F2:Management Accounting

2 Designed to give you knowledge and application of: Section D: Cost accounting techniques D1. Accounting for materials D2. Accounting for labour D3. Accounting for overheads D4. Marginal and absorption costing D5. Job and batch costing D6. Process costing D7. Service/operation costing

3 D6: Process costing Learning outcomes  Describe the characteristics of process costing. [1]  Describe the situations where the use of process costing would be appropriate. [1]  Explain the concepts of normal and abnormal losses & gains. [1]  Calculate the cost per unit of process outputs. [1]  Calculate & explain the concept of equivalent units. [1]  Apportion process costs between work remaining in process & transfers out of a process, using the weighted average & FIFO method. [2]  Prepare process accounts in situations where work remains incomplete. [2]  Prepare process accounts where losses & gains are identified at different stages of the process. [1]  Distinguish between by-products and joint products. [1]  Value by-products and joint products at the point of separation. [1]  Prepare process accounts in situations where by-products and/ or joint products occur. [2]

4 Process costing is the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes Process costing applies where Production is of a number of identical units Mass production on a continuous basis Difficult to establish identity of individual jobs as compared to entire production Production involves number of processes and output of one process forms input of the next process Describe the characteristics of process costing Describe the situations where the use of process costing would be appropriate

5 Process loss / gains: difference between input quantity of raw materials and output quantity of finished goods. Input material Normal / Actual output NL Actual output NL AL Actual output Actual loss AG (AL < NL) Actual output process Case 1 – NL occurs Case 2 – AL occurs Case 3 – AG occurs Normal output = Input units – Normal loss in units Explain the concepts of normal and abnormal losses and abnormal gains Refer to journal entries on page D6.12

6 Actual output900 units980 units Less: normal output950 units Abnormal loss(50) units Abnormal gain30 units The input to a process is 1,000 units and the normal loss is 5%. For the following situations find out abnormal loss or gain.  Total output at the end of the process is 900 units.  Total output at the end of the process is 980 units. Normal output = Input – Normal loss 5% = 1,000 units – 50 units = 950 units Example

7 Value of abnormal loss = Normal cost of normal output x Units of abnormal loss Normal output = Units input - Normal loss in units Normal cost = Normal cost of process – Realisable value of normal loss if any Calculate cost per unit of process output Total cost – Scrap value normal loss Cost per unit = Total input quantity – Normal loss quantity

8 Steps to calculate equivalent units Ascertain the extent of work completed on the work in process units with regard to materials, labour & overheads Multiply the percentage of work completed by the number of units of work in process Calculate the cost per equivalent unit by dividing the total material cost and conversion cost by the number of equivalent units Calculate the total cost of WIP units and finished units by multiplying the units for each cost by the cost per equivalent units. Calculate & explain the concept of equivalent units

9 Apportion process costs between work remaining in process & transfers out of a process using weighted average and FIFO methods First in first out method Units entering the process first are the first to be completed Calculation of equivalent units and valuation of work in process under FIFO method Equivalent units calculated separately for Opening WIP Units introduced and completed during the process Refer to Example on page D6.21

10 Separate equivalent units Opening WIP Units input and completed Closing WIP Only additional costs incurred are considered Actual costs incurred are considered Actual costs to the extent incurred are considered Costs / units valuation

11 Equivalent units under weighted average method Separate equivalent units Completed and transferred Closing WIP Costs of opening WIP and costs incurred in the process are considered Actual costs to the extent incurred are considered Costs / units valuation

12 Joint products are two or more products separated in processing, each having a sufficiently high saleable value to merit recognition as a main product. A by-product is the output of some value produced incidentally in manufacturing something else (main product). Valuation of joint products only up to split-off point on basis of Ratio of relative sales value of products By-products valued at net realisable value (NRV) Estimated sales value – Costs of completion & disposal Ratio of volume / weight of products produced Distinguish between by-products and joint products Refer to table on page D6.35

13 RECAP  Describe the characteristics of process costing?  Describe the situations where the use of process costing would be appropriate?  Explain the concepts of normal and abnormal losses & gains?  Calculate the cost per unit of process outputs? Calculate & explain the concept of equivalent units?  Apportion process costs between work remaining in process & transfers out of a process using the weighted average & FIFO methods?  Prepare process accounts in situations where work remains incomplete?  Prepare process accounts where losses & gains are identified at different stages of the process?  Distinguish between by-products and joint products?  Value by-products and joint products at the point of separation?  Prepare process accounts in situations where by-products and/ or joint products occur?