOH) Units lost in process Cost Charged To the Department: Cost added by the department: Materials Labor Factory Overhead (FOH) Total cost to be accounted for Cost Accounted for as Follows: Transferred to next department (45,000 Rs.1.72) Work in process - ending inventory: Materials (4,000 Rs.0.50) Labor (4,000 1/2 Rs.0.60) Factory Overhead (4,000 1/2 Rs.0.60) Total cost accounted for Additional Computations Equivalent Production: Materials = 45,000 + 4,000 = 49,000 units Labor and factory overhead = 45,000 + 4,000 / 2 = 47,000 units 45,000 4,000 1,000 ------Total Cost Rs.24,500 29,140 28,200 ------Rs.81,840 ====== 50,000 ======

50,000 ====== unit Cost Rs.0.50 0.62 0.60 ----Rs.1.72 ==== Rs.77,400

Rs.2,000 1,240 1,200 ------

4,440 -----Rs.81,840 =====

BAHRIA UNIVERSITY 15

Cost Accounting 2011

Unit Costs: Materials = Rs.24, 500 / 49,000 = Rs.0.50 per unit Labor = Rs.29, 140 / 47,000 = Rs.0.62 per unit Factory overhead = Rs.28, 200 / 47,000 = 0.60 per unit

EXPLANATION:
The quantity schedule of the cost report shows that Testing Department put 50,000 units inprocess, with units reported in terms of finished product. Finished units could be stated in pounds, feet, gallons, barrels, etc. If materials issued to a department are stated in pounds and finished product is reported in gallons, units in the quantity schedule will be in terms of the finished product, gallons. A product conversion table would be used to determine the number of units for which the department is accountable. The quantity schedule of the Blending Department's report shows that of the 50,000 units for which the department was responsible, 45,000 units were transferred to the next department (Testing Department - second department), 4,000 units are still in process, and 1,000 units were lost in processing.

Equivalent Production:
Costs charged to a department come from an analysis of materials used, payroll distribution sheets, and department expense analysis sheets. The Blending Department's unit cost amounts to Rs.1.72 (Rs.0.50 for materials, Rs.0.62 for labor, and Rs.0.60 for factory overhead). Calculations of individual unit costs require an analysis of the ending work in process to determine its stage of completion. This analysis is usually made by a supervisor or is the result of using predetermined formula. Materials, labor, and factory overhead have been used on the 4,000 units in the process but not in an amount sufficient for completion. To assign costs equitably to in process inventory and transferred units, units still in process must be restated in terms of completed units, which is 4,000 units for materials cost but less than 4,000 for labor and overhead costs. The figure for partially completed units in process is added to units actually completed in order to arrive at the equivalent production figure for the period. This equivalent production figure represents the number of units for which sufficient materials, labor, and overhead were issued or used during a period. Materials, labor and overhead costs are divided by the appropriate equivalent production figure to compute unit costs by elements. Should a costelement be at a different stage of completion with respect to units in process, then a separate equivalent production figure must be computed. In many manufacturing processes, all materials are issued at the start of production. Unless stated otherwise, the illustrations in this discussion assume such a procedure.

BAHRIA UNIVERSITY 16

Cost Accounting 2011

Therefore, the 4,000 units still in process have all the materials needed for their completion but not all labor and factory overhead (FOH). Only 50% of the labor and factory overhead needed to complete the units has been used. In terms of equivalent production, labor and factory overhead in process are sufficient to complete 2,000 units.

Units Costs:
Departmental cost of production reports indicates the cost of units as they leave department. These individual departmental units costs are accumulated into a completed unit cost for the period. The report for the Testing Department shows a materials cost of Rs.24,500, labor cost of Rs.29,140, and factory overhead of Rs.28,200. The materials cost of Rs.24,500 is sufficient to complete 49,000 units (the 45,000 units transferred out of the department as well as the work in process for which enough materials are in process to complete 4,000 units). The unit materials cost is, therefore, Rs.0.50 (Rs.24,500 / 49,000). A similar computation determines the number of units actually and potentially completed with the labor cost of Rs.29,140 and the factory overhead of Rs.28,200. The 2,000 equivalent units in process are added to the 45,000 units completed and transferred to obtain a total equivalent production figure of 47,000 units for both labor and factory overhead (FOH). When the equivalent production figure of 47,000 units is divided into the monthly labor cost of Rs.29,140, a unit cost for labor of Rs.0.62 (Rs.29,140 / 47,000) is computed. The unit cost for factory overhead is Rs.0.60 (Rs.28, 200 / 47,000). The unit cost added by the department is Rs.1.72, which is the sum of the materials, labor, and overhead unit costs - Rs.0.50, Rs.0.62, and Rs.0.60. This departmental unit cost figure cannot be determined by dividing the total departmental cost of Rs.81,840 by a single equivalent production figure, because no such figure exists; units in process are at different stages of completion as to materials, labor and factory overhead.

Disposition of Departmental Costs:

In the departmental cost report, the section titled "Cost Charged to the Department" shows a total departmental cost of Rs.81, 840. The section titled "Cost Accounted for as Follows" show the disposition of this cost. The 45,000 units transferred to the next department have a cost of Rs.77, 000 (45,000 Rs.1.72). The balance of the cost to be accounted for, Rs.4, 440 (Rs.81, 840 - Rs.77, 400), is the cost of work in process. The inventory figure must be broken down into its component parts: materials, labor, and factory overhead. These individual costs are easily determined. The cost of materials in process is obtained by multiplying total units in process by the materials unit cost (4,000 Rs.0.50 = Rs.2, 000). The costs of labor and overhead in process are sufficient to complete only 50 percent or 2,000 of the units in process.

BAHRIA UNIVERSITY 17

Cost Accounting 2011

Therefore, the cost of labor in process is Rs.1, 240 (2,000 Rs.0.62) and factory overhead in process is Rs.1,200 (2,000 Rs.0.60).

Lost Units:
Continuous processing leads to the possibility of waste, seepage, shrinkage, and other factors which cause loss or spoilage of production units. Management is interested not only in the quantities reported as completed production, units in process, and lost units but also in acomparison of planned and actual results. In verifying reported figures, the accountant must reconcile quantities put into process with quantities reported as completed and lost. One method of making such reconciliation is to establish the process yield, i.e., the finished production that should result from processing various materials. This yield is computed as follows: Percent Yield = (Weight of finished product / weight of materials charged) 100 The yield figure is useful to management for controlling materials consumption and ties in closely with a firm's quality control procedures. Various yields are established as normal. Yields below normal are measures of inefficiencies and are some times used to compute lost units. Frequently quality control data are used to compute production costs, since the use of incorrect quantities would result in incorrect unit costs.

Units Lost in the First Department:

Lost units reduce the number of units over which total cost can be spread, causing an increase in unit costs. The 1,000 units lost in the Testing Departmentincrease the units costs of materials, labor, and factory overhead. Had these units not been lost, the equivalent production figure would be 50,000 units for materials and 48,000 for labor and factory overhead. The unit cost for materials would be Rs.0.49 instead of Rs.0.50; labor, Rs.0.607 instead of 0.62; and factory overhead, Rs.0.588 instead of Rs.0.60. In the first department, the only effect of losing units is an increase in the unit cost of the remaining good units. In this situation, the loss is assumed to apply to all good units and to be within normal tolerance limits. Explanation: The Testing Department (first department) transferred 45,000 units to the Testing Department, where labor and factory overhead were added before the units were transferred to the Terminal Department (third or final department). Costs incurred in the Blending Departmentresulted in the additional departmental as well as cumulative unit costs. The cost of production report of the Blending Department differ from that of the Testing Department (first department) in several respects. Several additional calculations are

BAHRIA UNIVERSITY 18

Cost Accounting 2011

made, for which space has been provided on the report. The additional information deals with: 1. Cost received from the preceding department. 2. An adjustment of the preceding department's unit cost because of lost units. 3. Cost received from the preceding department to be included in the cost of ending work in process inventory. The quantity schedule of the Blending Department shows that the 45,000 units received from the Testing were accounted for as follows: 1. 40,000 units sent to terminal department. 2. 3,000 units still in process. 3. 2,000 units lost. An analysis of the work in process (WIP) indicates that units in process are but one third complete as to labor and factory overhead. Unit costs, Rs.0.91 for labor and Rs.0.80 for factory overhead, were calculated as follows: Equivalent production of the Blending Departments 41,000 units [40,000 + Rs.1/3 (3,000)], the labor unit cost is Rs.0.91 (Rs.37,310 / 41,000), and the factory overhead unit cost Rs.0.80 (Rs.32,800 / 41,000). There is no materials unit cost, since no materials were added by the department. The department unit cost is Rs.1.71, the sum of the labor unit cost of Rs.0.91 and the factory overhead unit cost of Rs.0.80. The Blending Departmentis responsible for the labor and factory overhead used as well as for the cost of units received from the Testing Department (first department). This latter cost is inserted as a cost charged to the department under the title "cost from preceding department" which is immediately above the section of the report dealing with cost added by the department. The cost transferred in was Rs.77,400, previously shown in the cost report of the Testing Department(first department) as cost transferred out of that department by this journal entry: Work in process - Blending Department Work in process - Blending Department 77,400 77,400

The work in process account of the Blending Departments charged with cost received from the preceding department and with Rs.70,110 of departmental labor and factory overhead (FOH), a total cost of Rs.147,510 to be accounted for by the department.

BAHRIA UNIVERSITY 19

Cost Accounting 2011

UNITS LOST IN THE DEPARTMENT SUBSEQUENT TO THE FIRST:

The Testing Department (first department) unit cost was Rs.1.72 when 45,000 units were transferred to the Testing Department. However, because 2,000 of these 45,000 units were lost during processing in the Testing Department, the Rs.1.72 unit cost figure no longer applies and must be adjusted. The total cost of the units transferred remains at Rs.77,400, but 43,000 units must now absorb this total cost, causing an increase of Rs.0.08 in the cost per unit due to the loss of 2,000 units in the testing department. The lost units cost can be computed by this methods.

Method:
Determines a new unit cost work done in the preceding department and subtracts the preceding departments old unit costs figure from the adjusted unit cost figure. The difference between the tow figures is the additional cost due to the lsot units. Rs.1.80 new adjusted unit cost for work done in the preceding department is obtained by dividing the remaining good units, 43,000 (45,000 - 2,000), into the cost transferred in, Rs.77,400. The old unit cost figure of Rs.1.72 is subtracted from the revised unit cost to arrive at the adjustment of Rs.0.08.

Timing of Lost Units:

Lost units may occur at the beginning, during, or at the end of a manufacturing process. For purposes of practicality and simplicity, it is ordinarily assumed that units lost at the beginning or during the process were never put in process. The cost of units lost is spread over the units completed and units still in process. When units are lost or are identified as lost at the end of a process, the cost of the lost units is charged to completed units only. No part of the loss is charged to units still in process. Assume that the 2,000 units lost by the Blending Department were the result of spoilage found at final inspection by the quality control department; their cost would be charged only the 40,000 finished units, as illustrated below:

BAHRIA UNIVERSITY 20

Cost Accounting 2011

DEPARTMENT # 2
Tapal Tea Pvt LTD Blending Department Cost of Production Report For the Month of September, 2011 Quantity Schedule: Units received from the preceding department Units transferred to next department Units still in process (1/2 labor and FOH) Units lost in process Cost Charged To the Department: Cost from preceding department: Transferred in during the month Cost added by the department: 40,000 3,000 2,000 Total Cost Rs.77,400 -------45,000 ======

45,000 ====== unit Cost Rs.1.72 -------

Labor Factory Overhead (FOH) Total cost added Total cost to be accounted for Cost Accounted for as Follows: Transferred to next department [(40,000 Rs.3.51+Rs.0.167)]* Work in process - ending inventory: From preceding department (3,000 Rs.1.72) Labor (3,000 1/3 Rs.0.87) Factory Overhead (3,000 1/2 Rs.0.76) Total cost accounted for Additional Computations:

37,310 32,800 ------Rs.70,110 ------Rs.147,510 ======

0.87 0.76 ----Rs.1.63 -----Rs.3.35 ====== Rs.140,720

Rs.5,160 870 760 ------

6,790 -----Rs.147,510 ======

BAHRIA UNIVERSITY 21

Cost Accounting 2011

Equivalent Production: Labor and factory overhead = 40,000 + 3,000 / 3 + 2,000 lost units = 41,000 units Unit Costs: Labor = Rs.37,310 / 43,000 = Rs.0.87 per unit Factory overhead = Rs.32,800 / 43,000 = Rs.0.76 per unit Lost unit cost = Rs.3.35 2,000 units = Rs.6,700 + 40,000 units Rs.0.1675 per unit to be added to Rs.3.35 to make the transfer cost Rs.3.5175. *40,000 units Rs.3.5175 = Rs.140, 700. To avoid a decimal discrepancy, the cost transferred is computed: Rs.147,510 - Rs.6,790 = Rs.140,720. A comparison of the differences between the two cost of production reports for the testing departments as to amounts for costs of units transferred and work in process inventory is shown below the production report. Not the offsetting increases and decreases. In this illustration, the assumption has been made that the lost units, identified at the end of the process, were complete as to all costs. In sum companies, members of the quality control or inspection departments make production checks prior to the end of the process. Such a procedure uncovers lost units that are not complete when the loss is incurred or the spoilage discovered and yet the loss may pertain only to units completed and not to units still in process. In such a case the lost units should be adjusted for their equivalent stage of completion. For example, 2,000 units lost at the 90% stage of conversion would appear as 1,800 equivalent units with regard to labor and factory overhead costs.

NORMAL VS ABNORMAL LOSS OF UNITS:

Units are lost through evaporation, shrinkage, substandard yields, spoiled work, poor work man ship, or inefficient equipment. In many instances the nature of operations makes certain losses normal or unavoidable, because they are considered with in normal tolerance limits for human and machine errors. The cost of these normally lost units does not appear as a separate item of cost but is spread over the remaining good units. A different situation is created by abnormal or avoidable spoilage or losses that are not expected to arise under normal, efficient operating conditions. The cost of such abnormal spoilage or losses is charged either to factory overhead as shown below, thereby appearing as an additional unfavorable able factory overhead variance, or directly to a current period expense account and reported as a separate item in the cost of goods sold statement. Factory Overhead Control 6,700 Work in process - Blending Department (lost units) 6,700

BAHRIA UNIVERSITY 22

Cost Accounting 2011

The cost of production report would show the abnormal spoilage or loss as follows: Transferred to next department (40,000 units Rs.3.35) ..............Rs.134,020* Transferred to factory overhead [40,000 units Rs.0.1675) or (2,000 lost units Rs.3.35)].......................................................6,700 *40,000 units Rs.3.35 = Rs.134, 000. To avoid decimal discrepancy, the cost transferred is computed: Rs.147, 510 - Rs.6, 790 ending inventory - Rs.6, 700 = Rs.134, 020 If the lost units were only partially complete, equivalent production calculations should consider their stage of completion when lost or spoiled, and the costing of the abnormal loss should be weighted accordingly. If one part of the loss is normal and another abnormal, each portion must be treated in accordance with the above discussion. The critical factor in distinguishing between normal and abnormal spoilage or loss is the degree of controllability. Normal or unavoidable spoilage or loss is produced by the process under efficient operating conditions, referred to as uncontrollable. Abnormal or avoidable spoilage or loss is considered unnecessary, because the conditions resulting in the loss are controllable. For this reason, within the limits set by the state of the art of production, the difference is a short-run condition; in the long run, management should adjust and control all factors of production and eliminate all abnormal conditions. The cost of production report at the beginning of this page shows a total cost of Rs.147,510 to be accounted for by the Testing department. The department completed and transferred 40,000 units to the Terminal Department (third or final department) at a cost of Rs.140,000 (40,000 Rs.3.51). The remaining cost is assigned to the work in process inventory. This balance is broken down by the various costs in process. When computing the cost of the ending work in process inventory of any department subsequent to the first, costs received from the preceding departments must be included. The 3,000 units still in process, completed by the Testing Department(first department) at a unit cost of Rs.1.72, were later adjusted by Rs.0.08 (to Rs.1.80) because of the loss of some of the units transferred. Therefore, the Blending Department's (first department) cost of the 3,000 units still in process is Rs.5,400 figure is not broken down further , since such information is not pertinent to the Testing Department's operations. However, the amount is listed separately in the cost of production report, because it is part of the Testing Department's ending work in process inventory. Materials (if any), labor, and factory overhead (FOH) added by a department are costed separately in order to arrive at total work in process (WIP). In the testing department, no materials were added to the units received; thus, the ending inventory shows no materials

BAHRIA UNIVERSITY 23

Cost Accounting 2011

in the process. However, labor and factory overhead costs were incurred. The work in process analysis stated that labor and factory overhead used on the units in process were sufficient to complete 1,000 units. The cost of labor in process is Rs.910 (1,000 Rs.0.91) and factory overhead is process is Rs.800 (1,000 Rs.0.80). The total cost of the 3,000 units in process is Rs.7,110 (Rs.5,400 + Rs.910 + Rs.800). This cost, added to that transferred to the Terminal Department (third or final department), Rs.140,400, accounts for the total cost of Rs.147,510 charged to the Testing Department.

DEPARTMENT # 3
The cost of production report of 3rd and final department is illustrated below: Tapal Tea Pvt LTD Terminal Department Cost of Production Report For the Month of September, 2011 Quantity Schedule: Units received from the preceding department Units transferred to finished goods storeroom Units still in process (1/4 labor and FOH) Units lost in process Cost Charged To the Department: Cost from preceding department: Transferred in during the month Cost added by the department: Labor Factory Overhead (FOH) Total cost added Adjusted for lost units Total cost to be accounted for 35,000 4,000 1,000 Total Cost Rs.140,400 32,400 19,800 ------Rs.52,500 ------Rs.192,600 ====== 40,000 ======

40,000 ====== unit Cost Rs.3.51 0.90 0.55 ----Rs.1.45 0.09* -----Rs.5.05 ====== Rs.176,750

Cost Accounted for as Follows: Transferred to finished goods storeroom (35,000 Rs.5.05) Work in process - ending inventory: Adjusted cost from preceding department [4,000 (Rs.3.51 + Rs.0.09)] Rs.14,400 Labor (4,000 1/4 Rs.0.90) 900

BAHRIA UNIVERSITY 24

Cost Accounting 2011

Factory Overhead (4,000 1/4 Rs.0.55) Total cost accounted for 550 -----15,850 -----Rs.192,600 ======

Additional Computations:
Equivalent Production: Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units Unit Costs: Labor = Rs.32,400 / 36,000 = Rs.0.90 per unit Factory overhead = Rs.19,800 / 36,000 = 0.55 per unit *Adjustment for lost units: Method No.1: Rs.140,400 / 39,000 = Rs.3.60; Rs.3.60 - Rs.3.51 = Rs.0.09 per unit Method No.2: 1,000 units Rs.3.51 = Rs.3,510; Rs.3,510 / 39,000 = Rs.0.09 per unit

EXPLANATION:
Total and unit cost figures were derived by using procedures discussed for the cost of production report of the Testing Department. The work completed is transferred to the finished goods storeroom; thus, the title "Transferred to finished goods storeroom" is used in place of the title "Transferred to next department." Cost charged to the Terminal Department come from the payroll distribution and the department's expense analysis sheet. The journal entry transferring costs from the Blending Department follows: Work in process - Terminal Department Work in process - Blending Department 140,000 140,000

The entry to transfer finished units to the finished goods storeroom is presented below: Finished Goods Work in process - Terminal Department 176,750 176,750

BAHRIA UNIVERSITY 25

Cost Accounting 2011

COSTS OF GOODS MANUFACTURED STATEMENT FOR THE PERIOD ENDED DECEMBER 31, 2010 and 2011
2011 Raw material consumed Salaries, wages and staff welfare Factory Overhead: Fuel power and gas Repairs and maintenance Depreciation Consumable stores Purchased services Storage and handling Training and travelling expenses Communication, stationery and other office expenses Insurance Provision for slow moving stores and spares Expired chemicals written off Other expenses 7,189,888 461,280 1,768,043 224,141 1,002,457 336,069 118,485 882,897 18,934 7,861 79,890 3,867 9,380 32,059 2010 6,906,800 211,896 771,237 49,292 502,452 91,649 54,458 339,425 5,943 2,971 52,050 3,867 18,558

BAHRIA UNIVERSITY 26

Cost Accounting 2011

Total Manufacturing Cost Add: Work in progress (opening) Total Work In Progress Less: Work in Progress (closing) Cost Of Goods Manufactured

14,145,151 17,579 14,162,730 (4,749) 14,157,981

10,007,505 21,293 10,028,798 (17,579) 10,011,219

BAHRIA UNIVERSITY 27

Cost Accounting 2011

COST OF GOODS SOLD STATEMENT FOR THE PERIOD ENDED DECEMBER 31, 2010 AND 2011

2011 Cost Of Goods Manufactured Finished Goods (opening) Cost Of Goods Available To Sale Finished Goods (closing) Cost Of Goods Sold - own manufactured product - purchased product (W-1) 14,157,981 410,653 14,568,634 (1,156,007) 13,412,627 23,967 13,436,594
W-1:
Cost of Sales purchased product

2010 10,011,219 810,355 10,821,574 (410,653) 10,410,921 7,736 10,418,657

Opening stock Purchases Closing Stock

8,815 15,152 23,967

16,551 (8,815) 7,736

BAHRIA UNIVERSITY 28

Cost Accounting 2011 INCOME STAEMENT FOR THE PERIOD ENDED DECEMBER31, 2010 AND 2011 (Amounts in Rs. M)
Net Revenue Cost of Sales Gross Profit Operating Expenses: Distribution and Marketing Expenses Administration Expense Other Expenses Other operating Income Operating Profit Finance Cost Loss/Profit before Taxation Taxation Loss/Profit after Taxation 2011 14,628 (13,437) 1,191 (609) (311) (171) 22 122 (1412) (1290) 476 (814) 2010 11,571 (10,419) 1152 (469) (205) (231) 100 347 (596) (249) 17 (232)

BAHRIA UNIVERSITY 29

Cost Accounting 2011

Tapal Tea Pvt Ltd. Pakistan Cost of Goods Manufactured Statement For the Period Ended December 31, 2011
Raw Material (Beginning) Add: Net Purchases: Purchases: Less: Purchase return & allowamce Purchase discount Add: Carriage In Net Purchases Total cost of material available for use Less: Raw Material (Ending) Direct Material Add: Direct Labour Factory Overhead Total Manufacturing Cost Add: Work in Process (Beginning) Total Work in Process Less: Work in Process (Ending) Cost of Goods Manufactured

Tapal Tea Pvt Ltd. Pakistan Cost of Goods Sold Statement For the Period Ended December 31, 2011
Cost of Goods Manufactured Add: Finish Goods (Beginning) Goods available for sale Less: Finish Goods (Ending) Cost of Goods Sold

BAHRIA UNIVERSITY 30

Cost Accounting 2011

Tapal Tea Pvt Ltd. Pakistan Income Statement For the Period Ended December 31, 2011
Sales Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Marketing Expenses (W-1) Administrative Expenses (W-2) Other Expenses Total Expenses Add: Other Income Net Profit

WORKING Working -1
Marketing Expenses: Salaries Sales staff

Working 2
Administrative Expenses: Salaries - Office staff Postage

BAHRIA UNIVERSITY 31

Cost Accounting 2011

Tapal Tea Pvt LTD Cost of Production Report All Producing Departments For the Month of January, 2011
Quantity Schedule: Units started in process Units received from the preceding department Units transferred to next department Units transferred to finished goods storeroom Units still in process Units lost in process 4,000 1,000 ------50,000 ====== Total unit cost Cost 3,000 2,000 ------45,000 ====== Total unit cost Cost Blending 1stDepartment 50,000 ====== 45,000 Testing 2ndDepartment 45,000 ====== 40,000 Terminal 3rdDepartment 40,000 ====== 35,000 4,000 1,000 ------40,000 ====== Total cost unit Cost

Cost Charged To the Department:

Cost from preceding department: Transferred in during the month Rs.77,400 Rs.1.72 Rs.140,400 Rs.3.51 -------Cost added by the department: Materials Labor Factory Overhead (FOH) Total cost added Adjusted for lost units Total cost to be accounted for Cost Accounted for as Follows: Transferred to next department Transferred to finished goods storeroom (35,000 Rs.5.05) Work in process - ending inventory: Adjusted cost from preceding department [4,000 (Rs.3.51 + Rs.0.09)] Materials Labor (4,000 1/4 Rs.0.90) Factory Overhead (4,000 1/4 Rs.0.55) Rs.5,400 Rs.2,000 1,240 1,200 -----4,440 -------Rs.81,840 ====== 910 800 -----7,110 -----Rs.147,510 ====== 900 550 -----15,850 -------Rs.192,600 ====== Rs.24,500 29,140 Rs..50 .62 Rs.37,310 Rs..91 Rs.32,400 Rs..90 ----------------

28,200 .60 32,800 .80 19,800 .55 -------------------------Rs.81,840 Rs.1.72 Rs.70,110 Rs.1.71 Rs.52,200 Rs.1.45 Rs..08 Rs..09 -----------------------------Rs.81,840 Rs.1.72 Rs.147,510 Rs.3.51 Rs.192,600 Rs.5.05 ====== === ====== === ====== ===

Rs.77,400

Rs.140,400 Rs.176,750

Rs.14,400

Total cost accounted for

BAHRIA UNIVERSITY 32