Process Costing,RAMAN ROY

8/14/2019 Process Costing,RAMAN ROY

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ACCOUNTING MANAGEMENT - II

PROCESS COSTING

Presented By:DR.N.K.GUPTA


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Introduction

In many industries, products are mass

produced, that is, relatively homogeneous

products are processed in a very similar

manner.

Companies in these industries use process

costing.


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Determining as to when

process-costing systems are

appropriate


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Process Costing In businesses where a product passes through

different stages of production, each well

defined, process costing is employed. A separate account for each process is opened

and all expenditures pertaining to that process

is charged to that process account. Thus, the

cost of the product at each stage of

manufacture is found out.


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Process costing is the method that applies cost

to alike products that are usually massproduced in continuous fashion through seriesof production steps or processes.

Process costing is suitable for industries

involving continuous production of the sameproduct through the same process or a set ofprocesses.

In a process-costing system, the unit cost of aproduct or service is obtained by assigningtotal costs to many identical or similar units.


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Describing five key steps

in process costing


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1. Summarize the flow of physical units ofoutput.

2. Compute output in terms of equivalentunits.

3. Compute equivalent unit costs.

4. Summarize total costs to account for.

5. Assign total costs to units completed and

to units in ending work-in-processinventory.


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Process account

It is an account that shows theallocation of different costs associated

in the production for differentprocesses associated in the productionof the final product in continuousproduction.

It shows the segregation of the differentcosts of production to a process.


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Sample Process Account

Factory Process Account

Particulars Product A Particulars Product A

Total cost

Cost Per

Unit

Total

Cost

Cost

Per

Unit

Materials

Consumed Wastage

Direct Wages Units Damaged

Factory

Overheads Sale

Profit

Transfer To

Finishing Process


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Process Loss and Wastages

NORMAL PROCESS LOSS

1. The usual percentage of wastage arising in aparticular process or operation.

2. It is unavoidable because of nature of material orprocess. It also includes units withdrawn from theprocess for test or sampling.

3. The loss due to normal wastage should be chargedto the effectives arising out of the process.

Thus, cost of spoiled and lost units is absorbed asan additional cost of good units produced by theprocess.


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Solution:

Let the total finished output of process C be x units.

Total sales = 10x

Wastage in units = (9120-x)

Salvage value = 1*(9120-x)

Profit = 2xTotal sales = Total cost + Profit

10x = 69,768 - (9120-x) + 2x

7x = 69,768 - 9120

X = 8664 unitsWastage = 9120 - 8664 = 456 units

Percentage to input = 456 / 9120 * 100 = 5%


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Process C account

Particulars Particulars

Units TotalCost Units TotalCost

Transfer

from

Process B 9120 49263Normal

Loss 456 456

SundryMaterials 1480

Transfer to

finishedgoods 8664 69312

Direct

Labor 6300

Stock A/C

(@Rs.8 per

unit)

DirectExpenses 1605

Overheads 10,920

9120 69768 9120 69678


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Process Loss and Wastage

ABNORMAL PROCESS LOSS

It consists of loss in excess of the normal

process loss.

This loss is due carelessness, bad plant designor operation, sabotage etc.

Abnormal wastage should not be allowed to

affect the cost of goods units otherwise cost ofproduction per unit will unnecessary fluctuate

and costing itself will give misleading results.


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Abnormal Effectiveness

In case, the actual production of a process is more thanthe expected production, the excess is known asabnormal effectiveness.

The presence of abnormal effectiveness should not

affect the cost of good units in normal circumstances.They, therefore, shall be valued at the rate at whichthe good units would have been valued had there beenwastage at the normal rate.

The amount shall be debited to the relevant process

account and credited to Abnormal EffectivenessAccount which will be closed by transferring toCosting Profit and Loss Account.


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Process Account

Particulars Process Particulars Process

Units

Total

Cost Units

Total

Cost

Raw

materials 1,000 4000

Normal

Wastage 100 250Direct

Wages 6,500

Abnormal

Wastage 50 69312

Indirect

Expenses 3,250

Transfer

to next

process 850 12,750

1,000 13,750 1,000 13,750


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Abnormal Wastage AccountParticulars Process Particulars Process

Units

Total

Cost Units

Total

Cost

Process

A/c 50 750

Sale

Proceeds 50 125

Profit and

Loss A/c 625

50 750 50 750


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Illustration

The product of a manufacturing concern passes through two processes

A and B and then to finished stock. It is ascertained that in each

process normally 5% of total weight is lost and 10% scrap which

processes A and B realizes Rs. 80 per tonne and Rs. 200 per tonne

respectively.

The following are the figures relating to both the processes:Process A Process B

Materials in tones 1,000 70

Cost of materials in rupees per tonne 125 200

Wages in rupees 28,000 10,000

Manufacturing expenses in rupees 8,000 5,250Output in tones 830 780

Prepare Cost account showing cost per tones of each process. There

was no stock or work-in-progress in any process.


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Soln:Process A Account

Particulars Process Particulars Process

Tonnes Amount Tonnes Amount

Materials 1,000 1,25,000

Loss in

Weight 50 -

Manufacturing

Expenses 8,000

Normal

Loss 100 8,000

Wages 28,000

Abnormal

Loss 20 3,600

Transfer to

process B

@ Rs. 180

per tonne 830 1,49,400

1,000 1,61,000 1,000 1,61,000

Cost of Abnormal Loss = 1,61,000 8,000 = Rs. 180 per tonne

850


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Process B Account

Value of Abnormal Effectiveness = Rs. 1,78,650 Rs. 18,000 = Rs. 21per tonne

765

Particulars Process Particulars ProcessTonnes Amount Tonnes Amount

Transfer fromProcess A 830 1,49,400

Loss inWeight 45 -

Materials 70 14,000 Normal Loss 90 18,000

ManufacturingExpenses 5,250

Transfer toFinished

Stock@ Rs.210 per

tonnne 780 1,63,800Wages 10,000AbnormalEffectiveness(or Gain A/C) 15 3,150

915 1,81,800 915 1,81,800


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Calculate and use

equivalent units


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Equivalent Units

Equivalent units is a derived amount of

output units that takes the quantity of each

input in units completed or in work in

process and converts it into the amount ofcompleted output units that could be made

with that quantity of input.

Equivalent unit calculations are necessarywhen all physical units of output are not

uniformly completed during the period.


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Equivalent Units

The following information relates to Aspen

Inc., a manufacturer of skiing accessories.

Ending work-in-process inventory is 100%complete for materials and 20% complete

for conversion.


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Physical Units (Step 1)

Physical

Flow of Production units

Work-in-process, beginning 0

Started during current period 35,000

To account for 35,000

Completed and transferred out

during current period 30,000

Work-in-process, ending (100%/20%) 5,000Accounted for 35,000


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Compute Equivalent

Units (Step 2)Equivalent units

Direct Conversion

Flow of Production Materials CostsCompleted and

transferred out 30,000 30,000

Work-in-process,

ending 5,000 (100%) 1,000 (20%)

Current period work 35,000 31,000


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Summarize and Assign Total Costs

(Steps 4 and 5)

Step 4: Total costs to account for: $146,050

Step 5: Assign total costs: Completed and

transferred out 30,000 x $4.4014 = $132,043 Work-in-process ending (5,000 units)

Direct materials 5,000 x $2.4014 = 12,007Conversion costs 1,000 x $2.00 = 2,000

Total $146,050


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Prepare journal entries for

process-costing systems


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Journal Entries

Journal entries in process-costing systems

are basically like those made in job-costing

systems with respect to direct materials and

conversions costs.

The main difference is that in a process-

costing system, there is a separate work-in-

process account for each department ratherthan for each job.


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Journal Entries

Assume that Aspen Inc. has two processing

departments Assembly and Finishing.

Aspen Inc. purchases direct materials as

needed.

What is the journal entry for materials?

Work-in-Process, Assembly 84,050

Accounts Payable Control 84,050To record direct materials purchased and

used


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What is the journal entry for conversion

costs?


Various accounts 62,000

To record Assembly Department conversion

costs

What is the journal entry to transfercompleted goods from Assembly to Finishing?

Journal Entries


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Work-in-Process, Finishing 132,043


To record cost of goods completed and transferred

from Assembly to Finishing during the period

Journal Entries


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Flow of Costs

Accounts Payable

Various Accounts

WIP Assembly

WIP Finishing

Finished Goods

84,050

62,000

84,050

62,000

132,043

14,007

132,043

Cost of Goods Sold


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Demonstrate the weighted-

average method of processcosting


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Weighted-Average Method

The weighted-average process-costing method

calculates the average equivalent unit cost of

the work done to date (regardless of the periodin which it was done).

It assigns this cost to equivalent units

completed and transferred out and to

equivalent units in ending work-in-processinventory.


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The weighted-average cost is the total of all

costs entering the Work-in-Process account

(regardless of whether it is from beginningwork in process or from work started during

the period) divided by total equivalent units

of work done to date.



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Assume that Aspen Inc. had 1,000 units in

the Assembly Department beginning work-

in- process inventory.

These units were 100% complete for

materials ($2,350) and 60% complete for

conversion ($5,200).

Ending work-in-process inventory consistedof 5,000 units (100% materials) and (20%

conversion).



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Work-in-process, beginning:

100% material 60%

conversion costs 1,000

Units started in process 35,000 36,000

Units transferred out: 31,000

Units in ending inventory: 100%

material 20%conversion costs 5,000

36,000


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Compute Equivalent

Units (Step 2)

Partially completed units are converted into

equivalent units. Ending inventory is only 20% complete for

conversion which equals 1,000 equivalent

units (5,000 x 20%).


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Compute Equivalent

Units (Step 2)Materials

Conversion

Completed andtransferred 31,000 31,000

Ending inventory 5,000 1,000

Equivalent units 36,000 32,000

100% 20%


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Compute Equivalent

Unit Costs (Step 3) Materials Conversion

Beginning

inventory $ 2,350 $ 5,200

Current costs 84,050 62,000

Total $86,400 $67,200


Cost per unit $2.40 $2.10


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Summarize and Assign Total

Costs (Steps 4 and 5) Work-in-process beginning inventory:

Materials $ 2,350

Conversion 5,200Total beginning inventory $ 7,550

+ Current costs in Assembly Department: Materials$ 84,050 Conversion62,000

= Costs to account for $153,600


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Costs (Steps 4 and 5)

Costs transferred out:

31,000 ($2.40 + $2.10) $139,500 Costs in ending inventory:

Materials 5,000 $2.40 12,000Conversion 1,000 $2.10 2,100

Total costs accounted for: $153,600


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Journalizing: Weighted-Average

What are the journal entries in the AssemblyDepartment?


Accounts Payable Control 84,050 To record direct materials purchased and used


Various accounts 62,000

To record Assembly Department conversion costs


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Journalizing: Weighted-Average

Work-in-Process, Finishing 139,500


To record cost of goods completed and

transferred from Assembly to Finishing

during the period


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Key T-Account:

Weighted-AverageWork-in-Process Inventory, Assembly

Beg. Inv. 7,550 Transferred toMaterials 84,050 FinishingConversion 62,000 139,500Balance 14,100


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Demonstrate the first-in,

first-out (FIFO) methodof process costing


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First-In, First-Out Method

FIFO process-costing method assigns the

cost of the prior accounting periods

equivalent units in beginning work-in-

process inventory to the first units

completed and transferred out.


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FIFO assigns the cost of equivalent unitsworked on during the current period first tocomplete beginning inventory, then to start

and complete new units, and finally to unitsin ending work-in-process inventory.

This method assumes that the earliestequivalent units in the Work-in-Process,

Assembly account are completed first.



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Assume that Aspen Inc. uses FIFO.

How many units will be in the quantityschedule (Step 1)?

36,000 (same as weighted-average method)

What are the equivalent units (Step 2)?



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Compute Equivalent

Units (Step 2)Materials Conversion

Completed and

transferred:From beginning

inventory 0 400

Started and completed 30,000 30,000Ending inventory 5,000 1,000

35,000 31,400


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Compute Equivalent

Units (Step 2)Materials Conversion

Completed and

transferred 31,000 31,000Ending inventory 5,000 (100%) 1,000 (20%)

36,000 32,000

Beginninginventory 1,000 (100%) 600 (60%)



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Compute Equivalent

Unit Costs (Step 3)

Materials Conversion

Current costs $84,050 $62,000Equivalent units 35,000 31,400Cost per unit $2.40 $1.975


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Work-in-process beg. inventory $ 7,550

Current costs: Material 84,050

Conversion 62,000Total $153,600

Same as using weighted-average


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Costs (Steps 4 and 5) Costs transferred out:

From beginning inventory: $7,550Conversion costs added:1,000 x 40% x $1.975 790 $8,340

From current production:

30,000 x $4.375 131,250 Total $139,590


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Work-in-process ending inventory: Materials: 5,000 $2.40 $12,000

Conversion:

5,000 20% $1.975 1,975Total $13,975


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Key T-Account: FIFO

Work-in-Process Inventory, Assembly

Beg. Inv. 7,550 Transferred to

Materials 84,050 Finishing

Conversion 62,000 139,625

Balance 13,975


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Comparison of Weighted-

Average and FIFO Methods The weighted-average ending inventory is

higher than the FIFO ending inventory by

$125.

This results in a lower cost of goods sold and

hence higher operating income and higher

income taxes than does the FIFO method.


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Incorporate standard costs

into a process-costing system


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Standard-Costing Method

of Process Costing

Setting standards for quantities of inputsneeded to produce output in companies that

use process-costing is often relativelystraightforward.

Standard costs per input unit may then beassigned to these physical standards to

develop standard costs per output unit.


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of Process Costing Assume that Aspen Inc. uses the standard-

costing method of process costing.

Steps 1 and 2 are identical to the stepsdescribed for the FIFO method.

Step 3 is easier than under weighted-average

and FIFO methods.

Why?


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of Process Costing

Process-costing systems using standard costs

usually accumulate actual costs incurred

separately from the inventory accounts.

Assume that actual materials cost is $84,050

and standard materials cost is $84,250

What are the journal entries in the AssemblyDepartment?


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Standard-Costing Method of Process

Costing

Direct Materials Control 84,050

Accounts Payable Control 84,050

Work-in-Process 84,250

Direct material

variances 200

Direct Materials Control 84,050

To record direct materials purchased and used inproduction during the period and variances


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Apply process-costing methods to

cases with transferred-in costs


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Transferred-In Costs

Weighted Average

Assume that the Finishing Department of Aspen

Inc. had 4,000 units in beginning work-in-process inventory and 2,000 in ending work-in-

process inventory.

31,000 units were transferred from the Assembly

Department to the Finishing Department duringthis period.


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Weighted Average

The beginning work-in-process inventory

was 60% complete for materials and 25%for conversion.

The ending work-in-process inventory was

100% complete for materials and 40% for

conversion.


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Beginning inventory 4,000Units started in process 31,000

35,000

Units completed andtransferred tofinished goods 33,000



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Compute Equivalent

Units (Step 2)

Equivalent units fortransferred-in costs:

Transferred to finished goods 33,000Ending inventory 2,000

35,000

Inventory is 100% complete for the workperformed in the Assembly Department.


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Compute Equivalent

Units (Step 2)

Equivalent units fordirectmaterials costs:

Transferred to finished goods 33,000Ending inventory (100%) 2,000

35,000


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Compute Equivalent

Units (Step 2)

Equivalent units forconversion costs

(ending inventory 2,000): Transferred to finished goods 33,000

Ending inventory (40%) 800

33,800


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Compute Equivalent

Unit Costs (Step 3) Assume the following costs in the Finishing

Department:

Work-in-process beginning inventory from:

Assembly Department $30,200

Direct materials 9,400

Conversion costs 8,000Total cost in beginning inventory $47,600


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Compute Equivalent

Unit Costs (Step 3)Current costs in Finishing Department are as

follows:

Costs received from the

Assembly Department $139,500

Direct materials 9,780

Conversion 42,640Total $191,920

C t E i l t


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Compute Equivalent

Unit Costs (Step 3)

(Transferred-in costs $30,200 + Costs

transferred-in from the Assembly Department

$139,500) 35,000 units = $4.85

(Direct materials $9,400 + $9,780) 35,000

= $0.55

(Conversion costs $8,000 + $42,640) 33,800

= $1.50

Total unit cost = $6.90


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Summarize and AssignTotal

Costs (Steps 4 and 5) Total costs in beginning

inventory $ 47,600

Current costs inFinishing Department 191,920

$239,520

Costs to account for:$47,600 + $ 191,920 = $239,520


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Summarize and AssignTotal


Costs in work-in-process ending inventory:

Transferred-in costs:2,000 $4.85 $ 9,700

Direct materials: 2,000 $0.55 1,100

Conversion: 2,000 40% $1.50 1,200 Total cost in ending inventory $12,000


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Summarize and AssignTotal Costs

(Steps 4 and 5) Costs to account for: $239,520

Costs transferred to

finished goods inventory:33,000 $6.90 $227,700

Costs in ending work-in-

process inventory:$12,000$180 rounding error 11,820

Total $239,520


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T-Account Finishing Department

Work-in-Process Inventory, Finishing

Beg. Inv. 47,600 Transferred toTransferred-in 139,500 Finished Goods

Materials 9,780 227,700

Conversion 42,640Balance 11,820


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FIFO Method The physical units (Step 1) is the same as in

weighted-average.

Beginning inventory 4,000

Units started in process 31,000 35,000

Units transferred to

finished goods 33,000



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Compute Equivalent Units

FIFO (Step 2)


From beginning work-in-process 0

Started and completed 29,000

Work-in-process, ending (100%) 2,000

Total equivalent units 31,000

Comp te Eq i alent Units


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FIFO (Step 2)


Transferred to finished goods 33,000

Ending work-in-process inventory 2,000Total 35,000

Beg. work-in-process inventory 4,000

Equivalent units 31,000 Inventories are 100% complete for the work

performed in the Assembly Department.


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FIFO (Step 2)

Equivalent units formaterials costs:

From beginning work-in-process 1,600Started and completed 29,000

Work-in-process, ending (100%) 2,000


C E i l U i


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FIFO (Step 2) Equivalent units formaterial costs

(beginning inventory 4,000):

Transferred to finished goods 33,000 Ending inventory (100%) 2,000

Total 35,000

Beginning inventory (60%) 2,400

Equivalent units 32,600


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FIFO (Step 2)

Equivalent units forconversion costs:

From beginning work-in-process 3,000Started and completed 29,000

Work-in-process, ending (40%) 800


Comp te Eq i alent Units


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FIFO (Step 2)

Equivalent units forconversion costs

(beginning inventory 4,000,

ending inventory 2,000):

Transferred to finished goods 33,000

Ending inventory (40%) 800

Total 33,800 Beginning inventory (25%) 1,000

Equivalent units 32,800


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Compute Equivalent Unit

Costs FIFO (Step 3)

Cost per equivalent unit:

Transferred-in: $139,590 31,000 $4.50 Direct materials: $9,780 32,600 0.30

Conversion: $42,640 32,800 1.30

Total unit cost $6.10


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Costs FIFO (Steps 4 and 5) Current costs in Finishing Department $192,010

Work-in-process beginning inventory 47,600

Costs to account for $239,610

Same as weighted-average


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S i d A i T t l


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Costs FIFO (Steps 4 and 5) Costs transferred out:

From beginning inventory: $47,600

Direct materials added:4,000 40% $0.30 480

Conversion costs added:

4,000 75% $1.30 3,900

Total $51,980


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Costs FIFO (Steps 4 and 5)

Total costs transferred out:

From beginning inventory $ 51,980From current production:

29,000 $6.10 176,900

Total $228,880

S i A i


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Costs FIFO (Steps 4 and 5) Total costs accounted for:

Transferred to finished goods:$176,900 + $51,980 $228,880

Work-in-process ending inventory 10,640

Rounding 90 Total $239,610

S i d A i T l


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Costs FIFO (Steps 4 and 5) Costs to account for $239,610

Work-in-process ending inventory -10,640 Transferred to finished goods $228,970


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Inter-process profits

Sometimes, it is considered desirable by a

manufacturing concern to value goods processed by

each process at a price corresponding to the market

price co parable goods.Thus, profit or loss made by each process is revealed

and the efficiency of one process is not affected by the

efficiency or inefficiency of a previous process. The

market price of the goods processed being generally

higher than the cost of the process, each process

account will show some profit.

Illustration


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Illustration

The following are the details in respect of process X andprocess Y of processing factory:

Process X Process Y

Rs. Rs.

Materials10,000 --

Labour

10,000 14,000

Overheads

4,000 10,000


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The output of Process X and Process Y at a price

calculated to give a process Y at a price calculated to

give a profit of 20% on transfer price and output of

Process Y is charged to Finished Stock at a profit of

25% on transfer price. The finished department

realized a profit of Rs.1,00,000 for the finished goodsreceived from Process Y. prepare the Process

accounts and total profit assuming there were no

opening and closing work-in-progress.


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Sol. Process X Account

Particulars Amount Particulars Amount

Materials 10,000Transfer to ProcessY 30,000

Labor 10,000

Overheads 4,000Profit- 20% oftransfer price 6,000

30,000 30,000


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Process Y Account


Transfer from Process X 30,000Transfer to Process

Stock 72,000

Labor 14,000

Overheads 10,000

Profit- 25% of transfer

price 18,000

72,000 72,000


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Finished Stock Account


Transfer fromProcess Y 72,000 Sale 1,00,000Profit and Loss

A/C 28,000

1,00,000 1,00,000


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Profit and Loss Account


TotalCostingProfit 52,000

Profit onProcess X 6,000

Profit onProcess Y 18,000

Profit onSales 28,000

52,000 52,000


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Adjustments for Inter-process profits

It is sound financial principle that stock for

balance sheet purposes should be valued at cost

or market price whichever is less. Cost here

means Cost to the business as a whole.

Thus, it is necessary to eliminate the inter-process

profits included in the value of inventory in each

process and the stock of finished goods at the endof accounting period.


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THANK YOU

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