Process costing

CNA22B2 Unit 3

Presented by Mrs. M Mouton

costing@uj.ac.za
Introduction

LEARNING OUTCOME

At the end of this unit, you should be able to:

• Prepare PRODUCTION COST REPORT using various valuation
methods.

2
Introduction
When the learning outcome is broken down you must be able to:
• Discuss the concepts and sequence of process costing;

• Prepare the production cost report which includes:

- Quantity statement (calculation of equivalent units)

- Cost statement (calculation of cost per equivalent unit)

- Cost allocation statement (using cost per unit to allocate cost)

• Discuss the differences between the First-in-First-out Method and

Weighted average method of inventory evaluation within the process
costing environment;

• Discuss normal and abnormal losses.

3
Costing Systems Unit 4

Unit 3

Unit 2

4
 Job costing vs Process costing
Job costing Process costing
Work on different products Nature of the Single product on a continuous
or jobs. product basis (process costing)
OR
multiple products from same
process. (Joint and by-products)

By job Cost By process

accumulation

May have WIP Work-in- Will always have WIP

process

Job cost card per job Recordkeeping Production cost report

Completed job Timing of cost At the end of accounting period

transfer

5
Process costing system
• The process costing system is designed to calculate the cost associated with
homogeneous products which is normally produced in a mass production
environment i.e. the same product produced in bulk.

• Mass production includes industries such as: food processing (tinned food),
a brewery and paint manufacturing.

• The cost per unit is calculated by dividing the Total cost for the period by
the number of units of output for that period (Chapter 12, p. 292).

• In order to allocate the cost to homogenous product you need to compile the
production cost report (consisting of 3 statements: quantity statement, cost
statement & cost allocation statement)
6
Is this process an example of single product process costing?

No, it is a joint and by-product costing system

7
Is this process an example of process costing?

Every woman deserves to feel like a

princess on their matric dance. From
the days of being small children,
women have dreamed of what their
dress would like.
We design matric farewell dresses to
ensure that dreams come true.

No, it is a job costing system

8
Is this process an example of process costing?

Albany offers the most comprehensive range of breads in

South Africa. There is an option for every family member
and something for every individual's taste and lifestyle.

From Albany Superior White and Brown bread to low G.I.

variants such as Albany Superior Low G.I. White,
Superior Low G.I. Seeded Brown and Superior Low G.I.
Wholewheat, to kids' favourites Albany Superior Best of
Both White Bread and 100% Smooth Wholegrain Brown
Bread.

http://www.fastmoving.co.za/fmcg-suppliers/albany-bakeries-312/food-
9/albany-bakeries-510

Yes, it is a single product process costing system

9
Understanding the dynamics of process costing
In the process costing production process you will still have your normal
production elements i.e.:
• Material
• Labour
• Overheads
You need to understand how these production elements are added to the
production process when mass production occurs.
• Material – can be added in different ways (see next slide)
• Labour – added evenly through-out the process*
• Overheads – added evenly through-out the process*
*evenly through-out the process means that if the process is 40% completed, 40% of labour and overheads
have been added
10
Understanding the dynamics of process costing
Different materials can be added in different stages of the process:
• At the beginning
• Anywhere in the middle
• At the end
• Continuously throughout the process
• During a part of the process

In order to understand the adding of production elements to the process

better it is advised that you draw the production process as explained in
a question by using a timeline.
• It will give you an overall picture of the process.
• Makes the calculations easier to understand.

11
Process costing – drawing a timeline

12
Process costing – examples of adding production
elements to the process

Material A (all at once) Labour & Overheads: added through-out the process

Material C (all at once)

Material B (all at once)

0% 50% 100%
Beginning Middle End

Remember: Labour + Overheads = Conversion cost (used in process costing)

13
Understanding the dynamics of process costing
During the mass production manufacturing process you will find different categories of
products during one accounting period:

 WIP Units: Opening Balance - i.e. incomplete units in the beginning

of the month (at start of the accounting period) which means production
on these units already started in the previous accounting period.
 Units put into production (introduced): Production on these units
started in the current accounting period (month
 Units Started & Completed (S&C): Units started and completed in the
same month.
 WIP Units: Closing Balance i.e. incomplete units at month-end.
 Units in Normal Losses – Unavoidable wastage
 Units in Abnormal Losses – Avoidable wastage
14
Understanding the dynamics of process costing
Losses (also referred to as spoilage):
In a process there are units that were placed into production (INPUT) and
completed units (OUTPUT). Losses occur when output units are less than
input units. There are two type of losses:
 Normal Losses – Units wasted that are normally part of the process eg.
evaporation
 Abnormal Losses – Units wasted that are above expectation meaning it
is NOT normally part of the process. Abnormal losses can be avoided
through proper management.
Losses are detected at an inspection point, which can be at ANY POINT in
the process (beginning, middle or end of the process). Page 297

15
Understanding the dynamics of process costing
At the end of any given production period there will be:
• Units completed that can be transferred and,
• Partly completed units referred to Work-in-Progress (WIP).

In order to spread cost correctly between completed units and partly

completed units the concept of equivalent production units (EU) is
used.
This concept of equivalent production units is based on the
understanding that 100 units that are only 40% completed is the
equivalent of 40 (100 x 40%) completed units.
Principle: Units x %
16
Example: Equivalent units (EU) – without losses
Information will be given as follows:
 Opening WIP (30%) 1000 units
 Units started and completed 3 000 units
 Closing WIP (65%) 500 units

The above information means the following:

• Opening WIP: Units in this batch reached the 30% process point in the
previous month and the rest of the process (70%) will be completed in the
current month. Movement: 30% to 100%. (EU: 1000 x 70% = 700)

 Units started and completed: These units were processed from

beginning to end in the current month. Movement from 0% to 100%.

 Closing WIP: These units were only 65% completed in the current month.
Movement: 0% to 65%. (EU: 500 x 65% = 325)
 (See the colour coded timeline on next slide)
17
Track progress to determine % of completion (EU)

WIP opening inventory (movement = 70%)

Remember:

Movement
UNITS STARTED & COMPLETED (movement = 100%) is only
tracked
within a
WIP closing inventory (movement = 65%) specific
month

0% 30% 50% 65% 100%

Beginning Middle End
18
Process costing
All these concepts were explained to be able to understand the
calculations needed for the PRODUCTION COST REPORT which
consists of THREE statements:

• Quantity statement
• Cost statement
• Cost allocation statement

19
PROCESS COSTING: Production cost report
Consists of three statements:

• Quantity Statement (Schedule) – This schedule ONLY indicates

UNITS.
• Aim: to calculate equivalent units

• Cost statement:
• Aim: to calculate Total cost and Cost per unit

• Cost allocation statement:

• Aim: to allocate the total cost to the different categories by
using the cost per unit. Once allocation is done, you need to
balance to the Total cost in the cost statement.
Production cost report – Quantity statement
The quantity statement ONLY indicates UNITS. Therefore, only work with
the information referring to UNITS given in a question, to compile the
quantity statement.

The quantity statement start with an INPUT column following an OUPUT

column. These two columns should balance.

There are two categories of units regarded as INPUT in the quantity

statement:
• Opening WIP

• Units put into production

21
Production cost report – Quantity statement
Categories of units regarded as OUTPUT in the quantity statement:
• Units completed and transferred (C&T): transferred to finished goods OR to the next
department in the current period.

• Units started and completed (S&C): This category of units are units started and
completed in the same period. Units started and completed are only calculated when first-
in-first-out (FIFO) valuation method is used. (Units S&C = Units C&T minus Units in
opening WIP)

• Closing WIP

• Normal losses: Calculate according to information in question.

• Abnormal losses: Missing part to balance will be units in abnormal losses.

22
Process costing – Quantity statement

Remember the INPUT column needs to balance with the OUTPUT column!

Once all inputs and outputs have been recorded and it does not balance
the missing number is possibly be ABNORMAL losses.

See the next slide to better understand the unit flow within a process
costing system.

23
Unit flow
Input: OPENING

Output: UNITS COMPLETED AND TRANSFERRED

WORK IN PROCESS

Output: UNITS
Input: UNITS STARTED &
STARTED COMPLETED (only
with FIFO)

Output: CLOSING
WORK IN PROCESS
Quantity statement - Framework
• Enter the given inputs & outputs.
• Abnormal losses would be the balancing figure.
• INPUT have to balance to OUTPUT.
INPUT OUTPUT
Units Units
WIP opening
Put into production

Completed & Transferred

- WIP (o)
- Started & completed
Normal losses
Abnormal losses
WIP closing

Once INPUT = OUTPUT, continue with EU section.

.
25
Quantity statement
Once the input and output columns balance, you can start with the equivalent
units (EU) section. This section is split into different costs:

• Various material cost

• Conversion cost

For this you need the timeline to track movement (%) of each category (batch) of
units which are units in:

• WIP opening

• Started & completed

• Losses

• WIP closing

26
Equivalent units (% of Completion)
Combining all concepts to establish the % of completion within the equivalent units’
section in the quantity statement. Since this section is split in two: Material and Conversion
cost.

How do I deal with material?

Material is normally added all at once which means once a batch of units move
through the material adding point in the process it received ALL (100%) of the
material. You will create a column for every material in the question.

How do I deal with labour and overheads?

It is combined in the conversion cost column. Why? Because labour and
overheads are added to the process in the same way, which is evenly and not all
at once. This means that if a batch only reach the 35% mark in the process only
35% of conversion cost had been added.
27
Timeline illustrating movement of different unit
categories

WIP opening

Started& Completed (S&C)

WIP closing
Material 1

inspection

0% Beginning 100% End

Quantity statement - Framework
• Enter % of completion for each element.
• Multiply % with Output to get EU.
• Calculate total for Material & Conversion
columns.
Equivalent units (EU) section
INPUT OUTPUT Material Conversion
Units Units % Eq. Units % Eq. Units
WIP opening
Put into production

Completed & Transferred

- WIP (o)
- Started & completed 100% 100%
Normal losses 0% 0%
Abnormal losses % %
WIP closing % %

Once you calculated EU you can continue with the cost statement.

29
Cost statement - Framework
Total EU Cost per unit
WIP opening - previous month's cost R 0,00
Material cost (for current month) R 0,00
Conversion cost (for current month) R 0,00
R 0,00

Start with the previous month’s cost given in the question (red).

Transfer the EU for material and conversion cost in the quantity

statement (light green & orange)

Calculate the Cost per unit by dividing Total cost by EU

(notice the colours following to next statement)

30
Cost allocation statement - Framework
EU R per eq unit R R
Category 1 WIP opening R 0,00
Previous month R 0,00
Current cost R 0,00
Material 0 R 0,00
Conversion 0 R 0,00
Category 2 S & C 0 R 0,00
C & T = S&C + WIP opening R 0,00
Category 3 Abnormal losses R 0,00
Material 0 R 0,00
Conversion 0 R 0,00
Category 4 WIP closing R 0,00
Material 0 R 0,00
Conversion 0 R 0,00
Total production cost R 0,00
• Use the R/u for material, conversion & total calculated in the cost
statement in previous slide in order to calculate the total allocated
cost for each batch in cost allocation statement.
• Refer to the colours used.
• Total production cost in yellow needs to balance with total cost in
Cost statement.
31
What is next?

Activity: Description:

Study The formats of:

Quantity statement
Cost Statement
Cost allocation statement

You can watch Video 1,2 & 3 for a

voice over of these slides.

In video 4 the theory knowledge will CMA Example 12.11, page 317.
be applied in an example.

32