ACOF 014

Introduction to Costing
Semester 2 2008/ 2009

TOPIC 6: PROCESS COSTING

Learning Objectives

After learning this subject, students will be able to:

• Describe process costing

• Explain the differences between job order costing & process costing
• Know the treatment for normal losses, abnormal losses and abnormal gains
• Calculate the equivalent unit concept
• Valuing the work-in-progress using FIFO method
• Preparing the Process Account with opening WIP only

What is Process Costing?

"The costing method where goods or services result from a sequence of continuous or repetitive
operations or processes. Costs are averaged over the units produced during the period, being initially
charged to the operation or process"

 a costing method that computes & allocates an equal amount of costs to each product (ie average
amount/cost per unit)

 a system for determining job costs in which conversion costs are applied to products as they pass
through successive process stages

 accumulated departmental costs are assigned to all units that flowed through that department during
the period (Raiborn, Barfield & Kinney, 1999)

 could also be described as having to:

1) identify costs of material inputs required at various stages

2) add estimated conversion costs for all process stages to the material costs
3) divide by the number of units produced during that particular period

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Explain the differences between job order costing & process costing

Job Order Costing Process Costing

Production Many different jobs; usually small Continuous or mass production; large
Job Costing batches of either single units, or volume Process
(identical,Costing
low cost)
batches of units (unique & high cost)
DirectProduction Jobs built
materials, Direct labor, to customer order
Overhead Units continuously produced for
Direct materials, Direct labor, Overhead
requirements inventory in automated process.
Costs & costs • Costs accumulated by the job • Costs accumulated by
objects
Job 100 Job 101 • Costs measured
Job 102 for individual WIP department
Chopping or WIP
process
Mixing & Bottling
Department
• Costs measuredDepartment
for individual
Variances Between actual & estimated costs are Between actual & estimated costs are
determined for individual jobs determined
Finishedfor individual process
Cost of stages
Finished Cost of
Others
Goods Goods Sold Processes
Goodsmay also produce:Goods Sold
 joint products, or
 by-products

3- Know the treatment for normal losses, abnormal losses and abnormal gains

Losses in processing materials could be due to:

• evaporation, residuals, ash(powder/dust), swarf
• unavoidable handling, breakage and spoilage losses
• withdrawal (goods taken) for testing and inspection

The treatment...
Normal process losses Abnormal process losses/ gains
Nature of losses In accordance with normal practice Above expectation, cannot be foreseen
The amount above the normal process
losses
Causes Could not be avoided, part of the x : Plant breakdown, industrial accidents,
process result inefficient working or unexpected defects
in materials
: unexpected favourable conditions
Costs treatment
• Cannot be covered • include in total production • all abnormal losses or gains should be
from sales of costs excluded from total production costs
defects

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• Could be covered • exclude from total production
from sales of costs
defects

4. Calculate the equivalent unit concept

Equivalent Units Example

Two one-half completed products are

equivalent to one completed product.

+ = l

So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.

Illustration

Assume that on September 30, the Key Largo Co.’s Shaping Department still had 5,000 masks that were
only 20% of the way through the shaping process.

What are the conversion equivalent units in ending work in process inventory?

Answer: 5,000 × .20 = 1,000 masks

BEGINNING AND ENDING WIP OF UNCOMPLETED UNITS

Issue:

• When opening WIP exists, an assumption must be made on allocating the opening stock to the
current accounting period to determine the unit cost for the period
• Two alternatives:

a) Weighted Average: Opening WIP is merged with the units introduced in the current period and
can no longer be identified separately

b) FIFO: Assume that the opening WIP is the first group of units to be processed and completed
during the current month

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5. Valuing the work-in-progress using FIFO method

Steps in Process Cost Accounting

1 Summarize the flow of physical units.

2 Compute output in terms of equivalent units.
3 Summarize total costs to account for.
4 Compute the cost per equivalent unit.
5 Assign costs to units completed and to units
in ending work in process.

Illustration:

McDonno Steel Inc. has two departments, melting and casting. McDonno melts scrap metal and then
pours the molten metal into an ingot casting.

To illustrate the first-in, first out method, we look at only one department, i.e. the Melting Department.
The following data for the melting Department are for July of the current year:

RM RM
WIP, July 1, 500 tonnes:
Direct materials cost, for 500 tonnes 24,550
Conversion costs, for 500 tonnes 3,600
28,150
Direct materials cost for July, 1,000 tonnes 50,000
Conversion costs for July 9,690
Goods transferred to Casting in July, 1,100 tonnes ?
WIP, July 31, 400 tonnes ?

STEP 1: Find the units to be assigned costs

STEP 2: Calculate equivalent units

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STEP 3: Calculate total costs to be assigned:

STEP 4: Compute the cost per equivalent unit:

STEP 5: Assign costs to units completed and to units in closing WIP:

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 6. Preparing the Process Account with opening WIP only

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH D TRA COG SOL
Actual M
costs
A N M D
D
incurred
L
FOH
A
Cost of Goods Sold
FOH – Casting WIP – Casting SOL
D
FOH TRA COG
Actual N M
costs
A
D
incurred
L
FOH
A

Summary of cost flows

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Example:
The Baltic Company has two processes, X and Y. Material is produced at the start of Process X, and an
additional material is added to process Y when the process is 70% complete. Conversion costs are applied
uniformly throughout both processes. The completed units of process X are immediately transferred to
process Y, and the completed production of Process Y are transferred to finished goods stock. Data for
the period include the following:

Process X Process Y
Opening WIP 6000 units 60% converted, 2000 units 80% converted,
consisting of materials consisting of previous process
RM72,000 and conversion costs cost of RM91,800, materials
RM45,900 RM12,000 and conversion costs
RM38,400
Units started during the period 16,000 units 18,000 units
Closing WIP 4,000 units ¾ completed 8,000 units ½ completed
Material costs added during the RM192,000 60,000
period
Conversion costs added during RM225,000 259,200
the period

Required:
Using Weighted Average & FIFO Methods separately:

a) Show your computations of equivalent units for the closing work in progress with regard to
materials and conversion costs.

b) Prepare the relevant computation table to determine the cost per unit with regard to materials and
conversion costs. (Round up your figures to the nearest Sen)

c) Show your computations for the items below:

i) Closing work in progress value
ii) Cost of completed units
(Round up your figures to the nearest Sen)

Tutorial Questions:

Drury 6.27, 6.28, 6.29 & 6.30 (Page 192 & 193)