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WELCOME TO THE PROGRAM ON

PROCESS COSTING
BY
T.VENKATARAMANAN.FICWA.FCS.
Chapter 6 1
Chapter 6
Process Costing
Key Topics:
–Cost flows in mass production
–Steps in preparing process cost reports (FIFO
and weighted average)
•Equivalent units
•Applying costs
–Spoilage in process costing
– Uses, Uncertainties, and limitations

Chapter 6 2
Process Costing
Process product-costing systems are used
for costing inventories or services when
they are mass-produced, identical units.

These products differ from the custom-made


or unique goods that are assigned costs
under a job costing system

Chapter 6 3
Mass Production
Many goods are produced using a
continuous process.
Examples:
Processing : Raw milk >> cream ,butter ,
skimmed milk.
Coco beans: cocoa butter, cocoa powder,
cocoa drink

Chapter 6 4
Process variants
• Single RM>>>single process>>single
output
• Single material>>single process>>multiple
outputs
• Multiple inputs>>single process >>multiple
out puts
• Multiple inputs >.multiple process>multiple
out puts.
Chapter 6 5
6 Chapter 6
• Butane, Ethane, Raw LPG,
• propane
• Crude oil , natural gas, petroleum
• Lpg, etc
• Coke ,gas, coal
• Benzol, tar, ammonia,
cost- basics

• Joint costs
Presplit • Material,
off labor, etc

• Specific costs
Post • Material lab
split off etc

Chapter 6 7
Product classification

• mainproduct
V • Joint products
A High • byproducts

L
U
E • spoilage
Low>0 • Scrap,defectives
• waste

Chapter 6 8
Approaches to allocating Joint
costs
• Sales value at split off
market • Net realizable value
based • Constant gross margin %

Physical • Volume-barrels, liters,


gallons etc
measures • Mass- weight ,kg, gm,
based etc

Chapter 6 9
Overview of Process Costing
Systems

Chapter 6 10
Steps for Preparing a Process
Costing Report:

1. Summarize total costs to account for.


2. Summarize total physical and equivalent
units.
3. Compute cost per equivalent unit.
4. Account for cost of units completed and
cost of ending WIP.

Chapter 6 11
What Are Equivalent Units, and How
Do They Relate to the Production
Process?
Equivalent Units:
• Measure the resources used in partially completed units
relative to the resources needed to complete the units.

Equivalent Units Depend on the Pattern of Cost Flow:


Direct Materials:
* Added at the beginning of the process
* Added during the process
Conversion Costs:
* Incurred uniformly throughout the process
* Incurred non-uniformly
Chapter 6 12
How Is the Weighted Average
Method Used in Process Costing?

Weighted Average Method:


Costs from beginning WIP (performed last
period) are averaged with costs incurred
during the current period and then allocated
to all units completed and ending WIP.

Chapter 6 13
Summaries of Physical Units and
Total Costs for Weighted Average
Calculations
(Assuming direct materials are added at the
beginning of the process)

Chapter 6 14
Calculation of Equivalent Units Under
the Weighted Average Method

Chapter 6 15
Calculation of Cost Per Equivalent Unit
Under the Weighted Average Method

Beg. WIP Costs + Costs Added This Period


Weighted Average Equivalent Units

Chapter 6 16
Equivalent Unit Costs
Weighted Average:
Direct materials = $6,000+$30,500
=$3.0417
12,000
Conversion costs=$4,200+$76,680=$7.0947
11,400
Total cost per equivalent unit = $10.1364

Chapter 6 17
Weighted Average Process Cost
Report
Weighted Average
Computation Units Costs

Total units
completed and
transferred out (2,000+9,000)x$10.1364 11,000 $111,500

Ending WIP: 1,000


Direct materials 1,000x$3.0417 3,042
Conversion costs 400x$7.0947 2,838
Total ending WIP
cost _____ 5,880

Total Accounted
For 12,000 $117,380
Chapter 6 18
Summaries of Physical Units and Total
Costs for FIFO Calculations
(Assuming direct materials are added at the
beginning of the process)

Chapter 6 19
Calculation of Equivalent Units Under the
FIFO Method

Chapter 6 20
First-in, First-out (FIFO) Method

The current period’s costs are used to


allocate cost to work performed this period

Chapter 6 21
Calculation of Cost Per Equivalent Unit

Current Period Cost


Equivalent Units for Work Performed this Period

Chapter 6 22
Equivalent Units Costs
FIFO:
Direct materials = $30,500 = $3.05
10,000
Conversion costs=76,680 = $7.10
10,800
Total cost per equivalent unit = $10.15

Chapter 6 23
FIFO Process Cost Report
First-in, First-Out
Computation Units Costs
Beginning WIP 2,000 $ 10,200
Costs to complete beginning WIP:
Direct materials 0x$3.05 0
Conversion costs 1,400x$7.10 9,940
Total costs added this period _____ 9,940

Total cost of beginning WIP transferred


out 2,000 20,140

New units started, completed, and


transferred out 9,000x$10.15 9,000 91,350

Total units completed and transferred out 11,000 111,490

Ending WIP: 1,000


Direct materials 1,000x$3.05 3,050
Conversion costs 400x$7.10 2,840
Total ending WIP cost _____ 5,890

Total Accounted For 12,000 $117,380

Chapter 6 24
How Is Process Costing Performed for
Multiple Production Departments
Transferred-in Costs:
• Costs of processing performed in a
previous department

• Transferred-in costs are pooled separately


from other costs

Chapter 6 25
Cost Flows in Process Costing With Costs Transferred from Another Department
Costs Assigned to Costs Allocated
Department WIP to Individual Units

Department Individual
Work in Process Units of
Product or
Service
Previous Allocate Transferred-in Allocate
Department WIP Costs

Trace Direct Allocate


Direct Materials Materials

Trace
Direct Labor

Overhead Conversion
Trace Allocate
Indirect materials, Costs
indirect labor, direct or Allocate
department costs such as
supervisor salary and
equipment depreciation,
and other costs such as
rent and plant insurance

Chapter 6 26
How Are Spoilage Costs Handled in
Process Costing?
Normal Spoilage:
Defective units that arise as part of regular
operations
Abnormal Spoilage:
Spoilage that is not part of everyday
operations

Chapter 6 27
Cost Flows with Spoilage in a Process Costing System

Costs Assigned to Costs Allocated


Department WIP to Individual Units

Trace Direct
Direct Materials Materials Allocate Cost of
Good Units and
Normal Spoilage

Trace
Direct Labor

Overhead Conversion
Trace
Indirect materials, Costs
indirect labor, direct Allocate Cost of
or Allocate Abnormal Spoilage
department costs such as
supervisor salary and
equipment depreciation,
and other costs such as
Abnormal
rent and plant insurance
Spoilage Loss

Chapter 6 28
Use Process Cost Information to:
• Measure costs of products mass-produced
products
• Assign costs to inventory and cost of goods sold
for financial statements and income tax returns
• Monitor operations and costs
• Develop estimates of future costs for decision
making
• Analyze the costs and benefits of quality
improvements
• Identify potential areas for process
improvements

Chapter 6 29
Uncertainties and Measurement Errors in
Process Costing
Actual cost flows might not be known:
* When are direct materials added?
* When are conversion costs incurred?
* How complete are the units in ending
work in process?
* What amount of spoilage is normal?

Chapter 6 30
Before we proceed further – a word
about service costing
• Also called operation costing, “the cost of
specific services & functions” like canteen
,hospital, maintenance , etc.
• In this method all costs are collected
periodically and the total operating
expenses are divided by the quantity of
services rendered to arrive at the costs /
unit.

Chapter 6 31
Before we proceed further – a word
about service costing
• The main feature of services are 1) labor intensive 2)expense
oriented. 3)Inputs & outputs cannot be stored 4)use of composite
cost units are more common than single cost units maintenance ,
etc.
• In this method all costs are collected under two broad heads i) fixed
charges or standing charges ii) operating charges e.g for transport
service:
• Standing charges: 1)insurance 2) rent rates & taxes 3)wages of
maintenance staff ,4) depreciation etc
• Operating charges 1) petrol ,diesel, oil, lubricants, 2)semi variable
expenses like tyre , tube, battery etc
• Additional records are to be maintained for operational details like i)
log book ii) daily operational schedule iii) job no. etc.iv)cost sheet v)
cost summary.
Chapter 6 32
Which of the following
statements are true/false
• 1)In process costing ordinarily no distinction is made
between direct and indirect materials
• 2)The cost of abnormal loss is not included in the cost of
process.
• 3)Normal loss and abnormal loss are treated alike in
process costing
• 4)Process a/c s should always be presented in
conventional T a/cs.
• 5)In process cost normal loss is absorbed by good units

Ans 1) true 2)T, 3) F, 4) F, 5) T


Chapter 6 33
Which of the following
statements are true/false
• 1)sales realization from normal scrap is
credited to process a/c
• 2) waste has no market value.
• 3) there is no difference between the terms common
costs and joint costs.
• 4)management may decide to treat a joint product as by
product.
• 5)It is posible for main product of one industry to be
byproduct of another.

Ans 1) true 2)T, 3) F, 4) T, 5) T


Chapter 6 34
Which of the following

statements are true/false
1)Process cost system is not applicable in paper mills &
textile mills
• 2)normal loss in a process is not avoidable.
• 3)In process costing costs are compiled process wise.
• 4)Equivalent units are computed when some units
remain in complete at the end of a particular period..
• 5)In process costing cost / unit is the average cost.

Ans 1) F 2)T, 3)T, 4) T, 5) T


Chapter 6 35
When FIFO method is used in process costing , the
opening stock values are :

• 1)the cost of inventory brought forward


from the past ,is not added to cost of new
period
• 2)added to the cost of the new period.
• 3)subtracted from the new period.
• 4)averaged with the new period

Ans: 1
Chapter 6 36
When average method is used in process costing , the
opening stock values :

• 1) from the past ,are kept separate from


the cost of new period
• 2)added to the cost of the new period.
• 3)subtracted from the new period.
• 4)none of the above

Ans: 2
Chapter 6 37
Under average cost method In process costing , the stage
of completion of opening stock is considered of no
consequence.

• 1) true
• 2) false

Ans: 1
Chapter 6 38
Match The following
1 Rail & road a No. .f.
transport patients
2 Boiler house b Guest days
3 Power c No of meals
house/ elec served
supply
4 Canteens d KWH
5 hotels e Cubic meter
of gas
6 hospitals f Passenger/k
m or ton -km

Chapter 6 39
Illustrations allocating joint costs
• Incase of product X the input in process is
1000 units ,normal loss = 2% of the input.if
the output is 990 units there will be
a)abnormal loss of 10 units. B)abnormal
gain of 10 units. C)neither gain nor lossd)
None of the above.

ans : b 40
Illustrations allocating joint costs
Particulars L M N

SELLING Rs 5 10 20
PRICE/KG

OUTPUT IN KG 2500 5000 15,000

POST 10,000 5,000 15,000


SEPARATION
COSTS

PRE ? ? ?
SEPARATION
COSTSRs
20,000/=

Calculate pre separation costs by 1) wt. 2) NRV 41


Input ,salt Rs 40,000/=conversion costs Rs
60,000 upto split off pt.output details are:
Particulars Caustic soda chlorine PVC

SELLING Rs 50 75(opportunity 200


PRICE/KG cost)
OUTPUT IN KG 1200 800(gets 500
converted to pvc)
POST 25,000
SEPARATION
COSTS
Sales.kgs 1200 500

PRE ? ? ?
SEPARATION
COSTS by -----.
basis

Chapter 6 a)qutty basis b)sales value at split off42


Illustrations allocating joint costs
Particulars L M N

SELLING Rs 5 10 20
PRICE/KG

OUTPUT IN KG 2500 5000 15,000

POST 10,000 5,000 15,000


SEPARATION
COSTS

PRE ?
SEPARATION
COSTS by wt.
basis20,000/=

BY
Chapter 6 a)weight basis b) nrv-basis 43
Illustrations allocating joint costs
Particulars L M N

SELLING Rs 5 10 20
PRICE/KG

OUTPUT IN KG 2500 5000 15,000

POST 10,000 5,000 15,000


SEPARATION
COSTS

PRE ? 4445 13333


SEPARATION 2222
COSTS by wt.
basis20,000/=

BY
Chapter 6 a)weight basis 44
Illustrations allocating joint costs
Particulars L M N

SELLING Rs 5 10 20
PRICE/KG

OUTPUT IN KG 2500 5000 15,000

POST 10,000 5,000 15,000


SEPARATION
COSTS

PRE 150 2700 17150


SEPARATION
COSTS by NRV.
Basis20,000/=

Chapter 6 b)sales value at split off 45


intr0duced 20000 @1.50 30,000
Labour cost 10,000
Overhead 7,000
Normal loss 10%

Scrap value Re 1/=


Completed & 17500 @? ?
transferred
There was No opening & closing stock

Cost/unit ? NL/ANL ?

Chapter 6 46
intr0duced 20000 @1.50 30,000
Labour cost 10,000
Overhead 7,000
Normal loss 10%

Scrap value Re 1/=


Completed & 17500 @? ?
transferred
There was No opening & closing stock

Cost/unit 2.50 /ANL 500*2.5=


1250

Chapter 6 47
Opening wip 900@4500/=complete
material -100% lab 60%
intr0duced 9100 @27300 27300
Labour cost 12300
Overhead 8200
Normal loss 10% of total input

Scrap value Re 3/=


Completed & 7800 @? ?
transferred
There was 1000 & closing Stock
Lab and ohs Complete
80%
Cost/unit NL/ANL

Units scrapped 1200.mat-100% l &oh 70% 48


Opening wip 900@4500/=complete
material -100% lab 60%
intr0duced 9100 @27300 27300
Labour cost 12300
Overhead 8200
Normal loss 10% of total input

Scrap value Re 3/=


Completed & 7800 @? ?
transferred
There was 1000 & closing Stock
Lab and ohs Complete
80%
Cost/unit 6.02 ANL 200/1024

Units scrapped 1200.mat-100% l &oh 70% 49


A transport company operates 4 buses between
city a & b distance 50.Kms.seating cap .of buses
40.
• The details of expenses for june 2009 are as follows:
• 1)wages of drivers cleaners etc. 4800
• 2) salaries of staff 2000
• 3)diesel oil& others 8000
• 4)rep & maintenance 1600
• 5)taxes & insurance 3200
• 6)depreciation 5200
• 7)interest & other charges 4000
• Actual capacity only 75% of seats Each bus made one
round trip /month .calculate cost / passenger -mile

Chapter 6 50
Solution: passenger –km = 4 X50 X 30 X 40
= 2,40,000.
75% * 2 = 360,000.
• Expenses for june 2009 are as follows:
• 1)wages of drivers cleaners etc. 4800
• 2) salaries of staff 2000
• 3)diesel oil& others 8000
• 4)rep & maintenance 1600
• 5)taxes & insurance 3200
• 6)depreciation 5200
• 7)interest & other charges 4000
• Total = 28,800
• Cost/passenger Km = 360,000/28800 =Re 0.08

Chapter 6 51

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