10 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 15 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=$71,940 SCHOOL OF BUSINESS & MANAGEMENT MISS FATIMA KHIZAR 18 PROCESS COSTING Started Finished CWIP 1,400 1,000 400 Finished goods are 100% complete for both material & conversion EUs Material Conversion Finished Goods (1,000×100%) CWIP (400×100%) Finished Goods (1,000×100%) CWIP (400×50%) SCHOOL OF BUSINESS & MANAGEMENT 1,000 1,400 400 1,000 1,200 200 MISS FATIMA KHIZAR 19 PROCESS COSTING Input Cost ($) 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 21 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) SCHOOL OF BUSINESS & MANAGEMENT 22 MISS FATIMA KHIZAR PROCESS COSTING ACTIVITY 5 (SOLUTION) SCHOOL OF BUSINESS & MANAGEMENT 23 MISS FATIMA KHIZAR PROCESS COSTING ACTIVITY 5 (SOLUTION) SCHOOL OF BUSINESS & MANAGEMENT 24 MISS FATIMA KHIZAR 25 SCHOOL OF BUSINESS & MANAGEMENT MISS FATIMA KHIZAR