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Process Costing
Process Costing
Definition:
A form of operation costing used where
production follows a series of sequential process
It is used in variety of industries for e.g: oil refineries, food processing, chemicals industry, paper manufacturer,
pharmaceutical industry
Common features:
Has a process cost centers and accumulation of manufacturing cost
Records of completed and partly completed equivalent unit and the cost incurred by each process
Cost of output of one process as the input cost of the next department
Cost unit should be relevant to its product.
A cost unit may be
Cost unit:
Industry
Paint industry
food processing
oil refinery
Cost unit
litre ,gallon
litre,can,Kg,tonne
litre,barrel
Normal loss
inherent in the production process
Cannot be eliminated
Occurs under efficient operating conditions
Unavoidable and uncontrollable
Example:
In making a pant suit some part of the cloth may be lost.
To make furniture wood may be lost during cutting
160-8=152 units
Cost per tonne=Total cost/goods produced units
Example :
improper of material ingredients,use of inferior material,plant break down,industrial
accidents,inefficient movement of materials,lack of skilled labor
Accounting treatment
Abnormal losses separately reported to draw attention of the management to take appropriate
action
Unit costing of the abnormal losses is made on the same basis as the good production unit
Cost of abnormal loss is a period cost and written off in profit and loss account
CALCULATION
Input
Less:normal loss 5%
160 tons
(8)
----------Standard output
152
Less actual output
148
Abnormal loss
4
Cost per unit of good produced unit
Formula:
Total cost-scrap value of normal loss/standard output
(6,576-40)/152=43 Per Unit
Value of abnormal loss:
4 loss units * 43 cost per unit= Rs.172
A.L Valued on the same cost of production i.e. 43 per ton
Abnormal gain
Actual loss in process may be less than expected
in which case an abnormal gain result
Assuming expected output is 10,000 ltr for an
input of 10,000 ltr but the actual output is 11,000
ltr
Resulting an abnormal gain of 1,000 ltr
Value of gain is calculated in same way as
abnormal loss
This procedure makes sure that inventory
valuation is not under stated in case of abnormal
gain of an abnormal nature
FIFO:
The opening W.I.P is charged separately to completed production and the cost per
unit is based only on the current period costs and production for the current period.
The closing work in progress is assumed to come from the new units started during
the current period.
FIFO(Formula):
Units transferred to next deptt or finish goods+ EQ units in end W.I.P EQ units in
beg W.I.P
Weighted average
Both the units and value of opening WIP
are merged with current period cost and
production to calculate the avg cost/unit
Average (Formula):
Units transferred to next department or
finish goods +EQ units in end W.I.P
Practical Question
Production and cost data were as follows
Total cost Materials
5115
labour
3952
O.H
3,000
.
12067
Practical Problems
Production was 1400 fully completed units and 200 partly completed.
The degree of completion 200 units WIP was follows
Materials 75%
Labour
60%
O.H
50%
Requirement : a)calculate equivalent production unit b) cost per unit c)
Value of WIP