1. Chapter 11 Process costing

2. Study guide Describe the characteristics of process costing. [k]
Describe the situations where the use of process costing would be appropriate. [s]
Explain the concepts of normal and abnormal losses and abnormal gains.[k]
Calculate the cost per unit of process outputs.[s]
Prepare process accounts involving normal and abnormal losses and abnormal gains.[s]

3. Calculate and explain the concept of equivalent units.[s]
Apportion process costs between work remaining in process and transfers out of a process using the weighted average and FIFO methods. [s]
Prepare process accounts in situations where work remains incomplete. [s]
Prepare process accounts where losses and gains are identified at different stages of the process. [s]

4. 1. The basics of process costing P212
Process costing is a costing method used where it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved.

5. Features of process costing
The output of one process becomes the input to the next.
There will usually be closing work in progress which must be valued. And production in progress is an indistinguishable homogeneous mass.
There is often a loss in process
Output from production may be a single product, but there may also be a by-product (or by­products) and/or joint products.

6. 2. Losses in process costing 2.1 Loss and normal loss P214
Loss may occur in process.
Normal loss is the loss expected during a process. It is not given a cost
Costs of normal loss are spread across expected units of output. (Since normal loss is not given a cost, the cost of producing these units is borne by the 'good' units of output.)
Cost per unit (normal loss) = $NIL

7. 2.2 Abnormal losses and gains
Abnormal loss arises when actual loss is greater than expected loss. It is given a cost
Abnormal gain arises when actual loss is less than expected loss. It is given a ‘negative cost’
Abnormal losses and gains are valued at the same cost per unit as good units
Abnormal losses/gains are taken to the income statement for the period

8. 3. Losses with scrap value P220
Scrap is 'Discarded material having some value.'
Loss or spoilage may have scrap value.
The scrap value of normal loss Is usually deducted from the cost of materials.
The scrap value of abnormal loss (or abnormal gain) is usually set off against its cost, in an abnormal loss (abnormal gain) account,

9. For normal loss scrap value:
Material costs of process reduced by scrap value of normal loss
DR Scrap account
CR Process account
For abnormal loss scrap value:
Cost of abnormal loss is reduced by the scrap value of abnormal loss
CR Abnormal loss account
For abnormal gain scrap value:
Scrap value is less than expected because there is no normal loss
DR Abnormal gain account
CR Scrap account

10. 4. Losses with a disposal cost
Increase the process costs by the cost of disposing of the units of normal loss and use the resulting cost per unit to value good output and abnormal loss/gain.
The normal loss is given no value in the process account.
Include the disposal costs of normal loss on the debit side of the process account.
Include the disposal costs of abnormal loss in the abnormal loss account and hence in the transfer of the cost of abnormal loss to the income statement.

11. 5. Equivalent units P226
Units of product which have not been completed at the end of the period are known as closing work in progress (WIP)
They cannot be valued at the cost of a complete unit therefore they are valued as an equivalent unit
Equivalent units of production provide a basis for apportioning costs between closing WIP and finished goods

12. Equivalent units are notional 估计的，想象的 whole units which represent incomplete work, and which are used to apportion costs between work in process and completed output.
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. (This is not always the case in practice)
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.

13. 6. Valuing opening work in progress: FIFO method P229
There are two methods of dealing with opening work in progress – the FIFO method and the weighted average method
Under the FIFO method the assumption is that the first units completed in any period are the units of opening inventory
Spreads costs incurred in the period over work done in that period
FG（finished good）/ output （started and finished)
Opening WIP (finished)
Closing WIP (started)
So, total costs of finished output
=opening WIP +①+②

14. 7. Valuing opening work in progress: weighted average cost method
An alternative to FIFO is the weighted average cost method of inventory valuation which calculates a weighted average cost of units produced from both opening inventory and units introduced in the current period.
By this method no distinction is made between units of opening inventory and new units introduced to the process during the accounting period. The cost of opening inventory is added to costs incurred during the period, and completed units of opening inventory are each given a value of one full equivalent unit of production.

15. 小结：Process costing framework P213
Process costing is centred around 4 steps：
Step 1 - Determine output and losses
Determine expected output
Calculate losses and gains
Calculate equivalent units if there is WIP
Step 2 - Calculate cost per unit of output, losses and WIP
Calculate cost per unit or cost per equivalent unit

16. Step 3 - Calculate total cost of output, losses and WIP
If there is opening and/or closing WIP, a statement of evaluation will have to be prepared
Step 4 - Complete accounts
Complete the process account
Write up any other accounts required by question

17. Chapter roundup
Process costing is a costing method used where it is not possible to identify separate units of production or jobs, usually because of the continuous nature of the production processes involved.
Process costing is centred around four key steps. The exact work done at each step will depend on whether there are normal losses, scrap, opening and closing work in progress.
Step 1. Determine output and losses
Step 2. Calculate cost per unit of output, tosses and Wl P
Step 3. Calculate total cost of output, losses and WIP
Step 4. Complete accounts

18. Losses may occur in process
Losses may occur in process. If a certain level of loss is expected, this is known as normal loss. If losses are greater than expected, the extra loss is abnormal loss. If losses are less than expected, the difference is known as abnormal gain.
The scrap value of normal loss is usually deducted from the cost of materials.
The scrap value of abnormal loss (or abnormal gain) is usually set off against its cost, in an abnormal loss (abnormal gain) account

19. Abnormal losses and gains never affect the cost of good units of production. The scrap value of abnormal loss is not credited to the process account, and abnormal loss and gain units carry the same full cost as a good unit of production.
When units are partly completed at the end of a period (and hence there is closing work in progress), it is necessary to calculate the equivalent units of production in order to determine the cost of a completed unit.
Account can be taken of opening work in progress using either the FIFO method or the weighted average.