Process Costing
Process Costing
Process Costing
COSTING
CH:4 H&P
■ Process costing is a costing method used where it is not possible to
identify separate units of production, or jobs, usually because of the
continuous nature of the production processes involved.
200,000
Direct labour
Production 200,000
overheads
Units
Step 4 Complete accounts
Actual output
850
PROCESS ACCOUNT
Normal loss (10% × 1,000) Units $ Units $
100
Period 3
Abnormal loss
50 29,070
Input Cost of input 1,000 Normal loss 100 0
1,000 Finished goods
Period 4 a/c 850 27,455
(850× $32.30)
Units Abnormal loss
Step 2 Calculate cost per unit of output and losses
Actual output a/c 50 1,615
For each 950
period the cost per unit is based on expected output.
=Cost of input / Expected units of output (50× $32.30)
Normal loss (10% × 1,000)
= $29,070/ 900 29,070 1,000
100
= $32.30 per unit 1,000 29,070
Abnormal gain
(50) Period 4
Step 3 Calculate total cost of output and losses
Input 29,070
Period 1,000
3
$ Cost of input 1,000 Normal loss 100 0
Cost of output (850 × $32.30) Abnormal gain Finished goods
27,455 a/c 50 1,615 a/c 950 30,685
Normal loss ABNORMAL
(50 × $32.30) LOSS OR(950
GAIN ACCOUNT
× $32.30)
0 30,685 1,050
Abnormal loss (50 × $32.30) 1,050 $ $30,685
1,615 Period 3 Period 4
29,070 Abnormal loss in 1,615 Abnormal gain in
Period 4 process a/c process a/c 1,615
$
Abnormal loss in 1,615 Abnormal gain in
Cost of output (950 × $32.30) process a/c process a/c 1,615
30,685
Example :Cost of output
■ CFC Co manufactures a product in a single process operation. Normal loss is
10% of input. Loss occurs at the end of the process. Data for June are as follows.
■ Opening and closing inventories of work in progress
Nil
■ Cost of input materials (3,300 units)
$59,100
■ Direct labour and production overhead
$30,000
■ Output to finished goods
2,750 units
– The full cost of finished
The output
correct in June was
answer is C.
– A $74,250
– B $81,000
– C $82,500
– D $89,100
Step 1 Determine output and losses
Units
Actual output
2,750
Normal loss (10% × 3,300)
330
Abnormal loss
220
3,300
Step 2 Calculate cost per unit of output and
losses
=Cost of input / Expected units of output
= $89,100 / 3,300 -330
= $30 per unit
Step 3 Calculate total cost of output and losses
$
Cost of output (2,750 × $30)
82,500
Normal loss
0
Abnormal loss (220 × $30)
6,600
89,100
Example: Abnormal gain
■ Y Co makes a product Emm which goes through several processes. The following
information is available for the month of June.
Kg
■ Opening WIP 5,200
■ Closing WIP 3,500
■ Input 58,300
■ Normal loss 400
■ Transferred to finished goods 59,900
– What was the abnormal gain in June?
■ A 260 kg
■ B 300 kg
■ C 400 kg
The correct answer is B.
■ D 560 kg
The abnormal gain is the balancing figure. 63,800 – 5,200 – 58,300
= 300
ACCOUNTING FOR SCRAP
■ Scrap is 'discarded material having some value'. CIMA
Official Terminology
(a) Revenue from scrap is treated, not as an addition to sales revenue, but as a
REDUCTION IN COSTS.
The valuation of normal loss is either at scrap value or nil. It is
conventional for the scrap value of normal loss to be deducted from the
cost of materials before a cost per equivalent unit is calculated.
(b) The scrap value of normal loss is therefore used to reduce the material costs of
the process.
DEBIT Scrap account
CREDIT Process account
with the scrap value of the normal loss.
Abnormal losses and gains never affect the cost of
good units of production. The scrap value of
abnormal losses is not
credited to the process account, and the abnormal
loss and gain units carry the same full cost as a
good unit of
(c) The scrap value of abnormal loss is used to reduce the cost of abnormal
loss.
DEBIT Scrap account
CREDIT Abnormal loss account
with the scrap value of abnormal loss, which therefore reduces the write-off
of cost to the income statement.
(d) The scrap value of abnormal gain arises because the actual units sold as
scrap will be less than the scrap value of normal loss. Because there are fewer
units of scrap than expected, there will be less revenue from scrap as a direct
consequence of the abnormal gain. The abnormal gain account should
therefore be debited with the scrap value.
DEBIT Abnormal gain account
CREDIT Scrap account
with the scrap value of abnormal gain.
(e) The scrap account is completed by recording the actual cash received from
the sale of scrap.
DEBIT Cash received
CREDIT Scrap account
with the cash received from the sale of the actual scrap.
Example: scrap and abnormal loss
or
A gain
factory has two production processes. Normal loss in each process is 10%
and scrapped units sell for $0.50 each from process 1 and $3 each from
process 2. Relevant information for costing purposes relating to period 5 is
as follows.
Direct materials added: Process 1
Process 2
units 2,000
1,250
cost $8,100
$1,900
Direct labour $4,000
$10,000
Production overhead 150% of direct labour cost
120% of direct labour cost
Process 1 Process 2
Units Units
Output 1,750 2,800
Normal loss (10% of input) 200 300
Abnormal loss 50 -
Abnormal gain - (100)
Input 2,000 3,000*
Process 1 Process 2
$ $
Cost of input
– material 8,100 1,900
– from Process 1 – (1,750 × $10) 17,500
– labour 4,000 10,000
– overhead (150% × $4,000) 6,000 (120% × $10,000) 12,000
18,100 41,400
Less: scrap value of
normal loss (200 × $0.50) (100) (300 × $3) (900)
18,000 40,500
Expected output
90% of 2,000 1,800
90% of 3,000 2,700
Cost per unit
$18,000 ÷ 1,800 $10
$40,500 ÷ 2,700 $15
Step 3 Calculate total cost of output and losses
Process 1 Process 2
$ $
Output (1,750 × $10) 17,500 (2,800 × $15) 42,000
Normal loss (200 × $0.50)* 100 (300 × $3)* 900
Abnormal loss (50 × $10) 500 –
18,100 42,900
Abnormal gain – (100 × $15) (1,500)
18,100 41,400
Units
Units $ $
Scrap a/c (normal
Direct material 2,000 8,100 loss) 200 100
1,750 17,500
Direct labour
PROCESS 2 ACCOUNT4,000 Process 2 a/c
Production overhead
a/c Units $ 6,000 Abnormal loss a/cUnits 50$ 500
Direct materials: From 1,750 17,500 Scrap a/c (normal
process 1 loss) 300 2,000
90018,100
2,000
1,250 1,900 18,100Finished goods
Added materials a/c 2,800 42,000
Direct labour 10,000
Production o'hd 12,000
3,000
41,400
Abnormal gain 100 1,500
3,100
42,900 3,100 42,900
ABNORMAL LOSS ACCOUNT
$ $
Scrap a/c: sale of scrap of extra loss (50 units
Process 1 (50 units) 500 @$0.50) 25
Income statement 475
500 500
ABNORMAL GAIN ACCOUNT
$ $
Scrap a/c (loss of scrap
revenue Process 2 abnormal gain 1,500
due to abnormal gain, (100 units)
100 units × $3) 300
Income statement 1,200
1500 1500
SCRAP ACCOUNT
$ $
Scrap value of normal loss Cash a/c - cash received
Process 1 (200 units) Loss in process 1 (250 units)
@$0.50 100 @$0.50 125
Process 2 (300 units) Loss in process 2 (200 units)
@$3.00 900 @$3.00 600
Abnormal loss a/c (process
1) 25 Abnormal gain a/c (process 2) 300
VALUING CLOSING WORK IN
PROGRESS
■ When units are partly completed at the end of a period (ie when there is
closing work in progress) it is necessary to calculate THE EQUIVALENT
UNITS OF PRODUCTION in order to determine the cost of a completed
unit.
•In the earlier problem we have looked at so far we have assumed that
opening and closing inventories of work in process have been nil.
•We must now look at more realistic issue and consider how to allocate the
costs incurred in a period between completed output (ie finished units) and
partly completed closing inventory.
Example: valuation of closing inventory
■ Tim Co is a manufacturer of processed goods. In March 20X3, in one
process, there was no opening inventory, but 5,000 units of input were
introduced to the process during the month, at the following cost.
$
– Direct materials
16,560
– Direct labour
7,360
– Production overhead
5,520
29,440
■ Of the 5,000 units introduced, 4,000 were completely finished during the
month and transferred to the next process. Closing inventory of 1,000 units
was only 60% complete with respect to materials and conversion costs.
■ Solution:
■ (a) The problem in this example is to divide the costs of production
($29,440) between the finished output of 4,000 units and the closing
inventory of 1,000 units. It is argued, with good reason, that a division of
costs in proportion to the number of units of each (4,000:1,000) would not
be 'fair' because closing inventory has not been completed, and has not yet
'received' its full amount of materials and conversion costs, but only 60% of
the full amount. The 1,000 units of closing inventory, being only 60%
complete, are the equivalent of 600 fully worked units.
■ (b) To apportion costs fairly and proportionately, units of production must be
converted into the equivalent of completed units, ie into equivalent units
of production.
Equivalent units are 'notional whole units
representing incomplete work. Used to apportion
costs between work in
progress and completed output …' CIMA Official
Terminology
Step 1 Determine output
Step 2 Calculate cost per unit of output, and WIP
For this step in our framework we need to prepare a statement
of equivalent units.
For this step in our framework we need to prepare a statement of costs per
STATEMENT OF EQUIVALENT UNITS equivalent unit because equivalent units are the basis for apportioning costs.
Total Equivalent
STATEMENT OF COSTS PER EQUIVALENT UNIT
Completio
units n units =Total costs / Equivalent units
Fully worked units 4,000 100% 4,000 = $29,440 /4,600 .
Closing inventory 1,000 60% 600 = Cost per equivalent unit $6.40
5,000 4,600
Step 3 Calculate total cost of output and WIP Step 4 Complete accounts
For this step in our framework a statement of evaluation may The process account would be shown as follows.
now be prepared, to show how the costs should be apportioned PROCESS ACCOUNT
between finished output and closing inventory.
Units
STATEMENT OF EVALUATION Units $ $
Equivalent Cost per equivalent
Item units unit Valuation $ Direct 16,560 4,00 25,600
Fully worked materials 5,000 Output to next process 0
units 4,000 $6.40 25,600
Closing 1,00
inventory 600 $6.40 3,840 Direct labour 7,360 Closing inventory c/f 0 3,840
4,600 29,440 Production
o'hd 5,520
A few hints on preparing accounts:
When preparing a process account, it might help to make the entries as follows.
29,440 5,00 29,440
(a) Enter the units first. The units columns are simply memorandum
5,000 columns, but they help you
0 to
make sure
that there are no units unaccounted for (for example as loss).
(b) Enter the costs of materials, labour and overheads next. These should be given to you.
(c) Enter your valuation of finished output and closing inventory next. The value of the credit
entries should,
Example: changes in inventory
level and losses
The following data have been collected for a process.
Opening Output to finished
inventory none goods 2,000 units
Input units 2,800 units Closing inventory 450 units, 70% complete
Cost of input $16,695 Total loss 350 units
Normal loss 10%; nil scrap value
Required:
Prepare the process account for the period.
Step 1 Determine output and losses
STATEMENT OF EQUIVALENT UNITS
Equivalent
units
of work Step 2 Calculate cost per unit of output, losses and WIP
done this STATEMENT OF COST PER EQUIVALENT UNIT
= Costs incurred/ Equivalent units of work done
Total units period
= $16,695 / 2,385
(× Cost per equivalent unit = $7
Completely worked units 2,000 100%) 2,000
(× 70%)
Closing inventory 450 315
Normal loss 280 0
(×
Abnormal loss 70 100%) 70
Step 3 Calculate total cost of output, losses and WIP Step 4 Complete
STATEMENT OF 2,800
EVALUATION 2,385 accounts
Equivalent PROCESS ACCOUNT
units $ Units $ Units $
Completely worked units 2,000 14,000 Opening inventory – – Normal loss 280 0
Closing inventory 315 2,205
Abnormal loss 70 490 16,69 14,000
Input costs 2,800 5 Finished goods a/c 2,000
2,385 16,695
Abnormal loss a/c 70 490
Closing inventory c/d 450 2,205
16,69 16,695
2,800 5 2,800