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Paper F2 Management Accounting

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Presentation on theme: "Paper F2 Management Accounting"— Presentation transcript:

1 Paper F2 Management Accounting
2019/1/18

2 Chapter 11 Process costing
2019/1/18

3 With/without scrap value Subsequent/previous processes
Chapter Preview Process costing Unit calculation Work in process Abnormal loss/gain Closing WIP Normal loss Opening WIP With/without scrap value FIFO Weighted average Subsequent/previous processes 2019/1/18 Ji Weili, JXUFE

4 Introduction to process costing
Used for continuous production of identical, large volumes, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product. 2019/1/18 Ji Weili, JXUFE

5 Job Order and Process Production
Job Order Systems Custom orders Heterogeneous products Low production volume High product flexibility Low to medium standardization Process Systems Repetitive operations Homogeneous products High production volume Low product flexibility High standardization 2019/1/18 Ji Weili, JXUFE

6 Job Costing and Process Costing
The Work in Process account consists of individual jobs in a job order system. The Work in Process account consists of individual jobs in a job order system. Direct Materials Direct Materials Direct Labor Direct Labor Jobs Jobs Finished Goods Finished Goods Production Overhead Production Overhead Cost per unit for each job 2019/1/18 Ji Weili, JXUFE

7 Job Costing and Process Costing
The Work in Process account consists of specific processes in a process cost system. Direct Materials Direct Labor Processes Finished Goods Production Overhead Cost per unit processed 2019/1/18 Ji Weili, JXUFE

8 Two Processes Manufacturing
Direct Materials Materials Materials Materials Process 1 Process 1 Indirect Transferred Production Overhead Production Overhead Process 2 Production Overhead Production Overhead Process 2 Finished Goods absorbed Overhead Delivered to Customers Indirect Direct Labor Labor Labor Labor 2019/1/18 Ji Weili, JXUFE

9 Introductory example – a party
a barrel holds 100 pints of beer and costs $100 How much should we charge per pint to cover our costs? $100 100 pints = $1/pint Explain that you are just trying to find the average cost of your output from the barrel ie costs / output. 2019/1/18 Ji Weili, JXUFE

10 Normal loss = 5 pints $100 $1.05/pint = 95 pints However……
Will you get the full 100 pints from your barrel?? We only actually expect to get 95 pints Normal loss = 5 pints So… what should we charge now per pint? Normal loss here could be the dregs of the barrel, spillages etc. Make the point that normal loss is expected so we can take it into account when finding the cost of our output. Remember we ultimately want to pass the cost on to our customer so we need to attribute all the cost to the stuff we are actually going to sell in the end! $100 95 pints = $1.05/pint 2019/1/18 Ji Weili, JXUFE

11 Normal loss – eg barrel dregs!
What could we do with our loss? A local gardener likes the dregs for his plants – he’ll pay 20p per pint, we could use this to reduce our costs. So… what should we charge now per pint? $100 95 pints = $1.04/pint - (20¢ x 5 pints) - scrap value 2019/1/18 Ji Weili, JXUFE

12 Learn this formula! Cont. - -
So how have we found the cost of a pint to charge our party goers? Cost per unit = - Input costs Scrap value of normal loss ________________________________ Input units - Normal loss units Learn this formula! 2019/1/18 Ji Weili, JXUFE

13 Abnormal loss = 10 pints But…… What about unexpected losses??
At the end of the party we realise that we didn’t get the 95 pints we expected we only got 85. Abnormal loss = 10 pints Its too late to charge more, we have already charged $1.04 per pint….… Mention the possibility of selling the abnormal loss to recover at least some of the loss. …its just our loss we’ll have to cover the $1.04 for each pint we didn’t sell 2019/1/18 Ji Weili, JXUFE

14 Abnormal gain = 3 pints Finally….good news
What if losses weren’t as much as we expected? At the end of the party we realise that instead of the 95 pints we were expecting we actually got 98 pints from the barrel. Abnormal gain = 3 pints We expected to scrap them for 20¢ – we actually sold them for $1.04 2019/1/18 Ji Weili, JXUFE

15 Process 1 Normal Loss Good output Inputs Normal loss
Normal loss = expected loss Good output Process 1 Inputs Normal loss 2019/1/18 Ji Weili, JXUFE

16 Process 1 Abnormal loss or gain Good output Inputs Normal loss
Abnormal loss = unexpected loss Abnormal gain = unexpected gain Good output Process 1 Inputs Normal loss Abnormal loss / gain 2019/1/18 Ji Weili, JXUFE

17 Example: abnormal losses and gains
Input Actual output & normal output Actual loss=input – actual output Normal loss=input * rate of normal loss Normal(expected) output=input – normal loss Abnormal loss or gain=actual loss – normal loss Cost per unit=total cost / normal output 2019/1/18 Ji Weili, JXUFE

18 Note: Normal loss is not given a cost.
Cost per unit Input costs Cost per unit = ____________________________ ____ Input units - Normal loss units Note: Normal loss is not given a cost. 2019/1/18 Ji Weili, JXUFE

19 Accounting for scrap– a reduction in costs
Scrap value of normal loss Scrap value of abnormal loss Reduce the material costs of the process Reduce the cost of abnormal loss 2019/1/18 Ji Weili, JXUFE

20 Cost per unit Input costs -Scrap value of NL Cost per unit = _________________________ _______ Input units - Normal loss units Note: The scrap value of Normal loss is deducted from the cost of material. 2019/1/18 Ji Weili, JXUFE

21 Disposal cost of abnormal loss Disposal cost of normal loss
Increase costs of the process Increase the cost of abnormal loss 2019/1/18 Ji Weili, JXUFE

22 Recap – Process costing
1 Units calculation Input units = Good output + NL +/(-) AL/(AG) 2 Set up the process account and complete as far as possible 3 Calculate cost per unit: CPU = Input cost - scrap proceeds from normal loss Input units – normal loss units 4 Valuations & transfer to process account 2019/1/18 Ji Weili, JXUFE

23 Input costs Introduction to WIP Cost per unit = Input units
-Scrap value of NL Cost per unit = Input costs ____________________________ ____ - Scrap value of normal loss ________________________________ Cost per unit = Input units Normal loss units Input units - Normal loss units BUT….What if units aren’t finished? MAY HAVE….. 2019/1/18 Ji Weili, JXUFE

24 Valuing closing WIP(期末在产品）
Costs are accumulated for a period by process or department. At the end of a period, we must consider how to allocate the costs between finished output and partly completed closing stock. Unit cost is computed by dividing the accumulated costs by the number of equivalent units produced in the period. 2019/1/18 Ji Weili, JXUFE

25 We can’t give them the same value
Introduction to WIP Finished unit WIP units We can’t give them the same value 2019/1/18 Ji Weili, JXUFE

26 cost per equivalent unit
Equivalent units Output from process includes: ½ unit 1 whole unit + 2 equivalent whole unit cost per equivalent unit 2019/1/18 Ji Weili, JXUFE

27 Question For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 2019/1/18 Ji Weili, JXUFE

28 Question For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units 2019/1/18 Ji Weili, JXUFE

29 Cost Per Equivalent Unit
= Cost incurred in the period Equivalent units for the period 2019/1/18 Ji Weili, JXUFE

30 Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 2019/1/18 Ji Weili, JXUFE

31 Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit 2019/1/18 Ji Weili, JXUFE

32 Equivalent Units 100% of Material Equivalent units may be different for material and labor and overhead at a process. Process 1 25% of Labor and Overhead At completion of the process, material is 100% complete, but labor and overhead are only 25% complete. 2019/1/18 Ji Weili, JXUFE

33 Previous processes Process I Process II Process 1 is another input
OWIP 100% complete for Process 1 See next slide for format 2019/1/18 Ji Weili, JXUFE

34 Valuing Opening WIP (期初在产品）
Cost of opening stock Cost of finished goods Cost incurred in the period Cost of closing stock 2019/1/18 Ji Weili, JXUFE

35 Valuing Opening WIP: FIFO
Divide finished goods into two parts: opening stock, completed first & work started and finished in current period. Equivalent units= Opening stock equivalent units to complete work in current period + Fully worked units (started and finished in current period) Closing stock equivalent units 2019/1/18 Ji Weili, JXUFE

36 Example: WIP and FIFO P234-6.2
Cost per EU= Cost incurred ÷ equivalent units 2019/1/18 Ji Weili, JXUFE

37 Example: WIP and FIFO P234-6.2
Cost of finished goods=cost of opening WIP + cost per equivalent unit × E-units Cost of closing WIP=cost per equivalent unit × E-units 2019/1/18 Ji Weili, JXUFE

38 Valuing Opening WIP: Weighted average method
There is no distinction made between units of opening stock and new units introduced to the process in current period. Equivalent units= Output to finished goods + Closing stock equivalent units 2019/1/18 Ji Weili, JXUFE

39 Example: WAC P Cost per equivalent unit=(cost of opening stock + cost incurred) ÷ equivalent units 2019/1/18 Ji Weili, JXUFE

40 Cost of finished goods= cost per equivalent unit × E-units
Example: WAC P Cost of finished goods= cost per equivalent unit × E-units Cost of closing WIP=cost per equivalent unit × E-units 2019/1/18 Ji Weili, JXUFE

41 Accounting Flow of Process costing
Abnormal Gain Process Account Abnormal Loss units $ M L O AG units $ FG NL AL y x x y Profit and Loss Account x y 2019/1/18 Ji Weili, JXUFE

42 Accounting Flow of Process costing
Abnormal Gain Process Account Abnormal Loss units $ M L O AG units $ FG NL AL y’ x’ X Y Scrap Value Account Of AL Of NL Of AG Profit and Loss Account X-x’ Y-y’ 2019/1/18 Ji Weili, JXUFE

43 Summary and question approach
1 Units calculation Opening WIP + Input = Good output + NL +/(-) AL/(AG) + Closing WIP 2 Set up the process account and complete as far as possible 3 Complete statement of equivalent units 4 Calculate cost per equivalent unit 5 Valuations & transfer to process account 2019/1/18 Ji Weili, JXUFE

44 ARE YOU STAYING ABOVE WATER?
End of Chapter 11 ARE YOU STAYING ABOVE WATER? 2019/1/18 Ji Weili, JXUFE

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