Process Costing Notes 1page PDF

FBS 220
PROCESS COSTING NOTES

1. INTRODUCTION
A process costing system is a costing system that is used to accumulate and reflect the
manufacturing costs of identical products which are manufactured in bulk, for example canned foods,
paper, etc. Process costing systems are therefore used in industries such as the chemical,
petroleum, textile, paint and food canning industries where products pass through the same process
in the course of manufacture.
An average cost per unit for a product is calculated by dividing the total manufacturing cost of a
process for a particular period by the number of units manufactured during that period. This cost per
unit is the cost price of the final product which is then used to cost inventory and cost of sales.
Process costing systems depend on the collection of two kinds of data, namely –
 the total manufacturing cost for each separate production process for a certain period
 the number of units manufactured during the corresponding period for the various processes
2. COMPARISON BETWEEN JOB COSTING AND PROCESS COSTING
Job costing and process costing are similar in that both costing systems have the same basic
approach, namely to assign material, labour and overhead cost to products and to calculate a cost
per unit. Both costing systems also make use of the same manufacturing accounts for raw materials,
overheads, work in process and finished goods.
However, there are a few differences between the two costing systems:
Job costing Process costing

Many different jobs are worked on during a A single product is produced either on a
period with each having unique requirements. continuous basis or for long periods of time and
all the units of the product are identical.
Manufacturing costs are accumulated per job. The manufacturing costs are accumulated by
department.
The job cost sheet is the key document to The department production report is the key
record and accumulate costs. document where the total cost as well as the
cost per department is accumulated.
The differences between the two systems can be further illustrated through the T-accounts for job
costing and process costing.
1
Job costing:
JOB 1
Materials Transfer to Finished Goods
Labour
Overheads
JOB 2
Materials Transfer to Finished Goods
Labour
Overheads
Process costing:
DEPARTMENT 1
Materials Transfer to Process 2
Labour
Overheads
DEPARTMENT 2
Received from Process 1 Transfer to Process 3
Materials
Labour
Overheads
DEPARTMENT 3
Received from Process 2 Transfer to Finished Goods
Materials
Labour
Overheads
3. AN ILLUSTRATION OF PROCESS COSTING
Let’s use an example of the process that potato chips goes through to illustrate how a process
costing system works.
Department 1: Preparation
Potatoes are the raw material The potatoes are peeled. The potatoes are cut into
for chips and are sourced from chips.
a farmer.
2
Department 2: Baking
The raw potato chips are baked The baked chips are drained of
in vegetable oil. excess oil.
Department 3: Packaging
The drained chips are packaged. The packaged chips are put into
boxes and sealed before going to
the warehouse.
Thereafter the chips are transported and marketed to the public.
WITH PROCESS COSTING, THE ISSUE AT HAND IS ESSENTIALLY TO ESTABLISH THE

COSTS OF THE FOLLOWING:
WORK-IN-PROCESS ACCOUNT
Complete Units
Production costs incurred Incomplete Units
Abnormal losses
The work-in-process account shows you how much it costs to produce units. In the process account
we are trying to give a value to complete units (finished goods ready for sale), incomplete units (work-
in-process) and abnormal losses. The cost of normal losses is absorbed by the complete units as
this is spoilage that is expected to occur during the process.
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4. SPOILED UNITS (LOSSES OR WASTAGE)
What are normal and abnormal losses?
In almost all production processes mistakes are made, defective outputs are produced and
resources are wasted. The cost of these defective products and wasted resources cannot be
recovered by rework or recycling and is referred to as losses.
4.1 Normal losses
Normal losses are spoilage that is considered to be

 inherent in the production process
 occur under even efficient operating conditions
 are uncontrollable
 absorbed by production (completed units and in some cases closing inventory work in process).
Examples of normal losses include evaporation in a chemical process or waste materials in the textile
industry.
4.2 Abnormal losses
In contrast, abnormal losses are

 not inherent in the production process
 occur due to inefficient operating conditions, e.g. material is cut along incorrect pattern,
overheating of rubber melting process etc.
 controllable
 treated as period cost i.e. not absorbed by completed production.
Abnormal losses can, for example, be caused by using the wrong or poor quality raw materials in
the manufacturing process or by labourers doing poor work.
4.3 Costing losses
You may ask why it is necessary to calculate the costs of normal losses. Estimating the cost of losses
highlights the cost of wasted resources which provides useful information for the manager, his
superiors and the quality manager to help them focus their attention on the cost of wasted resources.
With normal losses, the manufacturing costs are absorbed by the units that did meet the quality
requirements. The cost of abnormal losses (in other words wastage that is more than what is
regarded as normal), are considered to be controllable and has to be calculated separately and
shown as a loss in the income statement.
Losses usually take place during a process, but may also occur at the beginning or end of a process.
The loss is identified at an inspection point and it is therefore important to indicate whether the
products in the process have already moved past the inspection point or not.
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5. AN EXAMPLE:
Chipco Manufacturers produces deep fried, crispy chips. The following facts and figures are
applicable to Department 1, where potatoes are prepared for baking:
Department 1
R
Opening inventory work-in-process:
Raw Material 32 355
Conversion costs 13 133
Current costs:
Raw Material 173 260
Physical units:
Opening inventory work-in-process 1 400
Current inputs 7 100
Closing inventory work-in-process 1 850
Completed in the department ?
Stages of completion:
Opening inventory of work-in-process:
Conversion costs 50%
Closing inventory of work-in-process:
Conversion costs 60%
In Department 1, raw materials (potatoes) are added at the beginning of the process. Normal losses
are caused at this time when the potatoes are peeled. Chipco expects a normal loss of 5% of the
total input. Conversion costs are added evenly during the process.
STEP 1:
Draw a line diagram to further our understanding of the information relating to the process which
takes place in Department 1:
Raw Material Opening inventory Closing inventory

(added at the start (50% complete for (60% complete for
of the process) conversion costs) conversion costs)
5
5.1 Example: FIFO
Work In Process: Department 1
units R units R
Opening inventory balance Transferred out
-Raw Materials Opening inventory
-Conversion Started and Completed
Current input Normal losses

-Raw Materials
-Conversion Closing inventory balance
Allocation of current period costs

Raw Materials Conversion Costs
Units TOTAL Equiv units RM Equiv units Convers
Opening inventory units

Started & Completed
Closing inventory units
Cost per Equivalent Unit
5.2 Example: Weighted Average

units R units R

-Raw Materials

Opening inventory units

Started & Completed
Closing inventory units
6
5.1 USING THE FIRST-IN-FIRST-OUT METHOD OF INVENTORY VALUATION
STEP 2: Draft a T-account for Work-In-Process: Department 1 and:

 Record the total units to account for on the debit side.
 Determine any losses or gains in the process (5% of 7 100 units = 355 units lost).
 Balance and reconcile the output in units on the credit side to the units to account for on
the debit side.

units R units R
Opening inventory balance 1 400 Transferred out 6 295
Current input 7 100 Normal losses 355
Closing inventory balance 1 850
8 500 8 500
STEP 3: Expand the Work-In-Process: Department 1 account by adding the rand values of opening
inventory and the current period’s input:

units R units R
Opening inventory balance 1 400 45 488 Transferred out 6 295
-Raw Materials 32 355
-Conversion 13 133 Normal losses 355
Current input 293 211

-Raw Materials 7 100 173 260
-Conversion 119 951 Closing inventory balance 1 850
8 500 338 699 8 500
STEP 4: Carry over the total rand value (R338 699) of the input on the debit side to the output on
the credit side, as a T-account has to balance. Indicate the rand value of normal losses as zero,
since this cost has to be absorbed by the units of completed production (output).

units R units R
Opening inventory balance 1 400 45 488 Transferred out 6 295 ?
-Conversion 13 133
Current input 293 211 Normal losses 355 0

-Conversion 119 951 Closing inventory balance 1 850 ?
8 500 338 699 8 500 338 699
7
Take note that the R338 699 was spent in different time periods. R45 488 was spent in the previous
period and carried over from the previous period’s Work-In-Process: Department 1 account.
R293 211 was spent in the department during the current period. When the FIFO valuation method
is used, the opening inventory units are completed and transferred out first and only then can the
current units be started on and completed. To accommodate this issue, the Work-In-Process:
Department 1 account is adjusted as follows:

units R units R
-Raw Materials 32 355 Opening inventory 1 400 ?
-Conversion 13 133 Started and Completed 4 895 ?

8 500 338 699 8 500 338 699
STEP 5: Costs now have to be allocated to the completed production units and closing inventory
units. However, all 8 500 units are not the same. The 6 295 units transferred out have been
completed 100% in relation to raw materials as well as conversion costs. The 1 850 closing inventory
units have been 100% completed in terms of raw materials, but only 60% completed in terms of
conversion costs. To accommodate this issue, we make use of the concept costs per equivalent
unit. The cost per equivalent unit is best calculated in a schedule with steps a) to e):
STEP 5a: Transfer the output unit categories (credit side of the account) with their units to the
equivalent unit schedule:

Opening inventory units 1 400

Started & Completed 4 895
Closing inventory units 1 850
8 145
8
STEP 5b: Show the total raw material and conversion costs to be allocated to completed and closing
inventory units. When using the FIFO method to value inventory, the work-in-process cost of R45
488 are ignored at first – this cost is added at a later stage to the cost of opening units only. Only
the current period cost of R293 211 has to be allocated (split) to output units:

Opening inventory units 1 400

Started & Completed 4 895
8 145 173 260 119 951
STEP 5c: Determine the equivalent units per output category:

 Opening inventory units received all their raw materials in the previous period and are
therefore 100% completed in terms of raw material. No additional raw material is required
for the current period. Therefore the equivalent units for raw materials are 0 (0% x 1
400). However, these units require 50% of conversion costs to be added in the current
period to be completed. Therefore equivalent units for conversion are 700 (50% x 1 400).
 Started and completed units are only now put into production and therefore require
100% of raw materials to be added in the current period. Equivalent units for raw
materials are therefore 4 895 (100% x 4 895). Units started and completed also require
100% of conversion costs in order to be completed in the current period. Equivalent units
for conversion costs are 4 895 (100% x 4 895).
 The closing inventory units require 100% of raw materials to be added in the current
period. Equivalent units for raw materials are therefore 1 850 (100% x 1 850). Conversion
costs of 60% are added in the current period. Equivalent units for conversion costs are
therefore 1 110 (60% x 1 850).

Opening inventory units 1 400 0 700

Started & Completed 4 895 4 895 4 895
Closing inventory units 1 850 1 850 1 110
8 145 6 745 173 260 6 705 119 951
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STEP 5d: Calculate the cost per equivalent unit for raw materials as well as conversion costs (Total
Cost ÷ Equivalent units).

Opening units 1 400 0 700

Started & Completed 4 895 4 895 4 895
8 145 6 745 173 260 6 705 119 951
Cost per Equivalent Unit R25.6872 R17.8898
STEP 5e: Calculate the cost per category, namely raw materials and conversion costs (equivalent
units x cost per equivalent unit) and total the schedule.

units TOTAL Equiv units RM Equiv units Convers
Opening inventory units 1 400 12 523 0 0 700 12 523

Started & Completed 4 895 213 309 4 895 125 739 4 895 87 570
Closing inventory units 1 850 67 379 1 850 47 521 1 110 19 858
8 145 293 211 6 745 173 260 6 705 119 951
STEP 6: We are now ready to wrap up the Work-In-Process: Department 1 account by giving costs
to output units:
 The cost of the opening inventory units is the total of R12 523 (from the equivalent unit
schedule) and R45 488 (costs carried over from the previous period).
 The R213 309 cost of units started and completed comes from the equivalent unit
schedule.
 The R67 379 cost of the closing inventory units comes from the equivalent unit schedule.

units R Units R
Opening inventory balance 1 400 45 488 Transferred out 6 295 271 320
-Raw Materials 32 355 Opening inventory 1 400 58 011
-Conversion 13 133 Started and Completed 4 895 213 309

-Conversion 119 951 Closing inventory balance 1 850 67 379
8 500 338 699 8 500 338 699
10
5.2 USING THE WEIGHTED AVERAGE METHOD OF INVENTORY VALUATION
Steps 1 to 3 as explained above are the same for both first-in-first-out and weighted average. Only
steps 4, 5 and 6 of the approach explained above are influenced:
The weighted average method of inventory valuation implies that the opening inventory units and
costs are no longer kept separately, but that these units and their costs are averaged out.
STEP 4: Carry over the total R-value of the input (debit) side to the output (credit) side as these has
to balance. Indicate the R-value of normal losses as zero. This cost is absorbed by the units of
completed production (output).

units R units R
-Conversion 13 133

8 500 338 699 8 500 338 699
Take note that the R338 699 was spent in different time periods. R45 488 was spent in the
previous period and R293 211 was spent on the process during the current period. With the
weighted average method these costs will be categorised together and the Work in Process:
Department 1 account will remain as above.
STEP 5: Costs have to be allocated to completed production units and closing balance units.
However, all 8 500 units are not the same. The 6 295 units transferred out received all their raw
materials and conversion and are therefore 100% complete in relation to raw materials as well as
conversion costs. The 1 850 closing inventory units received all their raw materials and are therefore
100% complete in terms of raw materials, but received only 60% of conversion costs.
To accommodate this issue, we make use of the concept of costs per equivalent unit. The cost per
equivalent unit is best calculated in a schedule with steps a) to e):
STEP 5a: Transfer the output unit categories (credit side of the Work in Process: Department 1
account) with their units to the equivalent unit schedule:
Allocation of total costs

Transferred out 6 295

8 145
STEP 5b: Determine the total raw material and conversion costs to be allocated to the completed
and closing inventory units. For the weighted average method of inventory valuation, the opening
inventory cost of R45 488 needs to be added to the current period’s cost of R293 211 for each cost
category separately. Thus, the raw materials cost to be allocated becomes R205 615 (R32 355 +
R173 260). The conversion cost to be allocated becomes R133 084 (R13 133 + R 119 951).
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Transferred out 6 295

8 500 205 615 133 084
STEP 5c: Determine the equivalent units per output category:

 Transferred out units all require 100% raw materials to be added in the current period.
Equivalent units for raw materials are 6 295 (100% x 6 295). It also requires 100%
conversion costs to be added in the current period. Equivalent units for conversion costs
are therefore 6 295 (100% x 6 295).
 Closing inventory units require 100% raw materials to be added in the current period.
Equivalent units for raw materials are 1 850 (100% x 1 850). Conversion costs of 60%
are added to the units in the current period. Equivalent units for conversion costs are
therefore 1 110 (60% x 1 850).

Transferred out 6 295 6 295 6 295

8 145 8 145 205 615 7 405 133 084
STEP 5d: Calculate the cost per equivalent unit for raw materials as well as conversion costs (Total
cost ÷ Equivalent units).

Transferred out 6 295 6 295 6 295

8 145 8 145 205 615 7 405 133 084
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STEP 5e: Calculate the allocated cost per category, namely raw materials and conversion costs
(equivalent units x cost per equivalent unit) and total the schedule.

Transferred out 6 295 272 048 6 295 158 913 6 295 113 135
Closing inventory units 1 850 66 651 1 850 46 702 1 110 19 949
8 145 338 699 8 145 205 615 7 405 133 084
STEP 6: We are now ready to wrap up the Work in Process: Department 1 account by costing the
output units:
 The cost of the transferred out units comes from the equivalent unit schedule only.
 The cost of the closing inventory units comes from the equivalent unit schedule only.

units R units R
-Conversion 13 133

8 500 338 699 8 500 338 699
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6 EXAMPLE WHERE DEPARTMENT 1 CARRIES OVER INTO DEPARTMENT 2
Units transferred out can either be:

 Transferred out to finished goods, or
 Transferred out to the next department.
Only from the final process in the production line will goods be transferred to finished goods.
The approach followed in Examples 5 and 6 remains the same, except that the second department
will have an additional cost category for Previous Department costs which will be handled in exactly
the same manner as the raw material and conversion cost categories:
The illustrative example expanded for two departments follows:
Chipco Manufacturers produces deep fried, crisp chips. The following facts and figures are
applicable to Department 1 where potatoes are prepared for baking and Department 2 where the
chips are baked:
Department 1 Department 2
R R
Opening work-in-process:
Previous process costs 38 694
Raw Material 32 355 0
Conversion costs 13 133 2 820
Current costs:
Raw Material 173 260 28 482
Physical units:
Opening work-in-process 1 400 1 020
Current inputs 7 100 ?
Closing work-in-process 1 850 1 450
Completed in department ? ?
Stages of completion:
Opening balance of work-in-process:
Conversion costs 50% 30%
Closing balance of work-in-process
In Department 1, raw materials are added at the beginning of the process. Normal losses are caused
at this time when the potatoes are peeled. Chipco expects a normal loss of 5% of the total input for
the process that takes place in department 1.
In Department 2, Chipco expects a normal loss of 5% of the new units put into the process. Material
for the process that takes place in Department 2 is added at a 40% stage of completion.
Conversion costs are added evenly during the process.
First assume that a first-in-first-out method of inventory valuation is in use. Then do the example
again, assuming a weighted average method of inventory valuation is in use.
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First-in-first-out
Once again, the suggested approach and answer for the first of the two departments remains
unchanged. The transferred out costs from Department 1 represents the current period input for
previous process costs for Department 2:

units R units R
-Previous Dept - Opening
- Raw Material - Started & completed
-Conversion

-Previous Dept
- Raw Material
Allocation of Current Period Costs: Department 2

Dept 1 Raw Materials Conversion Cost
Equiv Equiv Equiv
units TOTAL units Dept 1 units RM units Convers
Transferred out
- Opening balance
- Started & completed
Closing inventory
15
Weighted average
The suggested approach and answer for the first of the two departments remains unchanged. The
transferred out costs from Department 1 represents the current period input for the previous process
costs for Department 2:

units R units R
Opening inventory balance
-Previous Dept
- Raw Material Transferred out
-Conversion

-Previous Dept
- Raw Material
Allocation of Total Costs: Department 2

Equiv Equiv Equiv
Transferred to FG
Closing inventory
16
First-in-first-out
Once again, the suggested approach and answer for the first of the two departments remains
unchanged. The transferred out costs from Department 1 represents the current period input for
previous process costs for Department 2:

units R units R
-Previous Dept 38 694 - Opening 1 020 52 927
- Raw Material 0 - Started & completed 4 530 270 042
-Conversion 2 820

-Previous Dept 6 295 271 320
- Raw Material 28 482
7 315 404 981 7 315 404 981
Allocation of Current Period Costs: Department 2

Equi Equi Equi
v v v
Transferred
out 5 550
- Opening
balance 1 020 11 413 0 0 1 020 4 150 714 7 263
- Started &
completed 4 530 270 042 4 530 205 532 4 530 18 432 4 530 46 078
Closing
inventory 1 450 82 012 1 450 65 788 1 450 5 900 1 015 10 324
7 000 363 467 5 980 271 320 7 000 28 482 6 259 63 665
Cost per Equivalent

Unit R45.3712 R4.0689 R10.1718
17
Weighted average
The suggested approach and answer for the first of the two departments remains unchanged. The
transferred out costs from Department 1 represents the current period input for the previous process
costs for Department 2:

units R units R
Opening inventory balance 1 020 41 514
-Previous Dept 38 694
- Raw Material 0 Transferred out 5 550 325 162
-Conversion 2 820

-Previous Dept 6 295 272 048
- Raw Material 28 482
-Conversion 63 665 Closing inventory balance 1 450 80,547
7 315 405 709 7 315 405 709
Allocation of Total Costs: Department 2

Equiv Equiv Equiv
Transferred to FG 5 550 325 162 5 550 246 374 5 550 22 582 5 550 56 206
Closing inventory 1 450 80 547 1 450 64 368 1 450 5 900 1 015 10 279
7 000 405 709 7 000 310 742 7 000 28 482 6 565 66 485
Cost per Equivalent Unit R44.3917 R4.0689 R10.1272
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8. CLASS EXAMPLES
CLASS EXAMPLE 1
Butterscotch Manufacturers operates a single process from which their product Dextrol emerges.
The following details regarding production for August are available:
a) Opening stock work-in-process amounted to 8 000 units and consisted of materials (100%
complete) and conversion costs (40% complete). Costs included in the units of opening
stock amount to:
Materials R55 000
b) Current inputs for August:

Materials (40 000 units) R249 300
c) Closing work-in-process amounted to 12 000 units and consisted of materials (100%

complete) and conversion costs (75% complete).
d) The transfer to the finished goods warehouse amounted to 29 000 units.
e) Normal loss is equivalent to 6% of current input and, together with any other losses, is
deemed to occur at the beginning of the process.
Required:
Prepare the process account for August using:
a) The FIFO method of stock valuation

b) The weighted average method of stock valuation.
Show all supporting calculations.
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Butterscotch Manufacturers
FIFO METHOD:
STEP 1: Draw a line diagram
STEP 2: Draft a T-account for Work-In-Process:

STEP 3: Expand the Work-In-Process account by adding the rand values of opening inventory and
the current period’s input:
STEP 4: Carry over the total rand value of the input on the debit side to the output on the credit
side, as a T-account has to balance. Indicate the rand value of normal losses as zero.
STEP 5:
Equiv
units TOTAL units RM Equiv units Convers
Opening inventory
units
Started & Completed

Abnormal losses
Closing inventory
units
STEP 6: Wrap up the Work-In-Process account by giving costs to output units
Work In Process
Units R units R
Opening inventory
balance Transferred out

Normal losses
Current input Abnormal losses
-Raw Materials
20
WEIGHTED AVERAGE METHOD:
STEP 1 - 3: As per FIFO method
side, as a T-account has to balance. Indicate rand value of normal losses as zero.
STEP 5:

Equiv
Transferred out
Abnormal losses
Closing inventory
units
STEP 6: Wrap up the Work-In-Process account by giving costs to output units:
Work In Process
units R units R
Opening inventory
-Raw Materials
-Conversion
Normal losses
-Raw Materials
Closing inventory
-Conversion balance
21
CLASS EXAMPLE 2
Bobo Manufacturers produces chemicals for industrial use. The process involves two departments
namely Mixing and Exiting.
Production data for August is as follows:

Mixing Exiting
Units 4 800 3 220
Stage of completion (conversion costs) 45% 40%
Cost – previous process: R11 000
Direct materials 5 400 R2 500
Current input costs:

Previous department ?
Direct materials 44 900 34 100
Closing work-in-process:
Units 3 200 3 400
Stage of completion (conversion costs) 60% 70%
Units completed 28 300 ?
Units put into process 30 200 ?
Additional information
1. In both the Mixing and Exiting departments direct materials are added at the beginning of
the production process.
2. In the Mixing department inspection takes place at the beginning of the production process.
Inspection in the Exiting department takes place at the beginning of the process.
3. In both the Mixing and Exiting departments, the expected normal loss is 5% of the units
started in that specific department.
4. A fire swept through the loading area in the Exiting Department, causing damage to loading
equipment and resulting in the loss of 320 units (40% completed).
Required:
a) Determine the number of units and their value to be transferred to the Exiting department if
the company uses the weighted average method of stock valuation.
b) Determine the number of units and their value to be transferred to finished goods if the
company uses the FIFO method of cost valuation.
Show all detailed workings and use four decimals for unit costs and two decimals for cost
allocations.
22
Bobo Manufacturers
WEIGHTED AVERAGE METHOD:
STEP 1: Draw a line diagram for Mixing dept
STEP 2: Draft a T-account for Work-In-Process: Mixing dept

STEP 5:
Equiv
Transferred out
Abnormal losses
Closing inventory
units
STEP 6: Wrap up the Work-In-Process account by giving costs to output units:

Work In Process
units R units R
Opening inventory
-Previous process
-Raw Materials
-Conversion
Normal losses

-Previous process
-Raw Materials Closing inventory
-Conversion balance
23
FIFO METHOD:
STEP 1: Draw a line diagram for Exiting dept
STEP 2: Draft a T-account for Work-In-Process: Exiting dept

STEP 5:
Previous Raw Materials Conversion
Process Costs
units TOTAL Equiv PP Equiv RM Equiv Conver
units units units
Opening inventory
units
Started &
Completed
Abnormal losses
Closing inventory
units
STEP 6: Wrap up the Work-In-Process account by giving costs to output units

Work In Process
units R units R
Opening inventory
bal Transferred out
-Previous process
Started and
-Conversion Completed
Normal losses

-Previous process
-Raw Materials Closing inventory
-Conversion balance
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9. HOMEWORK EXERCISES
HOMEWORK QUESTION 1
The following information relates to Mitchell Manufacturers:
1) Treginol is manufactured through a single process.
2) A normal loss equivalent to 7% of the input is expected.
3) Inspection in the process takes place at the beginning of the process.
4) Direct materials are added at the beginning of the process and conversion costs occur
evenly throughout the process.
5) Stages of completion for beginning and closing work-in-process are as follows:
Beginning work-in-process Closing work-in-process

Stage of Stage of
Cost completion Cost completion
Labour 30% Labour 70%

Overheads 25% Overheads 60%
6) The following cost information is relevant:
Process
Current cost inputs R
Material 300 000
Labour 302 130
Overheads 101 100
Opening work-in-process
Material 90 000
Labour 122 700
Overheads 31 200
7) The following details pertaining to the units are important:
Process
Beginning work-in-process 10 000
Closing work-in-process 20 000
Started in the process 50 000
Transferred to finished goods store 35 000
25
Required:
a) Apply the FIFO method of stock valuation and determine the following:
- The units completed and transferred to finished goods.

- The units in work-in-process.
- The value of the finished units and closing stock work-in-process as shown in the balance
sheet.
b) Apply the weighted average method of stock valuation and determine the following:
- The value of the units completed and transferred to finished goods.

- The value of the units in work-in-process.
- The value of the finished units and closing stock work-in-process as shown in the balance
sheet.
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HOMEWORK QUESTION 2
Sharpe Producers manufactures Rigent, which passes through two departments, namely Cutting
and Fitting. Pertinent production data in Rand and units is as follows:
Production cost information Cutting Fitting

Previous process R43 400
Materials R1 800 5 640
Opening work-in-process stages of completion:

Units 9 000 6 000
Materials 100% 100%
Current costs:
Materials R215 000 R96 300
Units started 36 000 ?
Transferred out 37 500 35 000
Closing work-in-process stages of completion:

Units 4 230 ?
Materials 100% 100%
Conversion costs 33,33% 25%
1) In the Cutting department material is added at the beginning of the process. Inspection
takes place at the beginning of the process. Normal losses are expected to be 2% of the
input into the process.
2) In the Fitting department, 3 000 units are lost at inspection, of which 20% is regarded as
normal.
3) In the Fitting department material are added just after the units are received. Inspection
takes place immediately after materials are added but before any further processing is done
on the units.
Required:
a) Calculate the value of the units transferred to the Fitting department if the FIFO method of
cost assignment is used by the company.
b) Calculate the numbers of units as well as the value of finished goods and closing stock
work-in-process as reflected in the balance sheet of the company if the weighted average
method of cost assignment is in use.
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ADDITIONAL QUESTION
Diversification Manufacturers produces fertilizers for the farming community. Three distinct
production departments exist, namely Mixing, Sorting and Finishing.
The following information for June is presented for your scrutiny:
Sorting Finishing
Units completed and transferred 41 250 32 650
Units received from Mixing dept 31 250
Opening inventory in units 24 500 4 500

Closing inventory in units 11 250 9 625
Stage of completion – opening inventory:

Stage of completion – closing inventory:
Current input costs:

Previous process R32 940 ?
Materials R38925 R137 390
Value of opening inventory:

Previous process R10 545 R19 500
Materials 6 700 -
1. The following production practices are followed or happen in the Sorting Department:
1.1 Materials are added at the beginning of the process.
1.2 The product is inspected at the beginning of the process.
1.3 Normal loss is expected to be 10% of the units started in the process.
2. The following production practices are followed or happen in the Finishing Department:
2.1 Materials are added at the beginning of the process.
2.2 Inspection takes place at the beginning of the process.
2.3 Normal loss is expected to be 6% of the new units started.
2.4 1 000 units, 40% completed, were lost due to a massive fire that occurred in the factory
on 20 June.
Required:
a) Use the weighted average method of stock valuation to calculate the number of units and
their value transferred to the Finishing department.
b) Use the FIFO method of stock valuation to calculate the number of finished units and
closing stock work-in-process and their value for inclusion in the balance sheet.
Note: Rounding:
Unit costs - four decimals, Allocation of costs - two decimals
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FBS 220

PROCESS COSTING NOTES

2. COMPARISON BETWEEN JOB COSTING AND PROCESS COSTING

Job costing Process costing

3. AN ILLUSTRATION OF PROCESS COSTING

Thereafter the chips are transported and marketed to the public.

WITH PROCESS COSTING, THE ISSUE AT HAND IS ESSENTIALLY TO ESTABLISH THE

What are normal and abnormal losses?

4.1 Normal losses

Normal losses are spoilage that is considered to be

In contrast, abnormal losses are

4.3 Costing losses

Raw Material Opening inventory Closing inventory

Current input Normal losses

Allocation of current period costs

Opening inventory units

Cost per Equivalent Unit

5.2 Example: Weighted Average

Current input Normal losses

Allocation of current period costs

Opening inventory units

Cost per Equivalent Unit

STEP 2: Draft a T-account for Work-In-Process: Department 1 and:

Work In Process: Department 1

Current input 7 100 Normal losses 355

Closing inventory balance 1 850

Work In Process: Department 1

Current input 293 211

8 500 338 699 8 500

Work In Process: Department 1

Current input 293 211 Normal losses 355 0

8 500 338 699 8 500 338 699

Work In Process: Department 1

Current input 293 211 Normal losses 355 0

8 500 338 699 8 500 338 699

Allocation of current period costs

Opening inventory units 1 400

Cost per Equivalent Unit

Allocation of current period costs

Opening inventory units 1 400

Cost per Equivalent Unit

STEP 5c: Determine the equivalent units per output category:

Allocation of current period costs

Opening inventory units 1 400 0 700

Allocation of current period costs

Opening units 1 400 0 700

Cost per Equivalent Unit R25.6872 R17.8898

Allocation of current period costs

Opening inventory units 1 400 12 523 0 0 700 12 523

Cost per Equivalent Unit R25.6872 R17.8898

Work In Process: Department 1

Current input 293 211 Normal losses 355 0

8 500 338 699 8 500 338 699

Work In Process: Department 1

Current input 293 211 Normal losses 355 0

8 500 338 699 8 500 338 699

Allocation of total costs

Transferred out 6 295

Cost per Equivalent Unit

Transferred out 6 295

Cost per Equivalent Unit

STEP 5c: Determine the equivalent units per output category: