COST ACCOUNTING PROCESS COSTING

Chapter 8 – Process costing

[MA1]
1. Valuation of completed units
2. Valuation of incomplete units – closing work in progress
[MA2]
3. Joint production costs
[FMA]
4. Valuation of incomplete units – OPENING work in progress

Meaning… When to use process costing?

This costing method is meant for continuous production processes/methods,
and owing to that, it appears to be difficult to see/identify individual units of
production.

Examples of industries/work areas using process costing technique?

❖ Food and beverages
❖ Chemical
❖ Paint
❖ Oil refinery (petroleum, palm oil and the like)

Output
1. complete
2. semi-complete/incomplete/work in progress

5 Features of Process costing

1. Production process is CONTINUOUS.

➔ Difficult to identify individual/separate units of output/production.

2. There may be losses during/throughout the process – expected and

unexpected.

3. Input can be added at ANY stage of processing.

4. Output of one process can become input of another.

5. Output may be a single product or joint products, with or without by-product.

By-product = expected but not intended output [i.e. Acid + Alkaline → Salt + Water]

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 COST ACCOUNTING PROCESS COSTING

COMPLETED UNITS

Cost per unit = Total cost …………………….costs include defects? wastage? losses?
Total units ……………………all complete??
NO!!...in different stages of completion.

Cost of one good unit

= Net production costs
Expected output

= Total costs of production – Scrap value of normal loss – Sales value of by-product
Input – Normal loss – By-products

Note:
1. Selling off losses and/or by-product → reduce production cost!

2. The EXPECTED unit cost is calculated BEFORE the prod. commences.

Cases:
“I am spending $5,000 on production, with the
intention of making 1,000 units.”
Production costs = $4,500
“The assumption here is, output is 1,000 units.”
Input = 1,000 units

1. Cost per unit = $4,500 = $4.50

1,000u

2. NL = 10%

Normal loss (NL) = expected loss

Cost per unit = $4,500 - $0 = $5

1,000u – (10% x 1,000u)

3. NL = 10%; scrap value = $0.90

Cost per unit = $4,500 – ($0.90 x 10% x 1,000u) = $4.90

1,000u x 90%

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 COST ACCOUNTING PROCESS COSTING

4. NL = 10% = 100 units; Actual loss (AL) = 130 units; scrap value = $0.90
(obtained AFTER the prod. process - @ the end!)

Cost per unit = $4,500 – ($0.90 x 10% x 1,000u) = $4.90

1,000u x 90%

The extra 30 units of loss is called Abnormal loss (ABL) = unexpected loss.
(ABL = NL vs AL…where AL > NL)

ABL = 30 units.

ABL is valued at cost of ONE good unit……@ $4.90

Output 900u 870 x $4.90

Input costs NL 100u x $0.90

1,000u @ $4,500
ABL 30u x $4.90

5. NL = 10% = 100 units; Actual loss (AL) = 80 units; scrap value = $0.90

Cost per unit = $4,500 – ($0.90 x 10% x 1,000u) = $4.90

1,000u x 90%

The shortfall of 20 units of loss is called Abnormal gain (ABG) = unexpected

good output.
(ABG = NL vs AL…where AL < NL)

ABG = 20 units.

ABG is valued at cost of ONE good unit……@ $4.90

Output 920u x $4.90 including ABG

Input costs NL (before) 100u x $0.90 including ABG

1,000u @ $4,500
ABG (20u x $4.90 )

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 COST ACCOUNTING PROCESS COSTING

Process account = WIP a/c [completed units]

Process account (represents production) = WIP a/c

units $ units $
Input x F/g or Proc. #2 x $
(D/) Material $ NL or Scrap a/c x $0 or $
(D/) Labour $ ABL a/c x $
(D/) Expenses $
ABSORBED Prod. o/h = POHC a/c $
ABG a/c x $
xxx $$$ xxx $$$

Process account = WIP a/c [incomplete units]

Process account (represents production) = WIP a/c

units $ units $
Input x F/g or Proc. #2 x $
(D/) Material $ Closing WIP x $
(D/) Labour $
(D/) Expenses $
ABSORBED Prod. o/h = POHC a/c $
xxx $$$ xxx $$$

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 COST ACCOUNTING PROCESS COSTING

INCOMPLETE UNITS = Closing WIP

→ Units in production are in different stages of completion

✓ Different degrees of completion
➔ Equivalent units = Notional whole units

i.e. 2 half-s of the same item IS AS GOOD AS 1 whole unit.

2 units….50% complete….equivalent to 1 complete unit.

4 things to do….all completed only 25% → COULD HAVE completed 1.

Equivalent units = Incomplete units x % of completion

Let’s say:

Input = 1,000 units Output:

Material cost = $20,000 Completed units = 800u
Labour cost = $9,500 Closing WIP = 200u
Production overhead = $13,800 degree of completion:
Total input/production costs = $43,300 M: 100%
L: 75%
P/o/h: 60%

Question: 1. Value of completed units?

2. Value of C/WIP??

Step 1 – Volume: Equivalent units

Eq. u. with respect to:

M 800u + (200u x 100%) = 800 eq.u. + 200 eq. u. = 1,000 eq. u.

L 800u + (200u x 75%) = 800 eq.u. + 150 eq. u. = 950 eq. u.

P/o/h 800u + (200u x 60%) = 800 eq.u. + 120 eq. u. = 920 eq. u.

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 COST ACCOUNTING PROCESS COSTING

Step 2 – Cost per equivalent unit

Total costs ($) Eq. u. Cost per eq. u. ($)

Material 20,000 1000 20

Labour 9,500 950 10

P/o/h 13,800 920 15

Cost of one good unit = Cost per completed unit 45

Step 3 – Value: Completed units & C/WIP

Value of completed units = Completed units x Cost of one good unit

= 800u x $45
= $36,000

Value of C/WIP = Incomplete units x ??

Value of C/WIP: Eq. u. for the input/resource x Cost per eq. u. for that resource
Mat 200 eq. u. x $20 = $4,000
Lab 150 eq. u. x $10 = $1,500
P/o/h 120 eq. u. x $15 = $1,800
Total = $7,300

<Both the values MUST add up to the same INPUT cost - $43,300>

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