Costing Systems (Job, Batch, Service & Process Costing) AAT Level 3 Costing Systems (Job, Batch, Service & Process Costing)

Objectives: Record costing information using a ‘Process’ costing system Define the various stages of inventory

Process Costing Outputs Inputs Used for continuous manufacturing processes Outputs Inputs Cost per unit of output = Input Costs + Conversion Costs Expected Units of Output

Process Costing Account

What is a Process Costing account? Dr Process Account Cr Litres £ Materials - a Output Materials - b Normal Losses Abnormal Losses Labour Overheads Abnormal gains Inputs Outputs

Normal Losses (No scrap value) What you EXPECT to lose during the processes

Activity 1 Demo Direct materials 80,000 kg £266,000 Direct Labour   £70,000 Production overheads £60,000 Normal loss 10% Actual output 72,000 Kg

Normal Losses (No scrap value) Activity 1 Process Account KG £ KG £ Normal Loss 8000 (10% x DM 80000) Materials 80000 266000 Labour 70000 Output (FG or next process) 72000 396000 Overheads 60000 80000 396000 80000 396000 Outputs Inputs

Activity 2 Direct materials 100,000 kg £300,000 Direct Labour £90,000   £90,000 Production overheads £60,000 Normal loss 10% Actual output 90,000 Kg

Normal Losses (No scrap value) Activity 2 What is the normal loss? = Materials KG x % loss =100000 x 10% =10000 KG What is the cost per KG? = Total Costs ÷ Expected Output =450000 ÷90000 =£5 per unit KG £ KG £ Normal Loss 10000 (10% x DM 100000) Materials 100000 300000 Labour 90000 Output (FG or next process) 90000 450000 Overheads 60000 100000 450000 100000 450000 Outputs What is expected output? = Materials KG - Loss =100000 - 10000 =90000 KG Inputs What are the total process costs? = Materials + Labour + Overheads =450000

Abnormal Losses (No scrap value) Avoidable

Activity 3 - Abnormal Losses (No scrap value) KG £ KG £ Materials 10000 7700 Normal Loss 5% x 10000 500 Labour & Overheads 3700 Abnormal loss 100 120 Output (FG or next process) 9400 11280 10000 11400 10000 11400 Outputs Inputs

Your turn! Activity 4

Activity 4 - Abnormal Losses (No scrap value) KG £ KG £ Materials 100000 287000 Normal Loss 6% x 100000 6000 Labour 138000 Abnormal loss 2000 10800 Overheads 82600 Output (FG or next process) 92000 496800 100000 507600 100000 507600 Outputs Inputs What is the cost of 1kg of EXPECTED output? Total Cost ÷ Output 507600 ÷ 94000 = £5.40 Abnormal loss is 2000kg x £5.40 = £10800 What is the abnormal loss in kg? Expected Output – Actual Output 94000 - 92000 = 2000kg

Abnormal Gain (No scrap value)

Activity 5 - Abnormal Gain (No scrap value) What is the cost per kg of expected output? = Total costs ÷ Expected output = 54720 ÷ 17100 = £3.20 KG £ KG £ Materials 18000 35800 Normal Loss 5% x 18000 900 Labour 7200 Overheads 11720 What is the expected output? = 18000-900 = 17100 Abnormal Gain 400 1280 Actual Output 17500 (FG or next process) 56000 18400 56000 18400 56000 What is the abnormal loss/gain? = Actual Output – Expected output = 17500 - 17100 = 400 units What is the value of the abnormal gain? = 400 x £3.20 = 1280

Your turn! Activity 6: October Jam

Activity 6 Answer Kg £ Materials 5000 5600 Normal Loss 500   Kg £ Materials 5000 5600 Normal Loss 500 Labour & Overheads 7900 Abnormal Gain 175 525 Finished Goods (or next process) 4675 14025* (*4675 x 3) 5175 14025

Normal Losses with Scrap Value

Activity 7: January Kg £ Materials 100000 300000 Normal loss 10000 Scrap value = 10000 x 1.50 Reduces the cost of the finished goods   Kg £ Materials 100000 300000 Normal loss 10000 Labour 90000 Overheads 60000 Output 450000 15000 435000

Activity 7: January Kg £ Materials 100000 300000 Normal loss 10000   Kg £ Materials 100000 300000 Normal loss 10000 Labour 90000 Overheads 60000 Output 450000 15000 435000

Your turn! Activity 8: February

Normal Losses (With scrap value) Activity 8 Process Account KG £ KG £ Normal Loss 8000 10000 (10% x DM 80000) Materials 80000 266000 Labour 70000 Output (FG or next process) 72000 386000 Overheads 60000 80000 396000 80000 396000 Outputs Inputs

Activity 9 Demo Abnormal loss with scrap What’s the difference between EXPECT & ACTUAL Production? Expected 50000 – 5000 = 45000 Actual 42000 Abnormal loss 3000 What’s cost per unit of EXPECTED output? = Total Costs Less Scrap = 518500 – 10000 = 11.30 Expected Output 45000 What’s the scrap value of NORMAL loss? 5000 x £2 = £10000 50000 356400 5000 10000 120500 3000 33900 41600 42000 474600 50000 518500 50000 518500

Your turn! Activity 10

Activity 10 - Answer Normal loss is 5%, Scrap Value = 38p per kg. Materials 10000 kg costing £7700 Labour and overheads £3700 Output 9200 kg   Kg £ Materials 10000 7700 Normal loss 500 (a) 190 Labour & Overheads 3700  Abnormal loss 300 (e) 354 Output 9200 10856 11400

Abnormal gains with Scrap Value

Activity 11 Abnormal gain with Scrap Value Total the costs MINUS scrap 35800 + 7200 + 11720 – 180 = £54540 Expected Output = 18000 – 900 = 17100 Abnormal Gain = 17500 - 17100 = 400 kg Calculate the cost per unit Total Costs = 54540 = 3.1894736!! Rounded to £3.19 Expected Units 17100 c) Value the abnormal gains = 400 x 3.1894736 = 1276 b) Losses sold for 20p per kg = 900 x 20p = £180 Value the actual output 17500 x 3.19 = 55816 180 55816 400 1276 18400 55996 18400 55996

Your turn Question 12 NB You will need to add ‘Abnormal Gain’ on the debit side of your account.

Activity 12 - Answer Kg £ Materials 5000 5600 Normal loss 500   Kg £ Materials 5000 5600 Normal loss 500 Labour & overheads 7900 Actual Output 4675 13506 Abnormal gain 175 506 5175 14006

More than one process

More than one process

Your turn! Activity 13

Activity 13 -Answer Process 1 Kg £ Materials 200000 100000 Normal Loss   Kg £ Materials 200000 100000 Normal Loss 20000 Labour Overheads 5000 Output to next process 180000 125000  200000 200000  Process 2   Kg £ Output from process 1 180000 125000 Normal Loss 20000 Materials 60000 Labour 40000 Output 285000 Overheads 200000

Work in Progress Equivalent Units Value of Equivalent Units Number of WIP units X % Completion Value of Equivalent Units Total Production Costs Completed units + Equivalent units

Activity 14: WIP Materials Labour & Overheads   Last month the following inputs were made to a process: Materials £15,575 Labour & overheads £8,480 4000 units were completed and 600 units in progress – 75% complete for materials, but only 40% for labour and overheads. What is the value of completed units and WIP?   Units Materials Completed Equivalent Units Labour Completed Work in Progress Total Equivalent Units Costs (Inputs) Cost per EU 4000 100% 4000 100% 4000 600 75% 450 40% 240 4450 4240 15575 8480 3.50 2.00

Completed Output Materials 4000 x 3. 50 £14000 Labour 4000 x 2 Completed Output Materials 4000 x 3.50 £14000 Labour 4000 x 2.00 £8000 £22000 Work in Progress Materials 450 x 3.50 £1575 Labour 240 x 2.00 £480 £2055   £ Materials 15575 Completed Output 22000 Labour & Overheads 8480 Work in progress 2055 24055

Your turn! Question 15 - 19