MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY © 2000 Colin Drury

Chapter Five: Process costing Part Two: Cost accumulation for inventory valuation and profit measurement Chapter Five: Process costing © 2000 Colin Drury

5.1 PROCESS COSTING Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. Process costing does not assign costs to each unit of output because each unit is identical.Instead, average unit costs are computed. © 2000 Colin Drury

5.2a A comparison of job & process costing © 2000 Colin Drury

5.2b © 2000 Colin Drury

Normal and abnormal losses • Normal losses cannot be avoided –Cost is absorbed by good production. • Abnormal losses are avoidable –Cost is recorded separately and treated as a period cost. Example Input = 1 200 litres at a cost of £1 200 Normal loss = 1/6 of input Actual output = 900 litres CPU = £1 200/Expected output (1 000 litres) = 1.20 Cost of completed production = £1 080 (900 ×£1.20) Cost of abnormal loss = £120 (100 × £1.20) © 2000 Colin Drury

5.3b © 2000 Colin Drury

5.4a Sale proceeds from normal losses © 2000 Colin Drury

5.4b © 2000 Colin Drury

Sale proceeds (normal and abnormal losses) Example 2 As example 1 but output = 900 litres (abnormal loss = 100 litres) CPU as example 1 = £1.10 per litre The sales value of the abnormal loss should be offset against the cost of the abnormal loss. © 2000 Colin Drury

5.5b © 2000 Colin Drury

5.5c © 2000 Colin Drury

5.6a Abnormal gains Example Input = 1 200 litres at a cost of £1 200 Output = 1 100 litres Normal loss = 1/6 of input Scrap value = £0.50 per litre CPU = Cost of production less scrap value of normal loss Expected output = £1 100 /1 000 = £1.10 per litre © 2000 Colin Drury

5.6b © 2000 Colin Drury

5.6c © 2000 Colin Drury

5.7a Equivalent production & closing WIP Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g. 1000 units 50% complete equls 500 equivalent production. Example Opening WIP Nil Units introduced into the process 14 000 Units completed and trasferred to next process 10 000 Closing WIP (50% complete) 4 000 Materials cost (introduced at start) £70 000 Conversion cost £48 000 Note that materials are 100% complete. © 2000 Colin Drury

5.7b © 2000 Colin Drury

5.7b Equivalent production and closing WIP © 2000 Colin Drury

5.9a Previous process cost Costs transferred from a previous process are treated as a separate element of cost (100% complete) Example Opening WIP Nil Units transferred 10 000 Closing WIP *50% complete) 1 000 Completed units transferred to finished goods stock 9 000 Previous process cost £90 000 Conversion costs £57 000 Materials (introduced at end of process) £36 000 Note materials are zero complete and previous process cost 100% complete. © 2000 Colin Drury

5.9b © 2000 Colin Drury

5.10 Previous process cost © 2000 Colin Drury

5.11 Example to illustrate weighted average and FIFO © 2000 Colin Drury

Opening WIP-weighted average method 5.12 and 5.13 Opening WIP-weighted average method Use Overheads 5.12 & 5.13 as transparencies © 2000 Colin Drury

5.14a Opening WIP – FIFO method The FIFO method assumes opening WIP is the first group of units to be completed. Therefore, opening WIP is charged separately to completed production and CPU is based on current period costs. © 2000 Colin Drury

5.14b © 2000 Colin Drury

5.15a Opening WIP – FIFO method © 2000 Colin Drury

5.15b © 2000 Colin Drury

Losses in process and equivalent productions 5.16 Losses in process and equivalent productions Use Overhead 5.16 as transparency © 2000 Colin Drury