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PROCESS COSTING

Process
Where goods and services results from sequence of continuous &
repetitive operations or processes
Process costing is used when company is mass producing the same
items and the items goes through a number of different stages

For example : cement, chemical, oil & paint industries

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PROCESS COSTING

Two key issues in process costing are losses & incomplete units
During production process, some input is loss due to evaporation or
wastage
Normal loss represent items that you expect to loss during a process.
Therefore its cost is treated as part of cost of good production
Normal loss are usually treated as percentage of input i.e. normal loss is
expected to be 5% of the input material

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PROCESS COSTING
Illustration:
At the start of the heating process 1,000 Kg of material costing $16/kg
is input. During the process the conversion cost of $2,000 are incurred.
Normal loss through evaporation is expected to be 10% of the input.
During March, 1,000 Kg were the input and output was 900 Kg.
Compute the unit and total cost of the output in March?
Input Output Loss (Balancing)
1,000 Kg 900 Kg 100 Kg

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PROCESS COSTING

Material ($16×1,000kg) $16,000

Conversion Cost $2,000

Total Input Cost $18,000

Cost per Unit of Output = Net cost of input
Expected Good Output
Cost per Unit of Output = $18,000
$20/kg
(1000-100)
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PROCESS COSTING

Process Account
Kg $ Kg $
Input 1,000 16,000 Input 900 18,000
Conversion Cost - 2,000 Normal Loss 100 -

1,000 18,000 1,000 18,000

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PROCESS COSTING

2nd key issue is incomplete units

Process costing is also used when products may not be completed at
the end of the period

For example: Manufacturing Cars

This means that process costs need to be shared between finished

(complete units) and Work In Progress-WIP (incomplete units)

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PROCESS COSTING
To be able to assigned correct amount of cost to finished and partially
completed units, we use a concept called equivalent units or EU
For example: if we had 1,000 units that are 50% complete at the end of
the period. How many finished units is this equivalent to?

1,000×50%=500 equivalent units

Equivalent units (EU) = No of Physical units × Percentage completion

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PROCESS COSTING

Illustration:
EM Ltd is a manufacturer. In period 1 the following production occurred
Started = 1,400 Units
Closing Work in Progress (CWIP) = 400 Units
Degree of completion of CWIP :
Material = 100% Conversion = 50%
Cost incurred in period 1:
Material=$81,060 Conversion=$71,940
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PROCESS COSTING

Started Finished CWIP

1,400 1,000 400

Finished goods are 100% complete for both material & conversion
EUs
Finished Goods (1,000×100%) 1,000
Material 1,400
CWIP (400×100%) 400
Finished Goods (1,000×100%) 1,000
Conversion 1,200
CWIP (400×50%) 200
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PROCESS COSTING

Input Cost ($) Units Cost per EU ($)

Material 81,060 1,400 57.90

Conversion 71,940 1,200 59.95

Total 153,000 2,600 117.85

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PROCESS COSTING

Cost may now be attributed to the output

Input $ $
Completed Units 1,000×$117.85 117,850
CWIP (Material) 400×$57.90 23,160
CWIP (Conversion) 200×$59.95 11,990
35,150
Total
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PROCESS COSTING

Process Account
$ $
Material 81,060 Finished Goods 117,850
Conversion 71,940 CWIP Material 23,160
CWIP Conversion 11,990
153,000 153,000

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 PROCESS
COSTING

ACTIVITY 4
(SOLUTION)

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 PROCESS
COSTING

ACTIVITY 5
(SOLUTION)

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 PROCESS
COSTING

ACTIVITY 5
(SOLUTION)

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