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Process Costing
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Process costing
Process costing is adopted when there is mass production through a sequence of several processesExample include chemical, flour and glass manufacturingIt 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
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Process 1
Process 2
Process 3
Direct materialDirect labouroverheads
Finished goods Cost of goods sold
Direct materialDirect labouroverheads
Direct materialDirect labouroverheads
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Accounting for Process Costing
Costs are accumulated by each processEach process maintains its process accountThe process account is debited with the costs incurred and credited with goods completed and transferred to other process accountWhen the goods are completed, they will be transferred to finished goods accountWhen the goods are sold, the amount will be transferred to the cost of goods sold account
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Process AMaterial 500Labour 100Overhead200
Process B 800
800 800
Process BProcess A800Material 50Labour 150Overhead100
Process C 1100
1100 1100
Process CProcess B 1100Material 80Labour 110Overhead 210
Finished Gds 1500
1500 1500
Finished GoodsProcess C 1500Cost of GDs
Sold 1300Bal c/d 200
1500 1500
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Accounting for losses and scrap in process account
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Accounting for losses in process costing
In a production process, losses are inherent and unavoidableNature of losses
Normal lossAbnormal loss
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Accounting for scrap
Damaged goods may be sold as scrapRevenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue
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Transactions Accounting treatment
Accounting entries
Normal loss Losses within expected levelNot assigned cost
No entry
Abnormal loss
Excess loss over the expected levelAssigned cost
Dr. Abnormal lossCr. Process account
Abnormal gain
Gain resulted when the actual loss is less than the normal or expected loss
Dr. Process accountCr. Abnormal gain
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Transactions Accounting treatment
Accounting entries
Scrap value of normal loss
Reducing material cost
Dr. Scrap Cr. Process account
Scrap value of abnormal loss
Reduce cost of abnormal loss
Dr. ScrapCr. 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 gainCr. Scrap
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Transactions Accounting treatment
Accounting entries
Actual cash received from the sale of scrap
Reducing material cost
Dr. Cash Cr. Scrap
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Example
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Joyce Ltd. operates a factory involving two production Processes. The output of process 1 is transferred to process2. The information of production for January 2005 is as follows:
• Cost for Process 1Materials: 3000 units at $5 per unitLabour $2400
• Cost for Process 2Materials: 2000 unit at $8 per unitLabour $1680
• No opening and closing work in progress• Output for January 2005
Process 1: 2300 unitsProcess 2 4000 units
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• 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
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Process 1 account
Units $ Units $
Labour 2400
Materials 3000 15000($5 *3000)
Overhead 9000(2400*375%)
Process 2 ($10*2300) 2300 23000Abnormal 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
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Process 2 account
Units $ Units $
Labour 1680Materials 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
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Abnormal loss account
Units $ Units $Process 1 100 1000Scrap 100 400
Profit and loss 600 100 1000 100 1000
Abnormal Gain account
Units $ Units $Process 2 130 1560Scrap: value of
abnormal gain 130 780Profit and loss 780
100 1000 100 1000
Loss on scrap value due to abnormal gain
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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
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Wk 2:Determining the output and loss:Process 2Input (2300+2000) 4300 unitsLess: normal loss (10%)Expected outputActual output 4000 units
430 units3870 units
Abnormal gain 130 units
Wk 1:Determining the output and loss:Process 1Input 3000 unitsLess: normal loss (20%)Expected outputActual output 2300 units
600 units2400 units
Abnormal loss 100 units
Back 1 Back 2
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Equivalent units of production
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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 costsProduction quantity
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However, If there is opening or closing work in progress, the partly completed production will have a lower cost than the fully completed productionWe have to converted the work in progress into finished equivalent units of production (EUP)
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Example
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The total production cost for January 2005 was $40000. 8000 units had been completed and 4000 units wee 50% complete.
Equivalent units of production8000 units completed 80004000 units were 50% completed 2000
10000
Finished goods =
Closing work in progress =
$40000/10000 * 8000 = $32000
$40000/10000*2000 = $8000
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Three categories in determining the equivalent units of production
Opening work in progressStarted and completed unitsClosing work in progress
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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 completedIn previous period
2/3 EUP completed in current period
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Started and completed units (SACU)
These units are started and completed in the current period
1 EUP completed in current period
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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 completedin current period
Incomplete part
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First in First outWeighted average cost
Two methods of cost flows in process costing
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First-in-first-out method
Weighted average method
The opening work 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
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First-in-first-out method
Weighted average method
The EUP computation 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
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FIFO Method WAVCO Method
10 units of OWIP(60% completed in previousPeriod)
70 SACU
40 units of CWIP(20% completed)
4 EUP
70 EUP
8 EUP
+
+
82 EUP
10 units of OWIP(60% completed in previousPeriod)
70 SACU
40 units of CWIP(20% completed)
10 EUP
70 EUP
8 EUP
+
+
88 EUP
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Example
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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 Cost
% $Direct materials 100 6000Conversion (labour + overhead) 60 1200
February production: 20000 units$
Direct materials 30000Conversion 52200
82200
7200
Closing work in progress: 3000 units (20% as complete as toconversion
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You are required to :Prepare Process 1 account using (a)The FIFO method of valuation; and(b)The weighted average method of valuation
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First in First out
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Wk 1:Number of Equivalent units (EU)
Total Materials Conversion Units EU EU
Opening work in progress Other completed units Total completed unitsClosing work in progress
1000 0 400 (40%)17000 17000 1700018000 17000 17400
3000 3000 600 (20%)21000 20000 18000
Wk 2:Costs
Total Materials Conversion$ $ $
Costs incurred in the periodCosts per equivalent units
82200 30000 522004.4 1.5 2.9
20000-3000
No opening WIP
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Wk 3:Cost of units transferred to finished goods and closing WIP
Total Materials Conversion $ $ $
Opening WIPCost to complete1000 units completed17000 units completedTransfer to finished goodsClosing WIP
7200 6000 12001160 11608360 6000 236074800 25500 49300 83160 31500 516606240 4500 174089400 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)
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Process account
Units $ Units $
Opening WIP 1000 7200Materials 20000 30000
Conversion 52200
Finished goods 18000 83160Closing WIP 3000 6240
21000 89400 21000 89400
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Weighted average cost method
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Wk 1:Number of Equivalent units (EU)
Total Materials Conversion Units EU EU
Opening work in progress Other completed units Total completed unitsClosing work in progress
1000 1000 100017000 17000 1700018000 18000 18000
21000 21000 18600
Wk 2:Costs
Total Materials Conversion$ $ $
Opening WIPCosts 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
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Wk 3:Cost of units transferred to finished goods and closing WIP
Total Materials Conversion $ $ $
Transfer to finished goodsClosing WIP
82535 30587 516786865 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)
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Process account
Units $ Units $
Opening WIP 1000 7200Materials 20000 30000
Conversion 52200
Finished goods 18000 82535Closing WIP 3000 6865
21000 89400 21000 89400
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Lost units in process costing
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Nature of losses
Normal lossAbnormal loss
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Normal loss
Normal loss are the losses within the expectation during the productionReasons:
Low quality materials and workers are engagedThere may be an inherent problem in production process
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Abnormal loss
The lost units that is out of expectation
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Continuous loss
Continuous losses occur evenly throughout the production processFor example, the weight loss in making mild powder
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Discrete loss
Discrete losses occur at the specific pointA firm will not be aware of discrete losses unless the products are inspected at the inspection pointFor example, wrong buttons on a garment and wrong colour of toy cars m
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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 loss
Including the lost units
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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
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Types and natures Treatments for losses and costs
Discrete and normal loss
Loss are included as product costCost are assigned to lost unitsDetermining 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
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Types and natures Treatments for losses and costs
Discrete and abnormal loss
Loss are charged as period costCost are assigned to lost unitsAbnormal losses will be written off to the profit and loss account
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Example
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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 Cost
% $Direct materials 100 6000Conversion (labour + overhead) 60 1200
February production: 20000 units$
Direct materials 30000Conversion 52200
82200
7200
Closing work in progress: 3000 units (20% as complete as toconversion
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Loss: 2000 units
You are required to :Prepare Process 1 account using the FIFO method:Case 1: Continuous normal lossCase 2: Discrete normal lossCase 3: Abnormal loss (both continuous and discrete
loss)
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Case 1: Continuous normal loss
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Wk 1:Number of Equivalent units (EU)
Total Materials Conversion Units EU EU
Opening work in progress Other completed units Total completed unitsNormal loss 2000Closing work in progress
1000 0 400 (40%)15000 15000 1500016000 15000 15400
3000 3000 600 (20%)21000 18000 16000
Wk 2:Costs
Total Materials Conversion$ $ $
Costs incurred in the periodCosts per equivalent units
82200 30000 522004.9292 1.6667 3.2625
20000-3000-2000
No opening WIP
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Wk 3:Cost of units transferred to finished goods and closing WIP
Total Materials Conversion $ $ $
Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIP
7200 6000 12001305 13058505 6000 250573938 25000.5 48937.5 82443 31000.5 51442.56957 5000 195789400 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)
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Process account
Units $ Units $
Opening WIP 1000 7200Materials 20000 30000
Conversion 52200
Finished goods 16000 82443Closing WIP 3000 6957
21000 89400 21000 89400
Normal loss 2000
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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%)
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Wk 1:Number of Equivalent units (EU)
Total Materials Conversion Units EU EU
Opening work in progress Other completed units Total completed unitsNormal loss 2000 2000 2000Closing work in progress
1000 0 400 (40%)15000 15000 1500016000 15000 15400
3000 3000 600 (20%)21000 20000 18000
Wk 2:Costs
Total Materials Conversion$ $ $
Costs incurred in the periodCosts per equivalent units
82200 30000 522004.4 1.5 2.9
20000-3000-2000
No opening WIP
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Wk 3:Cost of units transferred to finished goods and closing WIP
Total Materials Conversion $ $ $
Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIPNormal loss
7200 6000 12001160 11608360 6000 236066000 22500 4350074360 28500 458606240 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
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Process account
Units $ Units $
Opening WIP 1000 7200Materials 20000 30000
Conversion 52200
Finished goods 16000 74360Closing WIP 3000 6240
21000 89400 21000 89400
Normal loss 2000 8800
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Case 3: Abnormal loss (both continuous and
discrete)
For the discrete losses, it is assumed that the inspection point is set at 100% completion
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Wk 1:Number of Equivalent units (EU)
Total Materials Conversion Units EU EU
Opening work in progress Other completed units Total completed unitsNormal loss 2000 2000 2000Closing work in progress
1000 0 400 (40%)15000 15000 1500016000 15000 15400
3000 3000 600 (20%)21000 20000 18000
Wk 2:Costs
Total Materials Conversion$ $ $
Costs incurred in the periodCosts per equivalent units
82200 30000 522004.4 1.5 2.9
20000-3000-2000
No opening WIP
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Wk 3:Cost of units transferred to finished goods and closing WIP
Total Materials Conversion $ $ $
Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIPAbnormal Normal loss
7200 6000 12001160 11608360 6000 236066000 22500 4350074360 28500 458606240 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
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Process account
Units $ Units $
Opening WIP 1000 7200Materials 20000 30000
Conversion 52200Finished goods 16000 74360Closing WIP 3000 6240
21000 89400 21000 89400
Abnormal normal loss 2000 8800