PROCESS COSTING

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