PROCESS COSTING PROCESS COSTING 1 Job costing assigns

PROCESS COSTING

PROCESS COSTING 1. Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. 2. Process costing does not assign costs to each unit of output because each unit is identical. Instead, average unit costs are computed.

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.

A comparison of job & process costing

A comparison of job & process costing

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.

Example 5. 1 = 12000 litres at a cost of £ 120000 = 1/6 of input = 9000 litres = £ 120 000/Expected output (10 Input Cost 000 litres) = £ 12 Expected outcome • Cost of completed production = £ 108 000 (9000 ×£ 12) • Cost of abnormal loss = £ 12000 (1000 × £ 12) • • Input Normal loss Actual output CPU

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

Abnormal losses in process with no scrap value Process account Units Input cost Unit Cost (£) 12000 10 (£) Units Unit Cost (£) 2 000 - - Output to finished goods inventory 9000 12 108 000 Abnormal loss 12 12 000 120 000 Normal Loss 120 000

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

Normal losses in process with a scrap value Process account Units Input cost Unit Cost (£) 12000 10 (£) Units 120 000 Normal Loss Scrap value is credited against Unit the (£)normal loss Costentry in the process account (£) 2 000 - Output to finished goods inventory 10 000 11 120 000 110 000 120 000

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

Abnormal losses in process with a scrap value Process account Units Input cost Unit Cost (£) 12000 10 (£) Units 120 000 Normal Loss 120 000 Unit Cost (£) 2 000 - 10 000 Output to finished goods inventory 9 000 11 99 000 Abnormal Loss 1 000 11 11 000 Scrap value is NOT credited against the abnormal loss entry in the process account 120 000

Abnormal losses in process with a scrap value Abnormal loss account (£) Process account (£) 11 000 Cash sale for units scrapped Profit and Loss account 11 000 5 000 6 000 11 000

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

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

Abnormal gains in process with a scrap value Process account Units Unit Cost (£) Input cost 12000 10 Abnormal 1000 gain 11 (£) 120 000 Normal Loss 11 000 Output to finished goods inventory 131 000 Units Unit Cost (£) 2 000 - 10 000 11 121 000 131 000

Abnormal gains in process with a scrap value Abnormal gain account (£) Normal loss account 5 000 Process account Profit and Loss account 6 000 11 000 Normal Loss (Income due from normal losses) (£) Process account (£) 10 000 Abnormal gain account 5 000 Cash from spoiled units 5 000 10 000

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

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

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

P 111_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.

P 111_Example 5. 2 Calculation of cost per unit for Process A Cost Element Total cost Completed units WIP equivalent units Total Equivalent units Cost per unit Materials 210 000 4 000 14 000 R 15 / u Conversion cost 144 000 10 000 (50%) 2 000 12 000 R 12 / u 354 000 R 27 / unit Value of work-in progress: 84 000 Materials (4000 x 15) 60 000 Conversion cost (2000 x 12) 24 000 Completed units(10000 x 27) 270 000 Total production costs 354 000

Example 5. 2 Calculation of cost per unit for Process B Cost Element Total cost Complete d units WIP Total Cost per equivalent Equivalent units Previous process cost 270 000 9 000 10 000 R 27 / u Materials 108 000 9 000 - 9 000 R 12 / u Conversion cost 171 000 9 000 (50%) 500 9 500 R 18 / u 549 000 R 57 / unit Value of work-in progress: Previous process cost Materials Conversion cost (500 x 18) 36 000 27 000 9 000 Completed units(9000 x 57) 513 000 Total production costs 549 000

P 113_Example 5. 3 Process X Process Y 6 000 (60% converted) 2 000 (80% converted) Materials 72 000 12 000 Conversion cost 45 900 38 400 Units started in this period 16 000 18 000 Closing WIP 4000 (75% complete) 8 000 units (50% complete) Materials added 192 000 60 000 Conversion cost 225 000 259 200 Opening Work in progress

Example 5. 3 Calculation of cost using weighted average method - Process X Cost Element Openin g WIP Current Total cost Comple WIP ted equival units ent units Total Equival ent units Cost per unit Materials 72 000 192 000 264 000 18 000 4 000 22 000 R 12/u Conversion cost 45 900 225 000 270 900 18 000 3 000 21 000 R 12. 90/u 117 900 534 900 R 24. 90/ unit Value of work-in progress: 86 700 Previous process cost Materials – (4000 x 12) 48 000 Conversion cost (3000 x 12. 90) 38 700 Completed units(18000 x 24. 90) 448 200 Total production costs 534 900

Example 5. 3 Calculation of cost using weighted average method - Process X Input (units) Details 6 000 Opening WIP Output Raw materials Conversion (units) % % 16 000 Put into production Completed from: Opening WIP 6 000 60 15 600 100 Current production 12 000 18 000 Completed & Trfed 18 000 0 4 000 3 000 75 22 000 21 000 Closing WIP 100 2 400

Example 5. 3 - Process Y Cost Element Openin g WIP Previous process cost Materials Conversion cost Current Total cost Comple WIP ted equival units ent units Total Equival ent units Cost per unit 91 800 448 200 540 000 12 000 8 000 20 000 R 27/u 12 000 - 12 000 R 6/u 12 000 8000 x. 5 4000 16 000 R 18. 60/ u 60 000 72 000 38 400 259 200 297 600 142 200 909 600 R 51. 60/ unit Value of work-in progress: Previous process cost(8000 x 27) Materials – (0 x 12) Conversion cost (4000 x 18. 60) 290 400 216 000 0 74 400 Completed units(12000 x 51. 60) 619 200 Total production costs 909 600

P 113_Example 5. 3 Process X Process Y 6 000 (60% converted) 2 000 (80% converted) Materials 72 000 12 000 Conversion cost 45 900 38 400 Units started in this period 16 000 18 000 Closing WIP 4000 (75% complete) 8 000 units (50% complete) Materials added 192 000 60 000 Conversion cost 225 000 259 200 Opening Work in progress

Process X- First in first out Pg 115 Cost Element Current Completed units cost less opening WIP equivalent units Closing units WIP equivalent units Total Equival ent units Cost per unit Materials 192 000 12000 (18000 -6000) 4 000 16 000 R 12/u Conversion cost 225 000 14400 (18000 -3600) 3 000 17 400 R 12. 931/u 417 000 R 24. 931/unit Value of work-in progress: Opening WIP 117 900 Materials – (12000 x 12) 144 000 Conversion cost (14400 x 12. 931) 186 207 448 107 Closing WIP: Materials – (4000 x 12) 48 000 Conversion cost (3000 x 12. 931) 38 793 Total production costs 86 793 534 900

Process Y- First in first out Cost Element Current Completed units cost less opening WIP equivalent units Closing units WIP equivalent units Total Equival ent units 8 000 18 000 R 24. 8948 60 000 10 000 (12000 -2000) - 10 000 R 6/u Conversion cost 259 200 10 400 (12000 -1600) 4 000 14 400 R 18/u Previous process 448 107 10 000 (12000 -2000) Materials 417 000 Cost per unit R 48. 8948/unit Cost of completed production Opening WIP 142 200 Previous process (10000 x 24. 8948) 248 948 Materials – (10000 x 6) Conversion cost (10400 x 18) 60 000 187 200 638 348 Closing WIP: Previous process Materials Conversion cost (4000 x 18 199 159 72 000 271 159

Process Y- First in first out Value of work-in progress: Opening WIP 142 200 Previous process (10 000 x 24. 8948) 248 948 Materials – (10 000 x 6) 144 000 Conversion cost (10 400 x 18) 187 200 638 348 Closing WIP: Previous process (8 000 x 24. 8948) Materials Conversion cost (4000 x 18) Total production costs 199 159 72 000 271 159 909 507

Ex 5 A. 1 Losses in process & partially completed units Input (units) Details Output Raw materials Conversion (units) Total cost 0 Opening WIP 1 000 Put into production % 5000 % 3400 Completed from: Opening WIP 0 Current production 600 100 Completed & Trfed 600 600 100 Normal loss 100 100 300 150 1 000 850 5 4 Abnormal loss Closing WIP Cost per unit 50 P 120

Ex 5 A. 1 Losses in process & partially completed units Cost Element Total Cost Complet ed units Normal loss Closing units WIP equivalen t units Total Equival ent units Cost per unit Materials 5000 600 100 300 1000 5 Conversion cost 3400 600 150 850 4 R 9/unit Value of work-in progress: Materials – (300 x 5) Conversion cost (150 x 4) 1 500 600 Completed units (600 x 9) 5400 Normal loss (100 x 9) 900 Total production costs 2100 6300 8 400

Ex 5 A. 1 Losses in process & partially completed units Input (units) Details Total cost 0 Opening WIP 1 000 Put into production Output Raw materials Conversion (units) 9400 % 5000 % 3400 Completed from: Opening WIP 0 Current production 600 100 Completed & Trfed 600 600 100 300 150 50 900 750 10. 0888 5. 555 4. 5333 Normal loss Abnormal loss Closing WIP Cost per unit

Ex 5 A. 1 Losses in process & partially completed units Cost Element Total Cost Complet ed units Closing units WIP equivale nt units Total Cost per Equival unit ent units Materials 5000 600 300 900 5. 5555 Conversion cost 3400 600 150 750 4. 5333 R 10. 0888 /unit Value of work-in progress: Materials – (300 x 5. 555) Conversion cost (150 x 4. 533) 1 666. 65 680 2346. 65 Completed units (600 x 10. 0888) 6053. 35 Total production costs 8400. 00

Ex 5 A. 2 Losses in process & partially completed units Cost Element Total Cost Previous process cost 10 000 Compl Abnor eted mal units loss Closing units WIP equivale nt units Total Cost per Equiva unit lent units 600 50 250 900 11. 1111 Materials 8 000 600 50 250 900 8. 8888 Conversion cost 2 900 600 25 150 775 3. 742 R 23. 74/unit

Example 5 A. 2 Value of work-in progress: 5560 Previous process cost : 250 x 11. 11 2 777 Materials: 250 x 8. 88 2 222 Conversion: 150 x 3. 742 561 Completed units: 600 x 23. 74 14246 Abnormal loss 1094 Previous process cost : 50 x 11. 11 556 Materials: 50 x 8. 88 444 Conversion: 25 x 3. 742 Total production costs 94 20 900

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

Drury 5. 14 Calculation of cost using weighted average method - Process X Input (units) Details 2 000 Opening WIP Output Raw materials Conversion (units) % % 24 000 Put into production Completed from: Opening WIP 2000 Current production 17 500 Completed & Trfed 19 500 17 500 1 200 60 17 500 18 700 Normal loss 2 400 Abnormal loss 1 100 Closing WIP 3 000 26 000 1 100 3 000 1 350 45 21 600 21 150

P 125…Drury 5. 18 Step 1…calculate equivalent units Input Output Raw materials (units) Details (units) Labour Overheads % (units) % 800 Opening WIP 1800 Put into production Completed from: Opening WIP 800 Current production 1120 Completed & Trfed 1920 Normal loss 1920 100 1920 500 100 450 2600 2420 1920 100 200 40 180 Abnormal loss Closing WIP 2600 2370 90 2120

P 125…Drury 5. 18 Step 1…calculate equivalent units Cost Element Openin g WIP Cost Current cost Materials 98000 387800 Labour 46000 Overheads Total Cost Comple ted units Closing units WIP equivale nt units Total Cost per unit Equiva lent units 485 800 1920 500 2420 A(484000/2420) 276320 322320 1920 450 2370 (322320/2370) 7600 149280 156880 1920 200 2120 (156880/2120) 151600 813400 Value of work-in progress: Materials Labour Overheads Completed units(18000 x 24. 90) Total production costs R 136 R 74 R 410/unit A Total cost = current cost – (normal loss units x scrap value) = 485 800 – (180 x 10) = 485 800 – 1800 = 484 000 Scrap value from normal loss sales R 200 1800 965000

Quantity statement Physical Units Equivalent Units Input Output (units) Details (units) 1200 Raw Materials units % Conversion Cost units % Put into production Completed & transferred 900 900 Normal loss 200 200 Abnormal loss 100 100 1 200