1. Process Costing

2. 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

3. 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

4. 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

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

6. Accounting for losses and scrap in process account

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

8. 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

9. 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

10. 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

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

12. Cost/unit = costs for the period/expected good output for the period
Normal Loss
Cost/unit = costs for the period/expected good output for the period

13. 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: units at $5 per unit
Labour $2400
Cost for Process 2
Materials: unit at $8 per unit
Labour $1680
No opening and closing work in progress
Output for January 2005
Process 1: units
Process units

14. General overhead, for January 2005 amounted to $7140,
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

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

16. Process 2 account Units $ Units $ Scrap: normal loss
($6*430)
Process
Materials
Finished goods
($12*4000)
Labour
Overhead
(1680*469.4%)
Abnormal gain
($12 *130)
Cost per unit
= = $49020-$2580
= $12 per unit

17. Abnormal loss account
Units $ Units $
Process
Scrap
Profit and loss
Abnormal Gain account
Units $ Units $
Scrap: value of
abnormal gain
Process
Profit and loss
Loss on scrap value due to abnormal gain

18. Scrap account
Units $ Units $
Normal loss
(Process 1)
Abnormal gain
(Process 2)
(130*$6)
Normal loss
(Process 2)
Cash –process 1
( )*$
Abnormal loss
(Process 1)
(100*$4)
Cash – process 2
( )*$

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

20. Equivalent units of production

21. Equivalent units of production
If there is no opening or closing work in progress (WIP) the unit cost of products can be obtained as follows
Unit Cost = Sum of production costs
Production quantity

22. Equivalent units of production
However, If there is opening or closing work in progress, the partly completed production will have a lower cost than the fully completed production
We have to converted the work in progress into finished equivalent units of production (EUP)

23. Example

24. Equivalent units of production
The total production cost for January 2005 was $40000.
8000 units had been completed and 4000 units were 50%
complete.
Equivalent units of production
8000 units completed
4000 units were 50% completed 2000
10000
Finished goods =
$40000/10000 * 8000 = $32000
Closing work in progress =
$40000/10000*2000 = $8000

25. Three categories in determining the equivalent units of production
Opening work in progress
Started and completed units
Closing work in progress

26. Opening work in progress (OWIP)
These units were started in the previous period and are to be completed in the current period
1/3 EUP completed
In previous period
2/3 EUP completed
in current period

27. Started and completed units (SACU)
These units are started and completed in the current period
1 EUP completed
in current period

28. Closing Work in progress (CWIP)
These units are started in the current period and are to be completed in the coming period
1/3 EUP completed
in current period
Incomplete part

29. Two methods of cost flows in process costing
First in First out
Weighted average cost

30. First-in-first-out method
Weighted average method
The opening work in progress is the first group of units to be processed and completed during the current period
The opening work in progress is merged with the production of the current period to form one batch of production
It separates the cost computations of the opening work in progress and the current period production
The average cost per unit of the opening work in progress and the current period production is the same

31. First-in-first-out method
Weighted average method
The EUP computation ignores the work performed on the opening work in progress during the prior period
The EUP computation includes all work performed on the opening work in progress during the prior period
Cost per unit
= Current cost
EUP
= Cost of OWIP + Current Cost

32. FIFO Method WAVCO Method
10 units of OWIP
(60% completed
in previous
Period)
10 units of OWIP
(60% completed
in previous
Period)
4 EUP
10 EUP + +
70 SACU
70 EUP
70 SACU
70 EUP + +
40 units of CWIP
(20% completed)
40 units of CWIP
(20% completed)
8 EUP
8 EUP
82 EUP
88 EUP

33. Example

34. Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion Cost
% $
Direct materials
Conversion (labour + overhead)
February production: units $
Direct materials
Conversion
82200
7200
Closing work in progress: 3000 units (20% complete as to
conversion

35. You are required to :
Prepare Process 1 account using
The FIFO method of valuation; and
The weighted average method of valuation

36. First in First out

37. Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Closing work in progress
(40%)
(20%)
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
No opening WIP

38. Cost of units transferred to finished goods and closing WIP
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
17000 units completed
Transfer to finished goods
Closing WIP
(Wk 4)
(Wk 5)
(Wk 6)
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 17000*$1.5 = $25500
Conversion: 17000*$2.9 = $49300
Wk 6: Materials: 3000*$1.5 = $4500
Conversion: 600*$2.9 = $1740

39. Process account
Units $ Units $
Opening WIP
Finished goods
Materials
Closing WIP
Conversion

40. Weighted average cost method

41. Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Closing work in progress
(20%)
Wk 2:
Costs
Total Materials Conversion
$ $ $
Opening WIP
Costs incurred in the period
Costs per equivalent units

42. Cost of units transferred to finished goods and closing WIP
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
(Wk 4)
Transfer to finished goods
Closing WIP
(Wk 5)
Wk 4: Materials: 18000*$ = $30587
Conversion: 17000*$ = $51678
Wk 5: Materials: 3000*$ = $51678
Conversion: 600*$ = $1722

43. Process account
Units $ Units $
Opening WIP
Finished goods
Materials
Closing WIP
Conversion

44. Lost units in process costing

45. Nature of losses
Normal loss
Abnormal loss

46. Normal loss
Normal loss are the losses within the expectation during the production
Reasons:
Low quality materials and workers are engaged
There may be an inherent problem in production process

47. Abnormal loss
The lost units that is out of expectation

48. Continuous loss
Continuous losses occur evenly throughout the production process
For example, the weight loss in making mild powder

49. Discrete loss Discrete losses occur at the specific point
A firm will not be aware of discrete losses unless the products are inspected at the inspection point
For example, wrong buttons on a garment and wrong colour of toy cars m

50. Types and natures
EUP calculation
Continuous normal loss
Excluding the lost units
Continuous and abnormal loss
Including the lost units
Discrete and normal loss
Discrete and abnormal loss

51. Types and natures
Treatments for losses and costs
Continuous normal loss
Losses are included as product costs
Costs are not assigned to the lost units
Continuous and abnormal loss
Losses are charged as period cost
Costs are assigned to the lost units
Abnormal loss will be written off to the profit and loss

52. Types and natures
Treatments for losses and costs
Discrete and normal loss
Loss are included as product cost
Cost are assigned to lost units
Determining the point of work in progress:
Before passing inspection point, cost of lost units are only assigned to units transferred
After passing inspection point, cost of lost units are allocated between units transferred and closing WIP

53. Types and natures
Treatments for losses and costs
Discrete and abnormal loss
Loss are charged as period cost
Cost are assigned to lost units
Abnormal losses will be written off to the profit and loss account

54. Example

55. Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion Cost
% $
Direct materials
Conversion (labour + overhead)
February production: units $
Direct materials
Conversion
82200
7200
Closing work in progress: 3000 units (20% as complete as to
conversion

56. Prepare Process 1 account using the FIFO method:
Loss: 2000 units
You are required to :
Prepare Process 1 account using the FIFO method:
Case 1: Continuous normal loss
Case 2: Discrete normal loss
Case 3: Abnormal loss (both continuous and discrete
loss)

57. Case 1: Continuous normal loss

58. Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss
Closing work in progress
(40%)
(20%)
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
No opening WIP

59. Cost of units transferred to finished goods and closing WIP
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
(Wk 4)
(Wk 5)
(Wk 6)
Wk:4 Conversion: $3.2625*400= 1305
Wk 5: Materials: 15000*$ = $
Conversion: 15000*$ = $
Wk 6: Materials: 3000*$ = $5000
Conversion: 600*$ = $1957

60. Process account
Units $ Units $
Normal loss
Opening WIP
Materials
Finished goods
Closing WIP
Conversion

61. Case 2: Discrete normal loss
It is assumed that the inspection point is set at 100% completion, all work has been performed. As a result, the costs of lost units are assigned to the units transferred
Material added
Inspection point (100%)
Closing WIP (20%)

62. Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss
Closing work in progress
(40%)
(20%)
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
No opening WIP

63. Cost of units transferred to finished goods and closing WIP
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
Normal loss
(Wk 4)
(Wk 5)
(Wk 6)
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740

64. Process account
Units $ Units $
Normal loss
Opening WIP
Materials
Finished goods
Closing WIP
Conversion

65. Case 3: Abnormal loss (both continuous and discrete)
For the discrete losses, it is assumed that the inspection point is set at 100% completion

66. Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss
Closing work in progress
(40%)
(20%)
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
No opening WIP

67. Cost of units transferred to finished goods and closing WIP
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
Abnormal Normal loss
(Wk 4)
(Wk 5)
(Wk 6)
Wk:4 Conversion: $2.9*400= 1160
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740

68. Process account
Units $ Units $
Abnormal
normal loss
Opening WIP
Materials
Finished goods
Conversion
Closing WIP