MANAGEMENT

AND COST
ACCOUNTING
SIXTH EDITION

COLIN DRURY

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
 Part Two:
Cost accumulation for
inventory valuation and profit measurement

Chapter Five:
Process costing

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.1

PROCESS COSTING

1. Job costing assigns costs to each individual unit of output because

each unit consumes different quantities of resources.

2. Process costing does not assign costs to each unit of output because
each unit is identical.Instead, average unit costs are computed.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.2a

A comparison of job & process costing

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.2b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.3a

Normal and abnormal losses

• Normal losses cannot be avoided –Cost is absorbed by good

production.

• Abnormal losses are avoidable –Cost is recorded separately

and treated as a period cost.

Example
Input = 1 200 litres at a cost of £1 200
Normal loss = 1/6 of input
Actual output = 900 litres
CPU = £1 200/Expected output (1 000 litres) = 1.20
Cost of completed
production = £1 080 (900 ×£1.20)
Cost of abnormal loss = £120 (100 × £1.20)

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.3b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.4a
Sale proceeds from normal losses

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.4b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.5a

Sale proceeds (normal and abnormal losses)

Example 2
As example 1 but output = 900 litres (abnormal loss = 100 litres)
CPU as example 1 = £1.10 per litre

The sales value of the abnormal loss should be offset against the
cost of the abnormal loss.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.5b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.5c

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.6a

Abnormal gains

Example
Input = 1 200 litres at a cost of £1 200
Output = 1 100 litres
Normal loss = 1/6 of input
Scrap value = £0.50 per litre

CPU = Cost of production less scrap value of normal loss

Expected output

= £1 100 /1 000 = £1.10 per litre

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.6b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.6c

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.7a

Equivalent production & closing WIP

Partly completed units are expressed as fully completed equivalent

units in order to compute CPU (e.g. 1000 units 50% complete equls
500 equivalent production.

Example
Opening WIP Nil
Units introduced into the process 14 000
Units completed and trasferred to next process 10 000
Closing WIP (50% complete) 4 000
Materials cost (introduced at start) £70 000
Conversion cost £48 000

Note that materials are 100% complete.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.7b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.7b

Equivalent production and closing WIP

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.9a
Previous process cost
Costs transferred from a previous process are treated as a separate element of cost
(100% complete)

Example
Opening WIP Nil
Units transferred 10 000
Closing WIP *50% complete) 1 000
Completed units transferred to finished goods stock 9 000
Previous process cost £90 000
Conversion costs £57 000
Materials (introduced at end of process) £36 000
Note materials are zero complete and previous process cost 100% complete.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.9b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.10

Previous process cost

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.11
Example to illustrate weighted average and FIFO

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.12 and 5.13

Opening WIP-weighted average method

Use Overheads 5.12 & 5.13 as transparencies

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.14a
Opening WIP – FIFO method

The FIFO method assumes opening WIP is the first group of units to be completed.
Therefore, opening WIP is charged separately to completed production and CPU is
based on current period costs.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.14b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.15a

Opening WIP – FIFO method

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.15b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
5.16

Losses in process and equivalent productions

Use Overhead 5.16 as transparency

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury