understanding to process costing

8/13/2019 understanding to process costing

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Process costing

Process costing is adopted when there ismass production through a sequence ofseveral processes

Example include chemical, flour and glassmanufacturing

It computes the average cost per unit bydividing the costs or production for a

particular period by the number of unitsproduced during the period


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Process 1

Process 2

Process 3

Direct materialDirect labouroverheads

Finished goods Cost of goods sold




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Accounting for Process Costing

Costs are accumulated by each process

Each process maintains its process account

The process account is debited with the costs

incurred and credited with goods completedand transferred to other process account

When the goods are completed, they will betransferred to finished goods account

When the goods are sold, the amount will betransferred to the cost of goods sold account


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Process A

Material 500Labour 100

Overhead200

Process B 800

800 800

Process B

Process A800Material 50

Labour 150Overhead100

Process C 1100

1100 1100

Process C

Process B 1100Material 80

Labour 110Overhead 210

Finished Gds 1500

1500 1500

Finished Goods

Process C 1500 Cost of GDsSold 1300

Bal 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 processcosting

In a production process, losses areinherent and unavoidable

Nature of losses

Normal loss

Abnormal loss


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Accounting for scrap

Damaged goods may be sold as scrap

Revenue arising from the scrap should betreated as a reduction in cost rather thanan increase in sales revenue


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Transactions Accountingtreatment

Accountingentries

Normal loss Losses withinexpected level

Not assigned cost

No entry

Abnormal loss Excess loss overthe expected levelAssigned cost

Dr. AbnormallossCr. Processaccount

Abnormal gain Gain resulted whenthe actual loss isless than thenormal or

expected loss

Dr. Processaccount

Cr. Abnormalgain


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Accountingentries

Scrap value ofnormal loss

Reducing materialcost

Dr. Scrap

Cr. Processaccount

Scrap value ofabnormal loss

Reduce cost ofabnormal loss

Dr. ScrapCr. Abnormalloss

Loss of scrapvalue due toabnormal gain

The actual unitssold as scrap willbe less than thescrap value of

normal loss

Dr. Abnormalgain

Cr. Scrap


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Accountingentries

Actual cashreceived fromthe sale of

scrap

Reducing materialcost

Dr. Cash

Cr. Scrap


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Joyce Ltd. operates a factory involving two productionProcesses. The output of process 1 is transferred to process2. The information of production for January 2013 is asfollows:

Cost for Process 1

Materials: 3000 units at $5 per unitLabour $2400

Cost for Process 2

Materials: 2000 unit at $8 per unit

Labour $1680 No opening and closing work in progress

Output for January 2013

Process 1: 2300 unitsProcess 2 4000 units


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General overhead, for January 2013 amounted to $7140,are absorbed into the process cost at a rate of 375% ofdirect 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% and90% of input respectively

Waste matters from process 1 are sold for $4 per unit

and those from process 2 for $6 per unitRequired:(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 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


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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


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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 ofabnormal gain 130 780

Profit 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 units

3870 units

Abnormal gain 130 units

Wk 1:Determining the output and loss:Process 1Input 3000 units

Less: normal loss (20%)Expected outputActual output 2300 units

600 units

2400 units

Abnormal loss 100 units

Back 1 Back 2


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Equivalent units of production

If there is no opening or closing work inprogress (WIP) the unit cost of productscan be obtained as follows

Unit Cost = Sum of production costsProduction quantity


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However, If there is opening or closingwork in progress, the partly completedproduction will have a lower cost than the

fully completed production

We have to converted the work inprogress into finished equivalent units of

production (EUP)


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Three categories in determining

the equivalent units of production Opening work in progress Started and completed units

Closing work in progress


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Opening work in progress (OWIP)

These units were startedin the previousperiodand are to be completedin thecurrent period

1/3 EUP completed

In previous period

2/3 EUP completed

in current period


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Started and completed units(SACU)

These units are started andcompletedin the current period

1 EUP completedin current period


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Closing Work in progress (CWIP)

These units are started in the currentperiod and are to be completed in thecoming period

1/3 EUP completed

in current period

Incomplete part


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First in First out

Weighted average cost

Two methods of cost flows inprocess costing


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First-in-first-outmethod

Weighted averagemethod

The opening work inprogress is the firstgroup of units to beprocessed and

completed during thecurrent period

The opening work inprogress is merged withthe production of thecurrent period to form

one batch of production

It separates the costcomputations of theopening work in progressand the current periodproduction

The average costperunit of the opening workin progress and thecurrent periodproduction is the same


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First-in-first-outmethod

Weighted averagemethod

The EUP computationignoresthe workperformed on the openingwork in progress during

the prior period

The EUP computationincludes all workperformed on the openingwork in progress during

the prior periodCost per unit

= Current cost

EUP

Cost per unit

= Cost of OWIP + Current CostEUP


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FIFO Method WAVCO Method

10 units of OWIP(60% completedin previousPeriod)

70 SACU

40 units of CWIP(20% completed)

4 EUP

70 EUP

8 EUP

+

+

82 EUP

10 units of OWIP(60% completedin 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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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 ConversionUnits EU EU

Opening work in progress

Other completed unitsTotal completed unitsClosing 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 periodCosts per equivalent units 82200 30000 52200

4.4 1.5 2.9

20000-3000

No opening WIP

Wk 3:


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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 1200

1160 1160

8360 6000 2360

74800 25500 49300

83160 31500 516606240 4500 1740

89400 36000 53400

Wk:4 Conversion: $2.9*400= 1160

(Wk 4)

Wk 5: Materials: 17000*$1.5 = $25500Conversion: 17000*$2.9 = $49300


(Wk 5)

(Wk 6)


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Weighted average cost method


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Wk 1:Number of Equivalent units (EU)

Total Materials ConversionUnits EU EU

Opening work in progressOther completed unitsTotal completed unitsClosing work in progress

1000 1000 1000

17000 17000 17000

18000 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

Wk 3:


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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 51678

6865 5143 1722

89400 35730 53400

(Wk 4)



(Wk 5)


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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

understanding to process costing

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