Skip to content

CMA Intermediate · Cost Accounting · Process Costing

Rajdhani Components has three processes. P1 transfers to P2 at cost plus 25% on cost. P2 transfers to P3 at cost plus 20% on cost. At year end, P2's stock holds P1 material of Rs 60,000 at P1's transfer price. P3's stock holds goods from P2 at Rs 72,000 transfer price, where P2's cost of Rs 60,000 included Rs 40,000 of P1 transfer price. The opening provision for unrealised profit was Rs 26,000. What is the amount to be charged to profit and loss for the increase in the provision?

The increase in provision is Rs 6,000. Closing provision is Rs 12,000 on P2 stock plus Rs 20,000 on P3 stock (Rs 12,000 of P2 profit and Rs 8,000 of P1 profit embedded in cost), totalling Rs 32,000. Subtracting the opening Rs 26,000 leaves Rs 6,000.

  1. ARs 6,000Correct
  2. BRs 32,000
  3. CRs 8,000
  4. DRs 2,000 (decrease)

Explanation

P2 stock: 60,000 x 25/125 = 12,000. P3 stock: P2's own profit 72,000 x 20/120 = 12,000, plus P1 profit embedded in the Rs 40,000 P1 material: 40,000 x 25/125 = 8,000, giving 20,000. Closing provision = 12,000 + 20,000 = 32,000. Increase = 32,000 - 26,000 = 6,000. Rs 32,000 is the closing balance, not the increase, and ignoring P1's profit in P3 stock gives a decrease of Rs 2,000.

Did you get it right without looking?

One question tells you little. A timed set on Process Costing shows your real accuracy, how long you take and where you lose marks.

Practise Process CostingFree diagnostic mock

More Process Costing questions