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

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

3. 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

4. 5.2a
A comparison of job & process costing
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5. 5.2b
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6. 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)
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7. 5.3b
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8. 5.4a
Sale proceeds from normal losses
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9. 5.4b
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10. 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

11. 5.5b
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12. 5.5c
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13. 5.6a Abnormal gains Example Input = 1 200 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 / = £1.10 per litre
© 2000 Colin Drury

14. 5.6b
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15. 5.6c
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16. 5.7a Equivalent production & closing WIP
Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g units 50% complete equls 500 equivalent production.
Example
Opening WIP Nil
Units introduced into the process
Units completed and trasferred to next process
Closing WIP (50% complete)
Materials cost (introduced at start) £70 000
Conversion cost £48 000
Note that materials are 100% complete.
© 2000 Colin Drury

17. 5.7b
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18. 5.7b
Equivalent production and closing WIP
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19. 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 Closing WIP *50% complete) Completed units transferred to finished goods stock Previous process cost £ Conversion costs £ Materials (introduced at end of process) £36 000
Note materials are zero complete and previous process cost 100% complete.
© 2000 Colin Drury

20. 5.9b
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21. 5.10
Previous process cost
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22. 5.11 Example to illustrate weighted average and FIFO
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23. Opening WIP-weighted average method
5.12 and 5.13
Opening WIP-weighted average method
Use Overheads 5.12 & 5.13 as transparencies
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24. 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

25. 5.14b
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26. 5.15a
Opening WIP – FIFO method
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27. 5.15b
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28. Losses in process and equivalent productions
5.16
Losses in process and equivalent productions
Use Overhead 5.16 as transparency
© 2000 Colin Drury