This action might not be possible to undo. Are you sure you want to continue?
Process costing is a costing method used where it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. Process costs are attributed to the number of units produced.
Introduction cont. Products are produced in similar manner and consume same amount of cost and overheads. Process costing is used in those industries where masses of similar products or services are produced. Eg. . Continuous flow of identical units.
Features of process costing Continuous nature of production means there will be opening and closing WIP to be valued. . Output of one process becomes the input of the next. evaporation. Output may be a single product. wastage. but there may be a by-product/joint products. Often a loss in process ± spoilage.
2 columns each side LHS ± record inputs and cost of inputs RHS ± record what happens to inputs .Basics of process costing Process accounts 2 sides.
Process accounts Process 1 Units 1.000 18.000 .000 18.000 16.000 £ Units 11.000 Closing WIP 200 4.000 Finished units 800 3.000 Materials Labour Overheads 1.000 1.000 £ 2.
No losses within the process Normal losses with no scrap value Normal losses with a scrap value Abnormal losses and gains 2.Process Accounts .Scenarios 1. 4. 3. .
1.000 Process 2 £ 4.000 1. incurred the following costs in respect of each of its processes: Process 1 £ 6.000 Direct materials Direct labour Direct expenses Production overhead The quantities of input and output were as follows: Process 1 Process 2 kg kg Input 500 200 Output 500 700 . No losses A simple example: During the month of August ABC.000 2.000 2.000 1. a processing company.000 2.000 3.
000 kg 500 £ 10.000 3.000 10.000 2.000 Output 4.000 1.000 .000 kg 700 £ 21.000 2.000 500 500 10.000 Process 1 Materials Labour Expenses Overheads kg 500 200 700 Process 2 £ 10.000 Output 1.000 2.000 21.000 700 21.Process accounts Materials Labour Expenses Overheads kg 500 Process 1 £ 6.
Approach to process costing Step 1 ± determine output and losses Determine expected output Calculate normal loss and abnormal loss and gain Calculate equivalent units if there is any closing WIP Step 2 ± calculate cost per unit of output. losses and WIP Calculate cost per unit or cost per equivalent production Step 3 ± calculate the total cost of output. losses and WIP May need a statement of evaluation Step 4 ± complete accounts Complete the process accounts Write up the other accounts .
.Normal and abnormal losses Normal (or uncontrollable) losses Occur under efficient operating conditions and are unavoidable Expected loss allowed for in the budget Inherent part of production and thus absorbed by good production. Either valued at zero or at disposal value. Abnormal (or controllable) losses Not expected to occur under efficient operating conditions Any loss in excess of the normal loss allowance Arise from inefficiencies and thus are not included in the process costs.
. the debit entry shows the effect on the income statement. while the credit entry shows the units (and their value) from the process account.Treating the losses In an abnormal loss account. the debit entry shows the units (and their value) from the process account. The credit entry shows the impact on the income statement. In an abnormal gain account.
Calculating the cost per unit of output Normal losses (no scrap value) = Input cost Expected output Normal losses (scrap value) = Input cost less scrap value of normal loss Expected output .
Prepare the process account. 1. Normal losses and scrap value Example: The costs of the process are as follows: Process 1 £ Direct materials 6.000 Production overhead 1.000 Direct expenses 2.2 & 3. Actual output was 450 kg. 2. what is the effect of this on entries in the process account . If normal loss could be sold for scrap at £5 per kg.000 Direct labour 1.000 The input quantity was 500 kg and the expected loss was 10 per cent of input.
000 £2.000 £1.000 £1. 1. 2. .000 Normal loss is estimated to be 10 per cent of input. Losses may be sold as scrap for £5 per kg.4a. Prepare the process account. Abnormal losses The excess above a normal loss Example: Input 500 kg of materials costing Labour cost Expenses cost Overhead cost £6. Prepare the scrap account and abnormal loss account. Actual output was 430 kg.
4b. 1. . Abnormal gains Where actual loss is smaller than expected Using the same example as previously however assume that the actual output achieved was 470kg. Prepare the process account. Prepare the scrap account and abnormal gain account. 2.
Accounting for scrap Revenue from scrap is treated as a reduction in costs. Normal loss ± either nil or at scrap value DR Scrap a/c CR Process a/c Abnormal losses and gains never affect the cost of good production ± analysed in abnormal loss / gain account .
Need to convert WIP into finished equivalents so that the unit cost can be obtained.WIP.Equivalent production (units) Assumed so far that all output is fully complete. Will now consider where output started during the period is partially complete at the end i.e. Done by estimating the percentage degree of completion of the WIP. .
Equivalent units EU¶s are ³ notional whole units representing incomplete work. Used to apportion costs between work in progress and completed output.´ .
. It is common in many processes for the materials to be added in full at the start of processing and for them to be converted into the final product by the actions of labour and related overhead costs.Equivalent production cont. 500 units in progress which are 25% complete = complete units Further complications arise if WIP has reached different degrees of completion in respect of each cost element. Labour and overheads = conversion costs Separate equivalent production calculation is performed for each cost element.
Equivalent production example Example Input materials Labour cost Overhead cost Outputs Closing work in progress: 1.800 £5.580 Finished goods: 900 kg 100 kg The work in progress is completed: 100% as to material 60% as to labour 30% as to overhead .000 kg @ £9 per kg £4.
Opening and closing WIP of uncompleted units Two methods of calculating Weighted average method Opening work in progress is treated as follows: The opening work in progress is listed as an additional part of the input to the process for the period. The output value is based on the average cost per equivalent unit. and this is used to value each part of the output. hence the name of this method. The cost per equivalent unit of each cost element is calculated as before. First in first out (FIFO) . The cost of the opening WIP is added to the costs incurred in the period.
300 During September.000 units were transferred from process 1 at a valuation of £18.800. . Added materials costs £9.100. Information relating to Process 2 during September is as follows: Opening Inventory 800 units Degree of completion of opening inventory : £ Process 1 materials 100% 4. produces an item which is manufactured in two consecutive processes. Conversion cost work was 40% complete. Prepare the Process 2 account for September. Closing inventory at 30 September was 1. 3.000 units which were 100% complete with respect to process 1 materials and 60% complete with respect to added materials.Weighted average example 1 Magpie Co.600 and conversion costs were £11.000 6.700 Added materials 40% 600 Conversion costs 30% 1.
You are required to complete the account for Process 3 in June. Output to the next process was 850 units. 70 units were scrapped in the month. .Weighted average example 2 The following information is available for Process 3 in June: Units Cost Degree of completion and cost Process 2 Materials Conversion input added in costs Process 3 £ % £ % £ % £ Opening stock 100 692 100 176 60 300 30 216 Closing stock 80 100 70 55 Input costs: Input from process 2 900 1. and all scrap units can be sold for £0.190 Normal loss is 10 per cent of input from Process 2.600 Materials added in process 3 3.20 each.294 Conversion costs 4.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.