PROCESS COSTING

Process costing is a cost accounting method in

a production system where a finished product
is a result of a series of sequential process.
Example food processing, chemical plants and
oil refineries

1
In this system, we could not be distinguishing one unit to another. It is
important for us to calculate cost per unit for every process. For that, a process
account has to be prepared for every process.

2
 Additional material, labour,overhead

input input

Finished
Process 1 output Process 2 Process 3 out
good
output put

Input

Material, labour
overhead

3
Cost per unit = Total cost incurred
Unit produced

4
Process Accounts
Journal entries:
While input have been introduced in the process,
Dr Process account
Cr material
Cr labour
Cr production overhead
On completion,
Dr Finished good
Cr Process account

5
EXAMPLE 1
A product must pass through two processes. During the month of
July, the following cost was incurred.

Process 1 Process 2
Material (RM) 100 -
Labor (RM) 90 50
Production overhead (RM) 80 40

During the month, 200 kg of materials were used and the production
output was 200 kg. Show the process accounts.

6
PROCESS 1 ACCOUNT

7
Normal loss
This is an avoidable loss (expected) loss due to the normal circumstances such
as evaporation and material spoilage. Normal loss are within the expectation
of the management, therefore it will be charged as part of production cost of
good units produced.

8
Journal entries:
Dr Normal loss Account
Cr process a/c
Normally these loses are being sold;
Journal entries:
Dr Cash/Debtors
Cr Normal loss account

9
Loses with a scrap value (have saleable value) is
called scrap

Loses with no scrap value (have no saleable value) is

called waste

When there is normal loss, cost per unit will be

calculated as follows:

CPU = Total production cost – scrap value of normal loss

Unit input – unit normal loss

10
Example 2
Use the same illustration in example 1, except that in process 1 there is a
normal loss of 10% of input and this loss have no saleable value. The output
for process 1 account is 180 units. Prepare Process 1 account and normal loss
account.

11
Example 3
Same illustration in example 2, except that now the loses are sold at RM 0.20
per unit. Prepare normal loss account and process 1 account.

12
Abnormal loss
Abnormal loss incurred when production loss is greater than expected
loss. This loses are unexpected losses, therefore it is valued at the same
cost as production.
Abnormal loss = actual loss – normal loss (actual loss > normal loss)

13
Journal entries:
Dr. Abnormal loss A/c
Cr Process Account
Example 4:
Input:
Material 2000 kg at RM 0.2 per kg
Labour RM 100
Prod. Overhead RM 50
Normal loss 10%
Scrap value RM 0.05 per kg
Actual production 1700 kg.
Prepare all necessary accounts.

14
Abnormal gain
When production loss is less than expected loss (normal loss), abnormal gain
is incurred. This gain is valued at the same cost as production.
Journal entries:
Dr Process account
Cr Abnormal Gain account
Then this abnormal gain will be set off against normal loss,
Dr Abnormal Gain A/c
Ct Normal loss account
(at scrap value)

15
Example 5:
Input:
Material 2000 kg (RM 0.2/kg)
Labour RM 100
Prod. Overhead RM 50
Normal loss 10%
Scrap value RM 0.05 per kg
Actual production 1900 kg.
Prepare all necessary accounts.

16
Work in Progress (WIP)
Production is normally a continuously process. There are also likely to be partly
completed unit or work in progress at the end of a period, which is called
closing work in progress (CWIP) or opening work in progress (OWIP) at the
beginning of the period. Therefore under process costing, the production cost
is apportioned equally between the completed unit and WIP based on
Equivalent Production concept.

17
Equivalent Production (EP)= completed unit + Equivalent units of WIP

Equivalent unit (EU)= number of equivalent fully completed unit represent by

WIP
(Eg. 10 units which is 30% completed is equivalent to 3 units which is 100%
completed)

18
Example 6
At the end of the year, in process A, there are 400 units, which were fully
completed, and another 600 units, which were only 60%, completed as to
material labour and overhead. Calculate the equivalent production.

Equivalent unit = 0.6 x 600 = 360

Equivalent Production = 400 + 360 =760
Next thing to be calculated is cost per EP
Cost per equivalent production = Total cost
Total equivalent product

19
Example 7:

1000 units of input were put into the process. At the end of the
period, 800 units were fully completed and the remaining 200 units
were 50% completed as to material, labour and production
overhead. Total cost of production was RM 4500.
Calculate cost per EP and show process account.
Equivalent unit = 0.5 x 200 =100
Equivalent Production = 800+ 100 =900
Cost per equivalent production =

20
Example 8

Input: material RM 15345

Labour RM 11856
OverheadRM 9000

Production: Fully completed units = 4200

Partly completed = 600 units

Degree of completion for the 600 units:material75% complete

Labour 60% complete
Overhead 50% complete

Requirement: Show all relevant statements and process account

21
Equivalent production with OWIP

There are two methods of valuation when there is OWIP:

Average cost methods
Under this method, the calculation of cost per unit is based on the costs
of the transferred in cost, cost of OWIP and current period cost.
CPU = Transferred in cost + OWIP + current cost
Equivalent product

The CWIP and Finished units will be valued at average unit cost.

22
Example 9:
The following data was recorded regarding process 2
OWIP 250 kg (40% complete), valued at RM 5750 (RM3750 for previous cost and
RM 2000 for labour and overhead)
Unit received from process 1 850 kg at RM 21000
Units transferred to process 3 875 kg
CWIP 225 kg (50% complete)
Labor and overhead cost for the period were RM 16250.

Required: Prepare all relevant statement and process 2 accounts

23
FIFO method
For this method, cost and quantity brought forward in the OWIP are to
excluded from the calculation of unit’s costs. The calculation of unit
cost is based only on current cost and current production

Example 10
Use the same data with example 9 but this time applies FIFO
method.

24