Process costing is used for mass production involving multiple processes. Costs are accumulated for each process and transferred between processes. When goods are completed, they are transferred to finished goods. When sold, the costs are transferred to cost of goods sold. The process maintains a process account that is debited for costs and credited for completed goods transferred out or to the next process. Normal losses are not assigned a cost, while abnormal losses are assigned a cost and transferred to the abnormal loss account.
Process costing is used for mass production involving multiple processes. Costs are accumulated for each process and transferred between processes. When goods are completed, they are transferred to finished goods. When sold, the costs are transferred to cost of goods sold. The process maintains a process account that is debited for costs and credited for completed goods transferred out or to the next process. Normal losses are not assigned a cost, while abnormal losses are assigned a cost and transferred to the abnormal loss account.
Process costing is used for mass production involving multiple processes. Costs are accumulated for each process and transferred between processes. When goods are completed, they are transferred to finished goods. When sold, the costs are transferred to cost of goods sold. The process maintains a process account that is debited for costs and credited for completed goods transferred out or to the next process. Normal losses are not assigned a cost, while abnormal losses are assigned a cost and transferred to the abnormal loss account.
Process costing is used for mass production involving multiple processes. Costs are accumulated for each process and transferred between processes. When goods are completed, they are transferred to finished goods. When sold, the costs are transferred to cost of goods sold. The process maintains a process account that is debited for costs and credited for completed goods transferred out or to the next process. Normal losses are not assigned a cost, while abnormal losses are assigned a cost and transferred to the abnormal loss account.
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Process Costing
Process costing Process costing is adopted when there is mass production through a sequence of several processes Example include chemical, flour and glass manufacturing It 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
Direct material Direct labour overheads
Process 1
Direct material Direct labour overheads
Process 2
Direct material Direct labour overheads
Process 3
Finished goods
Cost of goods sold
3
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 completed and transferred to other process account When the goods are completed, they will be transferred to finished goods account When the goods are sold, the amount will be transferred to the cost of goods sold account 4
Process A
Process B
Material 500 Process B
Labour 100 Overhead200
800
800
800
Process C
1100
1100
1100
Finished Goods
Process B 1100 Finished Gds 1500
Material 80 Labour 110 Overhead 210 1500
Process A800 Process C
Material 50 Labour 150 Overhead100
1500
Process C 1500 Cost of GDs
Sold 1300 Bal c/d 200 1500
1500
Accounting for losses and
scrap in process account
Accounting for losses in process
costing In a production process, losses are inherent and unavoidable Nature of losses Normal loss Abnormal loss
Accounting for scrap
Damaged goods may be sold as scrap Revenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue
Transactions Normal loss
Accounting treatment Losses within expected level
Accounting entries No entry
Not assigned cost
Abnormal loss Excess loss over Dr. Abnormal the expected level loss Assigned cost
Cr. Process account Abnormal gain Gain resulted when Dr. Process the actual loss is account less than the Cr. Abnormal normal or gain
Transactions
Accounting treatment Scrap value of Reducing material normal loss cost Scrap value of Reduce cost of abnormal loss abnormal loss Loss of scrap The actual units value due to sold as scrap will abnormal gain be less than the scrap value of
Accounting entries Dr. Scrap Cr. Process account Dr. Scrap Cr. Abnormal loss Dr. Abnormal gain Cr. Scrap 10
Transactions
Accounting treatment Actual cash Reducing material received from cost the sale of scrap
Accounting entries Dr. Cash Cr. Scrap
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Example
12
Joyce Ltd. operates a factory involving two production
Processes. The output of process 1 is transferred to process 2. The information of production for January 2005 is as follows:
Cost for Process 1
Materials: 3000 units at $5 per unit Labour $2400 Cost for Process 2 Materials: 2000 unit at $8 per unit Labour $1680 No opening and closing work in progress Output for January 2005 Process 1: 2300 units Process 2 4000 units 13
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 14
Process 1 account
Units $ Units $ Materials 3000 15000 Scrap: normal loss (4*600) 600 2400 ($5 *3000) Process 2 Labour 2400 ($10*2300) 2300 23000 Overhead 9000 Abnormal loss (2400*375%) ($10 *100) 100 1000 3000 264000 3000 26400 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 $ Process 1 2300 23000 Scrap: normal loss 430 2580 Materials 2000 16000 ($6*430) Labour 1680 Finished goods 4000 48000 Overhead 8340 ($12*4000) (1680*469.4%) 4300 49020 Abnormal gain ($12 *130)
130 1560 4430 50580
4430 50580 Cost per unit = = $49020-$2580 4300-430 = $12 per unit
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Abnormal loss account
Process 1
Units $ 100 1000 Scrap Profit and loss 100 1000
Units $ 100 400 600 100 1000
Abnormal Gain account
Scrap: value of abnormal gain Profit and loss
Units 130 100
$ 780 780 1000
Process 2
Units $ 130 1560
100
1000
Loss on scrap value due to abnormal gain
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Scrap account Units $ 600 2400
Units
Abnormal gain Normal loss (Process 2) 130 780 (Process 1) Normal loss 430 2580 (130*$6) Cash process 1 (Process 2) 700 2800 Abnormal loss 100 400 (600+100)*$4 Cash process 2 (Process 1) (430-130)*$6 300 1800 (100*$4) 1130 5380 1130 5380
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Wk 1: Determining the output and loss: Process 1 Input 3000 units Less: normal loss (20%) 600 units 2400 units Expected output Actual output 2300 units Abnormal loss 100 units Wk 2: Determining the output and loss: Process 2 Input (2300+2000) 4300 units Less: normal loss (10%) 430 units 3870 units Expected output Actual output 4000 units Abnormal gain 130 units
Back 1
Back 2 19
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 costs Production quantity
21
However, If there is opening or
closing work in progress, the partly completed production will have a lower cost than the fully completed production We have to converted the work in progress into finished equivalent units of production (EUP) 22
Example
23
The total production cost for January 2005 was $40000.
8000 units had been completed and 4000 units wee 50% complete. Equivalent units of production 8000 units completed 8000 4000 units were 50% completed 2000 10000 Finished goods = $40000/10000 * 8000 = $32000 Closing work in progress = $40000/10000*2000 = $8000 24
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 started in the previous period and are to be completed in the current 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 and completed in the current period
1 EUP completed in current period
27
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 completed in current period Incomplete part
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Two methods of cost flows in
process costing First in First out Weighted average cost
29
First-in-first-out method The opening work in progress is the first group of units to be processed and completed during the current period It separates the cost
Weighted average method The opening work in progress is merged with the production of the current period to form one batch of production
The average cost per
computations of the unit of the opening work opening work in progress in progress and the and the current period current period production production is the same
30
First-in-first-out method The EUP computation ignores the work performed on the opening work in progress during the prior period Cost per unit
Weighted average method The EUP computation includes all work performed on the opening work in progress during the prior period Cost per unit
= Current cost
EUP
Cost of OWIP + Current Cost
EUP
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FIFO Method 10 units of OWIP (60% completed in previous Period) 70 SACU 40 units of CWIP (20% completed)
WAVCO Method
4 EUP + 70 EUP + 8 EUP 82 EUP
10 units of OWIP (60% completed in previous Period) 70 SACU 40 units of CWIP (20% completed)
10 EUP + 70 EUP + 8 EUP 88 EUP
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Example
33
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 % Direct materials 100 Conversion (labour + overhead) 60 February production: 20000 units
Cost $ 6000 1200 7200
$ Direct materials 30000 Conversion 52200 82200 Closing work in progress: 3000 units (20% as complete as to conversion 34
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 1000 0 400 (40%) Other completed units 17000 17000 17000 Total completed units 18000 17000 17400 3000 3000 600 (20%) Closing work in progress 21000 20000 18000 20000-3000 Wk 2: Costs Total Materials Conversion No opening WIP $ $ $ 30000 52200 Costs incurred in the period 82200 Costs per equivalent units 4.4 1.5 2.9 37
Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP 7200 6000 1200 (Wk 4) 1160 1160 Cost to complete 8360 6000 2360 1000 units completed 74800 25500 (Wk 5) 49300 17000 units completed 51660 Transfer to finished goods83160 31500 Closing WIP 6240 4500 (Wk 6) 1740 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 Wk 5: Materials: 17000*$1.5 = $25500 Conversion: 17000*$2.9 = $49300 Wk 6: Materials: 3000*$1.5 = $4500 Conversion: 600*$2.9 = $1740
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Process account Units $ Units $ Opening WIP 1000 7200 Finished goods 18000 83160 Materials 20000 30000 Closing WIP 3000 6240 Conversion 52200 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 1000 1000 1000 Other completed units 17000 17000 17000 Total completed units 18000 18000 18000 3000 3000 600 (20%) Closing work in progress 21000 21000 18600 20000-3000 Wk 2: Costs Total Materials Conversion $ $ $ 7200 6000 1200 Opening WIP Costs incurred in the period 82200 30000 52200 89400 36000 53400 Costs per equivalent units 4.5853 1.7143 41 2.
Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials Conversion $ $ (Wk 4) $ 51678 Transfer to finished goods82535 30587 6865 5143 (Wk 5) 1722 Closing WIP 89400 35730 53400 Wk 4: Materials: 18000*$1.7143 = $30587 Conversion: 17000*$2.8710 = $51678 Wk 5: Materials: 3000*$1.7143 = $51678 Conversion: 600*$2.8710 = $1722
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Process account Units $ Units $ Opening WIP 1000 7200 Finished goods 18000 82535 Materials 20000 30000 Closing WIP 3000 6865 Conversion 52200 21000 89400 21000 89400
43
Lost units in process costing
44
Nature of losses Normal loss Abnormal loss
45
Normal loss Normal loss are the losses within the expectation during the production Reasons: Low quality materials and workers are engaged There may be an inherent problem in production process 46
Abnormal loss The lost units that is out of expectation
47
Continuous loss Continuous losses occur evenly throughout the production process For example, the weight loss in making mild powder
48
Discrete loss Discrete losses occur at the specific point A firm will not be aware of discrete losses unless the products are inspected at the inspection point For example, wrong buttons on a garment and wrong colour of toy cars m 49
Types and natures
EUP calculation
Continuous normal loss Excluding the lost
units Continuous and Including the lost abnormal loss units Discrete and normal Including the lost loss units Discrete and abnormal Including the lost loss units
50
Types and natures
Treatments for losses and costs
Continuous normal loss
Losses are included as product
costs
Continuous and abnormal loss
Costs are not assigned to the
lost units Losses are charged as period cost Costs are assigned to the lost units Abnormal loss will be written off to the profit and loss
51
Types and natures
Treatments for losses and costs
Discrete and normal
loss
Loss are included as product
cost Cost are assigned to lost units Determining 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 52
Types and natures
Discrete and abnormal loss
Treatments for losses and costs
Loss are charged as period cost Cost are assigned to lost units Abnormal losses will be written off to the profit and loss account
53
Example
54
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 % Direct materials 100 Conversion (labour + overhead) 60 February production: 20000 units
Cost $ 6000 1200 7200
$ Direct materials 30000 Conversion 52200 82200 Closing work in progress: 3000 units (20% as complete as to conversion 55
Loss: 2000 units
You are required to :
Prepare Process 1 account using the FIFO method: Case 1: Continuous normal loss Case 2: Discrete normal loss Case 3: Abnormal loss (both continuous and discrete loss)
56
Case 1: Continuous normal
loss
57
Wk 1: Number of Equivalent units (EU) Total Materials Conversion Units EU EU Opening work in progress 1000 0 400 (40%) Other completed units 15000 15000 15000 Total completed units 16000 15000 15400 Normal loss 2000 3000 3000 600 (20%) Closing work in progress 21000 18000 16000 Wk 2: 20000-3000-2000 Costs Total Materials Conversion No opening WIP $ $ $ 30000 52200 Costs incurred in the period 82200 Costs per equivalent units 4.9292 1.6667 3.2625 58
Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP 7200 6000 1200 (Wk 4) 1305 1305 Cost to complete 8505 6000 2505 1000 units completed 73938 25000.5(Wk 5) 48937.5 15000 units completed 51442.5 Transfer to finished goods82443 31000.5 Closing WIP 6957 5000 (Wk 6) 1957 89400 36000.5 53399.5 Wk:4 Conversion: $3.2625*400= 1305 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
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Process account Units $ Units $ 2000 Opening WIP 1000 7200 Normal loss Materials 20000 30000 Finished goods 16000 82443 6957 Conversion 52200 Closing WIP 3000 21000 89400 21000 89400
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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 1000 0 400 (40%) Other completed units 15000 15000 15000 Total completed units 16000 15000 15400 Normal loss 2000 2000 2000 3000 3000 600 (20%) Closing work in progress 21000 20000 18000 Wk 2: 20000-3000-2000 Costs Total Materials Conversion No opening WIP $ $ $ 30000 52200 Costs incurred in the period 82200 Costs per equivalent units 4.4 1.5 2.9 62
Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP 7200 6000 1200 (Wk 4) 1160 1160 Cost to complete 8360 6000 2360 1000 units completed 66000 22500 (Wk 5) 43500 15000 units completed 45860 Transfer to finished goods74360 28500 6240 4500 (Wk 6) 1740 Closing WIP 8800 3000 5800 Normal loss 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 Wk 5: Materials: 15000*$1.5 = $22500 Conversion: 15000*$2.9 = $43500 Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740
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Process account Units $ Units $ 2000 8800 Opening WIP 1000 7200 Normal loss Materials 20000 30000 Finished goods 16000 74360 6240 Conversion 52200 Closing WIP 3000 21000 89400 21000 89400
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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 1000 0 400 (40%) Other completed units 15000 15000 15000 Total completed units 16000 15000 15400 Normal loss 2000 2000 2000 3000 3000 600 (20%) Closing work in progress 21000 20000 18000 Wk 2: 20000-3000-2000 Costs Total Materials Conversion No opening WIP $ $ $ 30000 52200 Costs incurred in the period 82200 Costs per equivalent units 4.4 1.5 2.9 66
Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials Conversion $ $ $ Opening WIP 7200 6000 1200 (Wk 4) 1160 1160 Cost to complete 8360 6000 2360 1000 units completed 66000 22500 (Wk 5) 43500 15000 units completed 45860 Transfer to finished goods74360 28500 6240 4500 (Wk 6) 1740 Closing WIP 8800 3000 5800 Abnormal Normal loss 89400 36000 53400 Wk:4 Conversion: $2.9*400= 1160 Wk 5: Materials: 15000*$1.5 = $22500 Conversion: 15000*$2.9 = $43500 Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740
67
Process account Units $ Opening WIP 1000 7200 Materials 20000 30000 Conversion 52200 21000 89400
Units
Abnormal normal loss 2000 8800 Finished goods 16000 74360 Closing WIP 3000 6240 21000 89400
