COLLEGE OF BUSINESS AND MANAGEMENT SCIENES

COUCRSE: MBA YEAR TWO

MBS: 8101 COST AND MANAGEMENT ACCOUNTING
LECTURERS:
DR. NUWAGABA GEOFREY
DR.NYENDE FESTO
NAME REGISTRATION NUMBER
AHABWE PAMELA KABUNGA 2021/HD06/20381U
AYEBALE IRENE 2021/HD06/20411U
NINSIIMA SARAH 2021/HD06/20539U
NASIGE MARY 2021/HD06/20531U
NATWIJUKA GERALD 2021/HD06/20535U
NIWAGABA ROBERT 2021/HD06/20540U
NIWAMANYA INNOCENT 2021/HD06/20542U
KYOMUHENDO SIMON PETER 2021/HD06/20466U
SSEWAMALA GEORGE WILLIAM 2021/HD06/20580U

Process costing:

 Flow of production and costs in a process costing system

 Process costing when all output is fully complete
 Processes costing with ending work in progress partially complete.

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Contents
Introduction .................................................................................................................................................. 3
Cost and management accounting definition........................................................................................... 3
Process costing systems design ................................................................................................................ 3
Flow of production and costs in a process costing system ....................................................................... 4
5 Steps in Process Costing............................................................................................................................. 5
Types of Process Costing .......................................................................................................................... 6
PROCESS ACCOUNT....................................................................................................................................... 7
a) Process costing when all output is fully completed .............................................................................. 7
1. When there are no losses in the process. ........................................................................................... 8
2. Normal losses in the process with no scrap value ............................................................................. 8
3. Abnormal losses in the process with no scrap value. ........................................................................ 9
4. Normal loss in the process with scrap value. .................................................................................. 10
5. Abnormal losses in the process with scrap value ............................................................................ 11
Abnormal gains with a scrap value. ............................................................................................................ 12
Process costing with ending work in progress partially completed ....................................................... 13
Elements of cost with different degrees of completion ......................................................................... 14
Previous process costs ............................................................................................................................ 16
Pros and Cons of Process Costing........................................................................................................... 17
Pros of process costing: .............................................................................................................................. 17
References .................................................................................................................................................. 19

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Introduction

Cost and management accounting definition

As per the Chartered Institute of Management Accountants (CIMA) London, cost means ―the
amount of expenditure (actual or notional) incurred on, or attributable to, a given thing.
However, the interpretation of the term depends on several factors such as the nature of the
business or industry. It goes without saying, however, that it is difficult to determine an exact
cost or a true cost because no figure of cost is true under all circumstances and for all purposes.
(Daniels, 2017) Defines cost and management accounting as a break away from accounting that
aims to maximize profit while managing revenues and expenses. It pulls from data reports used
by managers to inform the different strategies designed around the long-term profit and growth
patterns of the organization.

Cost Leadership: - implies producing goods or provision of services at the lowest cost while
maintaining quality, to have a better competitive price (India). Michael E. Porter in his theory of
Generic Competitive Strategies has described this as one of the three key strategic dimensions
among ‘Product differentiation’ and ‘Focus or Niche’ to achieve competitive advantage in the
industry.

This is where cost management comes into play. Cost leadership in line with the subject of cost
and management accounting is achievable in an entity with a strong management accounting
system in place. (India I. o.) Explains that the main objective of costing is to analyze financial
records to distribute expenditure and allocate resources carefully to selected cost centers while
building up a total cost for the departments, processes, or jobs/contracts available to undertake.

Process costing systems design

Where a product passes through different specialized stages or processes, the output of one
process being the input of the subsequent process, it is best practice to ascertain the cost of each
stage or process of production which is known as process costing (India I. o.).

Process costing system is used in industries where masses of similar products or services are
produced in a flow process; products are produced in the same manner and consume the same
amount of direct costs and overheads. It is therefore unnecessary, and often impossible, to assign
costs to individual units of output. Instead, the average cost per unit of output is calculated by
dividing the total costs assigned to a product or service for a period by the number of units of
output for that period. Process costing is also used in textile industries, chemical industries, oil
refineries, soap manufacturing, paper manufacturing, tanneries, brewing among others. For
example, one liter of beer that is produced is identical to another litre so the cost of one litre is

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identical to another. This method is used where it is difficult to trade the item of prime cost to a
particular order because its identity is lost in the volume of continuous production.

Flow of production and costs in a process costing system

The flow of production and costs in a process costing system is illustrated later in the diagram. It
should be noted that production moves from one process (or department) to the next until final
completion occurs. Each production process performs some part of the total operation and
transfers its completed production to the next process, where it becomes the input for further
processing. The completed production of the last process is transferred to the finished goods
inventory. The cost accumulation procedure follows this production flow. Control accounts are
established for each process (or department) and direct and indirect costs are assigned to each
process. A process costing system is easier to operate as many of the costs that are indirect in a
job costing system (an expense monitoring system that assigns manufacturing costs to each
product, enabling managers to keep track of expenses (Drury, 2008)) may be regarded as direct
in a process costing system. For example, supervision and depreciation that is confined to one
process would be treated as part of the direct costs of that process, since these costs are directly
attributable to the cost object (i.e. the department or process). As production moves from process
to process, costs are transferred with it.

The costs of process A in department A would be transferred to process B, department B;

process B costs would then be added to this cost and the resulting total cost transferred to process
C, department C; process C costs would then added to this cost. Therefore, the cost becomes
cumulative as production proceeds. The cost per unit of the completed product thus consists of
the total cost accumulated in process C for the period, divided by the output for that period. It
should be noted that in every case the aim is to account for or ‘recover’ all of the costs incurred
either as cost of goods sold, or loss or work in progress.

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In contrast, job costing relates to a costing system where each unit or batch of output is unique.
This creates the need for the cost of each unit to be calculated separately. Basically, these two
costing systems represent extreme ends. The output of many organizations requires a
combination of the elements of both job costing and process costing.

5 Steps in Process Costing

To accurately estimate the cost of producing each unit, process costing takes into account work
in progress items that have entered but not completed the production process at the start and end
of each period. Here are five primary steps in process costing.

1. Analyze inventory: Analyze the flow of items during the period to determine the amount of
inventory at the beginning of the period, how many items were started during the period, how
many were completed and transferred out and how many were incomplete at the end of the
period.
2. Calculate equivalent units: Process costing uses the concept of equivalent units to account
for items that are unfinished at the end of each period. For this step, multiply the number of
incomplete units at the end of the period by a percentage representing their progress through
the production process. For example, if there are 2,000 units of inventory still in progress and
they’re 75% complete, they are equivalent to 1,500 units for process costing purposes (2,000
x .75 = 1,500 units).
3. Calculate applicable costs: Total the costs for all production stages, including both direct
materials and conversion costs.
4. Calculate cost per unit: Divide the total cost by the number of units. This calculation
includes both completed units and equivalent units. So, if a business completed 4,000
products and another 1,000 units got halfway through production, the applicable costs would
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 be divided by 4,000 + (1,000/2) = 4,500 units. If all the costs added up across all departments
to produce those units were $16,875, simply divide the cost by the number of units to arrive
at $3.75 per unit produced.
5. Allocate costs to complete and incomplete products: Allocate costs for the completed and
ending work-in-progress inventory to the corresponding accounts. This helps determine how
much money is tied up in current work-in-progress inventory. In the above example, since
the equivalent of 500 units are in progress and it cost $3.75 to produce each unit, the work-
in-progress inventory cost is $1,875 (500 x $3.75). And the complete product inventory cost
is 4,000 x $3.75 = $15,000.

Types of Process Costing

In process costing there are three different ways to calculate costs: weighted average, standard
costing and first-in first-out (FIFO). Carefully selecting the method that best meets your business
needs is a best accounting practice.

 Weighted average costs: This is the simplest method of calculating cost. Companies add all
costs for the current period and divide by the total number of units completed and transferred
out, plus the equivalent units of work-in-progress at the end of the period. It’s used for cases
where cost fluctuations from period to period are minor.

 Standard costs: This method uses an estimated standard cost for each process stage instead
of actual costs. Companies typically use this method when it’s too difficult or time-
consuming to collect current information about the real costs. It can also be beneficial for
businesses that make a wide range of items and find it challenging to attribute precise costs to
each of the products. The estimated totals are compared to actual totals after a production run
is finished, and the difference is added to a variance account.

 First in, first out (FIFO): The most complicated process costing approach, FIFO is used to
obtain more precise product costing, especially in situations where costs change significantly
from one period to the next. FIFO assumes that the first units in (i.e., work in progress at the
beginning of the current period) are the first to be completed. When calculating costs for the

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 current period, it excludes costs incurred during the previous period for those beginning
work-in-progress units.

PROCESS ACCOUNT
Process accounts represent work in progress accounts. Inputs are debited to the process account
and the output from the process is entered on the credit side. The transfer to the next process or
finished goods inventory is at the cost of normal production. The abnormal losses are reported
separately in the abnormal loss account and are written off to the profit and loss statement as
period costs i.e. they are charged to the period in which they arise.

Process account
Unit Unit
Item Units Cost Amount Item Units Cost Amount
Material Costs xx x xxx Normal Loss xx x xxx
Labour Costs xx x xxx Output xx x xxx
Overhead
Costs xx x xxx Abnormal Loss xx x xxx
Abnormal
Gain xx x xxx Closing stock xx x xxx
Total xx x xxx xx x xxx

a) Process costing when all output is fully completed

During the production process, a lot of things happen that is profit and losses may occur both
abnormal and normal, as discussed below
Example:
Bamwe Company produces a liquid fertilizer within a single production process. During the
month of May the input into the process was 12,000 litres at a cost of ugx120, 000. There were
no opening or closing inventories and all output was fully complete. Prepare the process account
and calculate the cost per litre of output for the single process for each of the six cases listed
below:

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Case Input Output Normal Abnormal Abnormal Scrap value of
(litres) (litres) loss(litres) loss(litres) gain spoilt
(litres) output(UGX per
liter)
1 12000 12000 0 0 0 0
2 12000 10000 2000 0 0 0
3 12000 9000 2000 1000 0 0
4 12000 10000 2000 0 0 5
5 12000 9000 2000 1000 0 5
6 12000 11000 2000 0 1000 5

1. When there are no losses in the process.

To calculate the cost per unit in litres of output, we merely divide cost incurred for the period of
ugx120, 000 by the output for the period (12,000 litres). The cost per unit of output is ugx10. In
practice, the cost per unit is analyzed by the different cost categories which consist of the sum of
direct labor and overhead costs.

2. Normal losses in the process with no scrap value.

Certain losses are inherent to the production process. For example, liquids may evaporate,
part of the cloth required to make a suit may be lost and losses occur in cutting wood to make
furniture. These losses occur under efficient operating conditions and are unavoidable. They
are referred to as normal or uncontrollable costs and are absorbed by the good production.
Where normal losses apply the cost per unit of output is calculated by dividing the costs
incurred for a period by the output expected (expected output) from the actual input for that
period. In Case 2 in Example above, the normal loss is one-sixth of the input. Therefore, for
an input of 12,000 litres the output expected is 10,000 litres so that the cost per unit of output
is ugx12 (ugx120, 000/10,000 liters). When actual output is equal to expected output, there is
neither an abnormal loss nor gain. Compared with (a) the unit cost has increased by ugx2 per
unit because the cost of the normal loss has been absorbed by the good production. Our
objective is to calculate the cost of normal production under normal efficient operating
conditions.

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 Case two process account:
𝑪𝒐𝒔𝒕−𝒔𝒄𝒓𝒂𝒑 𝒗𝒂𝒍𝒖𝒆
Unit cost =
𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔
𝟏𝟐𝟎𝟎𝟎𝟎−𝟎
Unit cost=
𝑰𝒏𝒑𝒖𝒕−𝑵𝒐𝒓𝒎𝒂𝒍 𝒖𝒏𝒊𝒕𝒔

𝟏𝟐𝟎𝟎𝟎𝟎
Unit cost = =12/=
𝟏𝟐𝟎𝟎𝟎−𝟐𝟎𝟎𝟎
Unit Unit
Item Units Cost Amount Item Units Cost Amount
Material Costs 12000 10 120,000 Normal Loss 2000 0 0
Output 10000 12 120000
Abnormal Loss 0

Total 12000 120000 12000 120000

3. Abnormal losses in the process with no scrap value.

There may be some losses that are not expected to occur under efficient operating conditions,
caused for example by the improper mixing of ingredients, the use of inferior materials and
the incorrect cutting of materials. These losses are not an inherent part of the production
process, and are referred to as abnormal or controllable losses and arise from inefficiencies.
They are not included in the process costs. Instead, they are removed from the appropriate
process account and reported separately as an abnormal loss. The abnormal loss is treated as
a period cost and written off in the profit statement at the end of the accounting period. This
ensures that abnormal losses are recognized as extra costs and not incorporated in any
inventory valuations. It will also be highlighted to management to stimulate corrective action
from the illustration above, the expected output is 10,000 litres but the actual output was
9,000 litres, resulting in an abnormal loss of 1,000 litres. Our objective is the same as that for
normal losses. We need to calculate the cost per liter of the output expected (i.e. normal
production)
Case three process Account

𝑪𝒐𝒔𝒕−𝒔𝒄𝒓𝒂𝒑 𝒗𝒂𝒍𝒖𝒆
Unit cost =
𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔

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 𝟏𝟐𝟎𝟎𝟎𝟎−𝟎
Unit cost =
𝑰𝒏𝒑𝒖𝒕−𝑵𝒐𝒓𝒎𝒂𝒍 𝒖𝒏𝒊𝒕𝒔
𝟏𝟐𝟎𝟎𝟎𝟎
Unit cost = =12
𝟏𝟐𝟎𝟎𝟎−𝟐𝟎𝟎𝟎

Unit Unit
Item Units Cost Amount Item Units Cost Amount
Material Costs 12000 10 120,000 Normal Loss 2000 0 0
Output 9000 12 108000
Abnormal Loss 1000 12 12000

Total 12000 120000 12000 120000

4. Normal loss in the process with scrap value.

In case 4, actual output is equal to the expected output of 10,000 litres so there is neither an
abnormal gain nor loss. All of the units lost represent a normal loss in process. However, the
units lost now have a scrap value of ugx5 per liter. The sales value of the spoiled units should be
offset against the costs of the appropriate process where the loss occurred. Therefore the sales
value of the normal loss is credited to the process account and a corresponding debit entry will
be made in the cash or accounts receivable (debtors) account. The calculation of the cost per unit
of output is as follows: Input cost less scrap value of normal loss divided by Expected output
(ugx120, 000 - (2,000*uxg5))/10000 = ugx11
Compared with Cases 2 and 3, the cost per unit has declined from ugx12 per liter to ugx11 per
litre to reflect the fact that the normal spoilage has a scrap value which has been offset against
the process

Case Four process Account

𝐶𝑜𝑠𝑡−𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
Unit cost =
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠
120,000−(5∗2000)
Unit cost =
𝐼𝑛𝑝𝑢𝑡−𝑁𝑜𝑟𝑚𝑎𝑙 𝑢𝑛𝑖𝑡𝑠
110000
Unit cost = 12000−2000=11

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 Unit Unit
Item Units Cost Amount Units Cost Amount
Material Costs 12000 10 120,000 Normal Loss 2000 5 10,000
Output 10000 11 110,000
Abnormal Loss 0

Total 12000 120000 12000 120,000

5. Abnormal losses in the process with scrap value

In case 5 above for, expected output is 10,000 litres for an input of 12,000 litres and actual
output is 9,000 litres, resulting in a normal loss of 2,000 litres and an abnormal loss of 1,000
litres. The lost units have a scrap value of ugx5 per liter. Since our objective is to calculate the
cost per unit for the expected (normal) output, only the scrap value of the normal loss of 2,000
litres should be deducted in ascertaining the cost per unit. Therefore, the cost per unit calculation
is the same as that for Case 4 (i.e. ugx11). The sales value of the additional 1,000 litres lost
represents revenue of an abnormal nature and should not be used to reduce the process unit cost.
This revenue is offset against the cost of the abnormal loss, which is of interest to management.
The balance of ugx6, 000 shown below in the abnormal loss account is the net cost
Of the abnormal loss and is a charge to the profit and loss account. The net cost incurred in the
process is ugx105, 000 (ugx120, 000 input cost less 3,000 litres lost with a scrap value of ugx5
per liter), and the distribution of this cost and the entries in the process account is:
120000-(3000*5) =105000 .This can also be shown in the table below.

Case Five Process Account

𝑪𝒐𝒔𝒕−𝒔𝒄𝒓𝒂𝒑 𝒗𝒂𝒍𝒖𝒆
Unit cost =
𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔
𝟏𝟐𝟎,𝟎𝟎𝟎−(𝟓∗𝟐𝟎𝟎𝟎)
Unit cost =
𝑰𝒏𝒑𝒖𝒕−𝑵𝒐𝒓𝒎𝒂𝒍 𝒖𝒏𝒊𝒕𝒔
𝟏𝟏𝟎𝟎𝟎𝟎
Unit cost = =11
𝟏𝟐𝟎𝟎𝟎−𝟐𝟎𝟎𝟎

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 Unit Unit
Item Units Cost Amount Units Cost Amount
Material Costs 12000 10 120,000 Normal Loss 2000 5 10,000
Output 9000 11 99,000
Abnormal Loss 1000 11 11,000

Total 12000 120000 12000 120,000

ABNORMAL LOSS A/C

UGX
UGX Scrap sales A/C 5000
Process 1 A/C 11,000 Bal to P/L 6,000
11,000 11000

Abnormal gains with a scrap value.

On occasions the actual loss in process may be less than expected, in which case an abnormal
gain occurs As in the previous cases, it is necessary with Case 6 to begin by calculating the cost
per unit of normal output. For normal output, our assumptions are the same as those for Cases 4
and 5 (i.e. a normal loss of one-sixth and a scrap value of ugx5 per litre) so the cost per unit of
output is the same (i.e.11 per litre). The calculation is as follows

Case six process Account

𝑪𝒐𝒔𝒕−𝒔𝒄𝒓𝒂𝒑 𝒗𝒂𝒍𝒖𝒆
Unit cost =
𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒖𝒏𝒊𝒕𝒔
𝟏𝟐𝟎,𝟎𝟎𝟎−(𝟓∗𝟐𝟎𝟎𝟎)
Unit cost =
𝑰𝒏𝒑𝒖𝒕−𝑵𝒐𝒓𝒎𝒂𝒍 𝒖𝒏𝒊𝒕𝒔
𝟏𝟏𝟎𝟎𝟎𝟎
Unit cost = =11
𝟏𝟐𝟎𝟎𝟎−𝟐𝟎𝟎𝟎

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 Unit Unit
Item Units Cost Amount Units Cost Amount
Material Costs 12000 10 120,000 Normal Loss 2000 5 10,000
Abnormal gain 1000 11 11,000 Output 11000 11 121,000

Total 12000 131,0000 12000 131,000

ABNORMAL GAIN A/C

UGX UGX
Process A/c 11000
Bal to C/L
11,000 11000

P&L

NORMAL loss A/C

UGX UGX
Process Account 10000
Cash from spoilt
units
10,000 10,000

The net cost incurred in the process is UGX115, 000 (UGX120, 000 input cost less 1,000 litres
spoilt with a sales value of UGX5 per liter) the gain actually offsets the cost; this implies that the
gain is subtracted from the cost of production.
You will see that the abnormal gain has been removed from the process account and that it is
valued

Process costing with ending work in progress partially completed

So far we have assumed that all output within a process is fully complete. We shall now consider
Situations where output started during a period is partially complete at the end of the period. In
Other words, ending work in progress exists within a process. In this situation, unit costs cannot
be computed by simply dividing the total costs for a period by the output for that period. For

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example, if 8,000 units were started and completed during a period and another 2,000 units were
partly completed then these two items cannot be added together to ascertain their unit cost. We
must convert the work in progress into finished equivalents (also referred to as equivalent
production) so that the unit cost can be obtained. To do this, we must estimate the percentage
degree of completion of the work in progress and multiply this by the number of units in
progress at the end of the accounting period. If the 2,000 partly completed units were 50 per cent
complete, we could express this as an equivalent production of 1,000 fully completed units. This
would then be added to the completed production of 8,000 units to give a total equivalent
production of 9,000 units. The cost per unit would then be calculated in the normal way. For
example, if the costs for the period were Ugx180, 000 then the cost per unit completed would be
ugx20 (ugx180, 000/9,000 units) (ugx)
Completed units transferred to the next process 160000
(8000@ugx20)
WIP (1000 units @ ugx 20) 20000
Total 180000

Elements of cost with different degrees of completion

One complication that may arise is that, in any given inventory of work in progress, not all of the
Elements that make up the total cost may have reached the same degree of completion. For
example, materials may be added at the start of the process, and are thus fully complete, whereas
labor and manufacturing overhead (i.e. the conversion costs) may be added uniformly throughout
the process. Hence, the ending work in progress may consist of materials that are 100 per cent
complete and conversion costs that are only partially complete. Where this situation arises,
separate equivalent production calculations must be made for each element of cost.
Example:
MBA2 manufactures a product that passes through two processes. The following
Information relates to the two processes A &B

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Materials are added at the start of process A and at the end of process B and conversion costs are
added uniformly throughout both processes. The closing work in progress is estimated to be 50
per cent complete for both processes; the process account will look like the following.
Calculation of cost per unit for process A
Cost element Total cost Completed WIP Total Cost per unit
units equivalent (cost/total
units units)
Material 210,000 10,000 4000 14000 15
Conversion 144,000 10,000 2000 12000 12
Total 354,000 27

You will see from the above statement that details are collected relating to the equivalent
production for completed units and work in progress by materials and conversion costs. This
information is required to calculate the cost per unit of equivalent production for each element of
cost. As materials are issued at the start of the process, any partly completed units in ending
work in progress must be fully complete as far as materials are concerned. Therefore, an entry of
4,000 units is made in the work in progress equivalent unit’s column. Regarding conversion cost,
the 4,000 units in progress are only 50 per cent complete and therefore the entry in the work in
progress column for this element of cost is 2,000 units. To compute the value of work in
progress, the unit costs are multiplied separately by the materials and conversion cost work in
progress equivalent production figures. Only one calculation is required to ascertain the value of
completed production. This is obtained by multiplying the total cost per unit of ugx27 by the

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completed production. Note that the cost of the output, including work in progress, of ugx354,
000 in the above statement is in agreement with the cost of input of ugx354, 000

Previous process costs

As production continues, the output of one process becomes the input of the next process. The
next process will carry out additional conversion work, and may add further materials. It is
important to distinguish between these different cost items and this is achieved by labeling the
transferred cost from the previous process as previous process cost. Note that this element of cost
will always be fully complete as far as closing work in progress is concerned because it is added
at the start. Let us now calculate the unit costs and the value of work in progress and completed
production for process B in Example.

You will see that the previous process cost is treated as a separate cost in the table, and, since
this element of cost will not be added to in process B, the closing work in progress must be fully
complete as far as previous process cost is concerned. Note that, after the first process, materials
may be issued at different stages of production. In process B, materials are not added until the
end of the process, and the closing work in progress will not have reached this point; the

16
equivalent production for the closing work in progress will therefore be zero for materials.
Normally, material costs are introduced at one stage in the process and not uniformly throughout
the process. If the work in progress has passed the point at which the materials are added then the
materials will be 100 per cent complete. If this point has not been reached then the equivalent
production for materials will be zero.

Pros and Cons of Process Costing

For certain types of manufacturers, process costing is the most practical and efficient accounting
method for determining product costs. Still, this method has both advantages and disadvantages.
It can be difficult to accurately assign costs to work in progress, for example. Consider the
following pros and cons.

Pros of process costing:

Process costing can be easier to use than other costing methods, and it can help companies zero
in on areas for potential cost cutting.
 Ease of use: For companies making many similar goods, process costing is more practical
and simpler to use than other cost accounting methods, such as job costing, which involves
tracking the cost of each item and component part, along with managing payroll, other
materials and overhead.
 Flexibility: Process costing can help companies improve their operations to reduce costs, so
they can offer products at more competitive prices. It highlights the cost of each step in the
manufacturing process, helping companies target redundant, outdated or inefficient
processes.
 Standardized: Process costing applies the same standardized costing method each period,
enabling companies to compare changes in costs over time. This helps companies ensure that
costs are in line with budgeted expenses and identify areas for investigation.
Cons of process costing:
Potential disadvantages of process costing include inaccuracy.
 Errors: Process costing determines the cost of each unit based on the overall costs of
departments or stages involved in manufacturing. Errors can be caused by including non-
production costs in the calculation.

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 Calculation difficulties (equivalent units): Process costing also relies on calculations of
equivalent units, which are determined by assigning costs to unfinished goods at the start or
end of an accounting period. Companies include the value of this work in process on balance
sheets. The real cost of these unfinished goods can vary, for example if the price of raw
materials fluctuates from month to month. If companies don’t accurately estimate the cost of
work-in-progress items, they’ll end up with inaccurate product costs.
 Time consuming: Calculating equivalent units can be time consuming. Management
accountants must determine how far down the line in the production process these unfinished
goods are and assign costs accordingly.

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References
(n.d.). Retrieved from https://www.myaccountingcourse.com/accounting-dictionary/job-costing

Daniels, J. (2017). Career advice. Retrieved from Get Smarter:

https://www.getsmarter.com/blog/career-advice/what-is-cost-and-management-
accounting/#:~:text=Cost%20and%20management%20accounting%20is,long%2Dterm%20profit
%20and%20growth.

Drury. (2008). Cost and Management Accounting. In Drury.

India, I. o. (n.d.). Cost and Management Accounting.

India, T. I. (n.d.). Introduction to Cost and Management Accounting.

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