Part Two: Cost accumulation for inventory valuation and profit measurementChapter Five: Process costing Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.1PROCESS 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.

Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.2a Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.2b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.3a 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.

ExampleInput = 1 200 litres at a cost of 1 200Normal loss = 1/6 of inputActual output = 900 litresCPU = 1 200/Expected output (1 000 litres) = 1.20Cost of completedproduction = 1 080 (900 1.20)Cost of abnormal loss = 120 (100 1.20) Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.3b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.4a Sale proceeds from normal losses Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.4b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.5a Sale proceeds (normal and abnormal losses)

Example 2As 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 thecost of the abnormal loss.

Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.5b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.5c Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.6a Abnormal gains ExampleInput = 1 200 litres at a cost of 1 200Output = 1 100 litresNormal loss = 1/6 of inputScrap value = 0.50 per litre

CPU = Cost of production less scrap value of normal loss Expected output

= 1 100 /1 000 = 1.10 per litre

Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.6b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.6c Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.7aEquivalent production & closing WIP

Partly completed units are expressed as fully completed equivalent units in order to compute CPU (e.g. 1000 units 50% complete equals 500 equivalent production).

ExampleOpening WIP NilUnits introduced into the process 14 000Units completed and transferred to next process 10 000Closing WIP (50% complete) 4 000Materials cost (introduced at start) 70 000Conversion cost48 000

Note that materials are 100% complete. Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.7b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.8Equivalent production and closing WIP Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.9aPrevious process costCosts transferred from a previous process are treated as a separate element of cost (100% complete)

ExampleOpening WIPNil Units transferred 10 000 Closing WIP *50% complete) 1 000 Completed units transferred to finished goods stock 9 000 Previous process cost90 000 Conversion costs57 000 Materials (introduced at end of process)36 000Note materials are zero complete and previous process cost 100% complete. Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.9b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.10Previous process cost Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.11Example to illustrate weighted average and FIFO Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.12 Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.13Note the weighted average method assumes that the opening WIP is mergedwith the units produced in the current period.

Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.14aOpening 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. Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.14b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.15aOpening WIP FIFO method Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.15b Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

5.15c Use with Management and Cost Accounting 8e by Colin DruryISBN 9781408041802 2012 Colin Drury

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