F2-10 Process Costing

Session 10
Process Costing
FOCUS
This session covers the following content from the ACCA Study Guide.
B. Cost Accounting Techniques

3. Cost accounting methods
b) Process costing
i) Describe the characteristics of process costing.
ii) Describe the situations where the use of process costing would
be appropriate.
iii) Explain the concepts of normal and abnormal losses and
abnormal gains.
iv) Calculate the cost per unit of process outputs.
v) Prepare process accounts involving normal and abnormal
losses and abnormal gains.
vi) Calculate and explain the concept of equivalent units.
vii) Apportion process costs between work remaining in process
and transfers out of a process using the weighted average and
FIFO methods.
viii) Prepare process accounts in situations where work remains
incomplete.
ix) Prepare process accounts where losses and gains are identified
at different stages of the process.
x) Distinguish between by-products and joint products.
xi) Value by-products and joint products at the point of separation.
xii) Prepare process accounts in situations where by-products and/
or joint products occur. (Situations involving work-in-process
and losses in the same process are excluded.)
Session 10 Guidance
Read section 1 and appreciate that this is a type of batch costing applied to a continuous production
process. Note the specific costing problems that arise.
Read section 2, understand the key points concerning losses and the accounting entries, and work
Examples 1 and 2.
Work through Illustration 1 before attempting Example 4, which shows how CPEU can be used if
losses arise during a production process (s.4).
Learn the concepts of effective units in section 3 and cost per equivalent unit (CPEU), which are
necessary to solve work-in-process (WIP) problems.
(continued on next page)
F2 Management Accounting Becker Professional Education | ACCA Study System
Sadia sadia Afzal - gentledove004@gmail.com

VISUAL OVERVIEW
Objective: To describe the operation of process costing methods.
COSTING
RESOURCE
OUTPUTS
JOB BATCH PROCESS SERVICE

COSTING COSTING COSTING COSTING
(Session 9) (Session 9) • When Used (Session 9)
• Mechanics
• Potential
Problems
LOSSES WORK-IN-PROCESS JOINT AND

• Normal Loss • Terminology BY-PRODUCTS
• Abnormal Loss/ • Cost per Effective • Terminology
Gain Unit • Accounting for
• Cost per Unit • Opening WIP Flow Joint Product
Assumption Costs
• Process
Accounts • Question • Accounting for
Approach By-products
• Losses Account
• Comparison of
Methods
ABNORMAL LOSSES
OR GAINS ON
UNFINISHED ITEMS
Session 10 Guidance
Work through Example 3, ensuring you know the different approaches for FIFO and weighted
average assumptions.
Read section 5 on joint products and by-products, and attempt Example 5.
Note the advantages and disadvantages of the different bases of apportionment (s.5.2.2).
Appreciate that accounting for by-products at net realisable value (NRV) is to treat them as
a normal loss.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 10-1

Session 10 • Process Costing F2 Management Accounting
1 Process Costing
Process costing— a costing method for determining the total unit

cost of the output of a continuous production process in which a
product passes through a sequence of operations.
1.1 When Used

< Where more or less identical end products are produced
through a series of production stages.
< In organisations producing many units of the same product
during a period.
< Most appropriate in the food processing, chemical, petroleum,
paint and textile industries.
1.2 Mechanics
An average cost per unit is calculated for a specific period of time
(usually a month).
Average Total costs of production during the period

=
cost/unit Number of units produced (i.e. output) in the period
Process costing, therefore, concerns:

< Ascertainment and accumulation of costs (input) Questions will not be
set involving both
< Measurement of output losses and WIP in the
< Calculation of unit cost. same process and
period. The ACCA
1.3 Potential Problems examiner has also
said that she does not
expect to combine
For example, such items as evaporation
Losses: process costing with
(liquids), material wastage and "off-cuts".
under/over absorption
Work in process Where units are only partly completed at the and that standard
(WIP): end and/or beginning of a period. process costing is not
Joint products and Where two or more types of products are examinable.
by-products: produced in a single process.
2 Losses
2.1 Normal Loss

A normal loss is a loss that is expected to arise under efficient
(normal) operating conditions (usually given as a percentage of
units input).
< It is a loss that is inherent in the production process and *This is wholly
cannot be eliminated. consistent with the
underlying valuation
< A normal loss is uncontrollable/unavoidable. concept in IAS 2
< Therefore, it is regarded as part of the normal cost Inventory.
of production and its cost is absorbed into completed
production.*
10-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 10 • Process Costing
2.2 Abnormal Loss/Gain

Abnormal losses and gains are not expected to occur.
< For example, these can arise from:
 improper mixing of ingredients ⇒ losses > normal;
 use of inferior material;
 incorrect cutting of cloth;
 unexpected "shrinkage" including pilferage (i.e. theft).
< Abnormal losses and gains are controllable and avoidable.
Therefore they are not included in process costs but reported
separately (to facilitate investigation).
< If actual loss > Normal loss ⇒ Abnormal loss
< If actual loss < Normal loss ⇒ Abnormal gain.
2.3 Cost per Unit

< Cost per unit is always calculated based on:
 Costs initially charged to the process.
 Output under efficient operating (i.e. normal) conditions.
Scrap—discarded
Total production cost incurred
Cost per unit = material having a
Expected good output recovery value which
may be disposed
< If the normally lost units have a scrap value, this value is of (e.g. sold) with
used to reduce the costs of the process that are "spread" or without further
treatment.
over the expected good output:
Cost per Total cost incurred − Expected scrap value (i.e. of normal loss)
=
unit Expected (i.e. normal) good production
< Expected good production also can be calculated as actual

production plus abnormal loss (or minus abnormal gain).

Example 1 Cost per Unit
Units received from previous process 4,200 @ $22 each

Costs added: Materials $63,160
Labour and overhead $44,444
Normal spoilage is 7% of units input.

Spoilage is detected at the end of the process, and spoiled units are sold for $16 each.
Required:
Calculate the cost per unit.
Solution
Cost per unit =
2.4 Process Accounts

2.4.1 Accounting Entries
1. Costs are debited to the process accounts (a/c) as they are
incurred.
2. Any proceeds expected from a normal loss are a reduction
in process cost. Hence, normal losses are credited to the process
a/c at their expected scrap value (thereby reducing
the production costs to be spread over production units).
3. Actual output is credited to the process a/c at the cost per
unit (as calculated above).
4. Units on the process a/c are then balanced by considering
abnormal losses or gains:
If an abnormal loss has arisen: Cr Abnormal loss (at normal cost/unit)*
If an abnormal gain has arisen: Dr Abnormal gain (at normal cost/unit)
*Consider that one unit of abnormal loss was supposed to be good

production. Therefore its cost to the business is the normal cost
(of expected good production).

2.4.2 Pro Forma
Process a/c*
Units $ Units $
*Abnormal gains/
losses must be costed
 Costs incurred  Normal loss x x at the normal CPU (i.e.
Materials x x  Actual output x x of good production) in
the Process a/c.
Labour x  Abnormal loss x x
Overhead x
 Abnormal gain x x
x x x x
2.5 Losses Account

Any proceeds credited to losses a/c are only in respect of actual loss
(if there is an abnormal gain there will be less actual loss to sell).
2.5.1 Abnormal Loss
Losses a/c
Units $ Units $
Normal loss Scrap proceeds

(@ scrap value) x x received for
actual loss x x
Abnormal loss Loss written off to
*The balancing figure
(@ normal cost income statement
can be proved as
per unit) x x (balancing figure)* x = Number of units
x x of abnormal loss ×
(normal cost−normal
x x loss proceeds)
2.5.2 Abnormal Gain
Losses a/c
Units $ Units $
Normal loss Abnormal gains

(@ scrap value) x x (@ normal cost/unit) x x
Gains to income Scrap proceeds received
statement for actual loss x x
(balancing figure) x
x x x x

Example 2 Losses/Gains
Required:
For the process information in Example 1, draw up the process ledger account and
the losses ledger account if actual output is:
(a) 3,850 units
(b) 3,950 units
Solution
(i) Output of 3,850 units
Process a/c
Units $ Units $
Costs incurred
Previous process 4,200 92,400 Normal loss 294
Material 63,160 3,850
Labour/overhead 44,444 Abnormal loss
4,200 200,004
Losses a/c*
Units $ Units $
*Normal loss entries are always independent of the actual

production and so will be the same in part (b).
(ii) Output of 3,950 units
Process a/c
Units $ Units $
Costs incurred
Previous process 4,200 92,400
Material 63,160
Labour/overhead 44,444 Normal loss 4,704
Actual output 3,950
Losses a/c
Units $ Units $
Normal loss 294 4,704

3 Work-in-Process (WIP)
3.1 Terminology
Opening WIP: units which were not finished at the end of the
previous period (therefore unfinished at beginning of the current
period) for a given process. These must already have some costs
allocated to them relating to the work done in the previous period.
Closing WIP: units started in the given process in the current
period end, but not completed at the end of the current period.
These remain in the process and will be completed in the next
period.
Finished Units: units finished during the current period in
the given process. These will be made up of:
< opening WIP now completed—units in opening WIP finished
during the current period; and
< units started and finished—units completely produced
this period.
3.2 Cost per Effective Unit (CPEU)

Cost per effective unit (also called "cost per equivalent unit")
is calculated as follows:
Costs incurred during the period
Cost per equivalent unit =
Equivalent units produced in the period
CPEU provides a solution to the two complications of:

1. Partial units; and
2. Partial completion to different degrees for different costs.
3.2.1 Partial Units

Because not all units have been 100% completed in the period,
it is unfair to allocate the costs equally across all units.
Costs are allocated to units according to the work put into
them. This is measured in terms of effective/equivalent units
(EUs) of work.
For example, closing WIP is composed of:
100 units, each of which is 60% complete = 60 EU
80 units, each of which is 50% complete = 40 EU
3.2.2 Different Stages of Completion for Different Input Costs

If closing WIP is made up of units that are at different stages
of completion for different input costs, then it is necessary to
calculate a cost per equivalent unit (CPEU) for each type of
input cost.
For example, 100 units of closing WIP might be:
50% complete with respect to material = 50 EU
40% complete with respect to labour = 40 EU

3.3 Opening WIP Flow Assumption

When there is opening WIP, an assumption must be made about
the "flow" of those units. That they will be the first items to be
completed is the "first in, first out" assumption. The alternative The assumed flow
assumption gives rise to the weighted average cost method. will be given in the
question.
3.3.1 First In, First Out (FIFO) Method
If a "first in, first out" flow of physical units is assumed
(e.g. as on a production line):
< Any previous period costs (= value of opening WIP) must
be wholly attributed to the cost of units completed in the
current period (i.e. opening WIP completed). These costs
are therefore excluded from the calculation of CPEU for
the current period.
< CPEU is therefore only calculated in respect of current period
costs for current period production.
3.3.2 Weighted Average Cost (WAC) Method

If it is assumed that opening WIP is "merged" with units
introduced in the current period (e.g. as in liquid processes),
completed opening WIP cannot be separately identified.
In this case:
< It is necessary to add the opening WIP cost (previous period
cost) to the costs incurred in the current period. They are
therefore included in the calculation of CPEU.
< Separately identifiable output is units completed in the period
and closing WIP (i.e. units not completed in the period).
3.4 Question Approach*
*When considering production costs incurred, it is essential that you

think of and treat "units received/transfers from a previous process"
in the same way as a component bought-in from an outside supplier
is treated. Transfers between processes must be completed with
respect to the process that they have left. They have nothing to do
with opening/closing work-in-process, which is incomplete work.
Step 1 Establish the physical flow of total units. If required, prepare a process
a/c (excluding the value of transfers out/finished goods and closing WIP).
Opening WIP + Units received = Units completed + Closing WIP
Assuming FIFO:
Units completed = Opening WIP completed and Units started and finished
Step 2 In a table, calculate EUs of work done for each type of input (for current
period only if assuming FIFO).
Step 3 Calculate CPEU for the period(s) for each input cost to
be apportioned.
Step 4 Value the completed units and closing WIP started according to the EUs
of work done. For FIFO, distinguish between opening WIP completed (do
not forget to add in previous period costs) and units started and finished.
These values may then be included to complete the process a/c.

Example 3 WIP
The following information relates to production in February.
At 1 February
Opening WIP, 500 units
80% complete as regards materials
40% complete as regards labour and overhead
$
Costs: From previous process 22,000
Materials 21,180
Labour and overhead 12,480
55,660
During February
Units received from previous process: 4,500 @ $54 each
$
Costs added:
Materials 287,300
Labour and overhead 367,200
At 28 February
Closing WIP, 600 units
70% complete as regards materials
20% complete as regards labour and overhead
Required:
(a) Determine the physical flow of the units.
(b) Calculate the cost of completed units and the value of closing WIP and produce
the process account using the:
(i) FIFO method
(ii) Weighted average cost method
Solution
(a) Physical flow of the units (Step 1)
(b) Cost of completed units and the value of closing WIP and completed process account
(i) FIFO method
Step 2—Effective Units Step 3

Completed Started and Closing Total EUs Costs CPEU
Opening WIP Finished WIP (current)
$ $
Previous process
Materials added
Labour and overhead

Example 3 WIP (continued)
Step 4—Cost of completed units

Working $ $
Started and finished
Finishing opening WIP
Materials
Labour, etc
Opening WIP costs b/fwd

(previous period)
Value of closing WIP

Working $
Previous process
Materials
Labour, etc
Process a/c
Units $ Units $
Balance b/fwd Finished goods
Previous process Balance c/fwd
Materials
Labour, etc

Example 3 WIP (continued)
Step 2 Step 3
Completed Closing Total EUs Costs Costs Costs CPEU
WIP b/fwd (current) ("pooled")
$ $ $ $
Previous
process
Materials
added
Labour and
overhead
Cost of completed units =

Working $
Previous process
Materials
Labour, etc
Process a/c
Units $ Units $
Balance b/fwd Finished goods
Previous process Balance c/fwd
Materials
Labour, etc

3.5 Comparison of Methods

FIFO Method Weighted Average Cost Method
Assumes opening WIP remains Assumes opening WIP will be merged
separately identifiable and will be with units introduced in the current
completed before new production period (therefore cannot separately
(started in period) is completed. identify).
B/fwd cost of opening WIP is therefore B/fwd costs need to be analysed, by
wholly attributable to completed type, to be combined with current
opening WIP (and no analysis needed). period costs.
Calculate CPEU based on: Calculate (average) CPEU based on:
current period costs; costs b/fwd + current period costs
current period production (EU).
EU b/fwd + EU in current period
The cost of completed units is the
combination of the cost of opening The cost of completed units is the units
WIP brought forward, plus the cost to completed times the CPEU.
complete the opening WIP plus the
cost of the units started and finished
units in the period.
4 Abnormal Losses or Gains on Unfinished Items

So far it has been assumed, in dealing with losses (s.2), that
abnormal losses or gains are identified when a process is 100%
complete (i.e. when the units were expected to be good output).
However, losses may be identified at earlier stages in a process.
For example, inspection (e.g. for quality control purposes) may
arise when items are 100% complete with respect to materials,
but unfinished with respect to labour and conversion costs.*
< "Spoilage" or loss that is identified at an earlier stage will not
be completed.
< Dealing with the problem of abnormal losses or gains on
unfinished items can be overcome by applying CPEU to
each input cost:
Input cost incurred

Cost per equivalent unit =
Actual units of good output ± EU of abnormal loss/(gain)
*EUs of abnormal loss will be different for each input with a different
stage of completion.
< The value of good production and abnormal losses/

(gains) is then calculated based on the number of
equivalent units × CPEU.

Illustration 1 Unfinished Items
A process has expected losses of 10% of units input. Units are inspected when 100% of materials
have been included, but only 30% of conversion costs have been incurred, and it is at this stage
that any defective units are identified. The scrap value of losses is $0.10 per unit.
During April:
100,000 units were input into the process.
15,000 were rejected at the inspection stage.
Total material costs were $451,000.
Costs of conversion were $173,000.
There was no opening or closing WIP.
Required:
Calculate the value of production and abnormal losses arising for April and produce the
process account.
Solution
The number of abnormal loss units is 5,000, which is calculated as follows:
Abnormal Units Units put Expected

= − ×
loss units rejected in process loss %
= 15,000−(100,000 × 10%) = 5,000
Step 1 The EU and CPEU are calculated as follows:
% Completed
Completed Abnormal Loss Abnormal Total Costs
Units Units Loss EUs EU Incurred CPEU
$ $
Materials 85,000 100% 5,000 90,000 450,000 (W) 5.00
Conversion 85,000 30% 1,500 86,500 173,000 2.00
7.00
Working $
Material costs incurred 451,000
Less: Scrap value of normal loss
(10% × 100,000 @ $0.10) (1,000)
Total production cost 450,000
Step 3 Valuation of completed goods and abnormal loss:

Completed units (85,000 × $7.00) $595,000
Abnormal loss ((5,000 × $5.00) + (1,500 × 2.00)) $28,000

Step 4
Process a/c
Units $ Units $
Costs incurred
Material 100,000 451,000 Normal loss 10,000 1,000
Conversion costs 173,000 Complete output 85,000 595,000
Abnormal loss 5,000 28,000
100,000 624,000 4,200 624,000

Example 4 Abnormal Losses or Gains

on Unfinished Items
Goods passing through Process 3 are inspected when 90% of the Process 3 materials have been
input and 45% of the labour and other conversion costs have been input. On average, 90% of
units pass the test.
During September:
12,000 units were transferred in (from Process 2) with a unit cost of $3 each.
Materials added during the period cost $11,880.
Labour and conversion costs were $17,010.
Actual output was 11,000 units.
There was no opening or closing WIP.
Required:
Calculate the value of production and abnormal loss/(gain) arising during September
and produce the process account.
Solution
The EU and CPEU are calculated as follows:
% Completed
$ $
Process 2
Materials
Conversion
Working
Units
Expected output
Actual output
Abnormal loss/(gain)
Valuation of completed goods and abnormal loss/(gain)
Completed units:
Abnormal gain:
Process A/C
Units $ Units $
Costs incurred Normal loss
Process 2 Complete output
Materials Rounding
Labour and
conversion costs

5 Joint Products and By-products
Joint products and by-products arise where the manufacture of one

product makes inevitable the manufacture of other products.
5.1 Terminology
Joint products have significant relative sales value.
A by-product is produced in conjunction with one or more main
products but has a small relative sales value. (So it is unlikely to
influence the decision to produce main products.)
Products produced are not separately identifiable until a certain
stage in the production process—the split-off point (SOP).*
Costs incurred before the SOP are joint or pre-separation costs
and must be apportioned between the products produced.
*A process which
5.2 Accounting for Joint Product Costs produces joint
products may or may
The issue with joint products is how to apportion their joint costs. not also produce a
This can be likened to apportioning overhead costs to different by-product.
cost centres (Session 7) in that different bases may be used.
5.2.1 Bases
Pre-separation costs may be divided between joint products on
a number of bases:
< Physical quantity of output (e.g. litres, kilos).
< Market value (i.e. sales value) at SOP.
< Net realisable value at SOP (final sales value less any post-
separation (i.e. further process) cost).
< Final sales value of output (after any further processing).
After-separation products may be sold immediately or may be
processed further. Any post-separation costs obviously will be
allocated directly to the product for which they are incurred.
It is important to appreciate that because the apportionment of joint

costs is similar to the apportionment of fixed overheads, it will be
completely irrelevant for decision-making purposes. Consider, for
example, that it is impossible to stop production of one joint product,
without ceasing production of all joint products.

Example 5 Joint Product Costing
Dot, a chemical company, produces three joint products in one of its processes. After separation, each
joint product undergoes further processing. Senior management is eager to establish the profitability
of each product and requests that you prepare a report for the monthly management meeting.
The following information is available from its costing department for the month of May.
(1) Joint product costs for the month total $19,000.
(2) Product data is as follows:
Product
D O T
Sales price per kg $2.50 $5.00 $10.00
Estimated sales value per kg
at separation point $0.50 $2.75 $4.00
Output in kgs 5,000 2,000 3,000
Further process cost $10,000 $5,000 $15,000
Required:
Prepare a statement showing the estimated profit or loss for each product and in total,
using the following methods of allocating joint costs:
(a) Weight of output
(b) Sales value at split-off point
(c) Net realisable value
Note: Process loss can be ignored.

Example 5 Joint Product Costing (continued)
Solution
(a) Weight of output method:
Total weight of output =
Joint costs per kg =
D O T Total
$ $ $ $
Sales (Price/kg × kgs) 12,500 10,000 30,000 52,500
Post-separation costs
Joint costs
Profit/(loss)
(b) Sales value at split-off point:

$
5,000 × 0.50 = 2,500
2,000 × 2.75 = 5,500
3,000 × 4.00 = 12,000
20,000
D O T Total
$ $ $ $
Sales 12,500 10,000 30,000 52,500
Post-separation costs
Joint costs
Profit/(loss)
(c) Net realisable value:

$
D O T Total
$ $ $ $
Sales 12,500 10,000 30,000 52,500
Post-separation costs 10,000 5,000 15,000 30,000
Joint costs 19,000
49,000
Profit/(loss) 3,500

5.2.2 Comparison of Apportionment Bases
Method Advantages Disadvantages

Physical measures Simple apportionment Some industries do
(e.g. in coal processing) not have common
physical measures of
output (e.g. solids/
liquids/gases)
Does not take into
account individual product
profitability
May give rise to "loss-
making" products
Sales value @ SOP Proportional to products' May be no market value

(e.g. in petro-chemicals) ability to "bear costs" at SOP
(therefore fairer) Further process costs
may give rise to "losses
Net realisable value Estimates sales value Numerous subsequent

@ SOP further processing
Closest approximation stages (e.g. in oil
to revenue-generating refining) can make
power of joint products calculations too complex
5.3 Accounting for By-products

By-products can be accounted for using a net realisable value
approach or as miscellaneous income at the point of sale.
Net Realisable Value (NRV) Miscellaneous Income
By-products are valued at NRV (i.e. as though Income recognised at point

it were a normal loss) at SOP. Any income is of sale and added to main
netted off against pre-separation costs (i.e. product revenue
Cr Process a/c). (i.e. Cr Income Statement).
Appropriate where by-products are of Appropriate where value

noticeable value. is uncertain or small.

Example 6 By-products
A process produces 100 kg of by-product Alpha. Alpha can be sold at $5 per kg. At the end of
March there are 30 kgs in inventory.
Required:
Show the accounting entries in the product account if by-product income is recognised
at the point of:
(a) Production
(b) Sale
Solution
(a) Production
By-product Alpha
Kg $ Kg $
(b) Sale
By-product Alpha
Kg $ Kg $

Summary
< Process costing is used when items pass through a series of processes. It is used to calculate
the cumulative cost of items at the end of each process.
< For losses, the key points are:
• normal losses are a cost of manufacture;
• abnormal losses are an overhead cost; and
• cost per unit is based on expected good output.
< In processes involving losses, the value per unit of output is equal to total costs of inputs less
scrap value of normal loss (if any), spread over the expected number of units of good output.
< Normal losses are valued at scrap value per unit.
< Abnormal gains and losses are costed at the same amount per unit as good output.
< In some processes, there may be WIP at the beginning and/or end of a period. In this case,
it is necessary to calculate the equivalent units (EU) of production during the period.
< CPEU is calculated by dividing the cost of each input by the number of equivalent units of
production for that input.
< In calculating EUs, two methods are used. The FIFO method assumes that opening WIP is
completed first. The alternative, the weighted average method, makes no such assumption.
< Some processes may result in more than one output. Joint products are significant, whereas
by-products have little (if any) value. Deciding on whether a product is a joint product or a
by-product can be subjective.
< In allocating process costs between joint products, several methods can be used: volumes
of output, market values at split-off point or net realisable values at split-off point are the
most common.
< Scrap value of by-products can be applied either to reduce the costs of the process, or simply
credited to the income statement as "other income".

Session 10
Session 10 Quiz
Estimated time: 15 minutes
1. State the THREE elements of cost accounting that concern process costing. (1.2)
2. State what is meant by work-in-process (WIP). (1.3 and 3.1)
3. True or false? A normal loss is unavoidable. (2.1)
4. True or false? Cost per unit is the total production cost (less any scrap value) divided by the
normal or expected good production. (2.3)
5. State which method (FIFO or WAC) would be appropriate to the manufacture of:
(a) vehicles on a production line (3)
(b) paint (3)
6. True or false? If an abnormal loss or gain is identified for unfinished items, cost per
equivalent unit (CPEU) cannot be used because there is no equivalent unit (EU). (4)
7. True or false? A process which generates a by-product must also generate joint products. (5.1)
8. Suggest THREE bases for apportioning pre-separation costs of joint products. (5.2.1)
9. State ONE advantages and TWO disadvantages of using physical measures of

apportionment. (5.2.2)
10. State TWO methods of accounting for by-products. (5.3)
Study Question Bank

Estimated time: 95 minutes
Priority Estimated Time Completed
Q34 Chemical X 15 minutes
Q37 Insulation blocks 30 minutes
Q41 Furnival 25 minutes
Q44 MCQs 25 minutes

Additional
Q35 Needles
Q36 Phoenix
Q38 Oasis
Q39 Fairfax
Q40 Pine
Q42 Four joint products
Q43 Corcoran

EXAMPLE SOLUTIONS
Solution 1—Cost per Unit
Costs incurred−Scrap value of normal loss

=
Expected good output
((4,200 × $22) + $63,160 + $44,444)−(0.07 × 4,200 × $16)

Cost per unit =
0.93 × 4,200
$200,004−4,704
= = $50
3,906

Solution 2—Losses/Gains
(i) Output of 3,850 units
Process Account
Units $ Units $
Previous process 4,200 92,400 (7% × 4,200) 294 4,704
Material 63,160 Actual output (@ $50) 3,850 192,500
Labour/overhead 44,444 Abnormal loss (@ $50) 56 2,800
4,200 200,004 4,200 200,004
Losses Account
Units $ Units $
Normal loss 294 4,704 Actual scrap proceeds 350 5,600
Abnormal loss 56 2,800 (350 × 16)
Loss written off to
income statement
(balancing figure) - 1,904
350 7,504 350 7,504
(ii) Output of 3,950 unit

Process Account
Units $ Units $
Previous process 4,200 92,400 (7% × 4,200) 294 4,704
Material 63,160 Actual output (@ $50) 3,950 197,500
Labour/overhead 44,444
Abnormal gain 44 2,200

(@ $50) 4,244 202,204 4,244 202,204
Losses Account
Units $ Units $
Normal loss 294 4,704 Abnormal gain 44 2,200
Gain to income Scrap proceeds
statement (250 × 16) 250 4,000
(balancing figure) - 1,496 294 6,200
294 6,200

Solution 3—WIP
No losses must be assumed because: (1) the question is about WIP (opening WIP and
losses will not be examined in the same process in the same period) and (2) to assume
otherwise would be to "invent" data not given in the question.
(a) Physical flow of the units (Step 1)
500 + 4,500 = 4,400 + 600
Assuming FIFO: 4,400 completed are 500 from opening WIP and 3,900 started and finished
(b) Cost of completed units and the value of closing WIP and completed
process account
(i) FIFO method
Step 2—Effective Units Step 3
Completed Started and Closing Total EUs Costs CPEU
Opening WIP Finished WIP (current)
$ $
0% 3,900 100% 600 4,500 243,000 54
Previous process
20% 100 3,900 70% 420 4,420 287,300 65
Materials added
60% 300 3,900 20% 120 4,320 367,200 85
Labour and overhead
897,500 204

Solution 3—WIP (continued)
Working $ $
Started and finished 3,900 × $204 795,600
Finishing opening WIP
Materials 100 × $65 6,500
Labour, etc 300 × $85 25,500
32,000
Opening WIP costs brought forward 55,660 87,660
(previous period)
883,260
Working $
Previous process 600 × $54 32,400
Materials 420 × $65 27,300
Labour, etc 120 × $85 10,200
69,900
Process Account
Units $ Units $
Balance b/fwd 500 55,660 Finished goods 4,400 883,260
Previous process 4,500 243,000 Balance c/fwd 600 69,900
Materials - 287,300
Labour, etc - 367,200
5,000 953,160 5,000 953,160

Solution 3—WIP (continued)
Step 2 Step 3
Completed Closing Total EUs Costs Costs Costs CPEU
WIP b/fwd (current) ("pooled")
$ $ $ $
Previous 4,400 100% 600 5,000 22,000 243,000 265,000 53
process
Materials 4,400 70% 420 4,820 21,180 287,300 308,480 64

added
Labour and 4,400 20% 120 4,520 12,480 367,200 379,680 84

overhead
55,660 897,500 953,160 201

Cost of completed units = Units completed × CPEU = 4,400 × $201 = $884,400
$
Previous process 600 × $53 31,800
Materials 420 × $64 26,880
Labour, etc 120 × $84 10,080
68,760
Process a/c
Units $ Units $
Balance b/fwd 500 55,660 Finished goods 4,400 884,400
Previous process 4,500 243,000 Balance c/fwd 600 68,760
Materials - 287,300
Labour, etc - 367,200
5,000 953,160 5,000 953,160

Solution 4—Abnormal Losses or Gains on Unfinished Items
The EU and CPEU are calculated as follows:
% Completed
$ $
Process 2 11,000 (200) (W) 10,800 36,000 3.333
Materials 11,000 90% (180) 10,820 11,880 1.098
Conversion 11,000 45% (90) 10,910 17,010 1.559
5.990
Working
Units
Expected output (12,000 × 90%) 10,800
Actual output (11,000)
Abnormal loss/(gain) (200)
Valuation of completed goods and abnormal loss/(gain)

Completed units: (11,000 units × $5.99) $65,890
Abnormal gain: ((200 × $3.333) + (180 × $1.098) + (90 × $1.559)) $1,005
Process Account
Units $ Units $
Costs incurred Normal loss 1,200 0
Process 2 12,000 36,000 Complete output 11,000 65,890
Materials 11,880 Rounding 5
Labour and
conversion costs 17,010
Abnormal gain 200 1,005
12,200 65,895 12,200 65,895

Solution 5—Joint Product Costing
(a) Weight of output method:
Total weight of output = 10,000 kg
19,000
Joint costs per kg = = $1.90
10,000
D O T Total
$ $ $ $
Sales (Price/kg × kgs) 12,500 10,000 30,000 52,500
Joint costs (output in kgs × $1.90) 9,500 3,800 5,700 19,000
19,500 8,800 20,700 49,000
Profit/(loss) (7,000) 1,200 9,300 3,500
(b) Sales value at split-off point:

$
5,000 × 0.50 = 2,500
2,000 × 2.75 = 5,500
3,000 × 4.00 = 12,000
20,000
Joint costs must be apportioned in above ratio.
D O T Total
$ $ $ $
Sales 12,500 10,000 30,000 52,500
Joint costs 2,375 5,225 11,400 19,000
12,375 10,225 26,400 49,000
Profit/(loss) 125 (225) 3,600 3,500
(c) Net realisable value:

Net realisable value = Final sales value − further process costs
(Output × final sales price)−further process costs $
D 12,500−10,000 = 2,500
O 10,000−5,000 = 5,000
T 30,000−15,000 = 15,000
22,500
D O T Total
$ $ $ $
Sales 12,500 10,000 30,000 52,500
Joint costs (based on NRV) 2,111 4,222 12,667 19,000
12,111 9,222 27,667 49,000
Profit/(loss) 389 778 2,333 3,500

Solution 6—By-products
(a) Production
By-product Alpha
Kg $ Kg $
Process account 100 500 Cash 70 350
500 Balance carried
forward 30 150
Balance brought 500
forward 30 150
(b) Sale
By-product Alpha
Kg $ Kg $
Profit & Loss account 70 350 Cash 70 350
350 350

F2-10 Process Costing

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F2-10 Process Costing

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Session 10

B. Cost Accounting Techniques

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JOB BATCH PROCESS SERVICE

LOSSES WORK-IN-PROCESS JOINT AND

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Process costing— a costing method for determining the total unit

1.1 When Used

Average Total costs of production during the period

Process costing, therefore, concerns:

2.1 Normal Loss

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2.2 Abnormal Loss/Gain

2.3 Cost per Unit

< Expected good production also can be calculated as actual

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Example 1 Cost per Unit

Units received from previous process 4,200 @ $22 each

Normal spoilage is 7% of units input.

Cost per unit =

2.4 Process Accounts

*Consider that one unit of abnormal loss was supposed to be good

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2.4.2 Pro Forma

2.5 Losses Account

2.5.1 Abnormal Loss

Normal loss Scrap proceeds

2.5.2 Abnormal Gain

Normal loss Abnormal gains

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Material 63,160 3,850

Labour/overhead 44,444 Abnormal loss

*Normal loss entries are always independent of the actual

(ii) Output of 3,950 units

Actual output 3,950

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3.2 Cost per Effective Unit (CPEU)

CPEU provides a solution to the two complications of:

3.2.1 Partial Units

3.2.2 Different Stages of Completion for Different Input Costs

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3.3 Opening WIP Flow Assumption

3.3.2 Weighted Average Cost (WAC) Method

3.4 Question Approach*

*When considering production costs incurred, it is essential that you

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The following information relates to production in February.

Opening WIP + Units received = Units completed + Closing WIP

Step 2—Effective Units Step 3

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Example 3 WIP (continued)

Step 4—Cost of completed units

Opening WIP costs b/fwd

Value of closing WIP

Previous process Balance c/fwd