1

Process Costing
2
Process costing
Process costing is adopted when there is
mass production through a sequence of
several processes
Example include chemical, flour and glass
manufacturing
It computes the average cost per unit by
dividing the costs or production for a
particular period by the number of units
produced during the period
3
Process 1
Process 2
Process
!irect material
!irect labour
overheads
"inished goods
Cost of goods sold
!irect material
!irect labour
overheads
!irect material
!irect labour
overheads
4
#ccounting for Process Costing
Costs are accumulated by each process
Each process maintains its process account
$he process account is debited with the
costs incurred and credited with goods
completed and transferred to other
process account
%hen the goods are completed, they will
be transferred to finished goods account
%hen the goods are sold, the amount will
be transferred to the cost of goods sold
account
5
Process #
&aterial '((
)abour 1((
*verhead2((
Process + ,((
,(( ,((
Process +
Process #,((
&aterial '(
)abour 1'(
*verhead1((
Process C 11((
11(( 11((
Process C
Process + 11((
&aterial ,(
)abour 11(
*verhead 21(
"inished -ds 1'((
1'(( 1'((
"inished -oods
Process C 1'((
Cost of -!s
.old 1((
+al c/d 2((
1'(( 1'((
0
#ccounting for losses and
scrap in process account
7
#ccounting for losses in process
costing
In a production process, losses are
inherent and unavoidable
1ature of losses
1ormal loss
#bnormal loss
8
#ccounting for scrap
!amaged goods may be sold as scrap
2evenue arising from the scrap should
be treated as a reduction in cost
rather than an increase in sales
revenue
9
$ransactions #ccounting
treatment
#ccounting
entries
1ormal loss )osses within
expected level
1ot assigned cost
1o entry
#bnormal loss Excess loss over
the expected level
#ssigned cost
!r3 #bnormal
loss
Cr3 Process
account
#bnormal gain -ain resulted when
the actual loss is
less than the
normal or
expected loss
!r3 Process
account
Cr3 #bnormal
gain
10
$ransactions #ccounting
treatment
#ccounting
entries
.crap value of
normal loss
2educing material
cost
!r3 .crap
Cr3 Process
account
.crap value of
abnormal loss
2educe cost of
abnormal loss
!r3 .crap
Cr3 #bnormal
loss
)oss of scrap
value due to
abnormal gain
$he actual units
sold as scrap will
be less than the
scrap value of
normal loss
!r3 #bnormal
gain
Cr3 .crap
11
$ransactions #ccounting
treatment
#ccounting
entries
#ctual cash
received from
the sale of
scrap
2educing material
cost
!r3 Cash
Cr3 .crap
12
Example
13
4oyce )td3 operates a factory involving two production
Processes3 $he output of process 1 is transferred to process
23 $he information of production for 4anuary 2((' is as
follows5
6 Cost for Process 1
&aterials5 ((( units at 7' per unit
)abour 728((
6 Cost for Process 2
&aterials5 2((( unit at 7, per unit
)abour 710,(
6 No opening and closing work in progress
6 Output for January 2005
Process 15 2(( units
Process 2 8((( units
14
6 -eneral overhead, for 4anuary 2((' amounted to 7918(,
are absorbed into the process cost at a rate of 9': of
direct labour costs in process 1 and 8;038: of direct labour
cost in process 23
6 $he normal output of process 1 and process 2 is ,(: and
;(: of input respectively
6 %aste matters from process 1 and sold for 78 per unit
and those from process 2 for 70 per unit
Required:
a! Process 1
"! Process 2
c! #crap
d! $"nor%al loss
e! $"nor%al gain
15
Process 1 account
<nits 7 <nits 7
)abour 28((
&aterials ((( 1'(((
=7' >(((?
*verhead ;(((
=28((>9':?
Process 2
=71(>2((? 2(( 2(((
#bnormal loss
=71( >1((? 1(( 1(((
((( 208((( ((( 208((
.crap5 normal loss
=8>0((? 0(( 28((
Cost per unit
@ $otal expected cost
$otal expected output
@ 7208((A728((
(((A0((
@ 71( per unit
16
Process 2 account
<nits 7 <nits 7
)abour 10,(
&aterials 2((( 10(((
*verhead ,8(
=10,(>80;38:?
"inished goods
=712>8(((? 8((( 8,(((
#bnormal gain
=712 >1(? 1( 1'0(
8(( 8;(2(
.crap5 normal loss
=70>8(? 8( 2',(
Cost per unit
@ @ 78;(2(A72',(
8((A8(
@ 712 per unit
Process 1 2(( 2(((
88( '(',( 88( '(',(
17
#bnormal loss account
<nits 7 <nits 7
Process 1 1(( 1((( .crap 1(( 8((
Profit and loss 0((
1(( 1((( 1(( 1(((
#bnormal -ain account
<nits 7 <nits 7
Process 2 1( 1'0( .crap5 value of
abnormal gain 1( 9,(
Profit and loss 9,(
1(( 1((( 1(( 1(((
)oss on scrap value due to abnormal gain
18
.crap account
<nits 7 <nits 7
1ormal loss 8( 2',(
=Process 2?
1ormal loss 0(( 28((
=Process 1?
#bnormal loss 1(( 8((
=Process 1?
=1((>78?
Cash Bprocess 1
=0((C1((?>78 9(( 2,((
11( ',( 11( ',(
#bnormal gain
=Process 2? 1( 9,(
=1(>70?
Cash B process 2
=8(A1(?>70 (( 1,((
19
%D 25
!etermining the output and loss5
Process 2
Input =2((C2(((? 8(( units
)ess5 normal loss =1(:?
Expected output
#ctual output 8((( units
8( units
,9( units
#bnormal gain 1( units
%D 15
!etermining the output and loss5
Process 1
Input ((( units
)ess5 normal loss =2(:?
Expected output
#ctual output 2(( units
0(( units
28(( units
#bnormal loss 1(( units
+acD 1 +acD 2
2(
Equivalent units of
production
21
Equivalent units of production
If there is no opening or closing worD
in progress =%IP? the unit cost of
products can be obtained as follows
<nit Cost @ .um of production costs
Production quantity
22
Eowever, If there is opening or
closing worD in progress, the partly
completed production will have a
lower cost than the fully completed
production
%e have to converted the worD in
progress into finished equivalent
units of production =E<P?
2
Example
24
$he total production cost for 4anuary 2((' was 78((((3
,((( units had been completed and 8((( units wee '(:
complete3
Equivalent units of production
,((( units completed ,(((
8((( units were '(: completed 2(((
1((((
"inished goods @
Closing worD in progress @
78((((/1(((( > ,((( @ 72(((
78((((/1((((>2((( @ 7,(((
25
$hree categories in determining
the equivalent units of
production
*pening worD in progress
.tarted and completed units
Closing worD in progress
26
*pening worD in progress
=*%IP?
$hese units were started in the
previous period and are to be
completed in the current period
1&' ()P co%pleted
*n pre+ious period
2&' ()P co%pleted
in current period
27
.tarted and completed units
=.#C<?
$hese units are started and
completed in the current period
1 ()P co%pleted
in current period
28
Closing %orD in progress =C%IP?
$hese units are started in the
current period and are to be
completed in the coming period
1&' ()P co%pleted
in current period
*nco%plete part
29
"irst in "irst out
%eighted average cost
$wo methods of cost flows in
process costing
30
,irst-in-first-out
%et.od
/eig.ted a+erage
%et.od
$he opening worD in
progress is the first
group of units to be
processed and
completed during the
current period
$he opening worD in
progress is merged with
the production of the
current period to form
one batch of production
It separates the cost
computations of the
opening worD in progress
and the current period
production
$he average cost per
unit of the opening worD
in progress and the
current period
production is the same
31
,irst-in-first-out
%et.od
/eig.ted a+erage
%et.od
$he E<P computation
ignores the worD
performed on the opening
worD in progress during
the prior period
$he E<P computation
includes all worD
performed on the opening
worD in progress during
the prior period
Cost per unit
@ Current cost
E<P
Cost per unit
@ Cost of *%IP C Current Cost
E<P

32
"I"* &ethod %#FC* &ethod
1( units of *%IP
=0(: completed
in previous
Period?
9( .#C<
8( units of C%IP
=2(: completed?
8 E<P
9( E<P
, E<P
C
C
,2 E<P
1( units of *%IP
=0(: completed
in previous
Period?
9( .#C<
8( units of C%IP
=2(: completed?
1( E<P
9( E<P
, E<P
C
C
,, E<P

Example
34
)ucDy )td3 maDes toys in a oneAdepartment production
process3 $he following information is available related
to the production in "ebruary 2(('3
Opening work in progress: 1000 units
!egree of completion Cost
: 7
!irect materials 1(( 0(((
Conversion =labour C overhead? 0( 12((
,e"ruary production: 20000 units
7
!irect materials ((((
Conversion '22((
,22((
92((
Closing work in progress: '000 units =2(: as complete as to
conversion
35
Gou are required to 5
Prepare Process 1 account using
=a?$he "I"* method of valuationH and
=b?$he weighted average method of valuation
0
"irst in "irst out
37
%D 15
1umber of Equivalent units =E<?
$otal &aterials Conversion
<nits E< E<
*pening worD in progress
*ther completed units
$otal completed units
Closing worD in progress
1((( ( 8(( =8(:?
19((( 19((( 19(((
1,((( 19((( 198((
((( ((( 0(( =2(:?
21((( 2(((( 1,(((
%D 25
Costs
$otal &aterials Conversion
7 7 7
Costs incurred in the period
Costs per equivalent units
,22(( (((( '22((
838 13' 23;
2((((A(((
1o opening %IP
38
%D 5
Cost of units transferred to finished goods and closing %IP
$otal &aterials Conversion
7 7 7
*pening %IP
Cost to complete
1((( units completed
19((( units completed
$ransfer to finished goods
Closing %IP
92(( 0((( 12((
110( 110(
,0( 0((( 20(
98,(( 2''(( 8;((
,10( 1'(( '100(
028( 8'(( 198(
,;8(( 0((( '8((
%D58 Conversion5 723;>8((@ 110(
=%D 8?
%D '5 &aterials5 19(((>713' @ 72''((
Conversion5 19(((>723; @ 78;((
%D 05 &aterials5 (((>713' @ 78'((
Conversion5 0((>723; @ 7198(
=%D '?
=%D 0?
39
Process account
<nits 7 <nits 7
*pening %IP 1((( 92((
&aterials 2(((( ((((
Conversion '22((
"inished goods 1,((( ,10(
Closing %IP ((( 028(
21((( ,;8(( 21((( ,;8((
8(
%eighted average cost method
41
%D 15
1umber of Equivalent units =E<?
$otal &aterials Conversion
<nits E< E<
*pening worD in progress
*ther completed units
$otal completed units
Closing worD in progress
1((( 1((( 1(((
19((( 19((( 19(((
1,((( 1,((( 1,(((
21((( 21((( 1,0((
%D 25
Costs
$otal &aterials Conversion
7 7 7
*pening %IP
Costs incurred in the period
Costs per equivalent units
,22(( (((( '22((
83',' 13918 23,91(
2((((A(((
((( ((( 0(( =2(:?
92(( 0((( 12((
,;8(( 0((( '8((
42
%D 5
Cost of units transferred to finished goods and closing %IP
$otal &aterials Conversion
7 7 7
$ransfer to finished goods
Closing %IP
,2'' (',9 '109,
0,0' '18 1922
,;8(( '9( '8((
=%D 8?
%D 85 &aterials5 1,(((>713918 @ 7(',9
Conversion5 19(((>723,91( @ 7'109,
%D '5 &aterials5 (((>713918 @ 7'109,
Conversion5 0((>723,91( @ 71922
=%D '?
43
Process account
<nits 7 <nits 7
*pening %IP 1((( 92((
&aterials 2(((( ((((
Conversion '22((
"inished goods 1,((( ,2''
Closing %IP ((( 0,0'
21((( ,;8(( 21((( ,;8((
88
)ost units in process costing
45
1ature of losses
1ormal loss
#bnormal loss
46
1ormal loss
1ormal loss are the losses within the
expectation during the production
2easons5
)ow quality materials and worDers are
engaged
$here may be an inherent problem in
production process
47
#bnormal loss
$he lost units that is out of
expectation
48
Continuous loss
Continuous losses occur evenly
throughout the production process
"or example, the weight loss in
maDing mild powder
49
!iscrete loss
!iscrete losses occur at the specific
point
# firm will not be aware of discrete
losses unless the products are
inspected at the inspection point
"or example, wrong buttons on a
garment and wrong colour of toy cars
m
50
0ypes and natures ()P calculation
Continuous normal loss Excluding the lost
units
Continuous and
abnormal loss
Including the lost
units
!iscrete and normal
loss
Including the lost
units
!iscrete and abnormal
loss
Including the lost
units
51
0ypes and natures 0reat%ents for losses and costs
Continuous normal loss )osses are included as product
costs
Costs are not assigned to the
lost units
Continuous and
abnormal loss
)osses are charged as period
cost
Costs are assigned to the lost
units
#bnormal loss will be written
off to the profit and loss
52
0ypes and natures 0reat%ents for losses and costs
!iscrete and normal
loss
)oss are included as product
cost
Cost are assigned to lost units
!etermining the point of worD
in progress5
13 +efore passing inspection
point, cost of lost units are
only assigned to units
transferred
23 #fter passing inspection
point, cost of lost units are
allocated between units
transferred and closing %IP
53
0ypes and natures 0reat%ents for losses and costs
!iscrete and abnormal
loss
)oss are charged as period
cost
Cost are assigned to lost units
#bnormal losses will be
written off to the profit and
loss account
'8
Example
55
)ucDy )td3 maDes toys in a oneAdepartment production
process3 $he following information is available related
to the production in "ebruary 2(('3
Opening work in progress: 1000 units
!egree of completion Cost
: 7
!irect materials 1(( 0(((
Conversion =labour C overhead? 0( 12((
,e"ruary production: 20000 units
7
!irect materials ((((
Conversion '22((
,22((
92((
Closing work in progress: '000 units =2(: as complete as to
conversion
56
1oss: 2000 units
Gou are required to 5
Prepare Process 1 account using the "I"* method5
Case 15 Continuous normal loss
Case 25 !iscrete normal loss
Case 5 #bnormal loss =both continuous and discrete
loss?
'9
Case 15 Continuous normal
loss
58
%D 15
1umber of Equivalent units =E<?
$otal &aterials Conversion
<nits E< E<
*pening worD in progress
*ther completed units
$otal completed units
1ormal loss 2(((
Closing worD in progress
1((( ( 8(( =8(:?
1'((( 1'((( 1'(((
10((( 1'((( 1'8((
((( ((( 0(( =2(:?
21((( 1,((( 10(((
%D 25
Costs
$otal &aterials Conversion
7 7 7
Costs incurred in the period
Costs per equivalent units
,22(( (((( '22((
83;2;2 130009 3202'
2((((A(((A2(((
1o opening %IP
59
%D 5
Cost of units transferred to finished goods and closing %IP
$otal &aterials Conversion
7 7 7
*pening %IP
Cost to complete
1((( units completed
1'((( units completed
$ransfer to finished goods
Closing %IP
92(( 0((( 12((
1(' 1('
,'(' 0((( 2'('
9;, 2'(((3' 8,;93'
,288 1(((3' '18823'
0;'9 '((( 1;'9
,;8(( 0(((3' ';;3'
%D58 Conversion5 73202'>8((@ 1('
=%D 8?
%D '5 &aterials5 1'(((>7130009 @ 72'(((3'
Conversion5 1'(((>73202' @ 78,;93'
%D 05 &aterials5 (((>7130009 @ 7'(((
Conversion5 0((>73202' @ 71;'9
=%D '?
=%D 0?
60
Process account
<nits 7 <nits 7
*pening %IP 1((( 92((
&aterials 2(((( ((((
Conversion '22((
"inished goods 10((( ,288
Closing %IP ((( 0;'9
21((( ,;8(( 21((( ,;8((
1ormal loss 2(((
01
Case 25 !iscrete normal loss
It is assumed that the inspection point
is set at 1((: completion, all worD has
been performed3 #s a result, the costs
of lost units are assigned to the units
transferred
&aterial added
Closing %IP =2(:?
Inspection point =1((:?
62
%D 15
1umber of Equivalent units =E<?
$otal &aterials Conversion
<nits E< E<
*pening worD in progress
*ther completed units
$otal completed units
1ormal loss 2((( 2((( 2(((
Closing worD in progress
1((( ( 8(( =8(:?
1'((( 1'((( 1'(((
10((( 1'((( 1'8((
((( ((( 0(( =2(:?
21((( 2(((( 1,(((
%D 25
Costs
$otal &aterials Conversion
7 7 7
Costs incurred in the period
Costs per equivalent units
,22(( (((( '22((
838 13' 23;
2((((A(((A2(((
1o opening %IP
63
%D 5
Cost of units transferred to finished goods and closing %IP
$otal &aterials Conversion
7 7 7
*pening %IP
Cost to complete
1((( units completed
1'((( units completed
$ransfer to finished goods
Closing %IP
1ormal loss
92(( 0((( 12((
110( 110(
,0( 0((( 20(
00((( 22'(( 8'((
980( 2,'(( 8',0(
028( 8'(( 198(
,;8(( 0((( '8((
%D58 Conversion5 723;>8((@ 110(
=%D 8?
%D '5 &aterials5 1'(((>713' @ 722'((
Conversion5 1'(((>723; @ 78'((
%D 05 &aterials5 (((>713'@ 78'((
Conversion5 0((>723; @ 7198(
=%D '?
=%D 0?
,,(( ((( ',((
64
Process account
<nits 7 <nits 7
*pening %IP 1((( 92((
&aterials 2(((( ((((
Conversion '22((
"inished goods 10((( 980(
Closing %IP ((( 028(
21((( ,;8(( 21((( ,;8((
1ormal loss 2((( ,,((
0'
Case 5 #bnormal loss =both
continuous and discrete?
"or the discrete losses, it is
assumed that the inspection
point is set at 1((: completion
66
%D 15
1umber of Equivalent units =E<?
$otal &aterials Conversion
<nits E< E<
*pening worD in progress
*ther completed units
$otal completed units
1ormal loss 2((( 2((( 2(((
Closing worD in progress
1((( ( 8(( =8(:?
1'((( 1'((( 1'(((
10((( 1'((( 1'8((
((( ((( 0(( =2(:?
21((( 2(((( 1,(((
%D 25
Costs
$otal &aterials Conversion
7 7 7
Costs incurred in the period
Costs per equivalent units
,22(( (((( '22((
838 13' 23;
2((((A(((A2(((
1o opening %IP
67
%D 5
Cost of units transferred to finished goods and closing %IP
$otal &aterials Conversion
7 7 7
*pening %IP
Cost to complete
1((( units completed
1'((( units completed
$ransfer to finished goods
Closing %IP
#bnormal 1ormal loss
92(( 0((( 12((
110( 110(
,0( 0((( 20(
00((( 22'(( 8'((
980( 2,'(( 8',0(
028( 8'(( 198(
,;8(( 0((( '8((
%D58 Conversion5 723;>8((@ 110(
=%D 8?
%D '5 &aterials5 1'(((>713' @ 722'((
Conversion5 1'(((>723; @ 78'((
%D 05 &aterials5 (((>713'@ 78'((
Conversion5 0((>723; @ 7198(
=%D '?
=%D 0?
,,(( ((( ',((
68
Process account
<nits 7 <nits 7
*pening %IP 1((( 92((
&aterials 2(((( ((((
Conversion '22((
"inished goods 10((( 980(
Closing %IP ((( 028(
21((( ,;8(( 21((( ,;8((
#bnormal
normal loss 2((( ,,((