Process Costing

Process costing Process costing is adopted when there is mass production through a sequence of several processes Example include chemical, flour and glass manufacturing It computes the average cost per unit by dividing the costs or production for a particular period by the number of units produced during the period

Direct material Direct labour overheads Process 1 Direct material Direct labour overheads Process 2 Direct material Direct labour overheads Process 3 Finished goods Cost of goods sold

Accounting for Process Costing Costs are accumulated by each process Each process maintains its process account The process account is debited with the costs incurred and credited with goods completed and transferred to other process account When the goods are completed, they will be transferred to finished goods account When the goods are sold, the amount will be transferred to the cost of goods sold account

Process A Process B Process C Finished Goods Material 500 Labour 100 Overhead200 Process B 800 Process A800 Material 50 Labour 150 Overhead100 Process C 1100 800 800 1100 1100 Process C Finished Goods Process B 1100 Material 80 Labour 110 Overhead 210 Finished Gds 1500 Process C 1500 Cost of GDs Sold 1300 Bal c/d 200 1500 1500 1500 1500

Accounting for losses and scrap in process account

Accounting for losses in process costing In a production process, losses are inherent and unavoidable Nature of losses Normal loss Abnormal loss

Accounting for scrap Damaged goods may be sold as scrap Revenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue

Transactions Accounting treatment Accounting entries Normal loss Losses within expected level Not assigned cost No entry Abnormal loss Excess loss over the expected level Assigned cost Dr. Abnormal loss Cr. Process account Abnormal gain Gain resulted when the actual loss is less than the normal or expected loss Dr. Process account Cr. Abnormal gain

Transactions Accounting treatment Accounting entries Scrap value of normal loss Reducing material cost Dr. Scrap Cr. Process account Scrap value of abnormal loss Reduce cost of abnormal loss Cr. Abnormal loss Loss of scrap value due to abnormal gain The actual units sold as scrap will be less than the scrap value of normal loss Dr. Abnormal gain Cr. Scrap

Transactions Accounting treatment Accounting entries Actual cash received from the sale of scrap Reducing material cost Dr. Cash Cr. Scrap

Example

Joyce Ltd. operates a factory involving two production Processes. The output of process 1 is transferred to process 2. The information of production for January 2005 is as follows: Cost for Process 1 Materials: 3000 units at $5 per unit Labour $2400 Cost for Process 2 Materials: 2000 unit at $8 per unit Labour $1680 No opening and closing work in progress Output for January 2005 Process 1: 2300 units Process 2 4000 units

General overhead, for January 2005, are absorbed into the process cost at a rate of 375% of direct labour costs in process 1 and 496.4% of direct labour cost in process 2. The normal output of process 1 and process 2 is 80% and 90% of input respectively Waste matters from process 1 and sold for $4 per unit and those from process 2 for $6 per unit Required: Process 1 (b) Process 2 (c) Scrap (d) Abnormal loss (e) Abnormal gain

Process 1 account Units $ Units $ Scrap: normal loss Materials 3000 15000 ($5 *3000) Scrap: normal loss (4*600) 600 2400 Process 2 ($10*2300) 2300 23000 Labour 2400 Overhead 9000 (2400*375%) Abnormal loss ($10 *100) 100 1000 3000 264000 3000 26400 Cost per unit = Total expected cost Total expected output = $26400-$2400 3000-600 = $10 per unit

Process 2 account Units $ Units $ Scrap: normal loss ($6*430) 430 2580 Process 1 2300 23000 Materials 2000 16000 Finished goods ($12*4000) 4000 48000 Labour 1680 Overhead 8340 (1680*469.4%) 4300 49020 Abnormal gain ($12 *130) 130 1560 4430 50580 4430 50580 Cost per unit = = $49020-$2580 4300-430 = $12 per unit

Abnormal loss account Units $ Units $ Process 1 100 1000 Scrap 100 400 Profit and loss 600 100 1000 100 1000 Abnormal Gain account Units $ Units $ Scrap: value of abnormal gain 130 780 Process 2 130 1560 Profit and loss 780 100 1000 100 1000 Loss on scrap value due to abnormal gain

Scrap account Units $ Units $ Normal loss 600 2400 (Process 1) Abnormal gain (Process 2) 130 780 (130*$6) Normal loss 430 2580 (Process 2) Cash –process 1 (600+100)*$4 700 2800 Abnormal loss 100 400 (Process 1) (100*$4) Cash – process 2 (430-130)*$6 300 1800 1130 5380 1130 5380

Wk 1: Determining the output and loss: Process 1 Input 3000 units Less: normal loss (20%) Expected output Actual output 2300 units 600 units 2400 units Abnormal loss 100 units Wk 2: Determining the output and loss: Process 2 Input (2300+2000) 4300 units Less: normal loss (10%) Expected output Actual output 4000 units 430 units 3870 units Abnormal gain 130 units Back 1 Back 2