PROCESS COSTING Spesific Outcomes: List the characteristics of process costing method

1. PROCESS COSTING • Spesific Outcomes: • List the characteristics of process costing method • Explain the recording procedure of cost elements under process costing method • Explain output determination procedure under this method

2. Characteristics of Process Costing 2 • Product are homogeneous and based on certain standard • Production are in big volume • Continues production • Cost collection based on processing department for each period (e.g : weekly or monthly ) It is used in a variety of industries including: oil refining, food processing, paper making, chemical and drug manufacture, paint and varnish manufacture.

3. 3 Differences betwen JOC and Process Costing Job 1 Direct Material Direct Labor Production OH Cost of Goods Sold Job 2 Finished Goods Job 3 Process 1 Direct Material Direct Labor Production OH Process 2 Finished Goods Cost of Goods Sold Process 3

4. TEST YOUR UNDERSTANDING • BEFORE YOU CONTINUE TO THE NEXT INPUT…..! • Define process costing? • What are the characteristics of process costing systems?

5. 4 PROCESS ACCOUNT • PREPARATION OF PROCESS ACCOUNT • The method of preparing process accounts is discussed herewith on the basis of the following situations which may exist at a particular time : • A. Process costing having no process loss. • B. Process costing having process losses or gains (normal, abnormal loss, abnormal gain). • C. Process costing having opening and closing work-in-progress at various stages of completion. Besides, there may be process losses or gains.

6. A. Process Costing Having No Process Loss • All costs of material, labor, direct expense, and apportioned overhead are debited to the process account. • The total ( accumulated ) costs of the process are transferred to the second process as raw materials ( input ) for that process • Accounting Entries • The double entries of the relevant process accounts are: • DR Process Account X • CR Material X • Wages X Production Overhead X • On completion, the process account is closed to the finished goods account. • DR Finished Goods X • CR Process Account X

7. Cont : Process Costing Having No Process Loss Example 9.1: A product “Honey” is manufactured by two distinct processes numbered 1 and 2. During the month of January 2002 the following information was obtained in respect of “Honey”. PROCESS 1 PROCESS 2 Output 500 kg 1,000 kg Material 500 kg 500 kg Material RM2,000 RM3,000 Labor RM3,000 RM4,000 Direct expenses RM1,000 RM2,000

8. Solution ... Process A/c 1 Unit cost = total production cost Output normal

9. Solution ... Process A/c 1

10. Process A/c 2

11. Solution ... Process A/c 2

12. Improve our understanding…. Prepare Process A/c based on these data : Process 1 Process 2 Raw materials RM3,600 RM600 Direct labour RM 200 RM400 Direct expenses RM600 - Overhead was absorbed based on 200% of direct labour cost.

13. Solution ... Process A/c 1

14. Solution ... Process A/c 2

15. B.Process Costing Having Process Losses or Gains • Define Process Loss • In process industries some loss is unavoidable at various stages of manufacture. It is important that records on process losses are kept so that step can be taken to control such losses and to remedy inefficient system of processing. • Process loss can be divided into two categories: • i. Normal Loss • Normal loss is the loss which is unavoidable, uncontrollable and expected in normal conditions. It may be inherent in the manufacturing process. If the loss is inevitable, i.e. unavoidable and within the limit, it is called normal process loss.

16. B.Process Costing Having Process Losses or Gains (cont.)… Example 2 : A food manufacturing process has a normal wastage of 5% which can be sold as animal feedstuff at RM5 per tonne. In a given period the following data were recorded: Input materials 160 tonnes at RM23 per tonne. Labour and overhead RM2896 Losses were at the normal level. Compute the cost per tonne. Solution to Example : Materials 160 ton Normal loss(5%) (8 ton) Normal output 152 ton

17. Process A/c

18. B.Process Costing Having Process Losses or Gains Example 1 : Total cost for 2000 inputs are RM 20,000. If total loss is 20% , compute : a). Quantity of good product b). Cost/unit for 2,000 units of product c). Cost/unit for good product d). Prepare Process A/c Solution to Example : Input 2000 Less Normal loss 20% (400) Normal Output 1600

19. Process A/c

20. Process A/c

21. B.Process Costing Having Process Losses or Gains II. Abnormal Loss When production loss is greater than the expected loss ( Normal Loss ), an abnormal loss is suffered. As abnormal loss is controllable, it should be charged as controllable costs of inefficiency to a special loss account, i.e. Abnormal Loss Account. Abnormal Loss = transferred to P&L A/c as loss for that period. What can be a cause to Abnormal Loss ? Eg : low quality of materials, mistake/careless materials handling, accident etc

22. B.Process Costing Having Process Losses or Gains ( cont.) ….. In the manufacture of Product Z, in Process A: Materials 100 kg Labor RM 46 Overhead RM0.50 Normal process Loss 10% of input. Scrap could be sold for RM0.10 per kg. During March, the actual output was 84 kg. Prepare Process A/c Solution : Compute the abnormal loss Kg Input 100 Normal Loss (10) % 10 Normal output 90 Actual output 84 Abnormal loss 6

23. Process A/c Normal Loss A/c

24. Abnormal Loss A/c

25. B.Process Costing Having Process Losses or Gains ( cont.) ….. In March,Process X produced 94 kg of Product B for 100 kg of material input. Material cost RM 0.5 per kg; labour cost was RM46 and overhead cost was RM40. Normal production loss is 10% of input. The scrap value is RM0.10 per kg. Show the relevant accounts.