Process costing manipal jaipur bba 3 semester

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Process Costing

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Process costingProcess costing is adopted when there is mass production through a sequence of several processesExample include chemical, flour and glass manufacturingIt 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

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Process 1

Process 2

Process 3

Direct materialDirect labouroverheads

Finished goods Cost of goods sold



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Accounting for Process CostingCosts are accumulated by each processEach process maintains its process accountThe process account is debited with the costs incurred and credited with goods completed and transferred to other process accountWhen the goods are completed, they will be transferred to finished goods accountWhen the goods are sold, the amount will be transferred to the cost of goods sold account

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Process AMaterial 500Labour 100Overhead200

Process B 800

800 800

Process BProcess A800Material 50Labour 150Overhead100

Process C 1100

1100 1100

Process CProcess B 1100Material 80Labour 110Overhead 210

Finished Gds 1500

1500 1500

Finished GoodsProcess C 1500 Cost of GDs

Sold 1300Bal c/d 200

1500 1500

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Accounting for losses and scrap in process account

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Accounting for losses in process costing

In a production process, losses are inherent and unavoidableNature of losses

Normal lossAbnormal loss

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Accounting for scrap

Damaged goods may be sold as scrapRevenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue

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Transactions Accounting treatment

Accounting entries

Normal loss Losses within expected levelNot assigned cost

No entry

Abnormal loss Excess loss over the expected levelAssigned cost

Dr. Abnormal lossCr. Process account

Abnormal gain Gain resulted when the actual loss is less than the normal or expected loss

Dr. Process accountCr. Abnormal gain

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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

Dr. ScrapCr. 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 gainCr. Scrap

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Accounting entries

Actual cash received from the sale of scrap

Reducing material cost

Dr. Cash Cr. Scrap

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Example

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Joyce Ltd. operates a factory involving two production Processes. The output of process 1 is transferred to process2. The information of production for January 2005 is as follows:

• Cost for Process 1Materials: 3000 units at $5 per unitLabour $2400

• Cost for Process 2Materials: 2000 unit at $8 per unitLabour $1680

• No opening and closing work in progress• Output for January 2005

Process 1: 2300 unitsProcess 2 4000 units

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• 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:(a) Process 1(b) Process 2(c) Scrap(d) Abnormal loss(e) Abnormal gain

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Process 1 accountUnits $ Units $

Labour 2400

Materials 3000 15000($5 *3000)

Overhead 9000(2400*375%)

Process 2 ($10*2300) 2300 23000Abnormal loss ($10 *100) 100 1000

3000 264000 3000 26400

Scrap: normal loss(4*600) 600 2400

Cost per unit = Total expected cost Total expected output = $26400-$2400 3000-600= $10 per unit

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Process 2 accountUnits $ Units $

Labour 1680Materials 2000 16000

Overhead 8340(1680*469.4%)

Finished goods($12*4000) 4000 48000

Abnormal gain ($12 *130) 130 1560

4300 49020

Scrap: normal loss($6*430) 430 2580

Cost per unit = = $49020-$2580 4300-430= $12 per unit

Process 1 2300 23000

4430 50580 4430 50580

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Abnormal loss accountUnits $ Units $

Process 1 100 1000 Scrap 100 400Profit and loss 600

100 1000 100 1000

Abnormal Gain accountUnits $ Units $

Process 2 130 1560Scrap: value of abnormal gain 130 780Profit and loss 780

100 1000 100 1000

Loss on scrap value due to abnormal gain

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Scrap accountUnits $ Units $

Normal loss 430 2580(Process 2)

Normal loss 600 2400(Process 1)

Abnormal loss 100 400(Process 1)(100*$4)

Cash –process 1(600+100)*$4 700 2800

1130 5380 1130 5380

Abnormal gain(Process 2) 130 780(130*$6)

Cash – process 2(430-130)*$6 300 1800

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Wk 2:Determining the output and loss:Process 2Input (2300+2000) 4300 unitsLess: normal loss (10%)Expected outputActual output 4000 units

430 units3870 units

Abnormal gain 130 units

Wk 1:Determining the output and loss:Process 1Input 3000 unitsLess: normal loss (20%)Expected outputActual output 2300 units

600 units2400 units

Abnormal loss 100 units

Back 1 Back 2

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Equivalent units of production

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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 costsProduction quantity

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

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Example

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The total production cost for January 2005 was $40000. 8000 units had been completed and 4000 units wee 50% complete.

Equivalent units of production8000 units completed 80004000 units were 50% completed 2000

10000

Finished goods =

Closing work in progress =

$40000/10000 * 8000 = $32000

$40000/10000*2000 = $8000

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Three categories in determining the equivalent units of production

Opening work in progressStarted and completed unitsClosing work in progress

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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 completedIn previous period

2/3 EUP completed in current period

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Started and completed units (SACU)

These units are started and completed in the current period

1 EUP completed in current period

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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 completedin current period

Incomplete part

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First in First outWeighted average cost

Two methods of cost flows in process costing

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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

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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 periodCost per unit

= Current cost EUP

Cost per unit= Cost of OWIP + Current Cost EUP

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FIFO Method WAVCO Method

10 units of OWIP(60% completed in previousPeriod)

70 SACU

40 units of CWIP(20% completed)

4 EUP

70 EUP

8 EUP

+

+

82 EUP

10 units of OWIP(60% completed in previousPeriod)

70 SACU

40 units of CWIP(20% completed)

10 EUP

70 EUP

8 EUP

+

+

88 EUP

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Example

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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 100 6000Conversion (labour + overhead) 60 1200

February production: 20000 units$

Direct materials 30000Conversion 52200

82200

7200

Closing work in progress: 3000 units (20% as complete as toconversion

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You are required to :Prepare Process 1 account using (a)The FIFO method of valuation; and(b)The weighted average method of valuation

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First in First out

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Wk 1:Number of Equivalent units (EU)

Total Materials Conversion Units EU EU

Opening work in progress Other completed units Total completed unitsClosing work in progress

1000 0 400 (40%)17000 17000 1700018000 17000 174003000 3000 600 (20%)21000 20000 18000

Wk 2:Costs

Total Materials Conversion$ $ $

Costs incurred in the periodCosts per equivalent units

82200 30000 522004.4 1.5 2.9

20000-3000

No opening WIP

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Wk 3:Cost of units transferred to finished goods and closing WIP

Total Materials Conversion $ $ $

Opening WIPCost to complete1000 units completed17000 units completedTransfer to finished goodsClosing WIP

7200 6000 12001160 11608360 6000 236074800 25500 49300 83160 31500 516606240 4500 174089400 36000 53400

Wk:4 Conversion: $2.9*400= 1160

(Wk 4)

Wk 5: Materials: 17000*$1.5 = $25500 Conversion: 17000*$2.9 = $49300


(Wk 5)

(Wk 6)

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Process accountUnits $ Units $

Opening WIP 1000 7200Materials 20000 30000Conversion 52200

Finished goods 18000 83160Closing WIP 3000 6240

21000 89400 21000 89400

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Weighted average cost method

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Opening work in progress Other completed units Total completed unitsClosing work in progress

1000 1000 100017000 17000 1700018000 18000 18000

21000 21000 18600

Wk 2:Costs


Opening WIPCosts incurred in the period

Costs per equivalent units

82200 30000 52200

4.5853 1.7143 2.8710

20000-3000

3000 3000 600 (20%)

7200 6000 1200

89400 36000 53400

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Transfer to finished goodsClosing WIP

82535 30587 516786865 5143 172289400 35730 53400

(Wk 4)



(Wk 5)

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21000 89400 21000 89400

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Lost units in process costing

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Nature of losses

Normal lossAbnormal loss

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Normal loss

Normal loss are the losses within the expectation during the productionReasons:

Low quality materials and workers are engagedThere may be an inherent problem in production process

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Abnormal loss

The lost units that is out of expectation

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Continuous loss

Continuous losses occur evenly throughout the production processFor example, the weight loss in making mild powder

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Discrete loss

Discrete losses occur at the specific pointA firm will not be aware of discrete losses unless the products are inspected at the inspection pointFor example, wrong buttons on a garment and wrong colour of toy cars m

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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


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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

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Discrete and normal loss

Loss are included as product costCost are assigned to lost unitsDetermining the point of work in progress:

1. Before passing inspection point, cost of lost units are only assigned to units transferred

2. After passing inspection point, cost of lost units are allocated between units transferred and closing WIP

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Discrete and abnormal loss

Loss are charged as period costCost are assigned to lost unitsAbnormal losses will be written off to the profit and loss account

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Example

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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 100 6000Conversion (labour + overhead) 60 1200

February production: 20000 units$

Direct materials 30000Conversion 52200

82200

7200

Closing work in progress: 3000 units (20% as complete as toconversion

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Loss: 2000 units

You are required to :Prepare Process 1 account using the FIFO method:Case 1: Continuous normal lossCase 2: Discrete normal lossCase 3: Abnormal loss (both continuous and discrete

loss)

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Case 1: Continuous normal loss

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Opening work in progress Other completed units Total completed unitsNormal loss 2000Closing work in progress

1000 0 400 (40%)15000 15000 1500016000 15000 15400

3000 3000 600 (20%)21000 18000 16000

Wk 2:Costs



82200 30000 522004.9292 1.6667 3.2625

20000-3000-2000

No opening WIP

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Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIP

7200 6000 12001305 13058505 6000 250573938 25000.5 48937.5 82443 31000.5 51442.56957 5000 195789400 36000.5 53399.5

Wk:4 Conversion: $3.2625*400= 1305

(Wk 4)

Wk 5: Materials: 15000*$1.6667 = $25000.5 Conversion: 15000*$3.2625 = $48937.5


(Wk 5)

(Wk 6)

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21000 89400 21000 89400

Normal loss 2000

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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

Closing WIP (20%)

Inspection point (100%)

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Opening work in progress Other completed units Total completed unitsNormal loss 2000 2000 2000Closing work in progress

1000 0 400 (40%)15000 15000 1500016000 15000 15400

3000 3000 600 (20%)21000 20000 18000

Wk 2:Costs



82200 30000 522004.4 1.5 2.9

20000-3000-2000

No opening WIP

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Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIPNormal loss

7200 6000 12001160 11608360 6000 236066000 22500 4350074360 28500 458606240 4500 1740

89400 36000 53400Wk:4 Conversion: $2.9*400= 1160

(Wk 4)


Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740

(Wk 5)

(Wk 6)8800 3000 5800

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21000 89400 21000 89400

Normal loss 2000 8800

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Case 3: Abnormal loss (both continuous and discrete)

For the discrete losses, it is assumed that the inspection point is set at 100% completion

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Opening work in progress Other completed units Total completed unitsNormal loss 2000 2000 2000Closing work in progress

1000 0 400 (40%)15000 15000 1500016000 15000 15400

3000 3000 600 (20%)21000 20000 18000

Wk 2:Costs



82200 30000 522004.4 1.5 2.9

20000-3000-2000

No opening WIP

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Opening WIPCost to complete1000 units completed15000 units completedTransfer to finished goodsClosing WIPAbnormal Normal loss

7200 6000 12001160 11608360 6000 236066000 22500 4350074360 28500 458606240 4500 1740

89400 36000 53400Wk:4 Conversion: $2.9*400= 1160

(Wk 4)


Wk 6: Materials: 3000*$1.5= $4500 Conversion: 600*$2.9 = $1740

(Wk 5)

(Wk 6)8800 3000 5800

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21000 89400 21000 89400

Abnormal normal loss 2000 8800

Process costing manipal jaipur bba 3 semester

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