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. Example

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,
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