AAT Level 3Costing Systems

(Job, Batch, Service & Process Costing)

Objectives:

1) Record costing information using a ‘Process’ costing system

2) Define the various stages of inventory

Process CostingUsed for continuous manufacturing processes

Inputs OutputsCost per unit of output = Input Costs + Conversion Costs

Expected Units of Output

Process Costing Account

What is a Process Costing account?Dr Process Account Cr

Litres £ Litres £

Inputs Outputs

Materials - a

Materials - b

Labour

Overheads

Output

Normal Losses

Abnormal Losses

Abnormal gains

Normal Losses (No scrap

value)What you EXPECT to lose

during the processes

Activity 1Demo

Direct materials 80,000 kg

£266,000

Direct Labour   £70,000Production overheads

  £60,000

Normal loss   10%

Actual output   72,000 Kg

Normal Losses (No scrap value) Activity 1

Materials 80000 266000

Labour 70000Overheads 60000

Output(FG or next process) 72000 396000

KG £ KG £

80000 396000 80000 396000

Inputs Outputs

Normal Loss 8000(10% x DM 80000)

Process Account

Activity 2

Direct materials 100,000 kg £300,000

Direct Labour   £90,000Production overheads

  £60,000

Normal loss   10%

Actual output   90,000 Kg

Normal Losses (No scrap value) Activity 2

Materials 100000 300000

Labour 90000Overheads 60000

Output(FG or next process) 90000 450000

KG £ KG £

100000 450000

Inputs Outputs

Normal Loss 10000(10% x DM 100000)

What is the normal loss?= Materials KG x % loss=100000 x 10%=10000 KG

What is expected output?= Materials KG - Loss=100000 - 10000=90000 KG

What are the total process costs?= Materials + Labour + Overheads=450000

What is the cost per KG?= Total Costs ÷ Expected Output=450000 ÷90000=£5 per unit

100000 450000

Abnormal Losses (No

scrap value)Avoidable

Materials 10000 7700

Labour & Overheads 3700

Output(FG or next process) 9400 11280

KG £ KG £

10000 11400 10000 11400

Inputs Outputs

Activity 3 - Abnormal Losses(No scrap value)

Normal Loss5% x 10000 500

Abnormal loss 100 120

Your turn!

Activity 4

Materials 100000 287000

Labour 138000

Output(FG or next process) 92000 496800

KG £ KG £

100000 507600 100000 507600

Inputs Outputs

Activity 4 - Abnormal Losses(No scrap value)

Normal Loss6% x 100000 6000

Abnormal loss 2000 10800Overheads 82600

What is the cost of 1kg of EXPECTED output?

Total Cost ÷ Output507600 ÷ 94000 = £5.40

What is the abnormal loss in kg?

Expected Output – Actual Output94000 - 92000 = 2000kg

Abnormal loss is 2000kg x £5.40 = £10800

Abnormal Gain (No scrap

value)

Materials 18000 35800Labour 7200

Actual Output 17500 (FG or next process)

KG £ KG £

18400 56000 18400 56000

Activity 5 - Abnormal Gain(No scrap value)

Overheads 11720

Normal Loss5% x 18000 900

What is the abnormal loss/gain?

= Actual Output – Expected output= 17500 - 17100 = 400 units

What is the value of the abnormal gain?

= 400 x £3.20 = 1280

Abnormal Gain 400 1280

What is the expected output?

= 18000-900= 17100

What is the cost per kg of expected output?

= Total costs ÷ Expected output= 54720 ÷ 17100 = £3.20

56000

Your turn!Activity 6: October Jam

Activity 6 Answer  Kg £   Kg £Materials 

5000 5600 Normal Loss 500  

Labour & Overheads

  7900      

Abnormal Gain

175 525 Finished Goods(or next process)

4675 14025*

  

    (*4675 x 3)    

  

5175 14025   5175 14025

  

         

Normal Losses with Scrap Value

Activity 7: January

  Kg £   Kg £Materials 100000 300000 Normal

loss10000

Labour   90000      Overheads

  60000 Output 90000

  100000 450000   100000 450000

15000

Scrap value = 10000 x 1.50Reduces the cost of the finished goods

435000

Activity 7: January

  Kg £   Kg £Materials 100000 300000 Normal

loss10000

Labour   90000      Overheads

  60000 Output 90000

  100000 450000   100000 450000

15000

435000

Your turn!Activity 8: February

Normal Losses (With scrap value) Activity 8

Materials 80000 266000

Labour 70000Overheads 60000

Output(FG or next process) 72000 386000

KG £ KG £

80000 396000 80000 396000

Inputs Outputs

Normal Loss 8000 10000(10% x DM 80000)

Process Account

Activity 9 DemoAbnormal loss with scrap

50000 356400

12050041600

5000

42000

What’s the difference between EXPECT & ACTUAL Production?

Expected 50000 – 5000 = 45000Actual 42000

Abnormal loss 3000

3000

What’s the scrap value of NORMAL loss?5000 x £2 = £10000

10000

What’s cost per unit of EXPECTED output?

= Total Costs Less Scrap = 518500 – 10000 = 11.30Expected Output 45000

33900

50000 518500

50000 518500474600

Your turn!Activity 10

Activity 10 - Answer

Normal loss is 5%, Scrap Value = 38p per kg. Materials 10000 kg costing £7700Labour and overheads £3700Output 9200 kg

  Kg £   Kg £Materials 

10000 7700 Normal loss 500 (a) 190

Labour &Overheads

  3700  Abnormal loss

300 (e) 354

  Output 9200 10856  10000 11400   10000 11400

Abnormal gains with Scrap Value

Activity 11 Abnormal gain with Scrap Value

Expected Output = 18000 – 900= 17100

Abnormal Gain = 17500 - 17100= 400 kgb) Losses sold for 20p per kg = 900 x 20p =

£180

180

Total the costs MINUS scrap35800 + 7200 + 11720 – 180 = £54540Calculate the cost per unitTotal Costs = 54540 = 3.1894736!! Rounded to £3.19Expected Units 17100

400

c) Value the abnormal gains = 400 x 3.1894736 = 1276

1276

Value the actual output 17500 x 3.19 = 55816

55816

18400 55996 18400 55996

Your turnQuestion 12

NB You will need to add ‘Abnormal Gain’ on the debit side of your account.

Activity 12 - Answer

  Kg £   Kg £

Materials 5000 5600 Normal loss

500 500

Labour & overheads

  7900 Actual Output

4675 13506

Abnormal gain

175 506      

  5175 14006   5175 14006

More than one process

More than one process

Your turn!Activity 13

Activity 13 -Answer

  Kg £   Kg £Materials 200000 100000 Normal Loss 20000  Labour   20000      Overheads

  5000 Output to next process

180000 125000

   200000 125000   200000  125000

  Kg £   Kg £Output from process 1

180000 125000 Normal Loss 20000  

Materials 20000 60000      Labour 40000 Output 18000

0285000

Overheads   60000        200000 285000   20000

0285000

Process 2

Process 1

Work in ProgressEquivalent

UnitsNumber of WIP units X % Completion

Value of Equivalent UnitsTotal Production Costs

Completed units + Equivalent units

Activity 14: WIP Materials Labour & Overheads Last month the following inputs were made to a process:Materials £15,575Labour & overheads £8,480 4000 units were completed and 600 units in progress – 75% complete for materials, but only 40% for labour and overheads. What is the value of completed units and WIP?

  Units Materials Completed

Equivalent Units

Labour Equivalent Units

Completed Work in ProgressTotal Equivalent UnitsCosts (Inputs)

Cost per EU

4000 4000 4000100% 100%

600 75% 450 40% 240

4450 4240

15575 84803.50 2.00

Completed Output

Materials 4000 x 3.50 £14000

Labour 4000 x 2.00 £8000

£22000

Work in Progress

Materials 450 x 3.50 £1575

Labour 240 x 2.00 £480

£2055

  £   £Materials 

15575 Completed Output

22000

Labour &Overheads

8480 Work in progress

2055

  24055   24055

Your turn!Question 15 - 19