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SBCS Global Learning Institute

ACCA MA/FIA FMA

Management Accounting

Lecturer: Nanda Maharaj

Study School

Process Costing

Solutions
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Process Costing
Introduction:

Process Costing is a costing method used where it is not possible to identify

separate units of production, or jobs, usually because of the continuous nature of the
production processes involved.

Examples of Process Costing with continuous production are:

 Oil refining
 Paper
 Foods and drink
 Chemicals

Features of Process Costing are:

(1) The output of one process becomes the input to the next until the finished product
is made in the final process.

(2) The continuous nature of production in many processes means that there will usually
be closing work in progress which must be valued.

(3) There is often a loss in process due to spoilage, wastage, evaporation etc.

(4) There usually results in some instances by-products and or joint products.

Process Costing is centered on four key steps.

Step 1 – Determine output and losses.

Input X
Normal Loss (X)
Expected Output X
Actual Output (X)
Abnormal loss/Gain X

Step 2 – Calculate cost per unit of output, losses and WIP.

Formula: Costs Incurred = $? Per output

Expected Output
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Step 3- Calculate total cost of output, losses and WIP.

Formula: Actual output X Cost per unit (calculated in step 2)

Abnormal Loss / Abnormal Gain X Cost per unit (calculated in step 2)

Step 4 – Complete Accounts

N.B. Normal Loss is not given a value in the process account unless it is sold for
scrap
Format:

Debit Process Account Credit

Units $ Units $
Costs Incurred X X Normal Loss X
Abnormal Gain X X Output X X
Abnormal Loss X X
X X X X

Losses in Process Costing

 Losses may occur in process. If a certain level of loss is expected, this is known
as normal loss.
 If losses are greater than expected, the extra loss is abnormal loss.
 If losses are less than expected, the difference is known as abnormal gain.

Abnormal Loss is the additional loss incurred from the normal loss. It is calculated as
follows: Abnormal Loss = Actual Output < Expected Output

Abnormal Gain reduces the amount of normal loss in a process. It is calculated as

follows: Abnormal Gain = Actual Output > Expected Output

N.B. Abnormal Loss and Gain are valued at full production cost in the Process
Account.
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Questions: Basic Process Costing

(1)

Answer: $11.20

Expected Output = 2,000 – {10% x 2,000} = 1,800 units

Cost per unit = $20,160 / 1,800 = $11.20

(2)
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Answer: C

Input = 3,000
Normal Loss (10%) = (300)
Expected Output = 2,700
Actual Output = ?
Abnormal Loss = 125

Abnormal Loss = Actual Output < Expected Output

Actual Output = 2,700 – 125 = 2,575

(3) 1,000 units are input to a manufacturing process in a period. The normal loss from
the process is 5% of input. Output in the period was 940 units. There was no work-in-
progress at the beginning or end of the period.
What was the abnormal loss/gain in the period?

Input = 1,000 units

- Normal Loss (5%) = (50 units)
Expected Output = 950 units
Actual Output = 940 units
Abnormal Loss = 10 units

(4) The following is a list of statements relating to terms used in process costing
Which TWO statements in the list relate to the term “abnormal gain?”
(a) Equivalent units of output exceed actual good units of output
(b) Credited to the process account at average finished unit cost
(c) Accounted for by crediting the net value to the process account
(d) Debited to the process account at average finished unit cost
(e) Equivalent units of output are less than the actual good units of output

Answer: D and E

(5) How should the saleable value of an abnormal gain be accounted for?
A. Debited to the process account
B. Credited to the abnormal gain account
C. Debited to the abnormal gain account
D. Credited to the process account

Answer: C
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(6) In which of the following circumstances would a manufacturing organization

implement process costing?
A. Where each order is large and different
B. Where each unit is quoted separately
C. Where production is continuous
D. Where different products are manufactured using common equipment

Answer: C

(7) PQ Ltd uses process costing. During a recent period 8221 litres of a product were
output from one of PQ Ltd’s manufacturing processes. There is a normal loss of 10% of
input volume. There was an abnormal gain of 121 litres during the period.
How many litres were input to the manufacturing process in the period?

Input = ? (100%)
- Normal Loss (10% = (?) (10%)
Expected Output = 8,100 litres (90%)
Actual Output = 8,221 litres
Abnormal Gain = 121 Litres

Expected Output (working backwards) = 8,221 – 121 = 8,100 litres

Input = 8,100 / 0.90 = 9,000 units

(8) Fenton Ltd uses process costing. 13000 units were input to a process during a
period. 11908 units passed inspection and were transferred to finished goods stock.
The abnormal loss was 182 units. There was no work in progress at the beginning or at
the end of the period.
What was the normal loss as a % of input?

Input = 13,000 units

- Normal Loss (? %) = (910 units)
Expected Output = 12,090 units
Actual Output = 11,908 units
Abnormal Loss = 182 units

Expected Output (working backwards) = 182 + 11,908 = 12,090 units

Normal loss units = 13,000 – 12,090 = 910 units
Normal Loss (%) = 910 / 13,000 x 100 = 7%
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(9) The output from a process in a period was:

Output passing inspection 11423 units
Normal inspection loss 444 units
Abnormal inspection loss 99 units
Total output 11,966 units

What are the units of output to be used to calculate the cost per unit in the
period?

Expected Output = 11,966 – 444 = 11,522 units

Expected Output (working backwards) = 11,423 + 99 = 11,522 units

(10) In process costing, how are units of abnormal loss valued?

(a) Raw material cost per unit
(b) Nil value
(c) Cost per unit of normal output
(d) Labour cost per unit

Answer: C

(11) Consider the following statements:

(1) Abnormal process losses are debited to the process account at the cost per unit
incurred on normal production
(2) Normal process losses are credited to the process account at net realizable
value
Are the Statements true or false?
True False
Statement 1
Statement 2

Statement 1 = False
Statement 2 = True

(12) In the manufacture of chemical X there is a normal loss of 10% of the material input
into the process. 340 litres of chemical X were manufactured in a period during which
there was an abnormal loss of 5% of the material input into the process.
How many litres of material were input into the process during the period?

Input = 100%
Total Loss = (15%)
Actual Output = 85%

Input (100%) = 340 / 0.85 = 400 litres

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(13) 4,000 litres of a chemical was manufactured in a period. There is a normal loss of
6% of the material input to the manufacturing process. There was an abnormal loss of
4% of the material input in the period.’
How many litres of material (to the nearest litre) were input during the period?

Actual Output = 100% - 10% = 90%

Input = 4,000 / 0.90 = 4,444 litres

(14) Information relating to two processes (F and G) was as follows:

Process Normal loss as Input Output
% of input litres litres
F 8 65,000 58,900
G 5 37,500 35,700
For each process, was there an abnormal loss or an abnormal gain?
Process F Process G
A Abnormal gain Abnormal gain
B Abnormal gain Abnormal loss
C Abnormal loss Abnormal gain
D Abnormal loss Abnormal loss

Answer: C

Process F Process G
Input 65,000 37,500
Normal Loss 8% (5,200) 5% (1,875)
Expected Output 59,800 35,625
Actual Output 58,900 35,700
Abnormal Loss Abnormal Gain

(15) R Ltd makes one product, which passes through a single process. Details of the
process account for period 1 were as follows:
$
Material cost – 20,000 kg 26,000
Labour cost 12,000
Production overhead cost 5,700

Output 18,800 kg
Normal losses 5% of input

There was no work in progress at the beginning or end of the period. Process losses
have no value.
The cost of the abnormal loss (to the nearest $) is
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Input = 20,000
Normal Loss = (1,000)
Expected Output = 19,000
Actual Output = 18,800
Abnormal Loss = 200

Cost per unit = $26,000 + $12,000 + $5,700 / 19,000 = $2.30

Abnormal Loss = 200 units x $2.30 = $460

(16) Normally no losses are expected from a process. Any abnormal losses are sold for
scrap.
Which of the following calculates the net cost to the company of one unit of
abnormal loss?
A Total input cost ÷ actual output units
B Total input cost ÷ expected output units
C (Total input cost – total scrap value) ÷ expected output units
D (Total input cost ÷ expected output) – scrap value per unit

Answer: B

There is no normal loss units, hence there is no scrap value

(17)

Input = 12,800
Normal Loss = (512)
Expected Output = 12,288
Actual Output = 12,500
Abnormal Gain = 212 Answer: C
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(18)

Answer: B

(19)

Answer: D
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Losses with Scrap Value

Scrap is ‘Discarded material having some value.’
Treatment of a Scrap Value

(1) Calculate the value of scrap i.e. normal loss units x scrap value per unit
(2) Deduct scrap value from material cost when calculating the cost per unit
(3) Normal loss is valued at scrap in the process account

Question:
3,000 units of material are input to a process. Process costs are as follows.
Material $11,700
Conversion costs $ 6,300
Output is 2,000 units. Normal loss is 20% of input.
The units of loss could be sold for $1 each.
Required: Prepare appropriate accounts

Losses with a Disposal Cost

Disposal Cost is an additional cost incurred in disposing of loss units

Treatment of a Disposal Cost

(1) Calculate value of disposal cost i.e. Normal loss units x disposal cost per unit
(2) Disposal cost is added to material cost when calculating the cost per unit
(3) Disposal cost is shown on the debit side of the process account
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Questions: Process Costing with Scrap Value

(1) What value should be placed on normal saleable waste in the process
account?
(a) Realizable value
(b) Unit cost of good units produced less realizable value
(c) Unit cost of good units produced
(d) Nil value

Answer: A

(2) Perth operates a process costing system. The process is expected to lose 25% of
input and this can be sold for $8 per kg.
Inputs for the month were:
Direct materials 3,500 kg at a total cost of $52,500
Direct labour $9,625 for the period
There is no opening or closing work in progress in the period. Actual output was 2,800
kg.
What is the valuation of the output?

Input = 3,500
- Normal Loss (25%) = 875
Expected Output = 2,625

Scrap Value = 875 x $8 = $7,000

Cost per unit = $52,500 - $7,000 + $9,625 / 2,625 = $21

Actual Output = 2,800 kg x $21 = $58,800

(3) Costs incurred in a process totaled $216,720 for a period. 24,000 units of a finished
product were manufactured including 1,200 units which were rejected on inspection and
disposed of. The level of rejects in the period was normal. Rejects are sold for $2.00 per
unit.
What was the cost per unit for the process?

Expected Output = 24,000 – 1,200 = 22,800 units

Scrap Value = 1,200 units x $2 = $2,400

Cost per unit = $216,720 - $2,400 / 22,800 = $9.40

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(4) A company uses process costing to value output. During the last month the following
information was recorded:
Output: 2,800 kg valued at $7·50/kg
Normal loss: 300 kg which has a scrap value of $3/kg
Actual loss: 200 kg
What was the value of the input?

Dr Process Account Cr
Units $ Units $
Costs ? ? Normal Loss 300 900
Abnormal gain 100 750 Actual Output 2,800 21,000
3,100 21,900 3,100 21,900

Input (working backwards) = 21,900 – 750 = $21,150

Abnormal Gain = Acual Loss < Normal Loss

Answer: $21,150

(5) A company uses process costing to value its output. The following was recorded for
the period:
Input materials 2,000 units at $4·50 per unit
Conversion costs $13,340
Normal loss 5% of input valued at $3 per unit
Actual loss 150 units
There was no opening or closing stocks.
What was the valuation of one unit of output to one decimal place?

Expected Output = 2,000 – {5% x 2,000} = 1,900

Scrap Value = 100 units x $3 = $300

Cost per unit = $9,000 - $300 + $13,340 / 1,900 = $11.60

(6) A process operates with a normal loss of 5% of input. All losses have a realisable
value of $38 per litre. Last month 10,000 litres were input to the process and good
production was 9,200 litres. Process costs arising last month were $456,000. There was
no work-in-progress.
What was the credit entry in the process account for abnormal loss last month?
A $11,400 B $13,440 C $13,800 D $14,400

Answer: C
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Input = 10,000
Normal Loss = 5% = (500)
Expected Output = 9,500
Actual Output = 9,200
Abnormal Loss = 300

Scrap Value = $38 x 500 units = $19,000

Cost per unit = $456,000 - $19,000 / 9,500 = $46

Abnormal Loss = 300 units x $46 = $13,800

(7)

Expected Output = 150,000 – {20% x 150,000} = 120,000

Scrap Value = 30,000 units x $5.60 = $168,000

Cost per unit = $924,000 - $168,000 / 120,000 = $6.30

Finished Output = 130,000 litres x $6.30 = $819,000

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