Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Process costing CHAPTER 6

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Process costing 1.Job costing assigns costs to each individual unit of output because each unit consumes different quantities of resources. 2.Process costing does not assign costs to each unit of output because each unit is identical. Instead, average unit costs are computed. 6.1

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.2a Exhibit 1 A comparison of job and process costing

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Exhibit 1 A comparison of job and process costing 6.2b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 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 = 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) 6.3a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.3b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Sale proceeds from normal losses 6.4a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.4b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 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. 6.5a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.5b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.5c

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Abnormal gains Example Input = litres at a cost of £1 200 Output = 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 6.6a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.6b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.6c

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Equivalent production and closing WIP Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g units 50% complete equals 500 equivalent production. Example Opening WIP Nil Units introduced into the process Units completed and transferred to next process Closing WIP (50% complete) Materials cost (introduced at start)£ Conversion cost£ Note that materials are 100% complete. 6.7a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.7b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Equivalent production and closing WIP 6.8

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.9a Previous process cost Costs transferred from a previous process are treated as a separate element of cost (100% complete). Example Opening WIPNil Units transferred Closing WIP *50% complete) Completed units transferred to finished goods stock Previous process cost£ Conversion costs£ Materials (introduced at end of process)£ *Note materials are zero complete and previous process cost 100% complete. 6.9a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.b6.9b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Previous process cost 6.10

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Example to illustrate weighted average and FIFO 6.11

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.12

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Note the weighted average method assumes that the opening WIP is merged with the units produced in the current period. 6.13

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 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. 6.14a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.14b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA Opening WIP – FIFO method 6.15a

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 6.15b

Cost and Management Accounting: An Introduction, 7 th edition Colin Drury ISBN © 2011 Cengage Learning EMEA 5.16