PROCESS COSTING

Introduction
Process costing is a costing method used where it is not possible to identify separate units of
production, or jobs, usually because of the continuous nature of the production processes involved.
It is common to identify process costing with continuous production such as the following.
- Oil refining - Foods and drinks
- Paper - Chemicals
Process costing may also be associated with the continuous production of large volumes of low-
cost items, such as cans or tins.

Features of Process Costing

(a) The output of one process becomes the input to the next until the finished product is made in
the final process.
(b) The continuous nature of production in many processes means that there will usually be closing
work in progress which must be valued. In process costing it is not possible to build up cost records
of the cost per unit of output or the cost per unit of closing inventory because production in progress
is an indistinguishable homogeneous mass.
(c) There is often a loss in process due to spoilage, wastage, evaporation and so on.
(d) Output from production may be a single product, but there may also be a by-product (or
byproducts) and/or joint products.

The aim of this topic is to describe how cost accountants keep a set of accounts to record the costs
of production in a processing industry. The aim of the set of accounts is to derive a cost, or
valuation, for output and closing inventory.

Process accounts
Where a series of separate processes is required to manufacture the finished product, the output of
one process becomes the input to the next until the final output is made in the final process. If two
processes are required the accounts would look like as follows;
Dr Process 1 Account Cr
Units Shs. Units Shs.
Direct materials 1,000 50,000,000 Output to process 2 1,000 90,000,000
Direct labour 20,000,000
Production overhead 20,000,000
1,000 90,000,000 1,000 90,000,000
Dr Process 2 Account Cr
Units Shs. Units Shs.
Materials from process 1 1,000 90,000,000
Added materials 30,000,000 Output to finished goods 1,000 150,000,000
Direct labour 15,000,000
Production overhead 15,000,000
1,000 150,000,000 1,000 150,000,000

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Direct labour and production overhead may sometimes be treated together as conversion cost.
Added materials, labour and overhead in process 2 are added gradually throughout the process.
Materials from process 1, in contrast, will often be introduced in full at the start of process 2.

The 'units' columns in the process accounts are for memorandum purposes only and help you to
ensure that you do not miss out any entries.

Framework for Dealing with Process Costing

Process costing is centered around four key steps. The exact work done at each step will depend
on whether there are normal losses, scrap, opening and closing work in progress.
Step 1: Determine output and losses.
This step involves the following.
- Determining expected output
- Calculating normal loss and abnormal loss and gain
- Calculating equivalent units if there is closing or opening work in progress
Step 2: Calculate cost per unit of output, losses and WIP.
This step involves calculating cost per unit or cost per equivalent unit.
Step 3: Calculate total cost of output, losses and WIP.
In some examples this will be straightforward; however in cases where there is closing and/or
opening work-in-progress a statement of evaluation will have to be prepared.
Step 4: Complete accounts.
This step involves the following.
- Completing the process account
- Writing up the other accounts required by the question

Losses in Process Costing

Losses may occur in process. If a certain level of loss is expected, this is known as normal loss. If
losses are greater than expected, the extra loss is abnormal loss. If losses are less than expected,
the difference is known as abnormal gain.
- Normal loss: is the loss expected during a process. It is not given a cost.
- Abnormal loss: is the extra loss resulting when actual loss is greater than normal or
expected loss, and it is given a cost.
- Abnormal gain: is the gain resulting when actual loss is less than the normal or expected
loss, and it is given a 'negative cost'.
Since normal loss is not given a cost, the cost of producing these units is borne by the 'good' units
of output. Abnormal loss and gain units are valued at the same unit rate as 'good' units. Abnormal
events do not therefore affect the cost of good production. Their costs are analyzed separately in
an abnormal loss or abnormal gain account.

Question 1
Suppose that input to a process is 1,000 units at a cost of shs. 4,500,000. Normal loss is 10% and
there are no opening or closing stocks. Determine the accounting entries for the cost of output and
the cost of the loss if actual output were as follows.
(a) 860 units (so that actual loss is 140 units)
(b) 920 units (so that actual loss is 80 units)

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Question 2
Shiny Co has two processes, Y and Z. There is an expected loss of 5% of input in process Y and
7% of input in process Z. Activity during a four week period is as follows.
Y Z
Material input (kg) 20,000 28,000
Output (kg) 18,500 26,100
Is there an abnormal gain or abnormal loss for each process?

Question 3
During a four-week period, period 3, costs of input to a process were shs. 29,070,000. Input was
1,000 units, output was 850 units and normal loss is 10%. During the next period, period 4, costs
of input were again shs. 29,070,000. Input was again 1,000 units, but output was 950 units.
There were no units of opening or closing inventory.
Required
Prepare the process account and abnormal loss or gain account for each period.

Question 4
3,000 units of material are input to a process. Process costs are as follows;
- Material shs. 11,700,000
- Conversion costs shs. 6,300,000
- Output is 2,000 units. Normal loss is 20% of input.
Required
Prepare a process account and the appropriate abnormal loss/gain account.

Question 5
Charlton Co manufactures a product in a single process operation. Normal loss is 10% of input.
Loss occurs at the end of the process. Data for June are as follows.
Opening and closing inventories of work in progress Nil
Cost of input materials (3,300 units) shs. 59,100,000
Direct labour and production overhead shs. 30,000,000
Output to finished goods 2,750 units
What was the full cost of finished output in June?

Losses with Scrap Value

Scrap is 'Discarded material having some value.'
Loss or spoilage may have scrap value.
- The scrap value of normal loss is usually deducted from the cost of materials.
- The scrap value of abnormal loss (or abnormal gain) is usually set off against its cost, in
an abnormal loss (abnormal gain) account.
The steps to follow when dealing with scrap value are;
1. Separate the scrap value of normal loss from the scrap value of abnormal loss or gain.
2. In effect, subtract the scrap value of normal loss from the cost of the process, by crediting
it to the process account (as a 'value' for normal loss).
3. Either subtract the value of abnormal loss scrap from the cost of abnormal loss, by crediting
the abnormal loss account. or subtract the cost of the abnormal gain scrap from the value
of abnormal gain, by debiting the abnormal gain account.

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Question 6
3,000 units of material are input to a process. Process costs are as follows.
Material shs. 11,700,000
Conversion costs shs. 6,300,000
Output is 2,000 units. Normal loss is 20% of input.
The units of loss could be sold for shs. 1,000 each.
Required:
Prepare appropriate accounts.

Question 7
JJ has a factory which operates two production processes, cutting and pasting. Normal loss in each
process is 10%. Scrapped units out of the cutting process sell for shs. 3,000 per unit whereas
scrapped units out of the pasting process sell for shs. 5,000. Output from the cutting process is
transferred to the pasting process: output from the pasting process is finished output ready for sale.
Relevant information about costs for control period 7 is as follows.
Cutting process Pasting process
Units Shs. Units Shs.
Input materials 18,000 54,000,000
Transferred to pasting process 16,000
Materials from cutting process 16,000
Added materials 14,000 70,000,000
Labour and overheads 32,400,000 135,000,000
Output to finished goods 28,000
Required
Prepare accounts for the cutting process, the pasting process, abnormal loss, abnormal gain and
scrap.

Losses with a disposal cost

There are some losses that are associated with disposal costs. The basic calculations required in
such circumstances are as follows.
(a) Increase the process costs by the cost of disposing of the units of normal loss and use the
resulting cost per unit to value good output and abnormal loss/gain.
(b) The normal loss is given no value in the process account.
(c) Include the disposal costs of normal loss on the debit side of the process account.
(d) Include the disposal costs of abnormal loss in the abnormal loss account and hence in the
transfer of the cost of abnormal loss to the income statement.

Question 8
Suppose that input to a process was 1,000 units at a cost of shs. 4,500,000. Normal loss is 10%
and there are no opening and closing inventories. Actual output was 860 units and loss units had
to be disposed of at a cost of shs. 900 per unit.
Required:
Prepare necessary accounts

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Valuing Closing Work In Progress
When units are partly completed at the end of a period (and hence there is closing work in
progress), it is necessary to calculate the equivalent units of production in order to determine the
cost of a completed unit.

In the previous examples it has been assumed that opening and closing inventories of work in
process have been nil. It is important now to look at more realistic examples and consider how to
allocate the costs incurred in a period between completed output (that is, finished units) and partly
completed closing inventory.

With any form of process costing involving closing WIP, we have to apportion costs between
output and closing WIP. To apportion costs 'fairly' we make use of the concept of equivalent units
of production.

Equivalent units
Equivalent units are notional whole units which represent incomplete work, and which are used to
apportion costs between work in process and completed output. The apportionment is done as
follows;
(a) Direct materials: These are added in full at the start of processing, and so any closing WIP
will have 100% of their direct material content. (This is not always the case in practice. Materials
might be added gradually throughout the process, in which case closing inventory will only be a
certain percentage complete as to material content)
(b) Direct labour and production overhead: These are usually assumed to be incurred at an even
rate through the production process, so that when we refer to a unit that is 50% complete, we mean
that it is half complete for labour and overhead, although it might be 100% complete for materials.

Example
Ally Co has the following information available on Process 9.
Dr Process 9 Account Cr
Units Shs. Units Shs.
Input 10,000kg 59,150,000 Finished goods 8,000kg 52,000,000
Closing WIP 2,000kg 7,150,000

59,150,000 59,150,000

How many equivalent units were there for Closing WIP?

Question 8
Ashley Co operates a process costing system. The following details are available for Process 2.
Materials input at beginning of process 12,000 kg, costing shs. 18,000,000
Labour and overheads added shs. 28,000,000
10,000kg were completed and transferred to the Finished Goods account. The remaining units
were 60% complete with regard to labour and overheads. There were no losses in the period.
What is the value of Closing WIP in the process account?

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Different Rates of Input
In many industries, materials, labour and overhead may be added at different rates during the
course of production.
(a) Output from a previous process (for example the output from process 1 to process 2) may be
introduced into the subsequent process all at once, so that closing inventory is 100% complete in
respect of these materials.
(b) Further materials may be added gradually during the process, so that closing inventory is only
partially complete in respect of these added materials.
(c) Labour and overhead may be 'added' at yet another different rate. When production overhead
is absorbed on a labour hour basis, however, we should expect the degree of completion on
overhead to be the same as the degree of completion on labour.

When this situation occurs, equivalent units, and a cost per equivalent unit, should be calculated
separately for each type of material, and also for conversion costs.

Question 9
Suppose that Columbine Co is a manufacturer of processed goods, and that results in process 2
for April 20X3 were as follows.
Opening inventory NIL
Material input from process 1 4,000 units
Costs of input:
Shs.
Material from process 1 6,000,000
Added materials in process 2 1,080,000
Conversion costs 1,720,000
Output is transferred into the next process, process 3.
Closing work in process amounted to 800 units, complete as to:
Process 1 material 100%
Added materials 50%
Conversion costs 30%
Required
Prepare the account for process 2 for April 20X3.

Valuing opening work in progress: FIFO method

Account can be taken of opening work in progress using either the FIFO method or the weighted
average cost method. Opening work in progress is partly complete at the beginning of a period and
is valued at the cost incurred to date.

The FIFO method of valuation deals with production on a first in, first out basis. The assumption
is that the first units completed in any period are the units of opening inventory that were held at
the beginning of the period.

Question 10
Suppose that information relating to process 1 of a two-stage production process is as follows,
for August 20X2.
Opening inventory 500 units: degree of completion 60%

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Cost to date shs. 2,800,000
Costs incurred in August 20X2 Shs.
Direct materials (2,500 units introduced) 13,200,000
Direct labour 6,600,000
Production overhead 6,600,000
26,400,000
Closing inventory 300 units: degree of completion 80%
Required
Prepare the process 1 account for August 20X2.

Question 11
Walter Co uses the FIFO method of process costing. At the end of a four week period, the
following information was available for process P.
Opening WIP 2,000 units (60% complete) costing shs. 3,000,000 to date
Closing WIP 1,500 units (40% complete)
Transferred to next process 7,000 units
How many units were started and completed during the period?

Question 12
The following information relates to process 3 of a three-stage production process for the month
of January 20X4.
Opening inventory
300 units complete as to: Shs.
Materials from process 2 100% 4,400,000
Added materials 90% 1,150,000
Labour 80% 540,000
Production overhead 80% 810,000
6,900,000
In January 20X4, a further 1,800 units were transferred from process 2 at a valuation of $27,000.
Added materials amounted to shs. 6,600,000 and direct labour to shs. 3,270,000. Production
overhead is absorbed at the rate of 150% of direct labour cost. Closing inventory at 31 January
20X4 amounted to 450 units, complete as to:
Process 2 materials 100%
Added materials 60%
Labour and overhead 50%
Required
Prepare the process 3 account for January 20X4 using FIFO valuation principles.

Question 13
Cheryl Co operates a FIFO process costing system. The following information is available for
last month.
Opening work in progress 2,000 units valued at shs. 3,000,000
Input 60,000 units costing shs. 30,000,000
Conversion costs shs. 20,000,000
Units transferred to next process 52,000 units
Closing work in progress 10,000 units

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 Opening work in progress was 100% complete with regard to input materials and 70% complete
as to conversion. Closing work in progress was complete with regard to input materials and 80%
complete as to conversion.
What was the number of equivalent units with regard to conversion costs?

Valuing opening work in progress: weighted average cost method

An alternative to FIFO is the weighted average cost method of inventory valuation which
calculates a weighted average cost of units produced from both opening inventory and units
introduced in the current period.

By this method no distinction is made between units of opening inventory and new units
introduced to the process during the accounting period. The cost of opening inventory is added
to costs incurred during the period, and completed units of opening inventory are each given a
value of one full equivalent unit of production.

Question 14
Magpie produces an item which is manufactured in two consecutive processes. Information
relating to process 2 during September 20X3 is as follows.
Opening inventory 800
units Degree of completion: Shs.
Process 1 materials 100% 4,700,000
Added materials 40% 600,000
Conversion costs 30% 1,000,000
6,300,000
During September 20X3, 3,000 units were transferred from process 1 at a valuation of shs.
18,100,000. Added materials cost shs. 9,600,000 and conversion costs were shs. 11,800,000.
Closing inventory at 30 September 20X3 amounted to 1,000 units which were 100% complete
with respect to process 1 materials and 60% complete with respect to added materials.
Conversion cost work was 40% complete. Magpie uses a weighted average cost system for the
valuation of output and closing inventory.
Required
Prepare the process 2 account for September 20X3.

Question 15
During August, a factory commenced work on 20,000 units. At the start of the month there were
no partly finished units but at the end of the month there were 2,000 units which were only 40%
complete. Costs in the month were shs. 3,722,400.
(a) How many equivalent units of closing WIP were there in the month?
(b) What is the total value of fully completed output which would show in the process account?

REVIEW QUESTIONS
Question One
A chemical compound is made by raw material being processed through two processes. The output
of Process A is passed to Process B where further material is added to the mix. The details of the
process costs for the financial period number 10 were as shown below:
Process A
Direct material: 2,000 kilograms at shs. 5,000 per kg
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Direct labour: shs. 7,200,000
Process plant time: 140 hours at shs. 60,000 per hour
Process B
Direct material: 1,400 kilograms at shs. 12,000 per kg
Direct labour: shs. 4,200,000
Process plant time: 80 hours at shs. 72,500 per hour
The departmental overhead for Period 10 was shs. 6,840,000 and is absorbed into the costs of each
process on direct labour cost.
Process A Process B
Expected output was 80% of input 90% of input
Actual output was 1,400 kg 2,620 kg
Assume no finished stock at the beginning of the period and no work in progress at either the
beginning or the end of the period. Normal loss is contaminated material which is sold as scrap for
shs. 500 per kg from Process A and shs. 1,825 per kg from Process B, for both of which immediate
payment is received.
You are required to prepare the accounts for Period 10, for
i. Process A,
ii. Process B,
iii. Normal loss/gain,
iv. Abnormal loss/gain,
v. Finished goods,
vi. Profit and loss (extract).

Question Two
A firm operates a process, the details of which for the period were as follows. There was no opening
work-in-progress. During the period 8,250 units were received from the previous process at a value
of shs. 453,750,000 labour and overheads were shs. 350,060,000 and material introduced was shs.
24,750,000. At the end of the period the closing work-in-progress was 1,600 units, which were 100%
complete in respect of materials, and 60% complete in respect of labour and overheads. The balance
of units were transferred to finished goods.
Requirements:
i. Calculate the number of equivalent units produced.
ii. Calculate the cost per equivalent unit.
iii. Prepare the process account.
iv. Distinguish between joint products and by-products, and briefly explain the difference in
accounting treatment between them.

Question Three
A company manufactures a product that requires two separate processes for its completion. Output
from Process 1 is immediately input to Process 2. The following information is available for Process
2 for a period:
(i) Opening work-in-progress units:
12,000 units: 90% complete as to materials, 50% complete as to conversion costs.
(ii) Opening work-in-progress value:
Process 1 output: shs. 13,440,000
Process 2 materials added: shs. 4,970,000
Conversion costs: shs. 3,120,000.
(iii) Costs incurred during the period:
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Process 1 output: shs. 107,790,000 (95,000 units)
Process 2 materials added: shs. 44,000,000
Conversion costs: shs. 51,480,000.
(iv) Closing work-in-progress units
10 000 units: 90% complete as to materials, 70% complete as to conversion costs.
(v) The product is inspected when it is complete. 200 units of finished product were rejected during
the period, in line with the normal allowance. Units rejected have no disposal value.
Required:
(a) Calculate the unit cost of production for the period in Process 2 (to three decimal places of shs.),
using the periodic weighted average method.
(b) Prepare the Process 2 Account for the period using the unit cost of production calculated in (a)
above.
(c) Explain why, and how, the Process 2 Account would be different if there was no normal allowance
for rejects. NB The process account should not be reworked.
(d) Explain how the process account workings, required in (a) above to calculate the unit cost, would
differ if the FIFO valuation method was used instead.
Question Four
Chemical Processors manufacture Wonderchem using two processes, mixing and distillation. The
following details relate to the distillation process for a period;
No opening work in progress (WIP)
Input from mixing 36 000 kg at a cost of shs. 166,000,000
Labour for period shs. 43,800,000
Overheads for period shs. 29,200,000
Closing WIP of 8000 kg, which was 100% complete for materials and 50% complete for labour and
overheads. The normal loss in distillation is 10% of fully complete production. Actual loss in the
period was 3600 kg, fully complete, which were scrapped.
Required:
(a) Calculate whether there was a normal or abnormal loss or abnormal gain for the period.
(b) Prepare the distillation process account for the period, showing clearly weights and values.
(c) Explain what changes would be required in the accounts if the scrapped production had a resale
value, and give the accounting entries.
Question Five
(a) Z Ltd manufactures metal cans for use in the food processing industry. The metal is introduced in
sheet form at the start of the process. Normal wastage in the form of off cuts is 2% of input. The off
cuts can be sold for shs 260 per kilo. Each metal sheet weighs 2 kilos and is expected to yield 80 cans.
In addition to wastage through off cuts, 1% of cans manufactured are expected to be rejected. These
rejects can also be sold at shs. 260 per kilo. Productions, and costs incurred, in the month just
completed, were as follows:
Production: 3,100,760 cans
Costs incurred:
Direct materials: 39,300 metal sheets at shs. 2,500 per sheet
Direct labour and overhead: shs. 33,087,000
There was no opening or closing work in process.

Required:
Prepare the process accounts for the can manufacturing operation for the month just completed.
(b) Another of the manufacturing operations of Z Ltd involves the continuous processing of raw

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materials with the result that, at the end of any period, there are partly completed units of product
remaining.
Required:
With reference to the general situation outlined above
(i) explain the concept of equivalent units.
(ii) describe, and contrast, the FIFO and average methods of work in process valuation.
Question Six
The manufacture of one of the products of A Ltd requires three separate processes. In the last of the
three processes, costs, production and stock for the month just ended were:
1. Transfers from Process 2: 180,000 units at a cost of shs. 394,200,000.
2. Process 3 costs: materials shs. 110,520,000, conversion costs shs. 76,506,000.
3. Work in process at the beginning of the month: 20,000 units at a cost of shs. 55,160,000 (based
on FIFO pricing method). Units were 70% complete for materials, and 40% complete for
conversion costs.
4. Work in process at the end of the month: 18,000 units which were 90% complete for materials,
and 70% complete for conversion costs.
5. Product is inspected when it is complete. Normally no losses are expected but during the
month 60 units were rejected and sold for shs. 1,500 per unit.

Required:
(a) Prepare the Process 3 account for the month just ended.
(b) Explain how, and why, your calculations would be affected if the 60 units lost were treated as
normal losses.
(c) Explain how your calculations would be affected by the use of weighted average pricing instead
of FIFO.
Question Seven
A company operates several production processes involving the mixing of ingredients to produce
bulk animal feedstuffs. One such product is mixed in two separate process operations. The
information below is of the costs incurred in, and output from, Process 2 during the period just
completed.
Costs incurred: Shs. 000
Transfers from Process 1 187,704
Raw materials costs 47,972
Conversion costs 63,176
Opening work in process 3,009
Production: Units
Opening work in process (100% complete, apart from Process 2
conversion costs which were 50% complete) 1,200
Transfers from Process 1 112 000
Completed output 105,400
Closing work in process 1,600
(100% complete, apart from Process 2 conversion costs which were 75% complete)
Normal wastage of materials (including product transferred from Process 1), which occurs in the early
stages of Process 2 (after all materials have been added), is expected to be 5% of input. Process 2
conversion costs are all apportioned to units of good output. Wastage materials have no saleable
value.
Required:
(a) Prepare the Process 2 account for the period, using FIFO principles.
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(b) Explain how, and why, your calculations would have been different if wastage occurred at the end
of the process.
JOINT PRODUCTS AND BY-PRODUCTS

Introduction
Joint Products and By-Products are produced from one production process (Joint Process). There
are no separate products until after the Joint Process is completed. For example, on a dairy farm, the
raw milk is processed into a number of Joint Products: milk, cheese, cream, butter and other dairy
products. Additionally, in a petroleum refining process, crude oil is processed into such Joint
Products as gasoline, kerosene, heating oil, and lubricating oil.

Joint products are two or more products which are output from the same processing operation, but
which are indistinguishable from each other up to their point of separation.

A by-product is a supplementary or secondary product (arising as the result of a process) whose

value is small relative to that of the principal product.
a) Joint products have a substantial sales value. Often they require further processing before
they are ready for sale. Joint products arise, for example, in the oil refining industry where
diesel fuel, petrol, paraffin and lubricants are all produced from the same process.
b) The distinguishing feature of a by-product is its relatively low sales value in comparison
to the main product. In the timber industry, for example, by-products include sawdust,
small off-cuts and bark.

What exactly separates a joint product from a by-product?

a) A joint product is regarded as an important saleable item, and so it should be separately
costed. The profitability of each joint product should be assessed in the cost accounts.
b) A by-product is not important as a saleable item, and whatever revenue it earns is a 'bonus'
for the organisation. Because of their relative insignificance, by-products are not separately
costed.

Problems in accounting for joint products

1. The point at which joint products and by-products become separately identifiable is known
as the split-off point or separation point. Costs incurred up to this point are called common
costs or joint costs.
2. Costs incurred prior to this point of separation are common or joint costs, and these need
to be allocated (apportioned) in some manner to each of the joint products. In the following
sketched example, there are two different split-off points.

Problems in accounting for joint products are basically of two different sorts.
a) How common costs should be apportioned between products, in order to put a value to
closing inventories and to the cost of sale (and profit) for each product.
b) Whether it is more profitable to sell a joint product at one stage of processing, or to
process the product further and sell it at a later stage.
Dealing with common costs
The main methods of apportioning joint costs, each of which can produce significantly different
results are as follows.
1.Physical measurement
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 2.Relative sales value apportionment method; sales value at split-off point

The problem of costing for joint products concerns common costs, that is those common
processing costs shared between the units of eventual output up to their 'split-off point'. Some
method needs to be devised for sharing the common costs between the individual joint products
for the following reasons.
(a) To put a value to closing inventories of each joint product.
(b) To record the costs and therefore the profit from each joint product.
(c) Perhaps to assist in pricing decisions.

Physical Measurement
With physical measurement, the common cost is apportioned to the joint products on the basis of
the proportion that the output of each product bears by weight or volume to the total output. An
example of this would be the case where two products, product 1 and product 2, incur common
costs to the point of separation of shs. 3,000,000 and the output of each product is 600 tons and
1,200 tons respectively. Then product 1 will take only shs. 1,000,000 and shs. 2,000,000 will be
fully taken by product 2.

Physical measurement has the following limitations.

a) Where the products separate during the processes into different states, for example where
one product is a gas and another is a liquid, this method is unsuitable.
b) This method does not take into account the relative income-earning potentials of the
individual products, with the result that one product might appear very profitable and
another appear to be incurring losses.

Sales Value at Split-Off Point

The relative sales value method is the most widely used method of apportioning joint costs because
(ignoring the effect of further processing costs) it assumes that all products achieve the same profit
margin. With relative sales value apportionment of common costs, the cost is allocated according to
the product's ability to produce income. This method is most widely used because the assumption
that some profit margin should be attained for all products under normal marketing conditions is
satisfied.

The common cost is apportioned to each product in the proportion that the sales (market) value of
that product bears to the sales value of the total output from the particular processes concerned.
Using the previous example where the sales price per unit is shs. 4,000 for product 1 and shs. 2,000
for product 2.
(a) Common costs of processes to split-off point shs. 3,000,000
(b) Sales value of product 1 at shs. 4,000 per ton shs. 2,400,000
(c) Sales value of product 2 at shs. 2,000 per ton shs. 2,400,000
So the common costs will be equally shared.

REVIEW QUESTIONS
Question One
PQR Limited produces two joint products – P and Q – together with a by-product R, from a single
main process (process 1). Product P is sold at the point of separation for shs. 5,000 per kg, whereas
product Q is sold for shs. 7,000 per kg after further processing into product Q2. By-product R is sold

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without further processing for shs. 1,750 per kg. Process 1 is closely monitored by a team of chemists,
who planned the output per 1,000 kg of input materials to be as follows:
Product P 500 kg
Product Q 350 kg
Product R 100 kg
Toxic waste 50 kg
The toxic waste is disposed of at a cost of shs. 1,500 per kg, and arises at the end of processing.
Process 2, which is used for further processing of product Q into product Q2, has the following cost
structure:
Fixed costs: shs. 6,000,000 per week
Variable costs: shs. 1,500 per kg processed
The following actual data relate to the first week of accounting period 10:
Process 1
Opening work in process: Nil
Materials input: 10,000 kg costing shs. 15,000,000
Direct labour shs. 10,000,000
Variable overhead shs. 4,000,000
Fixed overhead shs. 6,000,000

Outputs:
Product P 4,800 kg
Product Q 3,600 kg
Product R 1,000 kg
Toxic waste 600 kg
Closing work in progress nil

Process 2
Opening work in process: nil
Input of product Q: 3,600 kg
Output of product Q2: 3,300 kg
Closing work in progress: 300 kg,
50% converted
Conversion costs were incurred in accordance with the planned cost structure.
Required:
(a) Prepare the main process account for the first week of period 10 using the final sales value method
to attribute pre-separation costs to joint products.
(b) Prepare the toxic waste accounts and process 2 account for the first week of period 10.
(c) Comment on the method used by PQR Limited to attribute pre-separation costs to its joint
products.
(d) Advise the management of PQR Limited whether or not, on purely financial grounds, it should
continue to process product Q into product Q2:
(i) if product Q could be sold at the point of separation for shs. 4,300 per kg; and
(ii) if 60% of the weekly fixed costs of process 2 were avoided by not processing product Q further.

Question Two
A distillation plant, which works continuously, processes 1,000 tonnes of raw material each day. The
raw material costs £4 per tonne and the plant operating costs per day are shs. 2,600,000. From the

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input of raw material the following output is produced:
(%)
Distillate X 40
Distillate Y 30
Distillate Z 20
By-product B 10
From the initial distillation process, Distillate X passes through a heat process which costs shs.
1,500,000 per day and becomes product X which requires blending before sale. Distillate Y goes
through a second distillation process costing shs. 3,300,000 per day and produces 75% of product Y
and 25% of product X1. Distillate Z has a second distillation process costing shs. 2,400,000 per day
and produces 60% of product Z and 40% of product X2. The three streams of products X, X1 and X2
are blended, at a cost of shs. 1,555,000 per day to become the saleable final product XXX. There is
no loss of material from any of the processes. By-product B is sold for shs. 3,000 per tonne and such
proceeds are credited to the process from which the by-product is derived. Joint costs are apportioned
on a physical unit basis.
You are required to:
(a) draw a flow chart, flowing from left to right, to show for one day of production the flow of material
and the build up of the operating costs for each product;
(b) present a statement for management showing for each of the products XXX, Y and Z, the output
for one day, the total cost and the unit cost per tonne;
(c) suggest an alternative method for the treatment of the income receivable for by-product B than
that followed in this question (figures are not required).

Question Three
A chemical company carries on production operations in two processes. Materials first pass through
process I, where a compound is produced. A loss in weight takes place at the start of processing. The
following data, which can be assumed to be representative, relates to the month just ended:
Quantities (kg):
Material input 200,000
Opening work in process 40,000
(half processed)
Work completed 160,000
Closing work in process 30,000
(two-thirds processed)
Costs (Shs. 000):
Material input 75,000
Processing costs 96,000
Opening work in process:
Materials 20,000
Processing costs 12,000
Any quantity of the compound can be sold for shs. 1,600 per kg. Alternatively, it can be transferred
to process II for further processing and packing to be sold as Starcomp for shs. 2,000 per kg. Further
materials are added in process II such that for every kg of compound used, 2 kg of Starcomp result.
Of the 160,000 kg per month of work completed in process I, 40,000 kg are sold as compound and
120,000 kg are passed through process II for sale as Starcomp. Process
II has facilities to handle up to 160,000 kg of compound per month if required. The monthly costs
incurred in process II (other than the cost of the compound) are:

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 120 000 kg 160 000 kg
of compound of compound
input input
Materials (shs. 000) 120,000 160,000
Processing costs (shs. 000) 120,000 140,000
Required:
(a) Determine, using the average method, the cost per kg of compound in process I, and the value of
both work completed and closing work in process for the month just ended.
(b) Demonstrate that it is worth while further processing 120 000 kg of compound.
(c) Calculate the minimum acceptable selling price per kg, if a potential buyer could be found for the
additional output of Starcomp that could be produced with the remaining compound.

Question Four
C Ltd operates a process which produces three joint products. In the period just ended costs of
production totaled shs. 509,640,000. Output from the process during the period was:
Product W 276,000 kilos
Product X 334,000 kilos
Product Y 134,000 kilos
There were no opening stocks of the three products. Products W and X are sold in this state. Product
Y is subjected to further processing. Sales of Products W and X during the period were:
Product W 255,000 kilos at shs. 945 per kilo
Product X 312,000 kilos at shs. 890 per kilo
128,000 kilos of Product Y were further processed during the period. The balance of the period
production of the three products W, X and Y remained in stock at the end of the period. The value of
closing stock of individual products is calculated by apportioning costs according to weight of output.
The additional costs in the period of further processing Product Y, which is converted into Product
Z, were:
Direct labour shs. 10,850,000
Production overhead shs. 7,070,000

96,000 kilos of Product Z were produced from the 128,000 kilos of Product Y. A by product
BP is also produced which can be sold for shs. 120 per kilo. 8,000 kilos of BP were produced and
sold in the period. Sales of Product Z during the period were 94,000 kilos, with a total revenue of shs.
100,110,000. Opening stock of Product Z was 8,000 kilos, valued at shs. 8,640,000. The FIFO method
is used for pricing transfers of Product Z to cost of sales. Selling and administration costs are charged
to all main products when sold, at 10% of revenue.
Required:
(a) Prepare a profit and loss account for the period, identifying separately the profitability of each of
the three main products.
(b) C Ltd has now received an offer from another company to purchase the total output of Product Y
(i.e. before further processing) for shs. 620 per kilo. Calculate the viability of this alternative.
(c) Discuss briefly the methods of, and rationale for, joint cost apportionment.

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