PROCESS COSTING
PROCESS COSTING
1.Job costing assigns costs to each individual
unit of output because each unit consumes
different quantities of resources.
2.Process costing does not assign costs to each
unit of output because each unit is identical.
Instead, average unit costs are computed.
Process Costing
Outcomes
• Allocate the proceeds from the sales of scrap to the
correct accounts
• Account for transfers from previous processes in
‘completed and WIP inventories’
• Use short-cut to allocate losses
• Suitability of process costing in service org.
• Batch or operation costing
• Process a joint/by-product or sell-it.
A comparison of job & process costing
A comparison of job & process costing
Example 5.1
During the month the company input into the
production process 12 000 litres at a cost of
£120 000.
There was no opening or closing inventories and
all output was fully complete.
Example 5.1
•
•
•
•
Input
Normal loss
Actual output
CPU
= 12000 litres at a cost of £120000
= 1/6 of input
= 9000 litres
= £120 000/Expected output (10
Input Cost
000 litres) = £ 12
Expected outcome
• Cost of completed production
= £108 000 (9000 ×£12)
• Cost of abnormal loss
= £12000 (1000 × £12)
Normal and abnormal losses
• Normal losses cannot be avoided
– Cost is absorbed by good production.
• Abnormal losses are avoidable
– Cost is recorded separately
– Treated as a period cost
– Removed from process costs, recorded separately
as a loss in the abnormal loss account
– Not carried forward as a future expense
Abnormal losses in process with no
scrap value
Process account
Units
Input
cost
Unit
Cost
(£)
12000 10
(£)
Units
Unit
Cost
(£)
(£)
2 000
-
-
Output to finished
goods inventory
9000
12
108 000
Abnormal loss
12
12 000
120 000 Normal Loss
120 000
1000
120 000
Normal Losses in process with a scrap
value
• In case 4: Actual output = Expected output
No abnormal loss/gain ONLY normal loss
• Loss units have a scrap value of £5 per litre
Input Cost less £SCRAP value of normal loss
Expected outcome
=
£120 000 – (2000 x £5)
10 000 litres
=
£11
Normal losses in process with a scrap
value
Process account
Units
Input
cost
Unit
Cost
(£)
12000 10
(£)
Units
120 000 Normal Loss
Scrap value is
credited against
Unit the
(£)normal loss
Cost entry in the
(£) process account
2 000 -
Output to finished
goods inventory
10 000 11
120 000
10 000
110 000
120 000
Abnormal losses in process with a
scrap value
• In case 5: Actual output <> Expected output
• Actual output = 9 000 l  normal loss= 2000
& abnormal loss of 1000
• Loss units have a scrap value of £5 per litre
• What is the objective of process costing?
– Calculate the cost per unit for expected output!
 Only take scrap value of the normal loss into
account
Abnormal losses in process with a
scrap value
Process account
Units
Input
cost
Unit
Cost
(£)
12000 10
(£)
Units
120 000 Normal Loss
120 000
Unit
Cost
(£)
(£)
2 000 -
10 000
Output to finished
goods inventory
9 000 11
99 000
Abnormal Loss
1 000 11
11 000
Scrap value is NOT
credited against
the abnormal loss
entry in the
process account
120 000
Abnormal losses in process with a
scrap value
Abnormal loss account
(£)
Process account
(£)
11 000 Cash sale for units scrapped
Profit and Loss account
11 000
5 000
6 000
11 000
Abnormal gains with a scrap value
• In case 6: Actual output > Expected output
• Actual output = 11 000 l  normal loss= 1000
& abnormal gain of 1000
• Gain units have a scrap value of £5 per litre
• What is the objective of process costing?
– Calculate the cost per unit for expected output!
 Only take scrap value of the normal loss into
account
Abnormal gains with a scrap value
• The net cost incurred in case 6 in the process
is £ 115 000 = (£120000 input cost – 1000l
spoilt with a sales value of £5 per litre)
Amount transferred to finished goods 121 000
Less: abnormal gain(1000 x £11)
less lost sales of spoiled units
11 000
5 000
Cost per unit remains at £11/u and is not affected by the
abnormal gain.
6 000
115 000
Abnormal gains in process with a scrap
value
Process account
Units
Unit
Cost
(£)
Input cost 12000 10
Abnormal 1000
gain
11
(£)
120 000 Normal Loss
11 000 Output to finished
goods inventory
131 000
Units
Unit
Cost
(£)
(£)
2 000 -
10 000
11 000 11
121 000
131 000
Abnormal gains in process with a scrap
value
Abnormal gain account
(£)
(£)
Normal loss account
5 000 Process account
Profit and Loss account
6 000
11 000
11 000
11 000
Normal Loss (Income due from normal losses)
(£)
Process account
(£)
10 000 Abnormal gain account
5 000
Cash from spoiled units
5 000
10 000
10 000
Work in progress partially complete
Equivalent production & closing WIP
Partly completed units are expressed as fully completed
equivalent units in order to compute CPU (e.g. 8000 units
complete & 2000 partly completed) Must calculate equivalent
production of the partially completed units – estimate the %age
complete. Assume 50% complete  2000 x 50% = 1000). Cost
per unit (CPU) = 20
Example
Opening WIP
Nil
Units introduced into the process
10 000
Units completed and transferred to next process 8 000
Closing WIP (2000 @ 50% complete)
1 000
Work in progress partially complete
Equivalent production & closing WIP
Example continued…
Opening WIP
Units introduced into the process
Material costs
(8 000 x 20)
Closing WIP (2000 x 50% x 20)
160 000
20 000
180 000
Different degrees of completion
• Not all elements may have reached the same
degree of completion.
• Material – entered at start of process  will
be fully complete
• Labour – added uniformly throughout the
process
P111_Example 5.2
Example
Process A Process B
• Opening WIP
Nil
• Units introduced into the process
14 000
10 000
• Units completed and transferred to next process
10 000
9 000
• Closing WIP (50% complete)
4 000
1 000
• Costs of production transferred from process A
£270 000
• Materials cost (introduced at start)
£210 000
£108 000
• Conversion cost
£144 000
£171 000
•
Materials are added at the start of the process for Process A and at the end
of the process for Process B and conversion costs are added uniformly
throughout both processes.
P111_Example 5.2 Calculation of cost
per unit for Process A
Cost
Element
Total cost
Completed
units
WIP
equivalent
units
Total
Equivalent
units
Cost per
unit
Materials
210 000
10 000
4 000
14 000
R15 / u
Conversion
cost
144 000
10 000
(50%) 2 000
12 000
R12 / u
354 000
R27 / unit
Value of work-in progress:
84 000
Materials (4000x15)
60 000
Conversion cost (2000x12)
24 000
Completed units(10000 x 27)
270 000
Total production costs
354 000
Example 5.2 Calculation of cost per
unit for Process B
Cost Element
Total cost
Complete
d units
WIP
Total
Cost per
equivalent Equivalent unit
units
units
Previous process cost
270 000
9 000
1 000
10 000
R27 / u
Materials
108 000
9 000
-
9 000
R12 / u
Conversion cost
171 000
9 000
(50%) 500
9 500
R18 / u
549 000
R57 / unit
Value of work-in progress:
Previous process cost
Materials Conversion cost (500x18)
36 000
27 000
9 000
Completed units(9000 x 57)
513 000
Total production costs
549 000
P113_Example 5.3
Process X
Process Y
6 000 (60% converted)
2 000 (80% converted)
Materials
72 000
12 000
Conversion cost
45 900
38 400
Units started in this period
16 000
18 000
Closing WIP
4000 (75% complete)
8 000 units (50% complete)
Materials added
192 000
60 000
Conversion cost
225 000
259 200
Opening Work in progress
Example 5.3 Calculation of cost using
weighted average method - Process X
Cost Element
Openin
g WIP
Current Total
cost
cost
Comple WIP
ted
equival
units
ent
units
Total
Equival
ent
units
Cost per
unit
Materials
72 000 192 000 264 000
18 000
4 000
22 000
R12/u
Conversion cost
45 900 225 000 270 900
18 000
3 000
21 000
R12.90/u
117 900
534 900
R24.90/
unit
Value of work-in progress:
86 700
Previous process cost
Materials – (4000 x 12)
48 000
Conversion cost (3000x12.90)
38 700
Completed units(18000 x 24.90)
448 200
Total production costs
534 900
Example 5.3 Calculation of cost using
weighted average method - Process X
Input
(units)
Details
6 000
Opening WIP
Output
Raw materials
Conversion
(units)
(units)
(units)
%
%
16 000 Put into production
Completed from:
Opening WIP
6 000
60
15 600
100
Current production
12 000
18 000
Completed & Trfed
18 000
18 000
18 000
0
4 000
4 000
3 000
75
22 000
22 000
21 000
Closing WIP
100
2 400
Example 5.3 - Process Y
Cost Element
Openin
g WIP
Previous process cost
Materials
Conversion cost
Current Total
cost
cost
Comple WIP
ted
equival
units
ent
units
Total
Equival
ent
units
Cost per
unit
91 800 448 200 540 000
12 000
8 000
20 000
R27/u
12 000
12 000
-
12 000
R6/u
12 000 8000x.5
4000
16 000
R18.60/
u
60 000
72 000
38 400 259 200 297 600
142 200
909 600
R51.60/
unit
Value of work-in progress:
Previous process cost(8000x27)
Materials – (0 x 12)
Conversion cost (4000x18.60)
290 400
216 000
0
74 400
Completed units(12000 x 51.60)
619 200
Total production costs
909 600
P113_Example 5.3
Process X
Process Y
6 000 (60% converted)
2 000 (80% converted)
Materials
72 000
12 000
Conversion cost
45 900
38 400
Units started in this period
16 000
18 000
Closing WIP
4000 (75% complete)
8 000 units (50% complete)
Materials added
192 000
60 000
Conversion cost
225 000
259 200
Opening Work in progress
Process X- First in first out Pg 115
Cost Element
Current Completed units
cost
less opening WIP
equivalent units
Closing units
WIP
equivalent
units
Total
Equival
ent
units
Cost per unit
Materials 192 000
12000 (18000-6000)
4 000
16 000
R12/u
Conversion cost 225 000
14400 (18000-3600)
3 000
17 400
R12.931/u
417 000
R24.931/unit
Value of work-in progress:
Opening WIP
117 900
Materials – (12000 x 12)
144 000
Conversion cost (14400x12.931)
186 207
448 107
Closing WIP:
Materials – (4000 x 12)
48 000
Conversion cost (3000x12.931)
38 793
Total production costs
86 793
534 900
Process Y- First in first out
Cost Element
Current Completed units
cost
less opening WIP
equivalent units
Closing units
WIP
equivalent
units
Total
Equival
ent
units
8 000
18 000
R24.8948
60 000 10 000 (12000-2000)
-
10 000
R6/u
Conversion cost 259 200 10 400 (12000-1600)
4 000
14 400
R18/u
Previous process 448 107 10 000 (12000-2000)
Materials
417 000
Cost per unit
R48.8948/unit
Cost of completed production
Opening WIP
142 200
Previous process (10000x 24.8948)
248 948
Materials – (10000 x 6)
Conversion cost (10400x18)
60 000
187 200
638 348
Closing WIP:
Previous process
Materials
Conversion cost (4000x18
199 159
72 000
271 159
Process Y- First in first out
Value of work-in progress:
Opening WIP
142 200
Previous process (10 000x24.8948)
248 948
Materials – (10 000 x 6)
144 000
Conversion cost (10 400x18)
187 200
638 348
Closing WIP:
Previous process (8 000x24.8948)
Materials
Conversion cost (4000x18)
Total production costs
199 159
72 000
271 159
909 507
Ex5A.1Losses in process & partially completed units
Input
(units)
Details
Output
Raw materials
Conversion
(units)
(units)
(units)
Total cost
0
Opening WIP
1 000
Put into production
%
5000
P120
%
3400
Completed from:
Opening WIP
0
Current production
600
600 100
600
100
Completed & Trfed
600
600
600
100
Normal loss
100
100
100
300
300
150
1 000
1 000
850
5
4
Abnormal loss
Closing WIP
Cost per unit
50
Ex5A.1Losses in process & partially completed units
Cost Element
Total Cost Complete Normal
d units
loss
Closing
units
WIP
equivalen
t units
Total
Equival
ent
units
Cost per unit
Materials
5000
600
100
300
1000
5
Conversion cost
3400
600
100
150
850
4
R9/unit
Value of work-in progress:
Materials – (300 x 5)
Conversion cost (150 x 4)
1 500
600
Completed units (600x9)
5400
Normal loss (100x9)
900
Total production costs
2100
6300
8 400
Ex5A.1Losses in process & partially completed units
Input
(units)
Details
Total cost
0
Opening WIP
1 000
Put into production
Output
Raw materials
Conversion
(units)
(units)
(units)
9400
%
5000
%
3400
Completed from:
Opening WIP
0
Current production
600
600 100
600
100
Completed & Trfed
600
600
600
100
300
300
150
50
900
900
750
10.0888
5.555
4.5333
Normal loss
Abnormal loss
Closing WIP
Cost per unit
Ex5A.1Losses in process & partially completed units
Cost Element
Total
Cost
Complet
ed units
Closing
units
WIP
equivale
nt units
Total
Equival
ent
units
Cost per
unit
Materials
5000
600
300
900
5.5555
Conversion cost
3400
600
150
750
4.5333
R10.0888
/unit
Value of work-in progress:
Materials – (300 x 5.555)
Conversion cost (150 x 4.533)
1 666.65
680
2346.65
Completed units (600x10.0888)
6053.35
Total production costs
8400.00
Ex5A.2 Losses in process & partially completed units
Cost Element
Total
Cost
Previous process cost 10 000
Compl Abnor
eted
mal
units loss
Closing
units
WIP
equivale
nt units
Total
Cost per
Equiva unit
lent
units
600
50
250
900
11.1111
Materials
8 000
600
50
250
900
8.8888
Conversion cost
2 900
600
25
150
775
3.742
R23.74/unit
Example 5A.2
Value of work-in progress:
5560
Previous process cost : 250 x 11.11
2 777
Materials: 250 x 8.88
2 222
Conversion: 150 x 3.742
561
Completed units: 600 x 23.74
14246
Abnormal loss
1094
Previous process cost : 50 x 11.11
556
Materials: 50 x 8.88
444
Conversion: 25 x 3.742
Total production costs
94
20 900
Different degrees of completion
• Not all elements may have reached the same
degree of completion.
• Material – entered at start of process  will
be fully complete
• Labour – added uniformly throughout the
process
Drury 5.14 Calculation of cost using
weighted average method - Process X
Input
(units)
Details
2 000
Opening WIP
Output
Raw materials
Conversion
(units)
(units)
(units)
%
%
24 000 Put into production
Completed from:
Opening WIP
2000
Current production
17 500
Completed & Trfed
19 500
17 500
100
1 200
60
17 500
100
18 700
Normal loss
2 400
Abnormal loss
1 100
1 100
Closing WIP
3 000
26 000
100
1 100
100
3 000
1 350
45
21 600
21 150
P125…Drury 5.18 Step 1…calculate equivalent units
Input
Output
Raw materials
(units) Details
(units)
(units)
Labour
Overheads
%
(units)
%
800 Opening WIP
1800 Put into
production
Completed from:
Opening WIP
800
Current
production
1120
Completed & Trfed
1920
Normal loss
1920
100
1920
500
500
100
450
2600
2420
1920
100
200
40
180
Abnormal loss
Closing WIP
2600
2370
90
2120
P125…Drury 5.18 Step 1…calculate equivalent units
Cost
Element
Materials
Openin
g WIP
Cost
Current
cost
98000
387800
Total Cost
485 800
Comple
ted
units
Closing
units
WIP
equivale
nt units
Total
Equiva
lent
units
1920
500
2420
Cost per unit
A(484000/2420)
R200
Labour
46000
276320
322320
1920
450
2370
(322320/2370)
Overheads
7600
149280
156880
1920
200
2120
(156880/2120)
151600
813400
Value of work-in progress:
Materials
Labour
Overheads
Completed units(18000 x 24.90)
Total production costs
R74
R410/unit
A Total cost = current cost – (normal loss units x scrap value)
= 485 800 – (180 x 10) = 485 800 – 1800 = 484 000
Scrap value from normal loss sales
R136
1800
965000
Quantity statement
Physical Units
Equivalent Units
Input
Output
(units) Details
(units)
1200
1200
Raw Materials
units
%
Conversion
Cost
units
%
Put into production
Completed & transferred
900
900
900
Normal loss
200
200
200
Abnormal loss
100
100
100
1 200
1 200
1 200