ACOF 014

Introduction to Costing
Trimester 2 2009/2010

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 units concept
 Know the treatment of previous process costs.
 Beginning and ending WIP of uncompleted units
1. Valuing the opening work-in-progress using FIFO method
2. Valuing the opening work-in-progress using WACO method

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

DIFFERENCES BETWEEN JOB ORDER COSTING & PROCESS COSTING

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 Job Order Costing Process Costing
Production Many different jobs; usually small Continuous or mass production; large
batches of either single units, or volume (identical, low cost)
batches of units (unique & high cost)
Production Jobs built to customer order Units continuously produced for
requirements inventory in automated process.
Costs & costs  Costs accumulated by the job  Costs accumulated by department or
objects  Costs measured for individual process
 Costs measured for individual
Unit-cost Cost of each job ÷ Units produced Total manufacturing costs ÷ Units
computations for the job produced during the period
Variances Between actual & estimated costs Between actual & estimated costs are
are determined for individual jobs determined for individual process stages
Others Processes may also produce:
 joint products, or
 by-products

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

EQUIVALENT UNITS CONCEPT

 It is common to have partially/semi-completed units. (Ending/Closing WIP exists)

 How to determine unit cost? Total Costs ÷ Total output? Wrong!
 The WIP must be converted into equivalent production so that unit cost can be obtained.

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Example 1
In a given period, total costs were RM180,000. Production was 8,000 complete units and 2,000 partly
complete. The partly complete units were deemed to be 50% complete. Calculate the total equivalent
units and cost per unit.

Equivalent Units and Cost Elements

 Complication may arise when not all cost elements reach the same degree of completion.
 For example
- M are added at the start of the process
 equivalent production for closing WIP fully completed.
- M are added at the end of the process
 equivalent production for closing WIP zero.
- L and OH are added uniformly throughout the process
 equivalent production for closing WIP partially complete.
 Separate equivalent unit calculations must be made for each element of cost.
 The cost per unit of each element is added to give the cost of a complete unit.

Example 2
The Fontenbleau Company manufactures a product that passes through Process A and Process B. The
following information relates to the first process.

Completed units 10,000

Closing WIP 4,000
Materials RM210,000
Conversion costs RM144,000

Materials are added at the start of process and conversion costs are added uniformly throughout the
process. The closing WIP is estimated to be 50% complete.

Required: Calculate the total equivalent units, the cost per complete unit and the value of WIP.

PREVIOUS PROCESS COSTS

 The element of costs on completed units transferred from the previous process.
 As production moves through processing, the output of one process becomes the input of the next
process.
 The next process will carry out additional conversion work, and may add further materials.
 PPC will always be fully complete as far as closing WIP is concerned.

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Example 2 (Con’t)
The following information relates to Process B

Completed units 9,000

Closing WIP 1,000
Materials RM108,000
Conversion costs RM171,000

Materials are added at the end of process and conversion costs are added uniformly throughout the
process. The closing WIP is estimated to be 50% complete.

Required: Calculate the total equivalent units, the cost per complete unit and the value of WIP.

BEGINNING AND ENDING WIP OF UNCOMPLETED UNITS

 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.
- Average unit cost is calculated using the total of the opening WIP plus the current costs.
- Both closing WIP and completed units are valued using the same average unit cost.
b) FIFO
- Assume that the opening WIP is the first group of units to be processed and completed during
the current month.
- The opening WIP is charged separately to completed production, and the cost per unit is
based only on the current period costs and production for the current period.
- The closing WIP is assumed to come from the new units started during the period and valued
at current costs.

Example 3

The Baltic Company has two processes, X and Y. The following information is related to process X.

Opening WIP 6,000 units 60% converted (M = RM72,000, CC = RM45,900)

Units started during the period 16,000
Closing WIP 4,000 ¾ complete
Materials RM192,000
Conversion costs RM225,000

Material is introduced at the start of the process, conversion costs are applied uniformly throughout the
process.

Required: Using Weighted Average Method

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)

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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)

Example 3 (Con’t)

The following information is related to process Y.

Opening WIP 2,000 units 80% converted (PPC = RM91,800, M = RM12,000,
CC = RM38,400)
Units started during the period 18,000
Closing WIP 8,000 ½ complete
Materials RM 60,000
Conversion costs RM259,200

Additional material is added when the process is 70% complete, conversion costs are applied
uniformly throughout the process.

Required: Using Weighted Average Method

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)

Repeat your answers with FIFO methods