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Process costing explained
The document provides a detailed explanation of process costing, which is used in mass production environments and includes examples from various manufacturing sectors. It elaborates on cost accumulation across multiple processes, handling of normal and abnormal losses, and covers both FIFO and weighted average methods for valuation in a production context. Additionally, it includes practical examples and calculations for costs associated with production and work in progress, highlighting how to account for losses and scrap sales.
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Process costing explained
- 1. Explained with examples MoreInfo :www.brightscholarships.com 1
- 2. Process costingis 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
- 3. 3 Process 1 Process 2 Process3 Direct material Direct labour overheads Finished goods Cost of goods sold Direct material Direct labour overheads Direct material Direct labour overheads
- 4. Costs areaccumulated 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
- 5. 5 Process A Material 500 Labour100 Overhead200 Process B 800 800 800 Process B Process A800 Material 50 Labour 150 Overhead100 Process C 1100 1100 1100 Process C Process B 1100 Material 80 Labour 110 Overhead 210 Finished Gds 1500 1500 1500 Finished Goods Process C 1500 Cost of GDs Sold 1300 Bal c/d 200 1500 1500
- 6.
- 7. In aproduction process, losses are inherent and unavoidable Nature of losses ◦ Normal loss ◦ Abnormal loss 7
- 8. Damaged goodsmay 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
- 9. Transactions Accounting treatment Accounting entries Normal lossLosses within expected level Not assigned cost No entry Abnormal loss Excess loss over the expected level Assigned cost Dr. Abnormal loss Cr. Process account Abnormal gain Gain resulted when the actual loss is less than the normal or expected loss Dr. Process account Cr. Abnormal gain 9
- 10. Transactions Accounting treatment Accounting entries Scrap valueof normal loss Reducing material cost Dr. Scrap Cr. Process account Scrap value of abnormal loss Reduce cost of abnormal loss Dr. Scrap Cr. Abnormal loss Loss of scrap value due to abnormal gain The actual units sold as scrap will be less than the scrap value of normal loss Dr. Abnormal gain Cr. Scrap 10
- 11. Transactions Accounting treatment Accounting entries Actual cash receivedfrom the sale of scrap Reducing material cost Dr. Cash Cr. Scrap 11
- 12.
- 13. 13 Joyce Ltd. operatesa 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
- 14. 14 • 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 $6 per unit Required: (a) Process 1 (b) Process 2 (c) Scrap (d) Abnormal loss (e) Abnormal gain
- 15. 15 Process 1 account Units$ Units $ Labour 2400 Materials 3000 15000 ($5 *3000) Overhead 9000 (2400*375%) Process 2 ($10*2300) 2300 23000 Abnormal loss ($10 *100) 100 1000 3000 264000 3000 26400 Scrap: normal loss (4*600) 600 2400 Cost per unit = Total expected cost Total expected output = $26400-$2400 3000-600 = $10 per unit
- 16. 16 Process 2 account Units$ Units $ Labour 1680 Materials 2000 16000 Overhead 8340 (1680*469.4%) Finished goods ($12*4000) 4000 48000 Abnormal gain ($12 *130) 130 1560 4300 49020 Scrap: normal loss ($6*430) 430 2580 Cost per unit = = $49020-$2580 4300-430 = $12 per unit Process 1 2300 23000 4430 50580 4430 50580
- 17. 17 Abnormal loss account Units$ Units $ Process 1 100 1000 Scrap 100 400 Profit and loss 600 100 1000 100 1000 Abnormal Gain account Units $ Units $ Process 2 130 1560Scrap: value of abnormal gain 130 780 Profit and loss 780 100 1000 100 1000 Loss on scrap value due to abnormal gain
- 18. 18 Scrap account Units $Units $ Normal loss 430 2580 (Process 2) Normal loss 600 2400 (Process 1) Abnormal loss 100 400 (Process 1) (100*$4) Cash –process 1 (600+100)*$4 700 2800 1130 5380 1130 5380 Abnormal gain (Process 2) 130 780 (130*$6) Cash – process 2 (430-130)*$6 300 1800
- 19. 19 Wk 2: Determining theoutput and loss: Process 2 Input (2300+2000) 4300 units Less: normal loss (10%) Expected output Actual output 4000 units 430 units 3870 units Abnormal gain 130 units Wk 1: Determining the output and loss: Process 1 Input 3000 units Less: normal loss (20%) Expected output Actual output 2300 units 600 units 2400 units Abnormal loss 100 units Back 1 Back 2
- 20.
- 21. If thereis no opening or closing work in progress (WIP) the unit cost of products can be obtained as follows 21 Unit Cost = Sum of production costs Production quantity
- 22. However, Ifthere 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
- 23.
- 24. 24 The total productioncost 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 = Closing work in progress = $40000/10000 * 8000 = $32000 $40000/10000*2000 = $8000
- 25. Opening workin progress Started and completed units Closing work in progress 25
- 26. These unitswere started in the previous period and are to be completed in the current period 26 1/3 EUP completed In previous period 2/3 EUP completed in current period
- 27. These unitsare started and completed in the current period 27 1 EUP completed in current period
- 28. These unitsare started in the current period and are to be completed in the coming period 28 1/3 EUP completed in current period Incomplete part
- 29. First inFirst out Weighted average cost 29
- 30. 30 First-in-first-out method Weighted average method The openingwork in progress is the first group of units to be processed and completed during the current period The opening work in progress is merged with the production of the current period to form one batch of production It separates the cost computations of the opening work in progress and the current period production The average cost per unit of the opening work in progress and the current period production is the same
- 31. 31 First-in-first-out method Weighted average method The EUPcomputation ignores the work performed on the opening work in progress during the prior period The EUP computation includes all work performed on the opening work in progress during the prior period Cost per unit = Current cost EUP Cost per unit = Cost of OWIP + Current Cost EUP
- 32. 32 FIFO Method WAVCOMethod 10 units of OWIP (60% completed in previous Period) 70 SACU 40 units of CWIP (20% completed) 4 EUP 70 EUP 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
- 33.
- 34. 34 Lucky Ltd. makestoys 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 Cost % $ Direct materials 100 6000 Conversion (labour + overhead) 60 1200 February production: 20000 units $ Direct materials 30000 Conversion 52200 82200 7200 Closing work in progress: 3000 units (20% as complete as to conversion
- 35. 35 You are requiredto : Prepare Process 1 account using (a)The FIFO method of valuation; and (b)The weighted average method of valuation
- 36. First in Firstout 36
- 37. 37 Wk 1: Number ofEquivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress Other completed units Total completed units Closing work in progress 1000 0 400 (40%) 17000 17000 17000 18000 17000 17400 3000 3000 600 (20%) 21000 20000 18000 Wk 2: Costs Total Materials Conversion $ $ $ Costs incurred in the period Costs per equivalent units 82200 30000 52200 4.4 1.5 2.9 20000-3000 No opening WIP
- 38. 38 Wk 3: Cost ofunits transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP Cost to complete 1000 units completed 17000 units completed Transfer to finished goods Closing WIP 7200 6000 1200 1160 1160 8360 6000 2360 74800 25500 49300 83160 31500 51660 6240 4500 1740 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 (Wk 4) Wk 5: Materials: 17000*$1.5 = $25500 Conversion: 17000*$2.9 = $49300 Wk 6: Materials: 3000*$1.5 = $4500 Conversion: 600*$2.9 = $1740 (Wk 5) (Wk 6)
- 39. 39 Process account Units $Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 Finished goods 18000 83160 Closing WIP 3000 6240 21000 89400 21000 89400
- 40. Weighted average costmethod 40
- 41. 41 Wk 1: Number ofEquivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress Other completed units Total completed units Closing work in progress 1000 1000 1000 17000 17000 17000 18000 18000 18000 21000 21000 18600 Wk 2: Costs Total Materials Conversion $ $ $ Opening WIP Costs incurred in the period Costs per equivalent units 82200 30000 52200 4.5853 1.7143 2.8710 20000-3000 3000 3000 600 (20%) 7200 6000 1200 89400 36000 53400
- 42. 42 Wk 3: Cost ofunits transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Transfer to finished goods Closing WIP 82535 30587 51678 6865 5143 1722 89400 35730 53400 (Wk 4) Wk 4: Materials: 18000*$1.7143 = $30587 Conversion: 17000*$2.8710 = $51678 Wk 5: Materials: 3000*$1.7143 = $51678 Conversion: 600*$2.8710 = $1722 (Wk 5)
- 43. 43 Process account Units $Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 Finished goods 18000 82535 Closing WIP 3000 6865 21000 89400 21000 89400
- 44.
- 45. Normal loss Abnormal loss 45
- 46. Normal lossare 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
- 47. The lostunits that is out of expectation 47
- 48. Continuous lossesoccur evenly throughout the production process For example, the weight loss in making mild powder 48
- 49. Discrete lossesoccur 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
- 50. 50 Types and naturesEUP 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 loss Including the lost units
- 51. 51 Types and naturesTreatments 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
- 52. 52 Types and naturesTreatments 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
- 53. Types and naturesTreatments for losses and costs Discrete and abnormal loss 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
- 54.
- 55. 55 Lucky Ltd. makestoys 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 Cost % $ Direct materials 100 6000 Conversion (labour + overhead) 60 1200 February production: 20000 units $ Direct materials 30000 Conversion 52200 82200 7200 Closing work in progress: 3000 units (20% as complete as to conversion
- 56. 56 Loss: 2000 units Youare 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)
- 57.
- 58. 58 Wk 1: Number ofEquivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress Other completed units Total completed units Normal loss 2000 Closing work in progress 1000 0 400 (40%) 15000 15000 15000 16000 15000 15400 3000 3000 600 (20%) 21000 18000 16000 Wk 2: Costs Total Materials Conversion $ $ $ Costs incurred in the period Costs per equivalent units 82200 30000 52200 4.9292 1.6667 3.2625 20000-3000-2000 No opening WIP
- 59. 59 Wk 3: Cost ofunits transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP Cost to complete 1000 units completed 15000 units completed Transfer to finished goods Closing WIP 7200 6000 1200 1305 1305 8505 6000 2505 73938 25000.5 48937.5 82443 31000.5 51442.5 6957 5000 1957 89400 36000.5 53399.5 Wk:4 Conversion: $3.2625*400= 1305 (Wk 4) 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 (Wk 5) (Wk 6)
- 60. 60 Process account Units $Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 Finished goods 16000 82443 Closing WIP 3000 6957 21000 89400 21000 89400 Normal loss 2000
- 61. It is assumedthat 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 61 Material added Closing WIP (20%) Inspection point (100%)
- 62. 62 Wk 1: Number ofEquivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress Other completed units Total completed units Normal loss 2000 2000 2000 Closing work in progress 1000 0 400 (40%) 15000 15000 15000 16000 15000 15400 3000 3000 600 (20%) 21000 20000 18000 Wk 2: Costs Total Materials Conversion $ $ $ Costs incurred in the period Costs per equivalent units 82200 30000 52200 4.4 1.5 2.9 20000-3000-2000 No opening WIP
- 63. 63 Wk 3: Cost ofunits transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP Cost to complete 1000 units completed 15000 units completed Transfer to finished goods Closing WIP Normal loss 7200 6000 1200 1160 1160 8360 6000 2360 66000 22500 43500 74360 28500 45860 6240 4500 1740 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 (Wk 4) Wk 5: Materials: 15000*$1.5 = $22500 Conversion: 15000*$2.9 = $43500 Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740 (Wk 5) (Wk 6) 8800 3000 5800
- 64. 64 Process account Units $Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 Finished goods 16000 74360 Closing WIP 3000 6240 21000 89400 21000 89400 Normal loss 2000 8800
- 65. For the discretelosses, it is assumed that the inspection point is set at 100% completion 65
- 66. 66 Wk 1: Number ofEquivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress Other completed units Total completed units Normal loss 2000 2000 2000 Closing work in progress 1000 0 400 (40%) 15000 15000 15000 16000 15000 15400 3000 3000 600 (20%) 21000 20000 18000 Wk 2: Costs Total Materials Conversion $ $ $ Costs incurred in the period Costs per equivalent units 82200 30000 52200 4.4 1.5 2.9 20000-3000-2000 No opening WIP
- 67. 67 Wk 3: Cost ofunits transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP Cost to complete 1000 units completed 15000 units completed Transfer to finished goods Closing WIP Abnormal Normal loss 7200 6000 1200 1160 1160 8360 6000 2360 66000 22500 43500 74360 28500 45860 6240 4500 1740 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 (Wk 4) Wk 5: Materials: 15000*$1.5 = $22500 Conversion: 15000*$2.9 = $43500 Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740 (Wk 5) (Wk 6) 8800 3000 5800
- 68. 68 Process account Units $Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 Finished goods 16000 74360 Closing WIP 3000 6240 21000 89400 21000 89400 Abnormal normal loss 2000 8800