PROCESS COSTING

Topic 9
 PROCESS COSTING

• Process costing is a method of applying costing systems

to goods or services that are produced in a series of
processes.
• Every unit is assumed to have involved the same amount
of work and therefore the costs for a period are charged
to processes or operations, and unit costs are calculated
by dividing process costs by the quantity of units
produced.
• Cost per unit= costs of inputs
• expected output in units

• This method is done step by step and each step is called

a process and it involves large quantities of
homogeneous products or services
 Process A Process B Process C Finished
Direct Process A + Process B+ Goods
materials+ Direct Direct Process C
Direct labour+ materials+ materials+
Overheads+ Direct labour+ Direct labour+
Overheads Overheads
 ACCOUNTING FOR PROCESS
COSTING
• Costs are accumulated by each process and each process maintains its
process account.
• The process account is debited with the costs incurred and credited with
goods completed and transferred to other process account
• When goods are completed, they will be transferred to finished goods
account.
• When the goods are sold, the amount will be transferred to the cost of
goods sold account
 Process A Account

Direct Material Transfer to process B

xx xx
Direct labour
xx
Production
Overheads
xx

xx xx
Process B Account
Transfer from Transfer to next
Process A process C
xx xx
Direct Material
xx
Direct labour
xx
Production
Overheads
• During February, the following costs were incurred in a process:
$
Materials 20,000
Labour 10,000
Overheads 8,000

• 2,000 units were produced.

• Calculate the cost per unit.
 ACCOUNTING FOR LOSSES AND
GAIN IN PROCESS ACCOUNTING
Normal loss Abnormal loss Abnormal gain
• there are losses • excess loss over • gain resulted
which are the expected when the actual
inherent and level and these loss is less than
unavoidable losses are the normal or
• losses within controllable expected loss.
expected level
and these losses
are
uncontrollable
Transactions Accounting entries

Normal loss No entry

Abnormal loss Dr. Abnormal loss
Cr. Process Account
Abnormal Gain Dr Process account
Cr. Abnormal gain
Scrap value of normal loss - (reducing material cost) Dr. Scrap
Cr. Process Account
Scrap value of abnormal loss - (reduce cost of abnormal loss) Dr. Scrap
Cr. Abnormal loss
Loss of scrap value due to abnormal gain - (actual units sold as Dr. Abnormal gain
scrap will be less than the scrap value of normal loss) Cr. Scrap
Actual cash received from the sale of scrap - (reducing material Dr. Cash
cost) Cr. Scrap
 NORMAL LOSS QUESTION
• During March the following costs were incurred in a process:
$
Materials (1,000 kg) 12,000
Labour 7,000
Overheads 8,000

• A normal loss of 10% was expected. The actual output was 900 kg.

Calculate the cost per kg and prepare a Process Account.

 ACCOUNTING FOR SCRAP
• Damaged goods may be sold as scrap
• Revenue arising from the scrap should be treated as a reduction in cost
rather than an increase in sales revenue
 NORMAL LOSS WITH SCRAP
QUESTION
• During April, the following costs were incurred in a process:
$
Materials (3,000 kg) 30,000
Labour 12,000
Overheads 10,800

• A normal loss of 10% was expected. The actual output was 2,700 kg.
Losses have a scrap value of $5 per unit.
Calculate the cost per kg and prepare a Process Account and a
Loss Account.
 ABNORMAL LOSS QUESTION
• During May, the following costs were incurred in a process:
$
Materials (1,000 kg) 9,000
Labour 18,000
Overheads 13,500

• A normal loss of 10% was expected. The actual output was 850 kg.
Losses are sold as scrap for $9 per kg

Calculate the cost per kg and prepare a Process Account and a

Loss Account.
 ABNORMAL GAIN QUESTION
• During June the following costs were incurred in a process:
$
Materials (2,000 kg) 18,000
Labour 36,000
Overheads 27,000

• A normal loss of 10% was expected. The actual output was 1,840 kg.
Losses are sold as scrap for $9 per kg.

Calculate the cost per kg and prepare a Process Account and a

Loss Account.
 EXAMPLE
• Rudo Ltd operates a factory involving two production processes. The output of process 1 is transferred to
process 2. the information of production of production for January 2018 is as follows
• Cost for Process 1
Materials 3000 units @ $5 per unit
Labour $2400
• Cost for Process 2
Materials 2000 units @ $8 per unit
Labour $1680
• No opening or closing WIP
• Output for January
• Process 1 2300units
• Process 2 4000units
• General overhead for January 2018 amounted to $7140, are absorbed into the process cost at a rate of 375%
of direct labour costs in process 1 and 496.4% of direct labour cost in process 2.
• The normal output from process 1 is 80% and process 2 is 90%
• Waste matters from process 1 and sold for $4 per unit and thoses from
process 2 for $6 per unit
• Required
i. Process 1
ii. Process 2
iii. Scrap
iv. Abnormal loss
v. Abnormal gain
 Process 1 account

Units $ Units $
Materials 3000 15000 Scrap: normal 600
($5*3000) loss 2400
(4*600)
Labour 2400 Process 2 2300 2300
(10*2300) 0
Overhead 9000 Abnormal loss 100
(2400*375%) (10*100) 1000

3000 26400 3000 2640

cost per unit= total expected cost
0
total expected output

= 26400-2400
3000-600
=$10 per unit
 Process 2 account
Units $ Units $
Process 1 2300 23000 Scrap: normal loss 430 2580
Materials 2000 16000 ($6*430)
Labour 1680 Finished Goods 4000 48000
Overhead 8340 ($12*4000)
(1680*469.4%)
4300 49020
Abnormal gain 130 1560
($12*130)

4430 50580 4430 50580

 Abnormal loss account

Units $ Units $
Process 1 100 1000 Scrap 100 400
Profit and 600
loss
100 1000 100 1000

Abnormal gain account

Units $ Units $
Scrap: value 130 780 Process 2 130 1560
of abnormal
gain
Profit and 780
loss
100 1000 100 1000
 Scrap Account

Unit $ Unit $
Normal loss 600 2400 Abnormal 130 780
(Process1) gain(Process2)
(130*$6)

Normal loss (Process 430 2580 Cash-process 1 700 2800

2) (600+100)*$4

Abnormal loss 100 400 Cash-process 2 300 1800

(Process1) (430-130)*$6
(100*4)

1130 5380 1130 5380

• Working 1
determining the ouput and loss:
Process 1
Input 3000units
Less: normal loss (20%) 600units
Expected output 2400 units
Actual output 2300 units
Abnormal loss 100 units

Working 2
Determining the output and loss:
Input (2300+2000) 4300 units
Less: normal loss (10%) 430 units
Expected output 3870 units
Actual output 4000 units
Abnormal gain 130 units
 WORK IN PROGRESS
• At the end of a process there may be some units that have been started
but not completed. These are known as closing work-in-progress. They
are still there at the start of the next period, waiting to be finished. They
are therefore opening work-in-progress of the next period.
 EQUIVALENT UNITS OF
PRODUCTION
• Equivalent units are notional whole units which represent incomplete
work, and which are used to apportion costs between work in process and
completed output.
• For costing purposes we assume the work done on 100 units that are only
half finished is equivalent to 50 fully finished units. Therefore, 100 units
each 50% finished is regarded as 50 equivalent complete units.
• Direct materials. These are added in full at the start of processing, and so
any closing WIP will have 100% of their direct material content.
• Direct labour and production overhead. These are usually assumed to be
incurred at an even rate through the production process, so that when we
refer to a unit that is 50% complete, we mean that it is half complete for
labour and overhead, although it might be 100% complete for materials.
 EXAMPLE :PROCESS ACCOUNT

Process Account
Units $ Units $
Materials 1,000 6,200 Finished goods 800 ?
Labour overhead 2,850 Closing WIP 200 ?
1,000 9,050 1,000 9,050
Let us also assume that the closing WIP is 100% complete for materials and 25%
complete for labour and overhead.
 STEP 1 (CALCULATE EQUIVALENT UNITS)

STATEMENT OF EQUIVALENT UNITS

Materials Labour and overhead
Total Degree of Equivalent Degree of Equivalent
units completion units completion units
Finished output 800 100% 800 100% 800
Closing WIP 200 100% 200 25% 50
1,000 1,000 850
 STEP 2 (AVERAGE COST PER EQUIVALENT UNIT)

STATEMENT OF COSTS PER EQUIVALENT UNIT

Materials Labour and overhead
Costs incurred in the period $6,200 $2,850
Equivalent units of work done 1,000 850
Cost per equivalent unit (approx) $6.20 $3.3529
 STEP 3 (CALCULATE TOTAL COSTS)

STATEMENT OF EVALUATION
Materials Labour and overhead
Cost per Cost per
Item Equivalent equivalent Equivalen equivalent Total
units unit Cost t units unit Cost Cost
$ $ $ $ $
Finished 800 6.20 4,960 800 3.3529 2,682 7,642
output
Closing 200 6.20 1,240 50 3.3529 168 1,408
WIP
1,000 1,000 850 2,850 9,050
PROCESS ACCOUNT (WORK IN PROGRESS, OR
WORK IN PROCESS ACCOUNT)

Process Account
Units $ Units $
Materials 1,000 6,200 Finished goods 800 7,642
Labour overhead 2,850 Closing WIP 200 1,408
1,000 9,050 1,000 9,050
 EXAMPLE
• The total production cost for January 2019 was $40000.
8000 units had been completed and 4000 units were 50%
complete.

Equivalent units of production

8000 units completed = 8000
4000 units were 50% completed =2000
10000
Finished goods = $40000/10000 * 8000= $32000
Closing WIP = $40000/10000*2000=$8000
 CATERGORIES IN DETERMING
THE EUP
• Opening work in progress(OWIP) - these are units were started in the
previous period and are to be completed in the current period.
• Started and completed units - These are units started and completed
in the same period
• Closing work in progress - These are units started in the current
period and are to be completed in the coming period.
• The following refers to process A EXAMPLE
Opening WIP nil
Units introduced into the process 14000
Units completed and transferred to process B
10000
Closing WIP 4000
Material cost added during the period $70000
Conversion cost added during the period
$48000
Materials introduced at the start of the process, and conversion costs
are applied uniformly throughout the process. The closing WIP is
estimated to be 50% complete. You are required to compute the cost
of the completed production transferred to process B and the cost of
the WIP
• Solution

Cost element Total Complet WIP Total Cost

cost $ ed equivale equival per
units nt units ent unit
units
Materials 70000 10000 4000 14000 5.00
Conversion 48000 10000 2000 12000 4.00
cost
118000 9.00
Value of WIP $ $
Materials(4000 units @ $5) 20000
Coversion costs ( 2000 units @ $4) 8000
28000
Completed units(10000units @ $9)
90000

118000
TANK YOU TANK YOU TANK YOU