Process Costing
1
Process costing
Process costing is adopted when there is
mass production through a sequence of
several processes
Example include chemical, flour and glass
manufacturing
It computes the average cost per unit by
dividing the costs or production for a
particular period by the number of units
produced during the period
2
Direct material
Direct labour
overheads
Process 1
Direct material
Direct labour
overheads
Process 2
Direct material
Direct labour
overheads
Process 3
Finished goods
Cost of goods sold
3
Accounting for Process Costing
Costs are accumulated by each process
Each process maintains its process account
The process account is debited with the
costs incurred and credited with goods
completed and transferred to other
process account
When the goods are completed, they will
be transferred to finished goods account
When the goods are sold, the amount will
be transferred to the cost of goods sold
account
4
Process A
Process B
Material 500 Process B
Labour 100
Overhead200
800
800
800
Process C
1100
1100
1100
Finished Goods
Process B 1100 Finished Gds 1500
Material 80
Labour 110
Overhead 210
1500
Process A800 Process C
Material 50
Labour 150
Overhead100
1500
Process C 1500 Cost of GDs
Sold
1300
Bal c/d
200
1500
1500
5
Accounting for losses and
scrap in process account
6
Accounting for losses in process
costing
In a production process, losses are
inherent and unavoidable
Nature of losses
Normal loss
Abnormal loss
7
Accounting for scrap
Damaged goods may be sold as scrap
Revenue arising from the scrap should
be treated as a reduction in cost
rather than an increase in sales
revenue
8
Transactions
Normal loss
Accounting
treatment
Losses within
expected level
Not assigned cost
Abnormal loss Excess loss over
the expected level
Assigned cost
Accounting
entries
No entry
Dr. Abnormal
loss
Cr. Process
account
Abnormal gain Gain resulted when Dr. Process
the actual loss is
account
less than the
Cr. Abnormal
normal or
gain
expected loss
9
Transactions
Accounting
treatment
Scrap value of Reducing material
normal loss
cost
Scrap value of Reduce cost of
abnormal loss abnormal loss
Loss of scrap The actual units
value due to
sold as scrap will
abnormal gain be less than the
scrap value of
normal loss
Accounting
entries
Dr. Scrap
Cr. Process
account
Dr. Scrap
Cr. Abnormal
loss
Dr. Abnormal
gain
Cr. Scrap
10
Transactions
Accounting
treatment
Actual cash
Reducing material
received from cost
the sale of
scrap
Accounting
entries
Dr. Cash
Cr. Scrap
11
Example
12
Joyce Ltd. operates a factory involving two production
Processes. The output of process 1 is transferred to process
2. The information of production for January 2005 is as
follows:
•
•
•
•
Cost for Process 1
Materials:
3000 units at $5 per unit
Labour
$2400
Cost for Process 2
Materials:
2000 unit at $8 per unit
Labour
$1680
No opening and closing work in progress
Output for January 2005
Process 1:
2300 units
Process 2
4000 units
13
• General overhead, for January 2005 amounted to $7140,
are absorbed into the process cost at a rate of 375% of
direct labour costs in process 1 and 496.4% of direct labour
cost in process 2.
• The normal output of process 1 and process 2 is 80% and
90% of input respectively
• Waste matters from process 1 and sold for $4 per unit
and those from process 2 for $6 per unit
Required:
(a) Process 1
(b) Process 2
(c) Scrap
(d) Abnormal loss
(e) Abnormal gain
14
Process 1 account
Units $
Units $
Materials
3000 15000 Scrap: normal loss
(4*600)
600 2400
($5 *3000)
Process 2
Labour
2400
($10*2300)
2300 23000
Overhead
9000
Abnormal loss
(2400*375%)
($10 *100)
100
1000
3000 264000
3000 26400
Cost per unit
= Total expected cost
Total expected output
= $26400-$2400
3000-600
= $10 per unit
15
Process 2 account
Units $
Units $
Process 1
2300 23000 Scrap: normal loss
430 2580
Materials
2000 16000 ($6*430)
Labour
1680 Finished goods
4000 48000
Overhead
8340 ($12*4000)
(1680*469.4%)
4300 49020
Abnormal gain
($12 *130)
130
1560
4430 50580
4430 50580
Cost per unit
= = $49020-$2580
4300-430
= $12 per unit
16
Abnormal loss account
Process 1
Units $
100
1000 Scrap
Profit and loss
100
1000
Units $
100
400
600
100
1000
Abnormal Gain account
Scrap: value of
abnormal gain
Profit and loss
Units
130
100
$
780
780
1000
Process 2
Units $
130
1560
100
1000
Loss on scrap value due to abnormal gain
17
Scrap account
Units $
600 2400
Units
$
Abnormal gain
Normal loss
(Process 2)
130 780
(Process 1)
Normal loss 430 2580 (130*$6)
Cash –process 1
(Process 2)
700 2800
Abnormal loss 100 400 (600+100)*$4
Cash – process 2
(Process 1)
(430-130)*$6
300 1800
(100*$4)
1130 5380
1130 5380
18
Wk 1:
Determining the output and loss:
Process 1
Input
3000 units
Less: normal loss (20%) 600 units
2400 units
Expected output
Actual output
2300 units
Abnormal loss
100 units
Wk 2:
Determining the output and loss:
Process 2
Input (2300+2000)
4300 units
Less: normal loss (10%) 430 units
3870 units
Expected output
Actual output
4000 units
Abnormal gain
130 units
Back 1
Back 2
19
Equivalent units of
production
20
Equivalent units of production
If there is no opening or closing work
in progress (WIP) the unit cost of
products can be obtained as follows
Unit Cost = Sum of production costs
Production quantity
21
However, If there is opening or
closing work in progress, the partly
completed production will have a
lower cost than the fully completed
production
We have to converted the work in
progress into finished equivalent
units of production (EUP)
22
Example
23
The total production cost for January 2005 was $40000.
8000 units had been completed and 4000 units wee 50%
complete.
Equivalent units of production
8000 units completed
8000
4000 units were 50% completed
2000
10000
Finished goods = $40000/10000 * 8000 = $32000
Closing work in progress = $40000/10000*2000 = $8000
24
Three categories in determining
the equivalent units of
production
Opening work in progress
Started and completed units
Closing work in progress
25
Opening work in progress (OWIP)
These units were started in the
previous period and are to be
completed in the current period
1/3 EUP completed
In previous period
2/3 EUP completed
in current period
26
Started and completed units
(SACU)
These units are started and
completed in the current period
1 EUP completed
in current period
27
Closing Work in progress (CWIP)
These units are started in the
current period and are to be
completed in the coming period
1/3 EUP completed
in current period
Incomplete part
28
Two methods of cost flows in
process costing
First in First out
Weighted average cost
29
First-in-first-out
method
The opening work in
progress is the first
group of units to be
processed and
completed during the
current period
It separates the cost
computations of the
opening work in progress
and the current period
production
Weighted average
method
The opening work in
progress is merged with
the production of the
current period to form
one batch of production
The average cost per
unit of the opening work
in progress and the
current period
production is the same
30
First-in-first-out
method
The EUP computation
ignores the work
performed on the opening
work in progress during
the prior period
Cost per unit
= Current cost
EUP
Weighted average
method
The EUP computation
includes all work
performed on the opening
work in progress during
the prior period
Cost per unit
= Cost of OWIP + Current Cost
EUP
31
FIFO Method
WAVCO Method
10 units of OWIP
(60% completed
in previous
Period)
4 EUP
70 SACU
70 EUP
+
+
40 units of CWIP
(20% completed)
8 EUP
82 EUP
10 units of OWIP
(60% completed
in previous
Period)
70 SACU
40 units of CWIP
(20% completed)
10 EUP
+
70 EUP
+
8 EUP
88 EUP
32
Example
33
Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion
%
Direct materials
100
Conversion (labour + overhead) 60
February production: 20000 units
Cost
$
6000
1200
7200
$
Direct materials
30000
Conversion
52200
82200
Closing work in progress: 3000 units (20% as complete as to
conversion
34
You are required to :
Prepare Process 1 account using
(a)The FIFO method of valuation; and
(b)The weighted average method of valuation
35
First in First out
36
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units
EU
EU
Opening work in progress
1000
0
400 (40%)
Other completed units
17000
17000
17000
Total completed units
18000
17000
17400
3000
3000
600 (20%)
Closing work in progress
21000 20000
18000
20000-3000
Wk 2:
Costs
Total
Materials
Conversion
No opening WIP
$
$
$
30000
52200
Costs incurred in the period 82200
Costs per equivalent units
4.4
1.5
2.9
37
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials
Conversion
$
$
$
Opening WIP
7200
6000
1200
(Wk 4) 1160
1160
Cost to complete
8360
6000
2360
1000 units completed
74800
25500 (Wk 5) 49300
17000 units completed
51660
Transfer to finished goods83160 31500
Closing WIP
6240
4500 (Wk 6) 1740
89400
36000
53400
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 17000*$1.5 = $25500
Conversion: 17000*$2.9 = $49300
Wk 6: Materials: 3000*$1.5 = $4500
Conversion: 600*$2.9 = $1740
38
Process account
Units $
Units
$
Opening WIP 1000 7200 Finished goods 18000 83160
Materials
20000 30000 Closing WIP 3000
6240
Conversion
52200
21000 89400
21000 89400
39
Weighted average cost method
40
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units
EU
EU
Opening work in progress
1000
1000
1000
Other completed units
17000
17000
17000
Total completed units
18000
18000
18000
3000
3000
600 (20%)
Closing work in progress
21000 21000
18600
20000-3000
Wk 2:
Costs
Total
Materials
Conversion
$
$
$
7200
6000
1200
Opening WIP
Costs incurred in the period 82200
30000
52200
89400
36000
53400
41
Costs per equivalent units
4.5853
1.7143
2.8710
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials
Conversion
$
$ (Wk 4) $
51678
Transfer to finished goods82535 30587
6865
5143 (Wk 5) 1722
Closing WIP
89400
35730
53400
Wk 4: Materials: 18000*$1.7143 = $30587
Conversion: 17000*$2.8710 = $51678
Wk 5: Materials: 3000*$1.7143 = $51678
Conversion: 600*$2.8710 = $1722
42
Process account
Units $
Units
$
Opening WIP 1000 7200 Finished goods 18000 82535
Materials
20000 30000 Closing WIP 3000
6865
Conversion
52200
21000 89400
21000 89400
43
Lost units in process costing
44
Nature of losses
Normal loss
Abnormal loss
45
Normal loss
Normal loss are the losses within the
expectation during the production
Reasons:
Low quality materials and workers are
engaged
There may be an inherent problem in
production process
46
Abnormal loss
The lost units that is out of
expectation
47
Continuous loss
Continuous losses occur evenly
throughout the production process
For example, the weight loss in
making mild powder
48
Discrete loss
Discrete losses occur at the specific
point
A firm will not be aware of discrete
losses unless the products are
inspected at the inspection point
For example, wrong buttons on a
garment and wrong colour of toy cars
m
49
Types and natures
EUP calculation
Continuous normal loss Excluding the lost
units
Continuous and
abnormal loss
Including the lost
units
Discrete and normal
loss
Including the lost
units
Discrete and abnormal Including the lost
loss
units
50
Types and natures
Treatments for losses and costs
Continuous normal loss
Losses are included as product
costs
Costs are not assigned to the
lost units
Continuous and
abnormal loss
Losses are charged as period
cost
Costs are assigned to the lost
units
Abnormal loss will be written
off to the profit and loss
51
Types and natures
Treatments for losses and costs
Discrete and normal
loss
Loss are included as product
cost
Cost are assigned to lost units
Determining the point of work
in progress:
1. Before passing inspection
point, cost of lost units are
only assigned to units
transferred
2. After passing inspection point,
cost of lost units are
allocated between units
transferred and closing WIP
52
Types and natures
Discrete and abnormal
loss
Treatments for losses and costs
Loss are charged as period
cost
Cost are assigned to lost units
Abnormal losses will be
written off to the profit and
loss account
53
Example
54
Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion
%
Direct materials
100
Conversion (labour + overhead) 60
February production: 20000 units
Cost
$
6000
1200
7200
$
Direct materials
30000
Conversion
52200
82200
Closing work in progress: 3000 units (20% as complete as to
conversion
55
Loss: 2000 units
You are required to :
Prepare Process 1 account using the FIFO method:
Case 1: Continuous normal loss
Case 2: Discrete normal loss
Case 3: Abnormal loss (both continuous and discrete
loss)
56
Case 1: Continuous normal
loss
57
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units
EU
EU
Opening work in progress
1000
0
400 (40%)
Other completed units
15000
15000
15000
Total completed units
16000
15000
15400
Normal loss
2000
3000
3000
600 (20%)
Closing work in progress
21000 18000
16000
Wk 2: 20000-3000-2000
Costs
Total
Materials
Conversion
No opening WIP
$
$
$
30000
52200
Costs incurred in the period 82200
Costs per equivalent units
4.9292
1.6667
3.2625
58
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials
Conversion
$
$
$
Opening WIP
7200
6000
1200
(Wk 4) 1305
1305
Cost to complete
8505
6000
2505
1000 units completed
73938 25000.5(Wk 5) 48937.5
15000 units completed
51442.5
Transfer to finished goods82443 31000.5
Closing WIP
6957
5000 (Wk 6) 1957
89400
36000.5 53399.5
Wk:4 Conversion: $3.2625*400= 1305
Wk 5: Materials: 15000*$1.6667 = $25000.5
Conversion: 15000*$3.2625 = $48937.5
Wk 6: Materials: 3000*$1.6667 = $5000
Conversion: 600*$3.2625 = $1957
59
Process account
Units $
Units
$
2000
Opening WIP 1000 7200 Normal loss
Materials
20000 30000 Finished goods 16000 82443
6957
Conversion
52200 Closing WIP 3000
21000 89400
21000 89400
60
Case 2: Discrete normal loss
It is assumed that the inspection point
is set at 100% completion, all work has
been performed. As a result, the costs
of lost units are assigned to the units
transferred
Material added
Closing WIP (20%)
Inspection point (100%)
61
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units
EU
EU
Opening work in progress
1000
0
400 (40%)
Other completed units
15000
15000
15000
Total completed units
16000
15000
15400
Normal loss
2000
2000
2000
3000
3000
600 (20%)
Closing work in progress
21000 20000
18000
Wk 2: 20000-3000-2000
Costs
Total
Materials
Conversion
No opening WIP
$
$
$
30000
52200
Costs incurred in the period 82200
Costs per equivalent units
4.4
1.5
2.9
62
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials
Conversion
$
$
$
Opening WIP
7200
6000
1200
(Wk 4) 1160
1160
Cost to complete
8360
6000
2360
1000 units completed
66000 22500 (Wk 5) 43500
15000 units completed
45860
Transfer to finished goods74360 28500
6240
4500 (Wk 6) 1740
Closing WIP
8800
3000
5800
Normal loss
89400
36000
53400
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740
63
Process account
Units $
Units
$
2000 8800
Opening WIP 1000 7200 Normal loss
Materials
20000 30000 Finished goods 16000 74360
6240
Conversion
52200 Closing WIP 3000
21000 89400
21000 89400
64
Case 3: Abnormal loss (both
continuous and discrete)
For the discrete losses, it is
assumed that the inspection
point is set at 100% completion
65
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units
EU
EU
Opening work in progress
1000
0
400 (40%)
Other completed units
15000
15000
15000
Total completed units
16000
15000
15400
Normal loss
2000
2000
2000
3000
3000
600 (20%)
Closing work in progress
21000 20000
18000
Wk 2: 20000-3000-2000
Costs
Total
Materials
Conversion
No opening WIP
$
$
$
30000
52200
Costs incurred in the period 82200
Costs per equivalent units
4.4
1.5
2.9
66
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials
Conversion
$
$
$
Opening WIP
7200
6000
1200
(Wk 4) 1160
1160
Cost to complete
8360
6000
2360
1000 units completed
66000 22500 (Wk 5) 43500
15000 units completed
45860
Transfer to finished goods74360 28500
6240
4500 (Wk 6) 1740
Closing WIP
8800
3000
5800
Abnormal Normal loss
89400
36000
53400
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740
67
Process account
Units $
Opening WIP 1000 7200
Materials
20000 30000
Conversion
52200
21000 89400
Units
$
Abnormal
normal loss
2000 8800
Finished goods 16000 74360
Closing WIP 3000
6240
21000 89400
68