SABAR AART FARMER ENTERPRISE PRODUCER COMPANY LTD.:
USING PROCESS COSTING TO SET A PRICE CASE STUDY
SOLUTION
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pl
SYNOPSIS
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Sa
Shrikant Patel was the manager of Sabar Aart Farmer Enterprise Producer Company Ltd (SAFE), located
at Khedbrahma, in the Sabarkantha district of Gujarat. Patel knew that members of the farmer producer
organization (FPO) were working laboriously but were still not able to generate high incomes. Organic
n
cultivation of only a single crop in fertile land once a year did not boost their incomes. Passionate about
agriculture and social work, he wanted to encourage the FPO members to adopt multicropping and increase
tio
their incomes. He identified turmeric as one of the crops that was not grown in the Sabarkantha region.
Thus, growing turmeric along with creeper vegetables would not only ensure a steady income for the FPO
members but would also provide the FPO with first-mover advantage in organic turmeric cultivation in the
lu
region. Patel, not being an expert in accounting, needed support from advisers to determine an accurate
price for the turmeric powder from one kilogram (kg) of raw turmeric input.
So
OBJECTIVES
• Explain the concepts of material cost, labour cost, overheads, and normal loss.
• Describe the allocation and apportionment of overheads to the process.
• Calculate the cost of one kilogram of turmeric powder using the process costing method.
• Determine the sales price per kilogram (after adding the profit component) of turmeric seeds and
turmeric powder to be sold in the retail and wholesale markets.
The Case Solution Starts From page 7
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ASSIGNMENT QUESTIONS
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1. Estimate the normal loss in the reduction of the quantity to estimate the final quantity of output of
turmeric powder.
2. Identify and segregate costs as direct material, direct labour, direct expense, and overhead.
3. Identify the method (allocation or apportionment) in which the overhead would be absorbed in each process.
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4. Prepare a process costing account for the four processes (cleaning, boiling, drying, and grinding) to
estimate the cost of production of turmeric powder on a per-kilogram basis.
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5. Based on process costing, calculate the selling prices for turmeric seeds and turmeric powder to be sold in
the wholesale and the retail markets. Critically evaluate and comment on the fixing of these selling prices.
6. How would the market scenario influence the fixing of selling prices for turmeric seeds and turmeric
lu
powder in wholesale and retail markets?
So
The Case Solution Starts From page 7
,ANALYSIS
1. Estimate the normal loss in the reduction of the quantity to estimate the final quantity of output
of turmeric powder.
e
A normal loss is an estimated figure that represents the loss that would be expected under normal conditions.
pl
A normal loss cannot be avoided because of the nature of the material or process. Such a loss is inherent in
the process and is caused due to factors such as weight loss, evaporation, chemical change, withdrawals for
m
testing, and removal of spoiled quantity. It is usually estimated as a percentage of input. The normal loss
cannot remain unaccounted; its cost should be borne by the good production. If the normal loss is in a
Sa
physical form, it may have a scrap value, but if it is physically not present, then it does not have any value.
In the present case, normal loss occurs at three stages: At the cleaning stage, the spoiled turmeric, mud,
roots, etc. are removed, which reduces the input quantity. At the drying stage, the water content evaporates,
so the quantity is reduced further. At the grinding stage, some quantity of turmeric powder spreads on the
n
tio
lu
So
The Case Solution Starts From page 7
, e
pl
5. Based on process costing, calculate the selling prices for turmeric seeds and turmeric powder
m
to be sold in the wholesale and the retail markets. Critically evaluate and comment on the fixing
of these selling prices.
Sa
Based on the previous calculations, the cost of fresh turmeric is ₹20 per kg, which is the base cost for the
production of turmeric seeds. After applying the sequential process, the fresh turmeric is converted into a
value-added product—i.e., turmeric powder. The total cost of producing 4,469 kg of turmeric powder is
₹698,931. The per-kilogram cost of the turmeric powder is approximately ₹156. Patel decides to sell the
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seeds at 100 per cent profit on cost. He also decides to sell 80 per cent of the turmeric powder in the
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wholesale market, after charging a 4 per cent profit on cost, and to sell 20 per cent of the turmeric powder
in the retail market after charging a 34 per cent profit on cost. The calculation of the selling price per kg
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So
The Case Solution Starts From page 7
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EXHIBIT TN-2: SEGREGATION OF COSTS
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Particulars Nature of the Identification of Cost Object or Name of the
Cost Cost Centre Head
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Purchase of Raw Direct Process 1 Direct Material
Turmeric
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Loading and Unloading Direct Process 1 Direct Expense
Expense
Wages for Cleaning Direct Process 1 Direct Labour
Cleaning Vessels Overhead Process 1 Depreciation
(Indirect): Expense
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Allocation
Expense for Wood Log Direct Process 2 Direct Expense
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Purchase
Wages for Boiling Direct Process 2 Direct Labour
Electricity Expense Direct Process 2 Direct Expense
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So
The Case Solution Starts From page 7
, EXHIBIT -9: COMPUTATION OF SALES PRICE PER KILOGRAM (KG)
Numerical
Particulars Value
Total Cost of Finished Goods (Turmeric Powder) (₹) 698,931
Total Quantity of Turmeric Powder (kg) 4,469*
Cost Price per kg of Turmeric Powder (₹) 156
Particulars Seeds Wholesaling Retailing
Cost Price per kg (₹) 20 156 156
% of Profit on Cost Price 100% 4% 34%
Profit per kg (₹) 20 6 53
Selling Price per kg (₹) 40 162 209
e
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 7
USING PROCESS COSTING TO SET A PRICE CASE STUDY
SOLUTION
e
pl
SYNOPSIS
m
Sa
Shrikant Patel was the manager of Sabar Aart Farmer Enterprise Producer Company Ltd (SAFE), located
at Khedbrahma, in the Sabarkantha district of Gujarat. Patel knew that members of the farmer producer
organization (FPO) were working laboriously but were still not able to generate high incomes. Organic
n
cultivation of only a single crop in fertile land once a year did not boost their incomes. Passionate about
agriculture and social work, he wanted to encourage the FPO members to adopt multicropping and increase
tio
their incomes. He identified turmeric as one of the crops that was not grown in the Sabarkantha region.
Thus, growing turmeric along with creeper vegetables would not only ensure a steady income for the FPO
members but would also provide the FPO with first-mover advantage in organic turmeric cultivation in the
lu
region. Patel, not being an expert in accounting, needed support from advisers to determine an accurate
price for the turmeric powder from one kilogram (kg) of raw turmeric input.
So
OBJECTIVES
• Explain the concepts of material cost, labour cost, overheads, and normal loss.
• Describe the allocation and apportionment of overheads to the process.
• Calculate the cost of one kilogram of turmeric powder using the process costing method.
• Determine the sales price per kilogram (after adding the profit component) of turmeric seeds and
turmeric powder to be sold in the retail and wholesale markets.
The Case Solution Starts From page 7
, e
pl
m
ASSIGNMENT QUESTIONS
Sa
1. Estimate the normal loss in the reduction of the quantity to estimate the final quantity of output of
turmeric powder.
2. Identify and segregate costs as direct material, direct labour, direct expense, and overhead.
3. Identify the method (allocation or apportionment) in which the overhead would be absorbed in each process.
n
4. Prepare a process costing account for the four processes (cleaning, boiling, drying, and grinding) to
estimate the cost of production of turmeric powder on a per-kilogram basis.
tio
5. Based on process costing, calculate the selling prices for turmeric seeds and turmeric powder to be sold in
the wholesale and the retail markets. Critically evaluate and comment on the fixing of these selling prices.
6. How would the market scenario influence the fixing of selling prices for turmeric seeds and turmeric
lu
powder in wholesale and retail markets?
So
The Case Solution Starts From page 7
,ANALYSIS
1. Estimate the normal loss in the reduction of the quantity to estimate the final quantity of output
of turmeric powder.
e
A normal loss is an estimated figure that represents the loss that would be expected under normal conditions.
pl
A normal loss cannot be avoided because of the nature of the material or process. Such a loss is inherent in
the process and is caused due to factors such as weight loss, evaporation, chemical change, withdrawals for
m
testing, and removal of spoiled quantity. It is usually estimated as a percentage of input. The normal loss
cannot remain unaccounted; its cost should be borne by the good production. If the normal loss is in a
Sa
physical form, it may have a scrap value, but if it is physically not present, then it does not have any value.
In the present case, normal loss occurs at three stages: At the cleaning stage, the spoiled turmeric, mud,
roots, etc. are removed, which reduces the input quantity. At the drying stage, the water content evaporates,
so the quantity is reduced further. At the grinding stage, some quantity of turmeric powder spreads on the
n
tio
lu
So
The Case Solution Starts From page 7
, e
pl
5. Based on process costing, calculate the selling prices for turmeric seeds and turmeric powder
m
to be sold in the wholesale and the retail markets. Critically evaluate and comment on the fixing
of these selling prices.
Sa
Based on the previous calculations, the cost of fresh turmeric is ₹20 per kg, which is the base cost for the
production of turmeric seeds. After applying the sequential process, the fresh turmeric is converted into a
value-added product—i.e., turmeric powder. The total cost of producing 4,469 kg of turmeric powder is
₹698,931. The per-kilogram cost of the turmeric powder is approximately ₹156. Patel decides to sell the
n
seeds at 100 per cent profit on cost. He also decides to sell 80 per cent of the turmeric powder in the
tio
wholesale market, after charging a 4 per cent profit on cost, and to sell 20 per cent of the turmeric powder
in the retail market after charging a 34 per cent profit on cost. The calculation of the selling price per kg
lu
So
The Case Solution Starts From page 7
, e
EXHIBIT TN-2: SEGREGATION OF COSTS
pl
Particulars Nature of the Identification of Cost Object or Name of the
Cost Cost Centre Head
m
Purchase of Raw Direct Process 1 Direct Material
Turmeric
Sa
Loading and Unloading Direct Process 1 Direct Expense
Expense
Wages for Cleaning Direct Process 1 Direct Labour
Cleaning Vessels Overhead Process 1 Depreciation
(Indirect): Expense
n
Allocation
Expense for Wood Log Direct Process 2 Direct Expense
tio
Purchase
Wages for Boiling Direct Process 2 Direct Labour
Electricity Expense Direct Process 2 Direct Expense
lu
So
The Case Solution Starts From page 7
, EXHIBIT -9: COMPUTATION OF SALES PRICE PER KILOGRAM (KG)
Numerical
Particulars Value
Total Cost of Finished Goods (Turmeric Powder) (₹) 698,931
Total Quantity of Turmeric Powder (kg) 4,469*
Cost Price per kg of Turmeric Powder (₹) 156
Particulars Seeds Wholesaling Retailing
Cost Price per kg (₹) 20 156 156
% of Profit on Cost Price 100% 4% 34%
Profit per kg (₹) 20 6 53
Selling Price per kg (₹) 40 162 209
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Sa
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The Case Solution Starts From page 7
