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AAT Level 3Costing Systems
(Job, Batch, Service & Process Costing)
Objectives:
1) Record costing information using a ‘Process’ costing system
2) Define the various stages of inventory
Process CostingUsed for continuous manufacturing processes
Inputs OutputsCost per unit of output = Input Costs + Conversion Costs
Expected Units of Output
Process Costing Account
What is a Process Costing account?Dr Process Account Cr
Litres £ Litres £
Inputs Outputs
Materials - a
Materials - b
Labour
Overheads
Output
Normal Losses
Abnormal Losses
Abnormal gains
Normal Losses (No scrap
value)What you EXPECT to lose
during the processes
Activity 1Demo
Direct materials 80,000 kg
£266,000
Direct Labour £70,000Production overheads
£60,000
Normal loss 10%
Actual output 72,000 Kg
Normal Losses (No scrap value) Activity 1
Materials 80000 266000
Labour 70000Overheads 60000
Output(FG or next process) 72000 396000
KG £ KG £
80000 396000 80000 396000
Inputs Outputs
Normal Loss 8000(10% x DM 80000)
Process Account
Activity 2
Direct materials 100,000 kg £300,000
Direct Labour £90,000Production overheads
£60,000
Normal loss 10%
Actual output 90,000 Kg
Normal Losses (No scrap value) Activity 2
Materials 100000 300000
Labour 90000Overheads 60000
Output(FG or next process) 90000 450000
KG £ KG £
100000 450000
Inputs Outputs
Normal Loss 10000(10% x DM 100000)
What is the normal loss?= Materials KG x % loss=100000 x 10%=10000 KG
What is expected output?= Materials KG - Loss=100000 - 10000=90000 KG
What are the total process costs?= Materials + Labour + Overheads=450000
What is the cost per KG?= Total Costs ÷ Expected Output=450000 ÷90000=£5 per unit
100000 450000
Abnormal Losses (No
scrap value)Avoidable
Materials 10000 7700
Labour & Overheads 3700
Output(FG or next process) 9400 11280
KG £ KG £
10000 11400 10000 11400
Inputs Outputs
Activity 3 - Abnormal Losses(No scrap value)
Normal Loss5% x 10000 500
Abnormal loss 100 120
Your turn!
Activity 4
Materials 100000 287000
Labour 138000
Output(FG or next process) 92000 496800
KG £ KG £
100000 507600 100000 507600
Inputs Outputs
Activity 4 - Abnormal Losses(No scrap value)
Normal Loss6% x 100000 6000
Abnormal loss 2000 10800Overheads 82600
What is the cost of 1kg of EXPECTED output?
Total Cost ÷ Output507600 ÷ 94000 = £5.40
What is the abnormal loss in kg?
Expected Output – Actual Output94000 - 92000 = 2000kg
Abnormal loss is 2000kg x £5.40 = £10800
Abnormal Gain (No scrap
value)
Materials 18000 35800Labour 7200
Actual Output 17500 (FG or next process)
KG £ KG £
18400 56000 18400 56000
Activity 5 - Abnormal Gain(No scrap value)
Overheads 11720
Normal Loss5% x 18000 900
What is the abnormal loss/gain?
= Actual Output – Expected output= 17500 - 17100 = 400 units
What is the value of the abnormal gain?
= 400 x £3.20 = 1280
Abnormal Gain 400 1280
What is the expected output?
= 18000-900= 17100
What is the cost per kg of expected output?
= Total costs ÷ Expected output= 54720 ÷ 17100 = £3.20
56000
Your turn!Activity 6: October Jam
Activity 6 Answer Kg £ Kg £Materials
5000 5600 Normal Loss 500
Labour & Overheads
7900
Abnormal Gain
175 525 Finished Goods(or next process)
4675 14025*
(*4675 x 3)
5175 14025 5175 14025
Normal Losses with Scrap Value
Activity 7: January
Kg £ Kg £Materials 100000 300000 Normal
loss10000
Labour 90000 Overheads
60000 Output 90000
100000 450000 100000 450000
15000
Scrap value = 10000 x 1.50Reduces the cost of the finished goods
435000
Activity 7: January
Kg £ Kg £Materials 100000 300000 Normal
loss10000
Labour 90000 Overheads
60000 Output 90000
100000 450000 100000 450000
15000
435000
Your turn!Activity 8: February
Normal Losses (With scrap value) Activity 8
Materials 80000 266000
Labour 70000Overheads 60000
Output(FG or next process) 72000 386000
KG £ KG £
80000 396000 80000 396000
Inputs Outputs
Normal Loss 8000 10000(10% x DM 80000)
Process Account
Activity 9 DemoAbnormal loss with scrap
50000 356400
12050041600
5000
42000
What’s the difference between EXPECT & ACTUAL Production?
Expected 50000 – 5000 = 45000Actual 42000
Abnormal loss 3000
3000
What’s the scrap value of NORMAL loss?5000 x £2 = £10000
10000
What’s cost per unit of EXPECTED output?
= Total Costs Less Scrap = 518500 – 10000 = 11.30Expected Output 45000
33900
50000 518500
50000 518500474600
Your turn!Activity 10
Activity 10 - Answer
Normal loss is 5%, Scrap Value = 38p per kg. Materials 10000 kg costing £7700Labour and overheads £3700Output 9200 kg
Kg £ Kg £Materials
10000 7700 Normal loss 500 (a) 190
Labour &Overheads
3700 Abnormal loss
300 (e) 354
Output 9200 10856 10000 11400 10000 11400
Abnormal gains with Scrap Value
Activity 11 Abnormal gain with Scrap Value
Expected Output = 18000 – 900= 17100
Abnormal Gain = 17500 - 17100= 400 kgb) Losses sold for 20p per kg = 900 x 20p =
£180
180
Total the costs MINUS scrap35800 + 7200 + 11720 – 180 = £54540Calculate the cost per unitTotal Costs = 54540 = 3.1894736!! Rounded to £3.19Expected Units 17100
400
c) Value the abnormal gains = 400 x 3.1894736 = 1276
1276
Value the actual output 17500 x 3.19 = 55816
55816
18400 55996 18400 55996
Your turnQuestion 12
NB You will need to add ‘Abnormal Gain’ on the debit side of your account.
Activity 12 - Answer
Kg £ Kg £
Materials 5000 5600 Normal loss
500 500
Labour & overheads
7900 Actual Output
4675 13506
Abnormal gain
175 506
5175 14006 5175 14006
More than one process
More than one process
Your turn!Activity 13
Activity 13 -Answer
Kg £ Kg £Materials 200000 100000 Normal Loss 20000 Labour 20000 Overheads
5000 Output to next process
180000 125000
200000 125000 200000 125000
Kg £ Kg £Output from process 1
180000 125000 Normal Loss 20000
Materials 20000 60000 Labour 40000 Output 18000
0285000
Overheads 60000 200000 285000 20000
0285000
Process 2
Process 1
Work in ProgressEquivalent
UnitsNumber of WIP units X % Completion
Value of Equivalent UnitsTotal Production Costs
Completed units + Equivalent units
Activity 14: WIP Materials Labour & Overheads Last month the following inputs were made to a process:Materials £15,575Labour & overheads £8,480 4000 units were completed and 600 units in progress – 75% complete for materials, but only 40% for labour and overheads. What is the value of completed units and WIP?
Units Materials Completed
Equivalent Units
Labour Equivalent Units
Completed Work in ProgressTotal Equivalent UnitsCosts (Inputs)
Cost per EU
4000 4000 4000100% 100%
600 75% 450 40% 240
4450 4240
15575 84803.50 2.00
Completed Output
Materials 4000 x 3.50 £14000
Labour 4000 x 2.00 £8000
£22000
Work in Progress
Materials 450 x 3.50 £1575
Labour 240 x 2.00 £480
£2055
£ £Materials
15575 Completed Output
22000
Labour &Overheads
8480 Work in progress
2055
24055 24055
Your turn!Question 15 - 19