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PROCESS COSTING

PROCESS COSTING. PROCESS COSTING. Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. Process costing does not assign costs to each unit of output because each unit is identical. Instead, average unit costs are computed.

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PROCESS COSTING

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  1. PROCESS COSTING

  2. PROCESS COSTING • Job costing assigns costs to each individual unit of outputbecause each unit consumes different quantities ofresources. • Process costing does not assign costs to each unit ofoutput because each unit is identical. Instead, average unitcosts are computed.

  3. Process Costing Outcomes • Allocate the proceeds from the sales of scrap to the correct accounts • Account for transfers from previous processes in ‘completed and WIP inventories’ • Use short-cut to allocate losses • Suitability of process costing in service org. • Batch or operation costing • Process a joint/by-product or sell-it.

  4. A comparison of job & process costing

  5. A comparison of job & process costing

  6. Example 5.1 During the month the company input into the production process 12 000 litres at a cost of £120 000. There was no opening or closing inventories and all output was fully complete.

  7. Example 5.1 • Input = 12000 litres at a cost of £120000 • Normal loss =1/6 of input • Actual output = 9000 litres • CPU = £120 000/Expected output (10 000 litres) = £ 12 • Cost of completed production = £108 000 (9000 ×£12) • Cost of abnormal loss = £12000 (1000 × £12) Input Cost Expected outcome

  8. Normal and abnormal losses • Normal losses cannot be avoided • Cost is absorbed by good production. • Abnormal losses are avoidable • Cost is recorded separately • Treated as a period cost • Removed from process costs, recorded separately as a loss in the abnormal loss account • Not carried forward as a future expense

  9. Abnormal losses in process with no scrap value

  10. Normal Losses in process with a scrap value • In case 4: Actual output = Expected output • No abnormal loss/gain ONLY normal loss • Loss units have a scrap value of £5 per litre Input Cost less £SCRAP value of normal loss Expected outcome £120 000 – (2000 x £5) 10 000 litres = = £11

  11. Normal losses in process with a scrap value Scrap value is credited against the normal loss entry in the process account

  12. Abnormal losses in process with a scrap value • In case 5: Actual output <> Expected output • Actual output = 9 000 l  normal loss= 2000 & abnormal loss of 1000 • Loss units have a scrap value of £5 per litre • What is the objective of process costing? • Calculate the cost per unit for expected output!  Only take scrap value of the normal loss into account

  13. Abnormal losses in process with a scrap value Scrap value is NOT credited against the abnormal loss entry in the process account

  14. Abnormal losses in process with a scrap value

  15. Abnormal gains with a scrap value • In case 6: Actual output > Expected output • Actual output = 11 000 l  normal loss= 1000 & abnormal gain of 1000 • Gain units have a scrap value of £5 per litre • What is the objective of process costing? • Calculate the cost per unit for expected output!  Only take scrap value of the normal loss into account

  16. Abnormal gains with a scrap value • The net cost incurred in case 6 in the process is £ 115 000 = (£120000 input cost – 1000l spoilt with a sales value of £5 per litre) Amount transferred to finished goods 121 000 Less: abnormal gain(1000 x £11) 11 000 less lost sales of spoiled units 5 000 6 000 115 000 Cost per unit remains at £11/u and is not affected by the abnormal gain.

  17. Abnormal gains in process with a scrap value

  18. Abnormal gains in process with a scrap value

  19. Work in progress partially complete Equivalent production & closing WIP Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g. 8000 units complete & 2000 partly completed) Must calculate equivalent production of the partially completed units – estimate the %age complete. Assume 50% complete  2000 x 50% = 1000). Cost per unit (CPU) = 20 Example Opening WIP Nil Units introduced into the process 10 000 Units completed and transferred to next process 8 000 Closing WIP (2000 @ 50% complete) 1 000

  20. Work in progress partially complete Equivalent production & closing WIP Example continued… Opening WIP Units introduced into the process Material costs (8 000 x 20) 160 000 Closing WIP (2000 x 50% x 20) 20 000 180 000

  21. Different degrees of completion • Not all elements may have reached the same degree of completion. • Material – entered at start of process  will be fully complete • Labour – added uniformly throughout the process

  22. P111_Example 5.2 Example Process A Process B • Opening WIP Nil • Units introduced into the process 14 000 10 000 • Units completed and transferred to next process 10 000 9 000 • Closing WIP (50% complete) 4 000 1 000 • Costs of production transferred from process A £270 000 • Materials cost (introduced at start) £210 000£108 000 • Conversion cost £144 000 £171 000 • Materials are added at the start of the process for Process A and at the end of the process for Process B and conversion costs are added uniformly throughout both processes.

  23. P111_Example 5.2 Calculation of cost per unit for Process A

  24. Example 5.2 Calculation of cost per unit for Process B

  25. P113_Example 5.3

  26. Example 5.3 Calculation of cost using weighted average method - Process X

  27. Example 5.3 Calculation of cost using weighted average method - Process X

  28. Example 5.3 - Process Y

  29. P113_Example 5.3

  30. Process X- First in first out Pg 115

  31. Process Y- First in first out

  32. Process Y- First in first out

  33. Ex5A.1Losses in process & partially completed units P120

  34. Ex5A.1Losses in process & partially completed units

  35. Ex5A.1Losses in process & partially completed units

  36. Ex5A.1Losses in process & partially completed units

  37. Ex5A.2 Losses in process & partially completed units

  38. Example 5A.2

  39. Different degrees of completion • Not all elements may have reached the same degree of completion. • Material – entered at start of process  will be fully complete • Labour – added uniformly throughout the process

  40. Drury 5.14 Calculation of cost using weighted average method - Process X

  41. P125…Drury 5.18 Step 1…calculate equivalent units

  42. P125…Drury 5.18 Step 1…calculate equivalent units A Total cost = current cost – (normal loss units x scrap value) = 485 800 – (180 x 10) = 485 800 – 1800 = 484 000

  43. Quantity statement

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