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CHAPTER 6. Process costing. 6.1. Process costing Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources.
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CHAPTER 6 Process costing
6.1 • 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.
6.2a Exhibit 1 A comparison of job and process costing
6.2b 6.2b Exhibit 1 A comparison of job and process costing
6.3a 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)
6.4a Sale proceeds from normal losses
6.5a 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.
6.6a 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
6.7a Equivalent production and closing WIP Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g. 1000 units 50% complete equals 500 equivalent production. Example Opening WIP Nil Units introduced into the process 14 000 Units completed and transferred 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.
6.8 Equivalent production and closing WIP
6.9a 6.9a Previous process cost Costs transferred from a previous process are treated as a separate element of cost (100% complete). Example Opening WIP NilUnits transferred 10 000Closing WIP *50% complete) 1 000Completed units transferred to finished goods stock 9 000Previous process cost £90 000Conversion costs £57 000Materials (introduced at end of process) £36 000 *Note materials are zero complete and previous process cost 100% complete.
6.b 6.9b
6.10 Previous process cost
6.11 Example to illustrate weighted average and FIFO
6.13 Note the weighted average method assumes that the opening WIP is merged with the units produced in the current period.
6.14a 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.
6.15a Opening WIP – FIFO method
