Process costing

Question IM 5.1 (a) Describe the distinguishing characteristics of production systems where
Intermediate (i) job costing techniques would be used, and
(ii) process costing techniques would be used. (3 marks)
(b) Job costing produces more accurate product costs than process costing.
Critically examine the above statement by contrasting the information
requirements, procedures and problems associated with each costing method.
(14 marks)
(Total 17 marks)
ACCA Level 1 Costing

Question IM 5.2 A product is manufactured by passing through three processes: A, B and C. In

Intermediate: process C a by-product is also produced which is then transferred to process D
Preparation of where it is completed. For the first week in October, actual data included:
process accounts
with all output Process Process Process Process
fully completed A B C D

Normal loss of input (%) 5 10 5 10

Scrap value (£ per unit) 1.50 2.00 4.00 2.00
Estimated sales value of — — 8.00 —
by-product (£ per unit)
Output (units) 5760 5100 4370 —
Output of by-product (units) — — 510 450

(£) (£) (£) (£)

Direct materials (6000 units) 12 000 — — —

Direct materials added in
process 5 000 9000 4000 220
Direct wages 4 000 6000 2000 200
Direct expenses 800 1680 2260 151

Budgeted production overhead for the week is £30 500.

Budgeted direct wages for the week are £12 200.
You are required to prepare:
(a) accounts for process A, B, C and D. (20 marks)
(b) abnormal loss account and abnormal gain account. (5 marks)
(Total 25 marks)
CIMA P1 Cost Accounting 2

22 PROCESS COSTING
(a) ‘Whilst the ascertainment of product costs could be said to be one of the objec- Question IM 5.3
tives of cost accounting, where joint products are produced and joint costs Intermediate:
incurred, the total cost computed for the product may depend upon the Discussion
method selected for the apportionment of joint costs, thus making it difficult question on
for management to make decisions about the future of products.’ methods of
You are required to discuss the above statement and to state two different apportioning joint
methods of apportioning joint costs to joint products. (8 marks) costs and the
(b) A company using process costing manufactures a single product which passes preparation of
through two processes, the output of process 1 becoming the input to process process accounts
2. Normal losses and abnormal losses are defective units having a scrap value with all output
and cash is received at the end of the period for all such units. fully completed
The following information relates to the four-week period of accounting
period number 7.
Raw material issued to process 1 was 3000 units at a cost of £5 per unit.
There was no opening or closing work-in-progress but opening and closing
stocks of finished goods were £20 000 and £23 000 respectively.

Process 1 Process 2

Normal loss as a percentage of input 10% 5%

Output in units 2800 2600
Scrap value per unit £2 £5
Additional components £1000 £780
Direct wages incurred £4000 £6000
Direct expenses incurred £10 000 £14 000
Production overhead as a percentage of direct wages 75% 125%

You are required to present the accounts for

Process 1
Process 2
Finished goods
Normal loss
Abnormal loss
Abnormal gain
Profit and loss (so far as it relates to any of the accounts listed above).
(17 marks)
(Total 25 marks)
CIMA Stage 2 Cost Accounting

Industrial Solvents Limited mixes together three chemicals – A, B and C – in the Question IM 5.4
ratio 3:2:1 to produce Allklean, a specialised anti-static fluid. The chemicals cost £8, Intermediate:
£6 and £3.90 per litre respectively. Equivalent
In a period, 12 000 litres in total were input to the mixing process. The normal production and
process loss is 5% of input and in the period there was an abnormal loss of 100 litres losses in process
whilst the completed production was 9500 litres.
There was no opening work-in-progress (WIP) and the closing WIP was 100%
complete for materials and 40% complete for labour and overheads. Labour and
overheads were £41 280 in total for the period. Materials lost in production are
scrapped.
Required:
(a) Calculate the volume of closing WIP. (3 marks)
(b) Prepare the mixing process account for the period, showing clearly volumes
and values. (9 marks)
(c) Briefly explain what changes would be necessary in your account if an
abnormal gain were achieved in a period. (3 marks)
(Total 15 marks)
CIMA Stage 1 Cost Accounting

PROCESS COSTING 23
Question 5.5 (a) Outline the characteristics of industries in which a process costing system is
Intermediate: used and give two examples of such industries. (5 marks)
Losses in process (b) ATM Chemicals produces product XY by putting it through a single process.
(weighted You are given the following details for November.
average)
Input Costs

Materials costs 25 000 kilos at £2.48 per kilo

Labour costs 8 000 hours at £5.50 per hour
Overhead costs £63 000

You are also told the following:

(i) Normal loss is 4% of input.
(ii) Scrap value of normal loss is £2.00 per kilo.
(iii) Finished output amounted to 15 000 units.
(iv) Closing work in progress amounted to 6000 units and was fully complete
for material 2/3 complete for labour and 1/2 for overheads.
(v) There was no opening work in progress.
Required:
(i) Prepare the Process account for the month of November detailing the
value of the finished units and the work in progress. (12 marks)
(ii) Prepare an Abnormal Loss account. (2 marks)
(c) Distinguish between normal and abnormal losses, their costing treatment and
how each loss may be controlled. (6 marks)
(Total 25 marks)
AAT Cost Accounting and Budgeting

Question IM 5.6 A company manufactures a product that goes through two processes. You are
Intermediate: given the following cost information about the processes for the month of
Losses in process November.
(weighted
average) Process 1 Process 2

Unit input 15 000 —

Finished unit input from Process 1 — 10 000
Finished unit output to Process 2 10 000 —
Finished unit output from Process 2 — 9 500
Opening WIP – Units — 2 000
Opening WIP – Value — £26 200
Input – Materials £26 740
Input – Labour £36 150 £40 000
Input – Overhead £40 635 £59 700
Closing WIP – Units 4 400 1 800

You are told:

(1) The closing WIP in Process 1 was 80% complete for material, 50% complete for
labour and 40% complete for overhead.
(2) The opening WIP in Process 2 was 40% complete for labour and 50% complete
for overhead. It had a value of labour £3200, overheads £6000 for work done in
Process 2.
(3) The closing WIP in Process 2 was two-thirds complete for labour and 75%
complete for overhead.
(4) No further material needed to be added to the units transferred from Process 1.
(5) Normal loss is budgeted at 5% of total input in Process 1 and Process 2. Total
input is to be inclusive of any opening WIP.
(6) Normal loss has no scrap value in Process 1 and can be sold for the input value
from Process 1, in Process 2.

24 PROCESS COSTING
(7) Abnormal losses have no sales value.
(8) It is company policy to value opening WIP in a process by the weighted average
method.
Required:
(a) Prepare accounts for:
(i) Process 1.
(ii) Process 2.
(iii) Normal loss.
(iv) Any abnormal loss/gain. (19 marks)
(b) Compare and contrast a joint product with a by-product. (6 marks)
(Total 25 marks)
AAT Cost Accounting and Budgeting

(a) A company uses a process costing system in which the following terms arise: Question IM 5.7
conversion costs Intermediate:
work-in-process Losses in process
equivalent units (weighted
normal loss average)
abnormal loss.
Required:
Provide a definition of each of these terms. (5 marks)
(b) Explain how you would treat normal and abnormal losses in process costs
accounts. (4 marks)
(c) One of the products manufactured by the company passes through two
separate processes. In each process losses, arising from rejected material, occur.
In Process 1, normal losses are 20% of input. In Process 2, normal losses are
10% of input. The losses arise at the end of each of the processes. Reject
material can be sold. Process 1 reject material can be sold for £1.20 per kilo, and
Process 2 reject material for £1.42 per kilo.
Information for a period is as follows:
Process 1:
Material input 9000 kilos, cost £14 964.
Direct labour 2450 hours at £3.40 per hour.
Production overhead £2.60 per direct labour hour.
Material output 7300 kilos.
Process 2:
Material input 7300 kilos.
Direct labour 1000 hours at £3.40 per hour.
Production overhead £2.90 per direct labour hour.
Material output 4700 kilos.

At the end of the period 2000 kilos of material were incomplete in Process 2. These
were 50% complete as regards direct labour and production overhead. There was
no opening work-in-process in either process, and no closing work-in-process in
Process 1.
Required:
Prepare the relevant cost accounts for the period. (16 marks)
(Total 25 marks)
ACCA Level 1 Costing

PROCESS COSTING 25
Question IM 5.8 ABC plc operates an integrated cost accounting system and has a financial year
Intermediate: which ends on 30 September. It operates in a processing industry in which a single
Losses in process product is produced by passing inputs through two sequential processes. A normal
and weighted loss of 10% of input is expected in each process.
averages method The following account balances have been extracted from its ledger at 31 August:

Debit (£) Credit (£)

Process 1 (Materials £4400; Conversion costs £3744) 8144

Process 2 (Process 1 £4431; Conversion costs £5250) 9681
Abnormal loss 1400
Abnormal gain 300
Overhead control account 250
Sales 585 000
Cost of sales 442 500
Finished goods stock 65 000

ABC plc uses the weighted average method of accounting for work in process.
During September the following transactions occurred:

Process 1

materials input 4000 kg costing £22 000

labour cost £12 000
transfer to process 2 2400 kg

Process 2

transfer from process 1 2400 kg

labour cost £15 000
transfer to finished goods 2500 kg

Overhead costs incurred amounted to £54 000

Sales to customers were £52 000

Overhead costs are absorbed into process costs on the basis of 150% of labour cost.
The losses which arise in process 1 have no scrap value: those arising in process 2
can be sold for £2 per kg.
Details of opening and closing work in process for the month of September are as
follows:

Opening Closing

Process 1 3000 kg 3400 kg

Process 2 2250 kg 2600 kg

In both processes closing work in process is fully complete as to material cost and
40% complete as to conversion cost.
Stocks of finished goods at 30 September were valued at cost of £60 000.
Required:
Prepare the ledger accounts for September and the annual proft and loss account
of ABC plc. (Commence with the balances given above, balance off and transfer
any balances as appropriate.) (25 marks)
CIMA Stage 2 Operational Cost Accounting

26 PROCESS COSTING
The following information relates to a manufacturing process for a period: Question IM 5.9
Intermediate:
Materials costs £16 445 Process accounts
Labour and overhead costs £28 596 involving an
abnormal gain
10 000 units of output were produced by the process in the period, of which 420 and equivalent
failed testing and were scrapped. Scrapped units normally represent 5% of total production
production output. Testing takes place when production units are 60% complete in
terms of labour and overheads. Materials are input at the beginning of the process.
All scrapped units were sold in the period for £0.40 per unit.
Required:
Prepare the process accounts for the period, including those for process scrap and
abnormal losses/gains. (12 marks)
ACCA Foundation Stage Paper 3

A company produces a single product from one of its manufacturing processes. Question IM 5.10
The following information of process inputs, outputs and work in process relates to Intermediate:
the most recently completed period: Losses in process
(FIFO and
kg weighted average
Opening work in process 21 700
methods)
Materials input 105 600
Output completed 92 400
Closing work in process 28 200

The opening and closing work in process are respectively 60% and 50% complete
as to conversion costs. Losses occur at the beginning of the process and have a
scrap value of £0.45 per kg.
The opening work in process included raw material costs of £56 420 and conver-
sion costs of £30 597. Costs incurred during the period were:

Materials input £276 672

Conversion costs £226 195

Required:
(a) Calculate the unit costs of production (£ per kg to four decimal places) using:
(i) the weighted average method of valuation and assuming that all losses are
treated as normal;
(ii) the FIFO method of valuation and assuming that normal losses are 5% of
materials input. (13 marks)
(b) Prepare the process account for situation (a) (ii) above. (6 marks)
(c) Distinguish between:
(i) joint products, and
(ii) by-products and contrast their treatment in process accounts. (6 marks)
(Total 25 marks)
ACCA Cost and Management Accounting 1

PROCESS COSTING 27
Question IM 5.11 (a) You are required to explain and discuss the alternative methods of accounting
Advanced: FIFO for normal and abnormal spoilage. (8 marks)
method and (b) Weston Harvey Ltd assembles and finishes trapfoils from bought-in
losses in process components which are utilized at the beginning of the assembly process. The
other assembly costs are incurred evenly throughout that process. When the
assembly process is complete, the finishing process is undertaken. Overhead is
absorbed into assembly, but not finishing, at the rate of 100% of direct assembly
cost.

It is considered normal for some trapfoils to be spoiled during assembly and finish-
ing. Quality control inspection is applied at the conclusion of the finishing process
to determine whether units are spoiled.
It is accepted that the spoilage is normal if spoiled units are no more than one-
eighteenth of the completed good units produced. Normal spoilage is treated as a
product cost, and incorporated into the cost of good production. Any spoilage in
excess of this limit is classed as abnormal, and written off as a loss of the period in
which it occurs.
Trapfoils are valuable in relation to their weight and size. Despite vigilant secu-
rity precautions it is common that some units are lost, probably by pilferage. The
cost of lost units is written off as a loss of the period in which it occurs. This cost is
measured as the cost of the bought-in components plus the assembly process, but
no finishing cost is charged.
Weston Harvey uses a FIFO system of costing.
The following data summarize the firm’s activities during November:

Opening work in process:

Bought-in components £60 000

Direct assembly cost to 31 October £25 000
No. of units (on average one-half assembled) 50 000
Direct costs incurred during November
Bought-in components received £120 000
Direct assembly cost £40 000
Direct finishing cost £30 000
Production data for November: Trapfoils
Components received into assembly 112 000
Good units completed 90 000
Spoiled units 10 000
Lost units 2 000

None of the opening work in process had at that stage entered the finishing
process. Similarly, nor had any of the closing work in process at the end of the
month. The units in the closing work in process were, on average, one-third com-
plete as to assembly; none had entered the finishing process.
You are required:
(i) to calculate the number of units in the closing work in process; (3 marks)
(ii) to calculate the number of equivalent units processed in November, distin-
guishing between bought-in components, assembly and finishing; (6 marks)
(iii) to calculate the number of equivalent units processed in November, subdi-
vided into the amounts for good units produced, spoilage, lost units and
closing work in process. (8 marks)
(Total 25 marks)
ICAEW Management Accounting

28 PROCESS COSTING
On 1 October Bland Ltd opened a plant for making verniers. Data for the first two Question IM 5.12
months’ operations are shown below: Advanced:
Comparison of
October (units) November (units) FIFO and
weighted average,
Units started in month 3900 2700 stock valuation
Units completed (all sold) 2400 2400 methods
Closing work in progress 1500 1800

(£) (£)

Variable costs:
Materials 58 500 48 600
Labour 36 000 21 000
Fixed costs 63 000 63 000
Sales revenue 112 800 120 000

At 31 October the units in closing work in progress were 100% complete for materi-
als and 80% complete for labour. At 30 November the units in closing work in
progress were 100% complete for materials and 50% complete for labour.
The company’s policy for valuation of work in progress is under review. The
board of directors decided that two alternative profit and loss statements should be
prepared for October and November. One statement would value work in progress
on a weighted average cost basis and the other would adopt a first-in, first-out
basis. Fixed costs would be absorbed in proportion to actual labour costs in both
cases.
For October both bases gave a closing work in progress valuation of £55 500 and
a profit of £10 800. When the statements for November were presented to the board
the following suggestions were made:
(1) ‘We wouldn’t have a problem over the valuation basis if we used standard
costs.’
(2) ‘Standard cost valuation could be misleading for an operation facing volatile
costs; all data should be on a current cost basis for management purposes.’
(3) ‘It would be simpler and more informative to go to a direct cost valuation basis
for management use.’
(4) ‘All that management needs is a cash flow report; leave the work in progress
valuation to the year-end financial accounts.’
Requirements:
(a) Prepare profit and loss statements for November on the two alternative bases
decided by the board of directors, showing workings. (9 marks)
(b) Explain, with supporting calculations, the differences between the results
shown by each statement you have prepared. (6 marks)
(c) Assess the main strengths and weaknesses of each of the suggestions made by
the directors, confining your assessment to matters relating to the effects of
work in progress valuation on performance measurement. (10 marks)
(Total 25 marks)
ICAEW P2 Management Accounting

PROCESS COSTING 29