PROCESS COSTING (PC)

Process costing is a costing method used where it is not possible to identify separate units of
production or jobs, usually because of the continuous nature of the production process involved.
E.g. oil refining, chemicals, food and drinks and paper. Process costing is also used in a situation
where production follows a series of sequential processes.

FEATURES OF PROCESS COSTING

 The output of one process becomes the input of another
 There will always be closing work in progress (WIP) which must be valued
 There is often a loss in process due to spoilage, wastage, evaporation and so on
 Output from production may be a single product, but there may be a by product or joint
product.

PROCESS ACCOUNT
All expenses are debited to Process account while output are credited to process account

Process Account 1
Units N Units N
Direct materials 1,000 50,000 Output to Process 2 1,000 90,000
Direct labour 20,000
Production overhead . 20,000 . .
1,000 90,000 1,000 90,000

Process Account 2
Units N Units N
Direct materials from P1 1,000 90,000 Output to finished 1,000 150,000
Added materials 30,000 goods
Direct labour 15,000
Production overhead 15,000 . .
.
1,000 150,000 1,000 150,000

FRAMEWORK FOR DEALING WITH PROCESS COSTING

Process costing is centered on four key steps
i. Determine output and losses
ii. Calculate cost per unit of output and losses
iii. Calculate total cost of output and losses
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 iv. Complete/ Prepare the process account

LOSSES IN PROCESS COSTING

Losses may occur in process. If a certain level of loss is expected, it is known as NORMAL LOSS.
 Normal loss is the loss expected during a process. It is not given a cost.
 Abnormal loss is the extra loss resulting when actual loss is greater than normal or expected
loss. It is given a cost.
 Abnormal gain is the gain resulting when actual loss is less than the normal or expected
loss. It is given a negative cost.

Since normal loss is not given a cost, the cost of producing these units is borne by the expected
good units of output. Abnormal loss and gain units are valued at the same rate as good units.
Abnormal events do not affect the cost of good production. Their costs therefore are analysed
separately in an abnormal loss or gain account and are taken to profit or loss account.

Illustration 1: Abnormal losses and gains

Suppose that an input to a process is 1,000 units at a cost of N4, 500. Normal loss is 10% and there
is no opening or closing inventory.

Determine the accounting entries for the cost of output and the cost of the loss if actual output
were as follow:
(a) 860 units
(b) 920 units

Solution to Illustration 1a
Step 1: Determine output and losses
Material input 1000
Normal loss (10%) (100)
Expected units 900*
Actual Units (860)
Abnormal loss 40

Step 2: Determine cost/ unit

= Total cost = N 4,500
Expected units 900 = N5/unit

Step 3: Determine Total cost of output & Losses

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 N
Actual output 860 x N5 = 4,300
Normal loss 100 x N0 = 0
Abnormal loss 40 x N5 = 200
1,000 4,500

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finish goods 860 4,300
Normal loss 100 0
Abnormal loss 40 200
1,000 4,500 1,000 4,500

Solution to Illustration 1b
Step 1: Determine Output & Loss
Material input 1000
Normal Loss (10%) (100)
Expected unit 900 *
Actual unit (920)
Abnormal gain (20)

Step 2: Determine Cost/unit

= Total cost = N 4,500
Expected units 900 = N5/unit

Step 3: Determine total cost of output & Losses

N
Actual output 920 x N5 = 4,600
Normal loss 100 x N0 = 0
Abnormal gain (20) x N5 = (100)
1,000 4,500

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finish goods 920 4,600
Abnormal gain 20 100 Normal loss 100 0
1,020 4,600 1,020 4,600

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Class work
Ade Guru has two processes, F and G. there is an expected loss of 5% of input in process F and
7% of input in process G. activity during a four week period is s follows:
F G
Material input (kg) 20,000 28,000
Output (kg) 18,500 26,100

Is there an abnormal gain or abnormal loss for each process?

Determine Output & Loss F G

Material input 20,000 28,000
Normal Loss (5%) (1,000) (7%) (1,960)
Expected unit 19,000 26,040
Actual unit (18,500) (26,100)
Abnormal loss /(gain) 500 (60)

Illustration 2
During a four week period, period 3, costs of input to a process were N29,070. Input was 1,000
units, output was 850 units and normal loss is 10%. During the next period,

Period 4, costs of input were again N29,070. Input was 1,000 units, but output was 950 units and
normal loss is 10%. There were no units of opening or closing inventory.

Required
Prepare the process account and abnormal loss or gain account for each period.

Illustration 2

Period 3
Step 1: Determine output and losses
Material input 1,000
Normal loss (10%) (100)
Expected units 900*
Actual units (850)
Abnormal Loss 50

Step 2: Determine cost/ unit

= Total cost N29,070
Expected unit 900 = N32.3/unit

Step 3: Determine total cost of output & Losses

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 N
Actual output 850 x N32.3 = 27,455
Normal loss 100 x N0 = 0
Abnormal loss 50 x N32. 3 = 1,615
1,000 = 29,070

Step 4: Prepare the Process Account

Period 3 Process Account
Particulars Units N Particulars Units N
Material input 1,000 29,070 Output to finish goods 850 27,455
Normal loss 100 0
Abnormal loss 50 1,615
1,000 29,070 1,000 29,070

Abnormal Loss Account

Particulars N Particulars N
Period 3 process a/c 1,615 Income statement 1,615

Period 4
Step 1: Determine output and losses
Material input 1000
Normal loss (10%) (100)
Expected units 900*
Actual units (950)
Abnormal gain (50)

Step 2: Determine cost/ unit

Total cost N29,070
Expected unit 900 = N32.3/unit

Step 3: Determine total cost of output & Losses

N
Actual output 950 x N32.3 = 30,685
Normal loss 100 x N0 = 0
Abnormal gain (50) x N32. 3 = (1,615)
1000 = 29,070

Step 4: Prepare the Process Account

Period 4 Process Account

Particulars Units N Particulars Units N
Material input 1,000 29,070 Output to finish goods 950 30,685
Abnormal gain 50 1,615 Normal loss 100 0
1,050 30,685 1,050 30,685

Abnormal Gain Account

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 Particulars N Particulars N
Income statement 1,615 Period 4 Process a/c 1,615

Illustration 3
3,000 units of materials are input to a process. Process costs are as follows:
Materials N11,700
Conversion costs N6,300
Output is 2000 units. Normal loss is 20% of input

Required
Prepare a process account and abnormal loss or gain account

Step 1:
Determine output and losses
Material Input 3,000
Normal Loss (20%) (600)
Expected units 2,400*
Actual units (2000)
Abnormal Loss 400

Step 2: Determine cost/ unit

Cost/unit = Total Cost

Expected units

= N11,700 + N6,300 = N18,000 = N7.50/unit

2,400 2,400

Step 3: Determine total cost of output & Losses

N
Actual output 2,000 x N7.5 = 15,000
Normal loss 600 x N0 = 0
Abnormal loss 400 x N7.5 = 3,000
3,000 18,000

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 3,000 11,700 Output to finish goods 2,000 15,000
Normal loss 600 0
Conversion cost 6,300 Abnormal loss 400 3,000
3,000 18,000 3,000 18,000

Abnormal Loss Account

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 Particulars N Particulars N
Process a/c 3,000 Income statement 3,000
3,000 3,000

LOSSES WITH SCRAP VALUE

When there is scrap value for normal loss, then the normal loss will be given a cost equivalent to
the scrap value. This will reduce the cost of processing. That is to say, you will deduct the scrap
value of normal loss from the process cost and also credit process account with the value.
Steps involved are:
i. Separate scrap value of normal loss from scrap value of abnormal loss or gain
ii. Subtract the scrap value of normal loss from process cost before you determine the cost of
good units. Credit process account to reflect this.
iii. Either subtracts the scrap value of abnormal loss from abnormal loss account by crediting
abnormal loss account. Or subtract the scrap value of abnormal gain from abnormal gain
account by debiting abnormal gain account.

Illustration 4
3,000 units of materials are input to a process. Process costs are as follows:
Materials N11,700
Conversion costs N6,300
Output is 2000 units. Normal loss is 20% of input
The units of loss can be sold for N1 each

Required
Prepare appropriate accounts.

Step 1: Determine output and losses

Material Input 3,000
Normal Loss (20%) (600)
Expected units 2,400*
Actual units (2,000)
Abnormal Loss 400

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 600 x N1 = 600*
Abnormal loss 400 x N1 = 400
1,000

= N11,700 + N6,300 – N600* = N17,400 = N7.25/unit

2,400 2,400
Step 3: Determine total cost of output & Losses
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 N
Actual output 2,000 x N7.25 = 14,500
Normal loss 600 x N1 = 600
Abnormal loss 400 x N7.25 = 2,900
3,000 18,000

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 3,000 11,700 Output to finished goods 2,000 14,500
Normal loss (Scrap val. A/C) 600 600
Conversion cost 6,300 Abnormal loss 400 2,900
3,000 18,000 3,000 18,000

Abnormal Loss Account

Particulars N Particulars N
Process a/c 2,900 Scrap value a/c 400
Income statement 2,500
2,900 2,900

Scrap Value Account

Particulars N Particulars N
Process a/c 600
Abnormal loss 400 Cash 1,000
1,000 1,000

Illustration 5
Ayomide has a factory which operates two production processes, cutting and pasting. Normal loss
in each process is 10%. Scrapped units of the cutting process sell for N3 per units whereas scrapped
units of pasting process sell for N5. Output from the cutting process is transferred to the pasting
process. Output from the pasting process is finished output ready for sale.
Relevant information about costs for control period 7 is as follows:

Cutting Process Pasting Process

Units N Units N
Input materials 18,000 54,000
Material transferred to pasting 16,000
Materials from cutting process 16,000
Added materials 14,000 70,000
Labour and overheads 32,400 135,000
Output to finished goods 28,000

Required
Prepare account for the cutting process, pasting process abnormal loss, and abnormal gain and
scrap value.
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Cutting process
Step 1: Determine output and losses
Material Input 18,000
Normal Loss (10%) (1,800)
Expected units 16,200*
Actual units (16,000)
Abnormal loss 200

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 1,800 x N3 = 5,400*
Abnormal loss 200 x N3 = 600
2,000 6,000

:. Cost/ Unit = N54,000 + N32,400 – N5,400 = N81,000 = N5/unit

16,200 16,200

Step 3: Determine total cost of output & Losses

N
Actual output 16,000 x N5 = 80,000
Normal loss 1,800 x N3 = 5,400
Abnormal loss 200 x N5 = 1,000
18,000 86,400

Step 4: Prepare the Process Account

Cutting Process Account
Particulars Units N Particulars Units N
Material input 18,000 54,000 Output to pasting process 16,000 80,000
Normal loss (Scrap val. A/C) 1,800 5,400
Labour and overheads 32,400 Abnormal loss 200 1,000
18,000 86,400 18,000 86,400

Abnormal Loss Account

Particulars N Particulars N
Scrap value a/c 600
Cutting Process a/c 1,000 Income statement 400
1,000 1,000

Scrap Value Account

Particulars N Particulars N
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 Cutting Process a/c 5,400
Abnormal loss 600 Cash 6,000
6,000 6,000

Pasting process
Step 1: Determine output and losses
Material from cutting process 16,000
Added materials 14,000
30,000
Normal loss (10%) (3,000)
Expected units 27,000*
Actual units (28,000)
Abnormal gain (1000)

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 3,000 x N5 15,000*
Abnormal gain (1,000) x N5 (5,000)
2,000 10,000

Cost/unit = N80,000 + N70,000 + N135,000 – N15,000 = N270,000 = N10/unit

27,000 27,000

Step 3: Determine total cost of output & Losses

N
Actual output 28,000 x N10 = 280,000
Normal loss 3,000 x N5 = 15,000
Abnormal gain (1,000) x N10 = (10,000)
30,000 285,000

Step 4: Prepare the Process Account

Pasting Process Account
Particulars Units N Particulars Units N
Material from cutting Output to finished goods 28,000 280,000
process 16,000 80,000
Added material 14,000 70,000
Labour and overheads 135,000
Abnormal gain 1,000 10,000 Normal loss (Scrap val. 3,000 15,000
31,000 295,000 A/C) 31,000 295,000

Abnormal Gain Account

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 Particulars N Particulars N
Scrap value a/c 5,000
Income statement 5,000 Pasting Process a/c 10,000
Cutting 10,000 10,000

Scrap Value Account

Particulars N Particulars N
Abnormal gain 5,000
Pasting Process a/c 15,000 Cash 10,000
15,000 15,000

Abnormal Loss / Gain Account

Particulars N Particulars N
Cutting process 1,000
Scrap value a/c 5,000 Pasting Process a/c 10,000
Income statement 4,600 Scrap value 600
Cutting 10,600 10,600

Scrap Value Account

Particulars N Particulars N
Abnormal loss 600 Abnormal gain 5,000
Cutting process 5,400
Pasting Process a/c 15,000 Cash 16,000
21,000 21,000

LOSSES WITH A DISPOSAL COST

 When normal loss is disposed off with a cost, the cost should be added to increase the cost
of process and divided by the expected good units to give unit cost.
 The normal loss is given no value in the process account
 Include the disposal costs of normal loss on the debit side of process account
 Include the disposal costs of abnormal loss in abnormal loss account and transfer the
balance to income statement.

Illustration 6: Losses with a disposal cost

Suppose that an input to a process is 1,000 units at a cost of N4,500. Normal loss is 10% and there
is no opening or closing inventory. Actual output was 860 units and loss units had to be disposed
off at a cost of N0.90 per unit. Prepare the process account.

LOSSES WITH DISPOSAL COST

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Illustration 6
Step 1: Determine output and losses
Material Input 1,000
Normal loss (10%) (100)
Expected units 900*
Actual units (860)
Abnormal loss 40

Step 2: Determine cost/ unit

Cost/ unit = Total cost + Disposal Cost of Normal loss
Expected units
N
Disposal Cost: Normal loss 100 x N0.9 = 90*
Abnormal Loss 40 x N0.9 = 36
126
:. = N4,500 + N90*
900 = N5.10/unit

Step 3: Determine total cost of output & Losses

N
Actual output 860 x N5.10 = 4,386
Normal loss 100 x N0 = 0
Abnormal loss 40 x N5.10 = 204
1,000 4,590

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finished goods 860 4,386
Normal loss 100 0
Disposal cost 90 Abnormal loss 40 204
1,000 4,590 1,000 4,590

Abnormal Loss Account

Particulars N Particulars N
Process a/c 204
Disposal a/c 36 Income statement 240
240 240

Disposal Account
Particulars
N Particulars N
Process a/c 90
Cash a/c 126 Abnormal loss 36
126 126
VALUING CLOSING WORK IN PROGRESS
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When units are partially completed at the end of a period (and hence there is closing WIP), it is
necessary to calculate the equivalent units of production in order to determine the cost of a
completed units and also value WIP.

EQUIVALENT UNITS
These are notional whole units which represent incomplete work, and which are used to apportion
cost between WIP and completed work.

Illustration 7
1,000kg of materials was input to a process. The process costs are: material N6,200 and labour and
overheads costs N2,850. 800kg were completed during the period. Closing WIP was 100%
complete for materials and 25% complete for labour and overheads.

Required
Prepare the account.

Class work
Mary K. operates a process costing system. The following details are available for process 2.
Materials input at the beginning of process 12,000kg costing N18,000
Labour and overheads added N28,000
10,000kg were completed and transferred to the finished goods account. The remaining units were
60% complete with regard to labour and overheads. There were no losses in the period.

Required
What is the value of closing WIP in the process account?

Illustration 8
Suppose that a company is a manufacturer of processed goods, and that results in process 2 for
April 2009 were as follows:
Opening inventory nil
Material input from process 1 4,000 units
Costs of input: N
Materials from process 1 6,000
Added materials in process 2 1,080
Conversion costs 1,720
Closing WIP amounted to 800 units, complete as to:
Process 1 material 100%
Added materials 50%
Conversion costs 30%

Required
Prepare the account for process 2 for April 2009.

EQUIVALENT UNITS WITH LOSSES

Illustration 9
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A process manufacturing company makes product H using two processes, 1 and 2. The following
figures are available for the last processing period:
Process 1
N
Input materials: 24,000 kg costing 168,000
Labour 52,800
Overheads 13,200
There were no process losses and 19,000 kg were transferred to process 2.
The unfinished production was completed as to materials and 60% complete as to labour and
overheads.

Process 2
N
Completed good production was 15,200 kg
Labour 45,752
Overheads 27,353

Normal loss was 5% of input which was exactly achieved in the period.
The unfinished production was estimated to be 40% completed as to labour and overheads.

You are required to write up the transactions, showing the statement of equivalent units, costs and
cost per unit of each process. Show all workings. (15 Marks)

VALUING OPENING WORK IN PROGRESS: FIFO METHOD

FIFO means first in first out. This means that it is assumed that the opening WIP are completed
first as to the degree of completion left to make it finished goods before others completed during
the period.

Illustration 10
Suppose that information relating to process 1 of a two stage production is as follows for August
2009:
Opening inventory 500 units: degree of completion 60%
Costs to date N2,800
Costs incurred in August 2009 N
Direct materials (2,500 units introduced) 13,200
Direct labour 6,600
Production overheads 6,600
26,400
Closing inventory 300 units: degree of completion 80%
There was no loss in the process

Required
Prepare process 1 account for August 2009.

Illustration 11
The following information relates to process 3 of a three stage process for the month of January
2010:
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Opening inventory 300 units complete as to:
N
Material from process 2 100% 4,400
Added materials 90% 1,150
Labour 80% 540
Production overhead 80% 810
6,900

In January 2010, a further 1800 units were transferred from process 2 at a valuation of N27,000.
Added materials amounted to N6,600 and direct labour to N3,270. Production overhead is
absorbed at the rate of 150% of direct labour cost. Closing inventory at 31 January 2010 amounted
to 450 units, complete as to:
Process 2 materials 100%
Added material 60%
Labour and overheads 50%

Required
Prepare the process 3 account for January 2010 using FIFO valuation method.

VALUING OPENING WORK IN PROGRESS: WEIGHTED AVERAGE METHOD

Using this method, there is no difference between opening WIP and finished goods started and
completed fully in the new process. The total output is given a common cost. To arrive at this cost,
the cost brought forward for opening WIP is added to cost incurred in the new process with the
assumption that the opening WIP has just started and completed in the new process.
Note that when using weighted average method, opening WIP units count as full equivalent unit
of production while closing WIP is assessed the same way it used to be i.e. applying the degree of
completion to determine the equivalent units.

Illustration 12
Opening WIP 300 units completed as to 70% costing N1,000
Added material during the period (700 units) N5,000
Output for the period was 800 units and closing WIP was 80% complete.

Required
Prepare the process account

Illustration 13
Guress produces an item which is manufactured in two consecutive processes. Information relating
to process 2 during February 2009 is as follows:
Opening inventory 800 units
Degree of completion: N
Process 1 materials 100% 4,700
Added materials 40% 600
Conversion cost 30% 1,000
6,300
During February 2009, 3000 units were transferred from process 1 at a valuation of N18,100.
Added materials cost N9,600 and conversion costs were N11,800.
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Closing inventory at 28 February 2009 amounted to 1,000 units which were 100% complete with
respect to process 1 materials and 60% complete with respect to added materials. Conversion cost
was 40% complete.
Guress uses a weighted average cost method for the valuation of output and closing inventory.

Required
Prepare the process 2 account for February 2009.

WHICH METHOD SHOULD BE USED?

FIFO inventory valuation is more common than the weighted average method, and should be used
unless an indication is given to the contrary. You may find that you are presented with limited
information about the opening inventory, which forces you to use either the FIFO or the weighted
average method. The rules are as follows:
(a) If you are told the degree of completion of each element in opening inventory, but not
the value of each cost element, then you must use the FIFO method
(b) If you are not given the degree of completion of each cost element in opening inventory,
but you are given the value of each cost element, then you must use the weighted
average method.

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