Process costing

Solutions to Chapter 5 questions

Solution IM 5.1

(a) See section on job and process costing systems in Chapter 2 and the introduction to Chapter 5 for the answer to this problem. (b) It would appear that a job costing system provides more accurate product costs because a separate cost is calculated for each job whereas with a process costing system the cost per unit is an average cost. On the other hand, a greater proportion of the costs are likely to be direct under process costing. With a job costing system, a large proportion of costs will be treated as overheads and the problem of apportioning and allocating overheads will result in inaccurate product costs. In this sense process costing might yield more accurate product costs. However, one problem with process costing is that there is a need to estimate the degree of completion of closing stocks of WIP in order to estimate equivalent units and cost per unit. If it is difficult to produce an accurate estimate of the degree of completion then the product costs will also be inaccurate. Therefore it depends on the circumstances in some situations job costing product costs will be more accurate and in other situations process costing product costs may be more accurate.

Solution IM 5.2

(a) The question does not indicate the method of overhead recovery. It is assumed that overheads are to be absorbed using the direct wages percentage method. Process A account
Units Direct materials Direct materials added Direct wages Direct expenses Production overhead (250% direct wages) Abnormal gain account 6000 Price Amount () () 12 000 5 000 4 000 800 10 000 31 800 5.5 330 32 130 Units Normal loss (scrap account) Process B Price Amount () () 1.5 450 5.5 31 680

300 5760

60 6060

6060

32 130

Cost per unit =

cost of production

scrap value of normal loss

expected output = 5.50

31 800 450 = 5700 units

Units Process A Direct materials added Direct wages Direct expenses Production overhead (250% direct wages) 5760 Price Amount () () 5.5 31 680 9 000 6 000 1 680 15 000 63 360

Process B account
Units Normal loss (scrap account) Process C Abnormal loss Price Amount () () 2.0 1 152 12.0 61 200 12.0 1 008 63 360

576 5100 84 5760

5760

PROCESS COSTING

25

63 360 1152 Cost per unit = 5760 576 units Process C account
Units Process B Direct materials added Direct wages Direct expenses Production overhead (250% direct wages) Abnormal gain 5100 Price Amount () () 61 200 4 000 2 000 2 260 5 000 74 460 560 75 020

= 12

Units Normal loss (scrap account) Finished goods Process D

Price Amount () () 4.0 1 020 16.0 69 920 8.0 4 080

255 4370 510

35 5135

16.0

5135

75 020

74 460 1020 4080 Cost per unit = 5100 255 510 units Process D account (by-product)
Units Process C Direct materials added Direct wages Direct expenses Production overhead (250% direct wages) 510 Price Amount () () 4080 220 200 151 500 5151

= 16

Units Normal loss (scrap account) Finished goods Abnormal loss

Price Amount () () 2.0 11.0 11.0 102 4950 99 5151

51 450 9 510

510

Cost per unit = (b)

Units Normal loss account Normal loss account Profit and loss account 60 35 95

5151 510

102 51 units

= 11

Abnormal gain account

Price Amount () () 1.5 90 4.0 140 660 890 Units Process A Process C 60 35 95 Price Amount () () 330 560 890

Abnormal loss account

Units Process B Process D 84 9 93 Price Amount () () 1008 99 1107 Units Normal loss account Normal loss account Profit and loss account 84 9 93 Price Amount () () 2.0 168 2.0 18 921 1107

Normal loss account (income due)

Process A normal loss Process B normal loss Process C normal loss Process D normal loss Abnormal loss account Abnormal loss account () 450 1152 1020 102 168 18 Abnormal gain account Abnormal gain account () 90 140

26

PROCESS COSTING

(a) See Methods of apportioning joint costs to products and Limitations of joint cost allocations for decision-making in Chapter 6 for the answer to this question. (b) Stock material Components stock Wages Expenses Production overhead Abnormal gain Process 1 Units () 3000 15 000 Process 2 1 000 Normal loss 4 000 10 000 3 000 33 000 100 1 200 3100 34 200 = 12 Units () 2800 33 600 300 600

Solution IM 5.3

3100 34 200

33 000 600 Cost per unit = 2700

Process 1 Components stock Wages Expenses Production overhead

Process 2 Units () 2800 33 600 Finished goods 780 Normal loss 6 000 Abnormal loss 14 000 7 500 2800 61 880 = 23

Units () 2600 59 800 140 700 60 1 380 2800 61 880

61 880 700 Cost per unit = 2600 units Finished goods () 20 000 Cost of sales 59 800 Balance 79 800

Balance b/f Process 2

() 56 800 23 000 79 800 () 200 1100 1300

Process 1 Process 2

Normal loss/scrap () 600 Abnormal gain (process 1) 700 Cash 1300 Abnormal loss () 1380 Cash Profit and loss account 1380 Abnormal gain () 200 Process 1 1000 1200

Process 2

() 300 1080 1380

Normal loss (100 2) Profit and loss account

() 1200 1200
27

PROCESS COSTING

Abnormal loss

Profit and loss account () 1080 Abnormal gain 12 000 600 100 9 500 1 800

() 1000

Solution IM 5.4

(a) Input materials Normal loss (5%) Abnormal loss Completed production Balance (Closing WIP) (b)

Statement of completed production and calculation of cost per unit a

Total cost Completed Closing WIP Abnormal Total Cost per () units equiv. units lossb equiv. units unit () Materials 79 800c 9 500 1 800 100 11 400 7.00 Labour and overhead 41 280 9 500 720 100 10 320 4.00 11.00 Cost element

Value of WIP Materials (1800 units at 7) 12 600 Labour and overhead (720 units at 4) 2 880 Abnormal loss (100 units at 11) Completed units (9500 units at 11)

15 480 1 100 104 500 121 080

Note aThe short cut method is used because the calculations suggest that it was the examiners intention that this method should be used. bIt is assumed that losses are detected at the completion stage. c See process account for calculation. (c) Materials: A B C 6 000 4 000 2 000 12 000 Labour and overheads 12 000 Mixing process account 48 000 Normal loss 24 000 Abnormal loss 7 800 Completed production 79 800 Closing WIP 41 280 121 080

600 100 1 100 9 500 104 500 1 800 15 480

12 000 121 080

(d) See Abnormal gains in Chapter 5 for the answer to this question

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PROCESS COSTING

(a) See Chapter 5 for a description of each of the terms. (b) See Normal and abnormal losses in Chapter 5 for the answer to this question. (c) Workings
Process 1 abnormal gain Process 2 abnormal loss = input (9000) = 100 units. = input (7300) = 70 units. (7300 completed units + 1800 normal loss) (4700 completed units + 2000 WIP + 530 normal loss)

Solution IM 5.5

It is assumed that the intention of the question is that normal loss is 10% of the input which reached the final inspection stage where the inspection occurs. Therefore normal loss is 530 units [10% (7300 input 2000 WIP)]. The cost per unit of output for process 1 is: cost of production 14 964 + (2450 = (80% = 3.82 Process 1 Units () 9000 14 964 Completed units 14 700 (7300 3.82) Normal loss 100 382 (1800 1.20) 30 046 Abnormal gain account () 120 Process 1 262 382 Normal loss (income due) account () 2160 Abnormal gain (100 753 Cash (balance) 2913 Units () scrap value of normal loss 6) 9000) (1800 1.20) expected output

Materials Conversion cost Abnormal gain (100 3.82)

7300 27 886 1800 2 160 30 046 () 382 382 () 120 2793 2913 () 24 456 753 337 8 640 34 186 () 99 238 337
29

Normal loss Profit and loss account

Process 1 Process 1

1.20)

Process 1 Conversion cost

Process 2 account () 27 886 Finished goods (W1) 6 300 Normal loss (530 1.42) Abnormal loss (W1) Closing WIP (W1) 34 186 Abnormal loss account () 337 Cash (sale of 70 units at 1.42) Profit and loss account 337

Process 2

PROCESS COSTING

Working (W1) The cost per unit calculation for Process 2 (not using the short cut method) is as follows:
WIP Total Cost Completed Normal Abnormal equivalent equivalent per units loss loss units units unit () 4700 530 70 2000 7300 3.82 4700 530 70 1000 6300 1.00 4.82 WIP value () 7640 1000 8640

Previous process Conversion cost

() 27 886 6 300 34 186

() Completed units (4700 4.82) Share of normal loss (530 4.82) Less sale proceeds (530 1.42) Cost of completed units Abnormal loss (70 4.82) WIP 2554.60 752.60

() 22 654

1 802 24 456 337 8 640 33 433 Note that the cost of the input (34 186) less the sale proceeds of the normal loss equals the cost of the output. The question specifically states that losses occur at the end of the process. This statement, and the above calculations, suggests that the examiners intention was that the short cut method should not be applied. The normal loss of 1802 ought to be apportioned between completed units and abnormal loss where this will have a significant impact on the value of completed units and abnormal loss. If this approach is adopted, the normal loss of 1802 could be apportioned as follows: Completed units [4700/(4700 + 70)] Abnormal loss [70/(4700 + 70)] 1802 = 1776 1802 = 26

Given that the above adjustment will only have a minor effect on the process costs, there is little point in reflecting this apportionment in the process accounts.

Solution IM 5.6

Statement of input and output (Kgs) Process 1 Process 2 Opening WIP 3000 2250 Input for the period 4000 2400 Total input 7000 4650 Transferred to next process/finished stock 2400 2500 Closing WIP 3400 2600 Normal loss (10%) 400 240 Balance Abnormal loss/(gain) 800 (690) 7000 4 650 a (Process 1) Statement of completed production and calculation of cost per unit
Opening WIP () 4 400 3 744 Current Total Completed Closing Abnormal cost cost units WIP loss b () () 22 000 26 400 30 000c 33 744 60 144 Total equiv. units 6 600 4 560 Cost per unit () 4.00 7.40 11.40

Materials Conversion cost

2 400 2 400

3 400 1 360

800 800

30

PROCESS COSTING

Completed production (2400 units at 11.40) Closing WIP: Materials (3400 units at 4) 13 600 Conversion cost (1360 units at 7.40) 10 064 Abnormal loss (800 units at 11.40)

27 360

23 664 9 120 60 144 Statement of completed production and calculation of cost per unita (Process 2)
Opening WIP Current Total Completed Closing Abnormal cost cost units WIP gain b () () 27 360 31 791 (480) 31 311 37 500 c42 750 73 061 Total equiv. units Cost per unit ()

() Previous process cost 4431 Less normal loss (240 units at 2) Conversion cost 5250

2500 2500

2600 1040

(690) (690)

4410 2850

7.10 15.00 22.10

Completed production (2500 units at 22.10) Closing WIP: Previous process cost (2600 units at 7.10) Conversion cost (1040 units at 15) Abnormal gain (690 units at 22.10)

55 250 18 460 15 600 34 060 (15 249) 74 061

Notes a The short cut method is used based on the assumption that the calculations suggest that it was the examiners intention to apply this method. b It is assumed that losses/gains are detected at the completion stage c Labour cost plus overheads (150% of overhead cost) (kgs) 3000 4000 7000 Process 1 () 8144 Normal loss 22 000 Process 2 12 000 Abnormal loss 18 000 WIP c/fwd 60 144 Process 2 () 9 681 Normal loss 27 360 Finished goods 15 000 WIP c/fwd 22 500 15 249 89 790 Abnormal loss () () 1 400 Profit and loss a/c 9 120 10 520 (kgs) 400 2400 800 3400 7000 () 27 360 9 120 23 664 60 144

WIP b/fwd Stock control Wages control Overhead control

WIP b/fwd Process 1 Wages control Overhead control Abnormal gain

(kgs) 2250 2400

(kgs) 240 2500 2600 5340

() 480 55 250 34 060 89 790

690 5340

B/fwd Process 1

10 520 10 520

PROCESS COSTING

31

Normal loss Profit and loss a/c

Abnormal gain () () 1 380 B/fwd 14 169 Process 2 15 549 Overhead control () 54 000 B/fwd Process 1 Process 2 Profit and loss a/c 54 000 () 637 000 637 000 Sales () B/fwd Debtors

300 15 249 15 549 () 250 18 000 22 500 13 250 54 000

Bank/expense creditors

Proft and loss a/c

585 000 52 000 637 000

B/fwd Process 2

Finished goods () () 65 000 Cost of sales 55 250 C/fwd 120 250 Cost of sales () () 442 500 Profit and loss a/c 60 250 502 750

60 250 60 000 120 250

B/fwd Finished goods

502 750 502 750

ABC plc Profit and loss account for the year ended September () () Cost of sales 502 750 Sales Abnormal loss 10 520 Abnormal gain Overhead control 13 250 Profit 124 649 651 169

637 000 14 169 651 169

Solution IM 5.7

Material Labour and overhead

Statement of cost per unit using the short-cut method: Completed Abnormal Total equiv. Cost per units gain units unit () () 16 245 9580 (80) 9.500 1.71 28 596 44 841 9580 (48) 9.532 3.00 4.71

32

PROCESS COSTING

Cost of completed production (9850 4.71) Abnormal gain: Materials (80 units 1.71) Labour and overhead (48 3) Net cost Process account () 16 445 Finished goods 28 596 Normal scrap 280.80 45 321.80

() 45 121.80 136.80 280.80 44 841.00

144.00

Materials Labour and overhead Abnormal gain

() 45 121.80 200.00 45 321.80 () 32 168 200 () 280.80 280.80

Process account

Normal loss (Income due) () 200 Abnormal gain (80 40p) Cash from scrap sold (420 40p) 200 Abnormal gain account () 32 Process account 248.80 280.80 Production statement Input: Opening WIP Materials input

Normal loss account Profit and loss account

(a) (i)

() 21 700 105 600 127 300 92 400 28 200 6 700 127 300

Solution IM 5.8

Output: Completed units Closing WIP Normal loss (balance)

Losses are detected at the start of the process and should be allocated between completed units and closing WIP. Therefore it is appropriate to use the short cut method. The calculations are: Total Completed costs units () 330 077a 92 400 256 792a 92 400 WIP equiv. units 28 200 14 100 Total equiv. unit 120 600 106 500 Cost per unit () 2.7371 2.4112 5.1482
33

Materials Conversion cost

PROCESS COSTING

Note a 333 092 total cost (opening WIP plus current cost) less scrap value of normal loss (3015). (a) (ii) Production statement Input: Opening WIP Materials input

(kg) 21 700 105 600 127 300 92 400 28 200 5 280 1 420 127 300

Output: Completed units Closing WIP Normal loss (5% 105 600) Abnormal loss (balance)

Statement of equivalent production and calculation of cost of completed production and WIP
Completed units less opening WIP requirements 70 700 79 380 Abnormal loss equiv. units 1420 Closing WIP equiv. units 28 200 14 100 Total equiv. units 100 320 93 480 Cost per unit () 2.7342 2.4197 5.1539

Materials Conversion cost

Current cost () 274 296a 226 195

Note a 276 672 current cost less the scrap value of the normal loss (5 280 kg 0.45). Cost of completed production: Opening WIP (56 420 + 30 597) 87 017 Materials (70 700 2.7342) 193 309 Conversion cost (79 380 2.4197) 192 076 472 402 Abnormal loss: Materials (1 420 2.7342) 77 106 34 118 3 882

Closing WIP: Materials (28 200 2.7342) Conversion cost (14 100 2.4197)

111 224 587 508

(b) Process account Opening WIP: Materials Conversion costs

56 420 30 597 87 017

Completed units Abnormal loss Normal loss (sale proceeds) Closing WIP

472 402 3 882 2 376 111 224

Input costs: Materials Conversion costs

276 672 226 195 589 884

589 884
PROCESS COSTING

34

(c) See introduction to Chapter 6 and Accounting for by-products in Chapter 6 for the answer to this question. (a) The answer should include an explanation of the accounting treatment of normal and abnormal losses as indicated in Chapter 5. A discussion of the alternative treatment of losses might include the following: (i) The stage where the loss is assumed to occur will determine how much of the loss is allocated to completed production and closing WIP. If the loss is assumed to occur at the end of the process, it will be charged to completed production only. (ii) The normal loss may be charged to the good output only or apportioned between the good output and the abnormal loss. (iii) Losses may be valued at variable cost or absorption cost. If the loss has resulted in the consumption of scarce resources then a charge might be added to reflect the opportunity cost of the scarce capacity. (b) (i) Calculation of units in closing WIP Units Total input: Opening assembly WIP Units added to assembly process Output to be accounted for (162 000 units): Good units completed Spoiled units Lost units Closing WIP (difference) 50 000 112 000 162 000 90 000 10 000 2 000 60 000 162 000

Solution IM 5.9

(ii) Calculation of equivalent units processed Equivalent units Total units Components Assembly Finishing 40 000 40 000 40 000 40 000 50 000 Nil 25 000 50 000 10 000 10 000 10 000 10 000 2 000 2 000 2 000 Nil 60 000 60 000 20 000 Nil 162 000 Notes opening WIP completed in this period is 50 000 units. Therefore 40 000 units out of the 90 000 completed units will be started and finished during the period. The opening WIP will be fully completed as far as components are concerned, so no additional equivalent units will be completed in this period. The opening WIP for assembly is 50% complete. Therefore the remaining 50% (i.e. 25 000 units) will be completed in this period. All the opening work in progress will be completed in this period in the finishing process. b Spoilage is recognized at the end of the finishing process. The 10 000 spoilt units will be passed from the assembly to finishing process and will not be considered to be spoilt until the end of the finishing process. Therefore it is inappropriate to allocate a share of the normal loss to the closing WIP of the assembly process.
PROCESS COSTING
a The

Units started and finished a Completion of opening WIP a Spoilage b Losses Closing WIP

112 000

97 000

100 000

35

(iii) Calculation of cost per equivalent unit: assembly process

Current costs () 120 000 40 000 40 000 200 000 Completed units less opening WIP equivalent Spoiled units units Lost units Closing WIP equivalent units Total equivalent units Cost per unit () 1.071 43 0.824 74 1.896 17

Cost element Bought in components Direct costs Overhead

40 000 65 000

10 000 10 000

2000 2000

60 000 20 000

112 000 97 000

() Closing WIP: Components (60 000 1.071 43) Closing WIP: Direct costs and overheads (20 000 64 286 0.824 74) 16 495 53 571 61 856 110 000 80 781

Completed units plus spoiled units transferred: Components (50 000 1.071 43) Direct costs etc. (75 000 0.824 74) Add opening WIP (60 000 + 25 000 + 25 000) Lost units (2000 1.896 17) written off Total assembly costs accounted for

225 427 3 792 310 000

Finishing process Completed units transferred from assembly process: 90 000 + 10 000 = 100 000 units. Finishing process costs: () () Transferred from assembly 225 427 Finishing costs 30 000 255 427 Completed cost per unit = 2.554 27 (255 427/100 000 units). Of the 100 000 units transferred, 90 000 units are completed and 10 000 units are spoiled. Therefore Normal loss = 5000 units ( 118 90 000) Abnormal loss = 5000 units (balance) The costs of 255 427 can be analysed as follows: Completed units = 242 656 (95 000 2.554 27) Abnormal loss = 12 771 (5000 2.554 27) Note that the normal loss is charged to the completed units. (a) The closing stock valuation for October which is given in the question does not distinguish between materials and conversion cost. It is therefore necessary to prepare the following statement for October: October cost schedule (weighted average basis)
Total cost () 58 500 99 000 Completed Closing WIP units equivalent units 2400 2400 1500 1200 Total Cost per equivalent units unit () 3900 15.00 3600 27.50 42.50 WIP value () 22 500 33 000 55 500

Solution IM 5.10

Materials Conversion cost

November cost schedule (weighted average basis)

Closing WIP Total Opening Current Total Completed equivalent equivalent Cost per WIP cost cost units units units unit () () () () Materials 22 500 48 600 71 100 2400 1800 4200 16.9286 Conversion cost 33 000 84 000 117 000 2400 900 3300 35.4545 52.3831 WIP value () 30 471 31 909 62 380
PROCESS COSTING

36

November cost schedule (FIFO basis)

Current cost () 48 600 84 000 Completed units Closing WIP less opening WIP equivalent equivalent units units 900 1200 1800 900 Current total equivalent units 2700 2100 Cost per unit () 18 40 58 WIP value () 32 400 36 000 68 400

Materials Conversion cost

Sales revenue Opening WIP Variable costs Fixed costs Closing WIP Cost of sales Profit/(loss)

Profit statements Weighted average () () 120 000) 55 500 69 600 63 000 188 100 62 380 125 720) ) (5 720) )

FIFO () 55 500 69 600 63 000 188 100 68 400 () 120 000

119 700 300

(b) The difference in profits is due entirely to the difference between the average cost and FIFO stock valuations. Unit costs increased from 42.50 in October to 58 in November. With the average cost method, the stock valuation is based on both October and November costs. This is because the opening WIP value for November is merged with the current costs to calculate the average cost per unit. With the FIFO method, the cost per unit is based entirely on November costs. The closing WIP is assumed to come from the new units which have been started during the period. (c) 1. Use of standard costs: The statement is correct. Standard costs per equivalent unit produced would be used to value stocks, and costs per unit would be the same each period (except for where standards are periodically changed). Consequently standard cost per equivalent unit for the opening WIP would be identical to the standard cost per equivalent unit for the current period, and the two alternative methods of allocating opening WIP to the current period would result in the calculation of identical unit costs. The use of standard costs would also provide useful information for cost control purposes. Periodic comparisons of actual and standard performance could be made to determine whether the process was running efficiently. The standard costing system should pinpoint costs which may be out of control. It is necessary to ensure that standards set are attainable and that variances are not a result of unreasonable standards. 2. Use of current costs: If current costs are used for stock valuation purposes, it will be necessary to adjust this valuation for financial accounting purposes. Therefore using current costs is likely to involve additional work. In addition, profit will be affected by temporary price changes. The comparison of actual costs with standard costs can be inappropriate when costs change frequently throughout the year. The standard cost is likely to represent an average target cost for the year. If costs increase rapidly throughout the year then favourable variances will arise in the early part of the year and these variances will be compensated by adverse variances in the later part of the year. A possible solution is to change the standards each month or to separate the variances into their planning and operational elements (see Chapter 18 for a discussion of planning and operating variances).
PROCESS COSTING

37

3. Use of direct cost valuation: Variable costing is preferable to absorption costing for managerial purposes. Monthly profit is a function of sales with a variable costing system, whereas monthly profit will be a function of sales and production with an absorption costing system. Managers might also be motivated to increase stocks in order to reduce the amount of fixed overheads allocated to an accounting period. For a more detailed discussion of the advantages of variable costing see Some arguments in favour of variable costing in Chapter 7. The disadvantage of variable costing is that the control of fixed costs might be ignored. If a variable costing system is used, it will be necessary to convert the stock valuation to an absorption costing basis for financial accounting. Note that if a variable costing system is used, a decision will still have to be made whether to use the FIFO or the weighted average stock valuations. 4. Use of cash flow reports: It is important that profit statements be prepared at frequent intervals for control purposes. Annual profit statements are inadequate for control purposes. If stock levels change significantly during a period, cash flow statements will not provide an indication of profit and production performance for the period. Management should receive periodic profit statements and cash flow statements. It is important that both cash flows and profits be monitored at frequent intervals.

38

PROCESS COSTING