43
PROCESS COSTING
| Date post: | 02-Jan-2016 |
| Category: |
Documents |
| Upload: | chad-hancock |
| View: | 227 times |
| Download: | 3 times |
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 = 12000 litres at a cost of £120000• Normal loss = 1/6 of input• Actual output = 9000 litres• CPU = £120 000/Expected output (10
000 litres) = £ 12• Cost of completed production
= £108 000 (9000 ×£12)• Cost of abnormal loss
= £12000 (1000 × £12)
Input Cost Expected outcome
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 accountUnits Unit
Cost (£)
(£) Units Unit Cost (£)
(£)
Input cost
12000 10 120 000 Normal Loss 2 000 - -
Output to finished goods inventory 9000 12 108 000Abnormal loss 1000 12 12 000
120 000 120 000
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 accountUnits Unit
Cost (£)
(£) Units Unit Cost (£)
(£)
Input cost
12000 10 120 000 Normal Loss 2 000 - 10 000
Output to finished goods inventory 10 000 11 110 000
120 000 120 000
Scrap value is credited against the normal loss
entry in the process account
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 accountUnits Unit
Cost (£)
(£) Units Unit Cost (£)
(£)
Input cost
12000 10 120 000 Normal Loss 2 000 - 10 000
Output to finished goods inventory 9 000 11 99 000Abnormal Loss 1 000 11 11 000
120 000 120 000Scrap value is NOT
credited against the abnormal loss
entry in the process account
Abnormal losses in process with a scrap value
Abnormal loss account(£) (£)
Process account 11 000 Cash sale for units scrapped 5 000
Profit and Loss account 6 000
11 000 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 000Less: abnormal gain(1000 x £11) 11 000 less lost sales of spoiled units 5 000 6 000
115 000
Cost per unit remains at £11/u and is not affected by the abnormal gain.
Abnormal gains in process with a scrap value
Process accountUnits Unit
Cost (£)
(£) Units Unit Cost (£)
(£)
Input cost 12000 10 120 000 Normal Loss 2 000 - 10 000
Abnormal gain
1000 11 11 000 Output to finished goods inventory 11 000 11 121 000
131 000 131 000
Abnormal gains in process with a scrap value
Abnormal gain account(£) (£)
Normal loss account 5 000 Process account 11 000
Profit and Loss account 6 000
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 00010 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
ExampleOpening WIP NilUnits introduced into the process 10 000Units completed and transferred to next process 8 000Closing WIP (2000 @ 50% complete) 1 000
Work in progress partially complete
Equivalent production & closing WIP
Example continued…
Opening WIP Units introduced into the processMaterial costs (8 000 x 20) 160 000Closing WIP (2000 x 50% x 20) 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 5.2Example 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 Completed units
WIP equivalent units
Total Equivalent units
Cost per unit
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: 36 000
Previous process cost 27 000
Materials - -
Conversion cost (500x18) 9 000
Completed units(9000 x 57) 513 000
Total production costs 549 000
P113_Example 5.3Process X Process Y
Opening Work in progress 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
Example 5.3 Calculation of cost using weighted average method - Process X
Cost Element Opening WIP
Current cost
Total cost
Completed units
WIP equivalent units
Total Equivalent 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 Output Raw materials Conversion
(units) Details (units) (units) % (units) %
6 000 Opening WIP
16 000 Put into production
Completed from:
Opening WIP 6 000 2 400 60
Current production 12 000 18 000 100 15 600 100
Completed & Trfed 18 000 18 000 18 000 0
Closing WIP 4 000 4 000 3 000 75
22 000 22 000 21 000
Cost Element Opening WIP
Current cost
Total cost
Completed units
WIP equivalent units
Total Equivalent units
Cost per unit
Previous process cost 91 800 448 200 540 000 12 000 8 000 20 000 R27/u
Materials 12 000 60 000 72 000 12 000 - 12 000 R6/u
Conversion cost 38 400 259 200 297 600 12 000 8000x.54000
16 000 R18.60/u
142 200 909 600 R51.60/unit
Value of work-in progress: 290 400
Previous process cost(8000x27) 216 000
Materials – (0 x 12) 0
Conversion cost (4000x18.60) 74 400
Completed units(12000 x 51.60) 619 200
Total production costs 909 600
Example 5.3 - Process Y
P113_Example 5.3Process X Process Y
Opening Work in progress 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
Process X- First in first out Pg 115Cost Element Current
costCompleted units less opening WIP equivalent units
Closing unitsWIP equivalent units
Total Equivalent 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 86 793
Total production costs 534 900
Process Y- First in first outCost Element Current
costCompleted units less opening WIP equivalent units
Closing unitsWIP equivalent units
Total Equivalent units
Cost per unit
Previous process 448 107 10 000 (12000-2000) 8 000 18 000 R24.8948
Materials 60 000 10 000 (12000-2000) - 10 000 R6/u
Conversion cost 259 200 10 400 (12000-1600) 4 000 14 400 R18/u
417 000 R48.8948/unit
Cost of completed production
Opening WIP 142 200
Previous process (10000x 24.8948) 248 948
Materials – (10000 x 6) 60 000
Conversion cost (10400x18) 187 200 638 348
Closing WIP:
Previous process 199 159
Materials -
Conversion cost (4000x18 72 000 271 159
Total production costs 534 900
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) 199 159
Materials -
Conversion cost (4000x18) 72 000 271 159
Total production costs 909 507
Ex5A.1Losses in process & partially completed units
Input Output Raw materials Conversion
(units) Details (units) (units) % (units) %
Total cost 5000 3400
0 Opening WIP
1 000 Put into production
Completed from:
Opening WIP 0
Current production 600 600 100 600 100
Completed & Trfed 600 600 600 100
Normal loss 100 100 100
Abnormal loss
Closing WIP 300 300 150 50
1 000 1 000 850
Cost per unit 5 4
P120
Value of work-in progress:
Materials – (300 x 5) 1 500
Conversion cost (150 x 4) 600 2100
Completed units (600x9) 5400
Normal loss (100x9) 900 6300
Total production costs 8 400
Cost Element Total Cost Completed units
Normal loss
Closing unitsWIP equivalent units
Total Equivalent units
Cost per unit
Materials 5000 600 100 300 1000 5
Conversion cost 3400 600 100 150 850 4
R9/unit
Ex5A.1Losses in process & partially completed units
Input Output Raw materials Conversion
(units) Details (units) (units) % (units) %
Total cost 9400 5000 3400
0 Opening WIP
1 000 Put into production
Completed from:
Opening WIP 0
Current production 600 600 100 600 100
Completed & Trfed 600 600 600 100
Normal loss
Abnormal loss
Closing WIP 300 300 150 50
900 900 750
Cost per unit 10.0888 5.555 4.5333
Ex5A.1Losses in process & partially completed units
Value of work-in progress:
Materials – (300 x 5.555) 1 666.65
Conversion cost (150 x 4.533) 680 2346.65
Completed units (600x10.0888) 6053.35
Total production costs 8400.00
Cost Element Total Cost
Completed units
Closing unitsWIP equivalent units
Total Equivalent units
Cost per unit
Materials 5000 600 300 900 5.5555
Conversion cost 3400 600 150 750 4.5333
R10.0888/unit
Ex5A.1Losses in process & partially completed units
Cost Element Total Cost
Completed units
Abnormal loss
Closing unitsWIP equivalent units
Total Equivalent units
Cost per unit
Previous process cost 10 000 600 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
Ex5A.2 Losses in process & partially completed units
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 94
Total production costs 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 Output Raw materials Conversion
(units) Details (units) (units) % (units) %
2 000 Opening WIP
24 000 Put into production
Completed from:
Opening WIP 2000 1 200 60
Current production 17 500 17 500 100 17 500 100
Completed & Trfed 19 500 18 700
Normal loss 2 400
Abnormal loss 1 100 1 100 100 1 100 100
Closing WIP 3 000 3 000 1 350 45
26 000 21 600 21 150
P125…Drury 5.18 Step 1…calculate equivalent unitsInput Output Raw materials Labour Overheads
(units) Details (units) (units) % (units) %
800 Opening WIP
1800 Put into productionCompleted from:
Opening WIP 800
Current production
1120
Completed & Trfed 1920 1920 100 1920 1920 100
Normal loss 180
Abnormal loss
Closing WIP 500 500 100 450 90 200 40
2600 2600 2420 2370 2120
P125…Drury 5.18 Step 1…calculate equivalent unitsCost Element
Opening WIPCost
Current cost
Total Cost Completed units
Closing unitsWIP equivalent units
Total Equivalent units
Cost per unit
Materials 98000 387800 485 800 1920 500 2420 A(484000/2420) R200
Labour 46000 276320 322320 1920 450 2370 (322320/2370) R136
Overheads 7600 149280 156880 1920 200 2120 (156880/2120) R74
151600 813400 R410/unit
A Total cost = current cost – (normal loss units x scrap value) = 485 800 – (180 x 10) = 485 800 – 1800 = 484 000
Value of work-in progress:
Materials
Labour
Overheads
Completed units(18000 x 24.90)
Scrap value from normal loss sales 1800
Total production costs 965000
Quantity statementPhysical Units Equivalent Units
Input Output Raw Materials Conversion Cost
(units) Details (units) units % units %
1200 Put into production
Completed & transferred 900 900 900
Normal loss 200 200 200
Abnormal loss 100 100 100
1200 1 200 1 200 1 200
