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PROCESS COSTING. 1.Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. 2.Process.

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Presentation on theme: "PROCESS COSTING. 1.Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. 2.Process."— Presentation transcript:

1 PROCESS COSTING

2 1.Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. 2.Process costing does not assign costs to each unit of output because each unit is identical. Instead, average unit costs are computed.

3 Process Costing Outcomes Allocate the proceeds from the sales of scrap to the correct accounts Account for transfers from previous processes in ‘completed and WIP inventories’ Use short-cut to allocate losses Suitability of process costing in service org. Batch or operation costing Process a joint/by-product or sell-it.

4 A comparison of job & process costing

5

6 Example 5.1 During the month the company input into the production process 12 000 litres at a cost of £120 000. There was no opening or closing inventories and all output was fully complete.

7 Example 5.1 Input = 12000 litres at a cost of £120000 Normal loss = 1/6 of input Actual output = 9000 litres CPU = £120 000/Expected output (10 000 litres) = £ 12 Cost of completed production = £108 000 (9000 ×£12) Cost of abnormal loss = £12000 (1000 × £12) Input Cost Expected outcome

8 Normal and abnormal losses Normal losses cannot be avoided – Cost is absorbed by good production. Abnormal losses are avoidable – Cost is recorded separately – Treated as a period cost – Removed from process costs, recorded separately as a loss in the abnormal loss account – Not carried forward as a future expense

9 Abnormal losses in process with no scrap value Process account UnitsUnit Cost (£) (£)UnitsUnit Cost (£) (£) Input cost 1200010120 000Normal Loss2 000-- Output to finished goods inventory 900012108 000 Abnormal loss10001212 000 120 000

10 Normal Losses in process with a scrap value In case 4: Actual output = Expected output  No abnormal loss/gain ONLY normal loss Loss units have a scrap value of £5 per litre Input Cost less £SCRAP value of normal loss Expected outcome £120 000 – (2000 x £5) 10 000 litres = £11 =

11 Normal losses in process with a scrap value Process account UnitsUnit Cost (£) (£)UnitsUnit Cost (£) (£) Input cost 1200010120 000Normal Loss2 000-10 000 Output to finished goods inventory 10 00011110 000 120 000 Scrap value is credited against the normal loss entry in the process account

12 Abnormal losses in process with a scrap value In case 5: Actual output <> Expected output Actual output = 9 000 l  normal loss= 2000 & abnormal loss of 1000 Loss units have a scrap value of £5 per litre What is the objective of process costing? – Calculate the cost per unit for expected output!  Only take scrap value of the normal loss into account

13 Abnormal losses in process with a scrap value Process account UnitsUnit Cost (£) (£)UnitsUnit Cost (£) (£) Input cost 1200010120 000Normal Loss2 000-10 000 Output to finished goods inventory 9 0001199 000 Abnormal Loss1 0001111 000 120 000 Scrap value is NOT credited against the abnormal loss entry in the process account

14 Abnormal losses in process with a scrap value Abnormal loss account (£) Process account11 000Cash sale for units scrapped5 000 Profit and Loss account 6 000 11 000

15 Abnormal gains with a scrap value In case 6: Actual output > Expected output Actual output = 11 000 l  normal loss= 1000 & abnormal gain of 1000 Gain units have a scrap value of £5 per litre What is the objective of process costing? – Calculate the cost per unit for expected output!  Only take scrap value of the normal loss into account

16 Abnormal gains with a scrap value The net cost incurred in case 6 in the process is £ 115 000 = (£120000 input cost – 1000l spoilt with a sales value of £5 per litre) Amount transferred to finished goods 121 000 Less: abnormal gain(1000 x £11)11 000 less lost sales of spoiled units 5 000 6 000 115 000 Cost per unit remains at £11/u and is not affected by the abnormal gain.

17 Abnormal gains in process with a scrap value Process account UnitsUnit Cost (£) (£)UnitsUnit Cost (£) (£) Input cost1200010120 000Normal Loss2 000-10 000 Abnormal gain 10001111 000Output to finished goods inventory 11 00011121 000 131 000

18 Abnormal gains in process with a scrap value Abnormal gain account (£) Normal loss account5 000Process account11 000 Profit and Loss account6 000 11 000 Normal Loss (Income due from normal losses) (£) Process account10 000Abnormal gain account5 000 Cash from spoiled units 5 000 10 000

19 Work in progress partially complete Equivalent production & closing WIP Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g. 8000 units complete & 2000 partly completed) Must calculate equivalent production of the partially completed units – estimate the %age complete. Assume 50% complete  2000 x 50% = 1000). Cost per unit (CPU) = 20 Example Opening WIP Nil Units introduced into the process 10 000 Units completed and transferred to next process 8 000 Closing WIP (2000 @ 50% complete) 1 000

20 Work in progress partially complete Equivalent production & closing WIP Example continued… Opening WIP Units introduced into the process Material costs (8 000 x 20)160 000 Closing WIP (2000 x 50% x 20) 20 000 180 000

21 Different degrees of completion Not all elements may have reached the same degree of completion. Material – entered at start of process  will be fully complete Labour – added uniformly throughout the process

22 P111_Example 5.2 ExampleProcess A Process B Opening WIP Nil Units introduced into the process 14 000 10 000 Units completed and transferred to next process 10 000 9 000 Closing WIP (50% complete) 4 000 1 000 Costs of production transferred from process A £270 000 Materials cost (introduced at start) £210 000 £108 000 Conversion cost £144 000 £171 000 Materials are added at the start of the process for Process A and at the end of the process for Process B and conversion costs are added uniformly throughout both processes.

23 P111_Example 5.2 Calculation of cost per unit for Process A Cost Element Total costCompleted units WIP equivalent units Total Equivalent units Cost per unit Materials210 00010 0004 00014 000R15 / u Conversion cost 144 00010 000(50%) 2 00012 000R12 / u 354 000R27 / unit Value of work-in progress:84 000 Materials (4000x15)60 000 Conversion cost (2000x12)24 000 Completed units(10000 x 27)270 000 Total production costs354 000

24 Example 5.2 Calculation of cost per unit for Process B Cost ElementTotal costComplete d units WIP equivalent units Total Equivalent units Cost per unit Previous process cost270 0009 0001 00010 000R27 / u Materials108 0009 000- R12 / u Conversion cost171 0009 000(50%) 5009 500R18 / u 549 000R57 / unit Value of work-in progress:36 000 Previous process cost27 000 Materials -- Conversion cost (500x18)9 000 Completed units(9000 x 57)513 000 Total production costs549 000

25 P113_Example 5.3 Process XProcess Y Opening Work in progress6 000 (60% converted)2 000 (80% converted) Materials72 00012 000 Conversion cost45 90038 400 Units started in this period16 00018 000 Closing WIP4000 (75% complete)8 000 units (50% complete) Materials added192 00060 000 Conversion cost225 000259 200

26 Example 5.3 Calculation of cost using weighted average method - Process X Cost ElementOpenin g WIP Current cost Total cost Comple ted units WIP equival ent units Total Equival ent units Cost per unit Materials72 000192 000264 00018 0004 00022 000R12/u Conversion cost45 900225 000270 90018 0003 00021 000R12.90/u 117 900534 900R24.90/ unit Value of work-in progress:86 700 Previous process cost Materials – (4000 x 12)48 000 Conversion cost (3000x12.90)38 700 Completed units(18000 x 24.90)448 200 Total production costs534 900

27 Example 5.3 Calculation of cost using weighted average method - Process X InputOutputRaw materialsConversion (units)Details(units) % % 6 000Opening WIP 16 000Put into production Completed from: Opening WIP6 0002 40060 Current production12 00018 00010015 600100 Completed & Trfed18 000 0 Closing WIP4 000 3 00075 22 000 21 000

28 Cost ElementOpenin g WIP Current cost Total cost Comple ted units WIP equival ent units Total Equival ent units Cost per unit Previous process cost91 800448 200540 00012 0008 00020 000R27/u Materials12 00060 00072 00012 000- R6/u Conversion cost38 400259 200297 60012 0008000x.5 4000 16 000R18.60/ u 142 200909 600R51.60/ unit Value of work-in progress:290 400 Previous process cost(8000x27)216 000 Materials – (0 x 12)0 Conversion cost (4000x18.60)74 400 Completed units(12000 x 51.60)619 200 Total production costs909 600 Example 5.3 - Process Y

29 P113_Example 5.3 Process XProcess Y Opening Work in progress6 000 (60% converted)2 000 (80% converted) Materials72 00012 000 Conversion cost45 90038 400 Units started in this period16 00018 000 Closing WIP4000 (75% complete)8 000 units (50% complete) Materials added192 00060 000 Conversion cost225 000259 200

30 Process X- First in first out Pg 115 Cost ElementCurrent cost Completed units less opening WIP equivalent units Closing units WIP equivalent units Total Equival ent units Cost per unit Materials192 00012000 (18000-6000) 4 00016 000R12/u Conversion cost225 00014400 (18000-3600) 3 00017 400R12.931/u 417 000R24.931/unit Value of work-in progress: Opening WIP117 900 Materials – (12000 x 12)144 000 Conversion cost (14400x12.931)186 207448 107 Closing WIP: Materials – (4000 x 12)48 000 Conversion cost (3000x12.931)38 79386 793 Total production costs534 900

31 Process Y- First in first out Cost ElementCurrent cost Completed units less opening WIP equivalent units Closing units WIP equivalent units Total Equival ent units Cost per unit Previous process448 10710 000 (12000-2000) 8 00018 000R24.8948 Materials60 00010 000 (12000-2000) -10 000R6/u Conversion cost259 20010 400 (12000-1600) 4 00014 400R18/u 417 000R48.8948/unit Cost of completed production Opening WIP142 200 Previous process (10000x 24.8948)248 948 Materials – (10000 x 6)60 000 Conversion cost (10400x18)187 200638 348 Closing WIP: Previous process199 159 Materials- Conversion cost (4000x1872 000271 159 Total production costs534 900

32 Process Y- First in first out Value of work-in progress: Opening WIP142 200 Previous process (10 000x24.8948)248 948 Materials – (10 000 x 6)144 000 Conversion cost (10 400x18)187 200638 348 Closing WIP: Previous process (8 000x24.8948)199 159 Materials- Conversion cost (4000x18)72 000271 159 Total production costs909 507

33 Ex5A.1Losses in process & partially completed units InputOutputRaw materialsConversion (units)Details(units) % % Total cost50003400 0Opening WIP 1 000Put into production Completed from: Opening WIP0 Current production600 100600100 Completed & Trfed600 100 Normal loss100 Abnormal loss Closing WIP300 15050 1 000 850 Cost per unit54 P120

34 Value of work-in progress: Materials – (300 x 5)1 500 Conversion cost (150 x 4)6002100 Completed units (600x9)5400 Normal loss (100x9)9006300 Total production costs8 400 Cost ElementTotal CostComplete d units Normal loss Closing units WIP equivalen t units Total Equival ent units Cost per unit Materials500060010030010005 Conversion cost34006001001508504 R9/unit Ex5A.1Losses in process & partially completed units

35 InputOutputRaw materialsConversion (units)Details(units) % % Total cost940050003400 0Opening WIP 1 000Put into production Completed from: Opening WIP0 Current production600 100600100 Completed & Trfed600 100 Normal loss Abnormal loss Closing WIP300 15050 900 750 Cost per unit10.08885.5554.5333 Ex5A.1Losses in process & partially completed units

36 Value of work-in progress: Materials – (300 x 5.555)1 666.65 Conversion cost (150 x 4.533)6802346.65 Completed units (600x10.0888)6053.35 Total production costs8400.00 Cost ElementTotal Cost Complet ed units Closing units WIP equivale nt units Total Equival ent units Cost per unit Materials50006003009005.5555 Conversion cost34006001507504.5333 R10.0888 /unit Ex5A.1Losses in process & partially completed units

37 Cost ElementTotal Cost Compl eted units Abnor mal loss Closing units WIP equivale nt units Total Equiva lent units Cost per unit Previous process cost10 0006005025090011.1111 Materials8 000600502509008.8888 Conversion cost2 900600251507753.742 R23.74/unit Ex5A.2 Losses in process & partially completed units

38 Example 5A.2 Value of work-in progress:5560 Previous process cost : 250 x 11.112 777 Materials: 250 x 8.882 222 Conversion: 150 x 3.742561 Completed units: 600 x 23.7414246 Abnormal loss1094 Previous process cost : 50 x 11.11556 Materials: 50 x 8.88444 Conversion: 25 x 3.74294 Total production costs20 900

39 Different degrees of completion Not all elements may have reached the same degree of completion. Material – entered at start of process  will be fully complete Labour – added uniformly throughout the process

40 Drury 5.14 Calculation of cost using weighted average method - Process X InputOutputRaw materialsConversion (units)Details(units) % % 2 000Opening WIP 24 000Put into production Completed from: Opening WIP20001 20060 Current production17 500 10017 500100 Completed & Trfed19 50018 700 Normal loss2 400 Abnormal loss1 100 1001 100100 Closing WIP3 000 1 35045 26 00021 60021 150

41 P125…Drury 5.18 Step 1…calculate equivalent units InputOutputRaw materialsLabourOverheads (units)Details(units) % % 800Opening WIP 1800Put into production Completed from: Opening WIP800 Current production 1120 Completed & Trfed 1920 100 1920 100 Normal loss180 Abnormal loss Closing WIP500 100 450 90 200 40 2600 242023702120

42 P125…Drury 5.18 Step 1…calculate equivalent units Cost Element Openin g WIP Cost Current cost Total CostComple ted units Closing units WIP equivale nt units Total Equiva lent units Cost per unit Materials98000387800485 80019205002420 A (484000/2420) R200 Labour4600027632032232019204502370 (322320/2370) R136 Overheads760014928015688019202002120 (156880/2120) R74 151600813400R410/unit A Total cost = current cost – (normal loss units x scrap value) = 485 800 – (180 x 10) = 485 800 – 1800 = 484 000 Value of work-in progress: Materials Labour Overheads Completed units(18000 x 24.90) Scrap value from normal loss sales1800 Total production costs965000

43 Quantity statement Physical UnitsEquivalent Units InputOutput Raw Materials Conversion Cost (units)Details(units)units% % 1200Put into production Completed & transferred900 Normal loss200 Abnormal loss100 1200

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