SPOILAGE : . Cost Per unit Time Period Varies from order to order Job costing has no time frame.Difference Between Job and Process Costing Job Costing Environment Suitable in a Batch production Materials required for Materials job varies from order to order Skilled labor varies according to changing Direct Labor specification Process Costing Suitable in a MASS production Materials needed are same for every order leading to bulk purchases opportunity Unskilled workers who carry out specific tasks repeatedly which form small part of the production process. Job costing obtains unit cost by dividing the total cost of the job by the job order units Big quantities are produced leading to longer production runs Remains the same for all orders Process costing has a time frame of certain months or years for which costs are accumulated. Each production run is Production runs relatively short as the production is carried out for specific orders. Unit Cost Ascertainment Process costing divides total departmental process costs by the departmental process output to derive the unit cost. It ends after the completion of a particular job so that costs are accumulated for each job.

they are immediately taken out of production. Abnormal: Spoilage that exceeds what is considered normal for a particular production process is called abnormal spoilage. The value of an abnormal gain is assessed on the basis of production cost. Method of determining the value of abnormal gain: . When spoiled units are discovered. This method establishes a separate cost for spoiled units. and no further work is performed on them. but it is not the preferred method because it does not distinguish between normal and abnormal spoilage. Total spoilage cost = (Number of spoiled units X Transferred in cost) + (Equivalent production of spoiled units X Equivalent unit cost) Abnormal Gain : Abnormal gain reduces the normal loss quantity so it comes in the form of profit to the industry. Method 2 . It is controllable and results from inefficient operations. Once the cost is recognized. Abnormal gain reduces the normal loss quantity so it comes in the form of profit to the industry. The value of an abnormal gain is assessed on the basis of production cost. ACCOUNTING FOR SPOILAGE: Spoilage in the First Department 1.Theory of Neglect. The amount of spoilage for a period can be considered either normal or abnormal. Abnormal spoilage cost is considered to be a period cost.Units that do not meet production standards and are either sold for their salvage value or discarded are called spoiled units. while normal spoilage is considered to be a product cost. The spoiled units are included in the computation of equivalent production up to the point at which they were removed from production (usually the point of inspection). it can be further allocated between normal and abnormal spoilage. It is the unavoidable cost of producing good units. Equivalent unit cost increases as costs are allocated over fewer units. This method is used because of its simplicity. Method 1 . More output over the expected or normal output realized is called an abnormal gain. Spoiled units are considered as not put into production at all. Normal: Spoilage that results from an efficient production process is called normal spoilage. Abnormal gain arises because of an abnormal effective in the use of raw material or efficiency in performance so it is known as abnormal effective.Spoilage as a Separate Element of Cost. 2.

labor and overhead costs have been accumulated in a department. Abnormal loss Abnormal loss is the loss caused by unexpected or abnormal conditions such as plant break down. accidents etc or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal loss. If abnormal loss has got any scrap value. if 500 units are completed as far as materials.Equivalent Units of Production . In process costing this is done by using the following formula: Equivalent Units = Number of partially Completed Units × Percentage of Completion Process Costing . the department's output must be determined so that unit cost can be computed. These partially converted units are mathematically converted into an equivalent number of fully completed units. it should be credited to abnormal loss account and the balance is ultimately written off to costing profit and loss account Equivalent units of production : A term used in cost accounting to arrive at the cost per unit. sub standard materials. A department usually has some partially completed units in its ending inventory. This measure is used as a benchmark in allocating departmental costs. In other words the units that are not completed at the end of an accounting period.Value of abnormal gain = (Normal cost of normal output/Normal output) Abnormal gain qty. For example. Abnormal loss = Actual loss – Normal loss Value of abnormal loss = Normal cost of normal output /Normal output *units of abnormal loss. the equivalent units are 500 for materials and 200 (40% of 500) for direct labor and manufacturing overhead. equivalent units of production (EUP) After materials. carelessness. The term is associated with number of units of an item that could have been produced with the given material and processing costs in an accounting period. but are only 40% completed as far as direct labor and manufacturing overhead. It does not seem reasonable to count these partially completed units as equivalent to fully completed units when counting the department's out put.

The price fixed by adding the nominal amount of profit for the transfer of finished goods to the next process is known as transfer price. By product can be classified into the following two groups according to their marketable condition at the split-off point: 1. finished goods are transfer to the immediate next process by including a nominal amount of profit. gasoline.. and distillate fuel oils. Those sold in their original form without need of further processing. By-Products: The term "by product" is generally used to denote one or more products of relatively small total value that are produced simultaneously with a product of greater total value. but not necessarily in the same proportion. or vice versa. Transfer Price = Cost of output+ Profit Objectives Of Inter-Process Profit The output of a particular process is transfer to the next process by adding a nominal amount of profit for the following objectives: * To assess the performance of the process operation. finished goods are transferred to the immediate next process at the cost of production basis. kerosene. kerosene. The definition emphasizes the point that the manufacturing process creates products in a definite quantitative relationship. * To decide whether the output should be sold without further processing or putting for further processing Joint product: Joint products are produced simultaneously by a common process or series of processes. An other example of joint products manufacturing is the production of gasoline. An increase in one product's output will bring about an increase in the quantity of the other products. Adding profit on the goods transferred is termed as mark-up price. In some process industries. * To examine whether the output can compete with the market or not. For example.Inter-Process Profit And Its Objectives The profit associated with the transfer of goods from one process to another process is called inter-process profit. where the derivation of gasoline inevitably results in the production of such items as naphtha. The profit so incorporated is called inter-process profit. Normally. with each product processing more than a nominal value in the form in which it is produced. . Other examples of joint products manufacturing are the simultaneous production of various grads of glue and the processing of soybeans into oil and meal. and paraffin are the joint products produced from crude oil. fuel oil.

the by product is left over scrap or waste. generally have a residual value. such as sawdust in lumber mills. In some cases. cores and seeds from apples. Nature of By-Products: By-products arising from the cleansing of the main product. the by product may not be the result of any manufacturing process but may arise from preparing raw materials before they are used in the manufacture of the main product. and shells from coca beans are examples of this type of product. In other cases. The separation of cotton seed from cotton. .2. Those which require further processing in order to be saleable. such as gas and tar from coke manufacture.