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Process Costing: An Overview of Key Concepts and Calculations

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PROCESS COSTING
Process
Where goods and services results from sequence of continuous &
repetitive operations or processes
Process costing is used when company is mass producing the same
items and the items goes through a number of different stages
For example : cement, chemical, oil & paint industries
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
11
PROCESS COSTING
Two key issues in process costing are losses & incomplete units
During production process, some input is loss due to evaporation or
wastage
Normal loss represent items that you expect to loss during a process.
Therefore its cost is treated as part of cost of good production
Normal loss are usually treated as percentage of input i.e. normal loss is
expected to be 5% of the input material
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
12
PROCESS COSTING
Illustration:
At the start of the heating process 1,000 Kg of material costing $16/kg
is input. During the process the conversion cost of $2,000 are incurred.
Normal loss through evaporation is expected to be 10% of the input.
During March, 1,000 Kg were the input and output was 900 Kg.
Compute the unit and total cost of the output in March?
Output
Loss (Balancing)
Input
900 Kg
100 Kg
1,000 Kg
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
13
PROCESS COSTING
Material ($16×1,000kg)
$16,000
Conversion Cost
$2,000
Total Input Cost
$18,000
Cost per Unit of Output = Net cost of input
Expected Good Output
Cost per Unit of Output = $18,000
$20/kg
(1000-100)
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
14
PROCESS COSTING
Process Account
Kg
Input
1,000
Conversion Cost
1,000
SCHOOL OF BUSINESS & MANAGEMENT
$
Kg
$
16,000 Input
2,000 Normal Loss
900
100
18,000
-
18,000
1,000
18,000
MISS FATIMA KHIZAR
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PROCESS COSTING
2nd key issue is incomplete units
Process costing is also used when products may not be completed at
the end of the period
For example: Manufacturing Cars
This means that process costs need to be shared between finished
(complete units) and Work In Progress-WIP (incomplete units)
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
16
PROCESS COSTING
To be able to assigned correct amount of cost to finished and partially
completed units, we use a concept called equivalent units or EU
For example: if we had 1,000 units that are 50% complete at the end of
the period. How many finished units is this equivalent to?
1,000×50%=500 equivalent units
Equivalent units (EU) = No of Physical units × Percentage completion
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
17
PROCESS COSTING
Illustration:
EM Ltd is a manufacturer. In period 1 the following production occurred
Started
= 1,400 Units
Closing Work in Progress (CWIP)
= 400 Units
Degree of completion of CWIP :
Material = 100%
Conversion = 50%
Cost incurred in period 1:
Material=$81,060 Conversion=$71,940
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
18
PROCESS COSTING
Started
Finished
CWIP
1,400
1,000
400
Finished goods are 100% complete for both material & conversion
EUs
Material
Conversion
Finished Goods (1,000×100%)
CWIP (400×100%)
Finished Goods (1,000×100%)
CWIP (400×50%)
SCHOOL OF BUSINESS & MANAGEMENT
1,000
1,400
400
1,000
1,200
200
MISS FATIMA KHIZAR
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PROCESS COSTING
Input
Cost ($)
Units
Cost per EU ($)
Material
81,060
1,400
57.90
Conversion
71,940
1,200
59.95
Total
153,000
2,600
117.85
SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
20
PROCESS COSTING
Cost may now be attributed to the output
Input
$
Completed Units
1,000×$117.85
CWIP (Material)
400×$57.90
23,160
CWIP (Conversion)
200×$59.95
11,990
$
117,850
35,150
Total
SCHOOL OF BUSINESS & MANAGEMENT
153,300
MISS FATIMA KHIZAR
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PROCESS COSTING
Process Account
$
Material
Conversion
SCHOOL OF BUSINESS & MANAGEMENT
81,060 Finished Goods
71,940 CWIP Material
CWIP Conversion
153,000
$
117,850
23,160
11,990
153,000
MISS FATIMA KHIZAR
PROCESS
COSTING
ACTIVITY 4
(SOLUTION)
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MISS FATIMA KHIZAR
PROCESS
COSTING
ACTIVITY 5
(SOLUTION)
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MISS FATIMA KHIZAR
PROCESS
COSTING
ACTIVITY 5
(SOLUTION)
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MISS FATIMA KHIZAR
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SCHOOL OF BUSINESS & MANAGEMENT
MISS FATIMA KHIZAR
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