1 2session09 d04

PROCESS COSTING
OVERVIEW
Objective
To describe the operation of process costing methods.
COSTING
RESOURCE Syllabus area
OUTPUTS
Session 10
BATCH PROCESS SERVICE

JOB COSTING
COSTING COSTING COSTING
Session 8 When used

Mechanics
Potential problems
CONTRACT
COSTING
WORK IN JOINT AND
LOSSES PROCESS BY-PRODUCTS
Normal loss Terminology Terminology
Abnormal loss/gain Cost per effective unit Apportionment
Cost per unit FIFO method Accg for
Process account Average cost method by-products
Losses account Comparison
 Accountancy Tuition Centre (International Holdings) Ltd 2004 0901

PROCESS COSTING
1 PROCESS COSTING
The costing method used where goods result from a sequence of continuous or
repetitive operations or processes.
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 chemical, oil, paint and textile industries.
1.2 Mechanics
An average cost per unit is calculated for a specific period of time

(usually a month).
Total costs of production during the period

Average cost/unit =
Number of units produced (ie output) in the period
Process costing therefore concerns
− ascertainment and accumulation of costs (input)

− measurement of output
− calculation of unit cost.
1.3 Potential problems
Losses: E.g. Evaporation (liquids), material wastage.
Work in progress (WIP): Where units are only partly completed at the
end/beginning of a period.
Joint products and by-products: Where two or more types of products are
produced in a single process.
Note Questions involving both completion of opening WIP and losses will not be set.

PROCESS COSTING
2 LOSSES
2.1 Normal loss
“Expected” to arise under efficient (normal) operating conditions (usually

given as a percentage of units input).
Certain losses are inherent in the production process ∴ cannot be

eliminated.
It is “uncontrollable”/“unavoidable”.
Therefore, regarded as part of the normal cost of production and so its cost
is absorbed into completed production.
2.2 Abnormal loss/gain
Not expected to occur.
E.g.
− improper mixing of ingredients ⇒ losses > normal
− use of inferior material
− incorrect cutting of cloth
− unexpected pilferage.
Controllable and avoidable ∴ not included in process costs but

reported separately.
Actual loss > normal loss ⇒ abnormal loss

Actual loss < normal loss ⇒ abnormal gain.
2.3 Cost per unit
Always calculated based on
– costs initially charged to the process

– output under efficient operating conditions.
Total production cost incurred

i.e. Cost/unit =
Expected good output
If the normally lost units have a scrap1 value, this is used to reduce the costs
of the process spread over the expected good output.
Total cost incurred − Expected scrap value (ie of normal loss)

i.e. Cost/unit =
Expected (ie normal) good production
1
“Scrap” is discarded material having a recovery value which may be either disposed of (e.g.
sold) without further treatment

PROCESS COSTING
Example 1
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 = Costs incurred − Scrap value of normal loss

2.4 Process accounts
2.4.1 Accounting entries
1 Costs are debited to the process a/c as they are incurred.
2 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 a/c at the cost per unit (as calculated above).
4 Units on the a/c are then balanced
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)

PROCESS COSTING
2.4.2 Pro-forma
Process a/c
Units £ Units £
c Costs incurred d Normal loss X X

Materials X X e Actual output X X
Labour X f Abnormal loss X X
Overhead X
f Abnormal gain X
___
X
___ ___ ___
X X X X
___ ___ ___ ___
2.5 Losses account
2.5.1 Abnormal loss situation
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
normal cost per unit) X X P&L (βal figure *) X
___ ___ ___ ___
X X X X
___ ___ ___ ___
2.5.2 Abnormal gain situation
Losses a/c
Units £ Units £
Normal loss (@ Abnormal gains (@

scrap value) X X normal cost/unit) X X
Gains to P&L (βal fig *) X Scrap proceeds received
for actual loss X X
___ ___ ___ ___
X X X X
___ ___ ___ ___
* “Proof” ⇒ Units abnormal gain × (normal cost – normal loss proceeds )

PROCESS COSTING
Example 2 – Losses
Required:
For the process information in Example 1, draw up the process ledger account and the
losses ledger account if actual output is
(i) 3,850 units
(ii) 3,950 units.
Solution
(i) Output of 3,850 units
Process a/c
Units £ Units £
Costs incurred loss
Previous process 4,200 92,400
Material 63,160
Labour/overhead 44,444 _____ _______
_____ _______
4,200 200,004 _____ _______
_____ _______
Losses a/c
Units £ Units £
____ ______ ____ ______
____ ______ ____ _____
(ii) Output of 3,950 unit

Process a/c
Units £ Units £
Costs incurred Normal loss 294 4,704
Previous process 4,200 92,400 Actual output (@ £50)
Material 63,160
Labour/overhead 44,444
_____ _______
4,200 200,004
_____ _______
______ _______
_____ _______ 4,244
______ 202,204
_______

PROCESS COSTING
Losses a/c
Units £ Units £
Normal loss 294 4,704
____ ______ ____ _____
____ ______ ____ _____
3 WORK IN PROCESS
3.1 Terminology
3.1.1 Opening WIP
Units which were not finished at the end of the previous period/beginning of the
current period. These will already have some costs allocated to them relating to the
work done in the previous period.
3.1.2 Closing WIP
Units started prior to the current period end but not completed.
3.1.3 Finished units
Units finished during the current period. These will be made up of
Opening WIP finished off 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
3.2.1 Partial units
Since 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 equivalent units of work. E.g.
100 units, each of which are 60% complete = 60 equivalent units
80 units each being 50% complete = 40 equivalent units

PROCESS COSTING
Costs incurred during the period

Cost per equivalent unit =
Equivalent units produced in the period
3.2.2 Different stages of completion for different input costs
E.g. 100 units of closing WIP might be

50% complete with respect to material (50 EU)
40% complete with respect to labour (40 EU)
If so, it is necessary to calculate a cost per equivalent unit (CPEU) for each type of
input cost.
3.3 FIFO method
If a first-in first-out flow of physical units is assumed.
Any previous period costs (= value of opening WIP) should be wholly

attributed to the cost of units completed in the current period (i.e. opening
WIP completed).
CPEU need only be calculated in respect of current period costs for current
period production.
3.4 Average cost method
If it is assumed that Op WIP is inextricably merged with units introduced in the current
period (e.g. liquid processes) and cannot be separately identified.
It is necessary to add the Op WIP cost (previous period cost) to costs

incurred in the current period.
Separately identifiable output is completed units and closing WIP.
3.5 Question approach
Step One Establish the physical flow of total units, and if required prepare a
process account (excluding the value of transfers out/finished goods
and closing WIP).
Op WIP + units received = units completed + Closing WIP
Op WIP Started &

Assuming FIFO + finished
completed
Step Two In a table, calculate EUs of work done for each type of input (for
current period only if assuming FIFO).

PROCESS COSTING
Step Three Calculate CPEU for the period(s) for each input cost to be
apportioned.
Step Four Value completed units and closing WIP started according to the EUs
of work done. For FIFO, must distinguish Op WIP completed (don’t
forget to add in previous period costs) and units started and finished.
These values may then be included to complete the process account.
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:
Calculate the cost of completed units and the value of closing WIP and produce the
process account using
(i) the FIFO method

(ii) the average method.

PROCESS COSTING
Solution
Step One – Physical flow of units
Op WIP + Units received = Units completed + Closing WIP
(i) FIFO method

Step Two – Effective units Step Three
Completed S&F Closing Total EUs Costs CPEU

Op WIP WIP (current)
£ £
Previous process
Materials added
Labour & o/head

__________ ____
__________ ____

PROCESS COSTING
Step Four – Cost of completed units

WORKING £ £
Started and finished
Finishing Op WIP
Materials
Labour, etc
______
Op WIP costs b/fwd (previous period)

______
_______
_______
Value of closing WIP

WORKING £
Previous process
Materials
Labour, etc
______
______
(Check £55,660 + £897,500 = )
Process a/c
Units £ Units £
Balance b/f Finished goods
Previous process Balance c/f
Materials
Labour, etc
_____ _______ _____ _______
_____ _______ _____ _______
(ii) Average method
Step Two Step Three
Completed Closing Total Costs Costs Costs CPEU

WIP EUs b/fwd (current) (“pooled”)
£ £ £ £
Previous process
Materials added
Labour & o/head
________ _________ __________ ____
________ _________ __________ ____

PROCESS COSTING
3.6 Comparison of FIFO v average cost methods
Assumes Op WIP completed before current Assumes Op WIP inextricably merged with
production completed. units introduced in current period ∴ cannot
separately identify
B/fwd cost of Op WIP ∴ wholly attributable B/fwd costs need to be analysed to be
to completed opening WIP and no analysis combined with current period costs
needed
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
Add b/fwd cost (of Op WIP) to cost of
completed transfers out
4 JOINT PRODUCTS AND BY-PRODUCTS
Joint and by-products arise where the manufacture of one product makes inevitable the
manufacture of other products.
4.1 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.
Products produced are not separately identifiable until a certain stage in

the production process – the split-off point (SOP).
Costs incurred before this point (joint or pre-separation costs) must be

shared (i.e. apportioned) between the products produced.
4.2 Apportionment of joint product costs
4.2.1 Bases
Pre-separation costs may be divided between joint products on a number of bases.
Physical quantity of output.
Market value at point of separation
Net realisable value at SOP (final sales value less any post-separation (i.e.
further process) cost).
After separation products may be sold immediately or may be processed

further. Any post-separation costs will obviously be allocated directly to
the product on which they are incurred.

PROCESS COSTING
Example 4 – Joint product costing
Dot Ltd, a chemical company, produces three joint products in one of its processes.
After separation each joint product undergoes further processing. Senior management
are anxious to establish the profitability of each product and request you to 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
(i) weight of output
(ii) sales value at split-off point
(iii) net realisable value.
Note Process loss can be ignored.
Solution
(i) Weight
Total weight of output =
Joint costs per kg =

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
______ ______ ______ ______

PROCESS COSTING
(ii) Sales value at SOP

£
D 5,000 × 0.50 = 2,500
O 2,000 × 2.75 = 5,500
T 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 19,000
_________ _________ _________ _________
49,000
_________ _________ _________ _________
Profit/(loss) 3,500
_________ _________ _________ _________
(iii) Net realisable value (final sales value - 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 19,000
_________ _________ _________ _________
49,000
_________ _________ _________ _________
Profit/(Loss) 3,500
_________ _________ _________ _________

PROCESS COSTING
4.2.2 Comparison of methods
Method Advantages Disadvantages
Physical measures Simple apportionment Some industries do not have

common physical measures of
Some industries do not have
output
common physical measures of
output Takes no account of product
profitability
May ⇒ “loss making” products
Sales value @ SOP Proportional to products’ May be no market value at SOP

ability to “bear costs” ∴ fairer
Further process costs may ⇒
“losses”
Net realisable value Estimates sales value @ SOP Numerous subsequent further
processing stages (e.g. in oil
Closest approximation to
refining) can make calculations
revenue-generating power of
too complex.
joint products
4.3 Accounting for by products
4.3.1 At net realisable value 4.3.2 As miscellaneous income
By-products are valued at NRV at SOP. Income recognised at point of sale and
Any income is netted off against pre- added to main product revenue
separation costs i.e. Cr P & L a/c
i.e. Cr Process a/c
Appropriate where by-products are of Appropriate where value is uncertain or

noticeable value. small.
Example 5 – 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 stock.
Required
Show the accounting entries in the product account if by-product income is recognised
at the point of
(i) production
(ii) sale.

PROCESS COSTING
Solution
(i)
By-product Alpha
Kg £ Kg £
_____
(ii)
By-product Alpha
Kg £ Kg £
_____ _____

PROCESS COSTING
FOCUS
You should now be able to:
describe the characteristics of process costing and the situations in which its
use is appropriate;
define “normal” losses, and “abnormal” gains and losses and justify their
treatment;
account for process scrap
calculate cost per unit and equivalent units;
allocate process cost between WIP and transfers out using average cost and
FIFO methods;
prepare process accounts in absorption and marginal costing systems and in

situations where:
work remains incomplete;

losses and gains are identified at different stages of the process;
by-products and/or joint products occur;
distinguish between and value joint products and by-products;
value by-products and joint products at the point of separation.

PROCESS COSTING
EXAMPLE SOLUTIONS
Solution 1 – Cost per unit
Cost per unit = Costs incurred − Scrap value of normal loss

= 200,004 − 4,704
= £50
93% × 4,200
Solution 2 – Losses/gains
(i) Output of 3,850 units
Process a/c
Units £ Units £
Costs incurred Normal loss
Previous process 4,20092,400 (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 a/c
Units £ Units £
Normal loss 294 4,704 Actual scrap proceeds 350 5,600
Abnormal loss 56 2,800 (350 × 16) c
Loss to P&L – 1,904
____ ______ _____ ______
350 7,504 350 7,504
____ ______ ____ _____
c “Proof” 56 × (50 – 16) = 1,904
(ii) Output of 3,950 unit
Process a/c
Units £ Units £
Costs incurred Normal loss 294 4,704
Previous process 4,20092,400 Actual output (@ £50) 3,950 197,500
Material 63,160
Labour/overhead 44,444
_____ _______
4,200 200,004
Abnormal gain
(@ £50) 44 2,200
_____ _______
______ _______
4,244 202,204 4,244 202,204
_____ _______ ______ _______

PROCESS COSTING
Losses a/c
Units £ Units £
Normal loss 294 4,704 Abnormal gain 44 2,200
Gain to P&L d – 1,496 Scrap proceeds
(250 × 16) 250 4,000
____ ______ _____ ______
294 6,200 294
____ 6,200
_____
____ ______
d “Proof” 44 × 34 = 1,496
Solution 3 – WIP
Note: No losses MUST be assumed because
(i) Q is about WIP (opening WIP and losses will NOT be examined in the same
process in the same period)
(ii) to assume otherwise would be to “invent” data not given in the Q!
Step One – Physical flow of units
Op WIP + Units received = Units completed + Closing WIP

500 + 4,500 = 4,400 + 600
Completed S&F
Op WIP
500 3,900
(i) FIFO method

Step Two – Effective units 2 Step Three
Completed S&F4 Closing Total EUs Costs CPEU

Op WIP 3 WIP (current)
£ £
Previous process 0% –5 3,900 100% 600 4,500 6 243,000 54
Materials added 20% 100 3,900 70% 420 4,420 287,300 65
Labour & o/head 60% 300 3,900 20% 120 4,320 367,200 85
__________ ____
897,500 204
__________ ____
2
Column headings correspond to physical units as identified by physical flow
3
% applied to physical units are to completion (∴ the “reciprocal” of % already
complete)
4
This is the easiest, so do first!
5
Opening WIP was already complete with respect to previous process at the beginning of
the period
6
Check! Must correspond to physical units of input in period being accounted for.

PROCESS COSTING
Step Four – Cost of completed units

£ £
Started and finished 3,900 × £204 795,600
Finishing Op WIP
Materials 100 × £65 6,500
Labour, etc 300 × £85 25,500
______
32,000
Op WIP costs b/fwd (previous period) 55,660 87,660
______ ________
883,260
________

£
Previous process 600 × £54 32,400
Materials 420 × £65 27,300
Labour, etc 120 × £85 10,200
______
69,900
______
(Check £55,660 + £897,500 = £883,260 + £69,900)
Process a/c
Units £ Units £
Balance b/f 500 55,660 Finished goods 4,400 883,260
Previous process 4,500 243,000 Balance c/f 600 69,900
Materials – 287,300
Labour, etc – 367,200
_____ _______ _____ _______
5,000 953,160 5,000 953,160
_____ _______ _____ _______
(ii) Average method
Step Two Step Three
Completed Closing Total Costs Costs Costs CPEU

7
WIP 8 EUs b/fwd (current) (“pooled”)
£ £ £ £
9
Previous process 4,400 100% 600 5,000 22,000 243,000 265,000 53
Materials added 4,400 70% 420 4,820 21,180 287,300 308,480 64
Labour & o/head 4,400 20% 120 4,520 12,480 367,200 379,680 84
________ _________ __________ ____
55,660 897,500 953,160 201

________ _________ __________ ____
7
Completed op WIP & S&F are indistinguishable
8
Exactly the same EU calculation as for FIFO
9
Check! This must be the total number of physical units being accounted for in the
process

PROCESS COSTING
Step 4 – Cost of completed units
4,400 × £201 = £884,400

£
Previous process 600 × £53 31,800
Materials 420 × £64 26,880
Labour, etc 120 × £84 10,080
______
68,760
______
(Check £55,660 + £897,500 = £884,400 + £68,760)
Process a/c
Units £ Units £
Balance b/f 500 55,660 Finished goods 4,400 884,400
Previous process 4,500 243,000 Balance c/f 600 68,760
Materials – 287,300
Labour, etc – 367,200
_____ _______ _____ _______
5,000 953,160 5,000 953,160
_____ _______ _____ _______
Solution 4 – Joint products
(i) Weight
Total weight of output 10,000 kg
19,000
Joint costs per kg = = £1.90
10,000
D O T Total
£ £ £ £
Sales 12,500 10,000 30,000 52,500
______ ______ ______ ______
Joint costs 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
______ ______ ______ ______

PROCESS COSTING
(ii) Sales value at SOP
£
D 5,000 × 0.50 = 2,500
O 2,000 × 2.75 = 5,500
T 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
______ ______ ______ ______
(iii) Net realisable value (final sales value – 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 2,111 4,222 12,667 19,000
______ ______ ______ ______
12,111 9,222 27,667 49,000
______ ______ ______ ______
Profit/(Loss) 389 778 2,333 3,500
______ ______ ______ ______

PROCESS COSTING
Solution 5 – By products
(i) By-product Alpha

Kg £ Kg £
Process a/c 100 500 Cash 70 350
Balance c/f 30 150
_____ _____
500 500
_____ _____
Balance b/f 30 150
i.e. Closing stock £150
(ii) By-product Alpha

Kg £ Kg £
P&L a/c 70 350 Cash 70 350
_____ _____
350 350
_____ _____
i.e. Closing stock £0

PROCESS COSTING

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PROCESS COSTING

 To describe the operation of process costing methods.

BATCH PROCESS SERVICE

Session 8 When used

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0901

1.1 When used

 In organisations producing many units of the same product during a

 Most appropriate in chemical, oil, paint and textile industries.

 An average cost per unit is calculated for a specific period of time

Total costs of production during the period

 Process costing therefore concerns

− ascertainment and accumulation of costs (input)

1.3 Potential problems

 Losses: E.g. Evaporation (liquids), material wastage.

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0902

2.1 Normal loss

 “Expected” to arise under efficient (normal) operating conditions (usually

 Certain losses are inherent in the production process ∴ cannot be

2.2 Abnormal loss/gain

 Not expected to occur.

 Controllable and avoidable ∴ not included in process costs but

 Actual loss > normal loss ⇒ abnormal loss

2.3 Cost per unit

 Always calculated based on

– costs initially charged to the process

Total production cost incurred

Total cost incurred − Expected scrap value (ie of normal loss)

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0903

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

Normal spoilage is 7% of units input.

Calculate the cost per unit.

Cost per unit = Costs incurred − Scrap value of normal loss

2.4 Process accounts

2.4.1 Accounting entries

1 Costs are debited to the process a/c as they are incurred.

4 Units on the a/c are then balanced

 If an abnormal loss has arisen Cr Abnormal loss

 If an abnormal gain has arisen Dr Abnormal gain

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0904

c Costs incurred d Normal loss X X

2.5 Losses account

2.5.1 Abnormal loss situation

2.5.2 Abnormal gain situation

Normal loss (@ Abnormal gains (@

* “Proof” ⇒ Units abnormal gain × (normal cost – normal loss proceeds )

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0905

(i) Output of 3,850 units

____ ______ ____ ______

____ ______ ____ _____

(ii) Output of 3,950 unit

 Accountancy Tuition Centre (International Holdings) Ltd 2004 0906

____ ______ ____ _____

____ ______ ____ _____

3.1.1 Opening WIP

3.1.2 Closing WIP

3.1.3 Finished units

Units finished during the current period. These will be made up of

To describe the operation of process costing methods.

In organisations producing many units of the same product during a

Most appropriate in chemical, oil, paint and textile industries.

An average cost per unit is calculated for a specific period of time

Process costing therefore concerns

Losses: E.g. Evaporation (liquids), material wastage.

“Expected” to arise under efficient (normal) operating conditions (usually

Certain losses are inherent in the production process ∴ cannot be

Not expected to occur.

Controllable and avoidable ∴ not included in process costs but

Actual loss > normal loss ⇒ abnormal loss

Always calculated based on

If an abnormal loss has arisen Cr Abnormal loss

If an abnormal gain has arisen Dr Abnormal gain

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Units started and finished Units completely produced this period.

Any previous period costs (= value of opening WIP) should be wholly

It is necessary to add the Op WIP cost (previous period cost) to costs

Separately identifiable output is completed units and closing WIP.

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Joint products have significant relative sales value.

A by-product is produced in conjunction with one or more main products

Products produced are not separately identifiable until a certain stage in

Costs incurred before this point (joint or pre-separation costs) must be

Physical quantity of output.

Market value at point of separation

After separation products may be sold immediately or may be processed

Physical measures Simple apportionment Some industries do not have

Sales value @ SOP Proportional to products’ May be no market value at SOP