PROCESS COSTING 2013-14.doc

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AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12 NOTES

PROCESS COSTING

Process costingis a form of operation costing used where production follows a seriesof sequential processes. It is used in a variety of industries including: oil refining, foo!rocessing, !"!er #"$ing, c%e#ic"l "n r&g #"n&f"ct&re, !"int "n '"rnis%#"n&f"ct&re. Although details vary from one concern to another, there are commonfeatures in most process costing systems. These include:

(") Clearly defined process cost centres and the accumulation of all costs (material,labour and overheads by the cost centres.

(*) The maintenance of accurate records of units and part units and parts unitsproduced and the cost incurred by each process.

(c) The averaging of the total costs of each process over the total production of thatprocess, including partly completed units.

() The charging of the cost of the output of one process as the raw materials inputcost of the following process.

(e) Clearly defined procedures for separating costs where the process produces twoor more products (i.e., +oint Pro&cts or where -.!ro&cts arise during

production.

C%oice of Cost UnitsThe cost unit chosen should be relevant to the organisation and its product. In mostcases the appropriate unit arises naturally having regard to the process and the way theproduct is sold and priced. !"amples include:

In&str- Possi*le Cost Unit#rewing $itre, gallon, barrel%aint, &arnish $itre, 'allonood processing Can, Case, )ilogram, Tonne, $itre, etc.*il refining $itres or multiples, #arrel

"sis of Process CostingThe basis of all %rocess Costing systems is shown in /ig&re 10

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It will be seen that materials passes through the various processes gathering costs as itprogresses.

Process Losses+ith many forms of production the quantity, weight or volume of the process output will

be less than the quantity, weight or volume of the materials inputThis may be due tovarious reasons:

(") !vaporation, residuals, ash.(*) navoidable handling, brea-age and spoilage losses.(c) +ithdrawal for testing and inspection.

#ecause of increasing material costs, careful records must be maintained of lossesoccurring and the resulting cost implications. If losses are in accordance with normalpractice, i.e., standard levels, they are termed nor#"l !rocess losses. If they areabove e"pectation, they are -nown as "*nor#"l !rocess losses.

Nor#"l Process LossesThese are unavoidable losses arising from the nature of the production process and it istherefore logical and equitable that the cost of such losses is included as part of the costof good production. If any value can be recouped from the sale of imperfect articles ormaterials than this would be credited to the process account thus reducing overall cost.

E"#!le 1A food manufacturing process has a normal wastage of 34which can be sold as animalfeedstuff at 53tonne. In a given period the following data were recorded:Input materials 167 tonnes at 528 per tonne. $abour and *verheads 529:6. $osseswere at the normal level. Co#!&te t%e cost !er tonne

Sol&tion0

INPUT Tonnes 5aterials /01 2031$abour and overheads 44444 5630

/01 0780Less

9ormal loss 34 6 1Goo !ro&ction 132 6386

Cost !er tonne of goo !ro&ction ; 6386


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units the concept of e>&i'"lent &nits is required.The number of equivalent fullycomplete units which the partly complete units (ie, t%e W?I?P)represent.

or e"ample, assume that in a given period production was 2277complete units and677partly complete. The partly complete units were deemed to be @34complete.

Total equivalent production ; Completed units > !quivalent units in +?I?%

;2

5511 (011 5511 71

+ = +

; 2637

The total costs for the period would be spread over the total equivalent production.

Total Costsi.e. Cost per unit ;

Total equivalent production units

E>&i'"lent Units "n Cost Ele#ents

The above illustration of equivalent units is the simplest possible. requently someoverall estimate of completion is not possible or desirable and it becomes necessary toconsider the percentage completion of each of the cost elements@ material, labour andoverheads. The same principles are used to calculate equivalents units, but each costelement must be treated separately and then the cost per unit of each element is addedto give the cost of a complete unit. This is shown below:

E"#!le 20

In a given period production and cost data were as follows:

5Total Costs aterials 7//7$abour 2375*verheads 2111

1276@

%roduction was 1=77 fully complete units and 277 partly complete. The degreecompletion of the 277 units W?I?P was as follows

aterial @34complete$abour 674complete*verheads 374complete

Calculate theTot"l E>&i'"lent Pro&ction

, theCost !er Co#!lete Unit

andt%e '"l&e

t%e W?I?P

Sol&tion0

CostEle#ent

E>&i'"lentUnits in W?I?P >

/&ll- Co#!lete&nits ;

Tot"lEffecti'e

Pro&ction

Tot"lcosts

5

Cost !erUnit

5aterial 511 " 87 ; /71 > /11 ; /771 7//7 2.2



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$abour*verheads

511 " 01 ; /51511 " 71 ; /11

>>

/11/11

;;

/751/711

23752111

5.05.11

1276@ @:7

rom the table it will be seen that the cost of a complete unit ; 5@:7 &alue of Completed %roduction ; 1=77 5@:7 ; 511,767

&alue of W?I?P; Total Costs B &alue of competed production

; 51276@ . 11767 ; 5177@ This can be verified by multiplying each element cost per unit by the number ofequivalent units in the W?I?Pof each element, thus:

Cost Ele#ent No of E>&i'"lentUnits in W?I?P

Cost !er Unit 5

"l&e of WIP 5

aterial /71 2.21 37$abour /51 5.01 2/5

*verheads /11 5.11 511177@

Note on E"#!le 2The way that the value of W?I?Pcan be cross chec-ed by using the cost elements or thetotal values should be carefully studied.emember: Tot"l cost for !erio ; "l&e of co#!lete &nits B "l&e of W?I?P

In!&t "teri"l "n "teri"l intro&ceThe output of one process forms the input material to the ne"t process. The full cost ofthe completed units transferred forms the input material cost of the process and by its

nature input material must be 1774complete.aterial introduced is e"tra material needed in the process and should always be shownseparately from input material. +henever there are partly completed units at the end ofthe period, they may contain two classifications of material, i.e,In!&t "teri"l (ie, !re'io&s !rocess costs) "l"-s 1774 co#!lete"teri"l Intro&ce, %ic% #"- or #"- not *e co#!lete

NoteInput material may also be described as: Units tr"nsferre,Cost of goos or &nitstr"nsferre or !re'io&s !rocess costs

+oint !ro&cts "n -?Pro&ctsAjoint productis the term used when two or more products arise simultaneously in thecourse of processing, each of which has a significant sales value in relation to eachother. !"amples of industries where Doint products arise as follows:

Oil refining- The Doint products include@ diesel fuel, petrol, lubricants.

e"t !rocessing- The Doint products include@ the various grades of meat and hide.

ining

PROCESS COSTING P"ge =


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- The Doint products frequently include the recovery of several metals from thesame crushing.

C"ttle f"r#ing- The Eoint %roducts include@ mil-, #utter, cheese etc.

-?Pro&ct is a product, which arises incidentally in the production of the main

product(s and which has a relatively small sales value in compared with the mainproduct(s. !"amples of by?products are:

Iron "n steel #"n&f"ct&re- urnace slag is sold for use in cement and bric- manufacture and for road

construction.e"t tr"e

- #ones, grease and certain offal are regarded as by?products.

Ti#*er tr"e-


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W"ste0+aste describes material, which has no value and therefore has no effect uponthe process account@ nor will it be included in stoc-.

+oint?Pro&ct Costing#ecause Doint products arise due to the inherent nature of the production process, it

follows that none of the products can be produced separately. The various productsbecome identifiable at a point -nown as the s!lit?off !ointF. p to that stage all costsare Doint costs, subsequent to the split?off point any costs incurred can be identified withspecific products and they are -nown as s&*se>&entF or "ition"l !rocessingcostsF. This is shown diagrammatically in /ig&re 2

It follows that subsequent costs after the split?off point do not pose any particular costingproblem because they are readily identifiable with a specific product and an be codedand charged accordingly. or product costing purposes the maDor problem in Doint?product costing is to apportion the Doint costs, ie, those prior to the split?off point, on anacceptable basis.



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PROCESS COSTING . LAOUTS

PROCESS 1 ACCOUNT

5 5"teri"l (Units "teri"l t- "teri"l Price) Tr"nsferre to Process 2 L"*o&r (Units L"*o&r Ho&rs L"*o&r R"te) "ri"*le O'er%e"s (Units L"*o&r Ho&rs

OH R"te) /ie O'er%e"s (Units L"*o&r Ho&rs

/OH R"te)

* Note: If based on Direct Labour Hours.

PROCESS 2 ACCOUNT

5 5"teri"l Tr"nsferre fro# Process 1 Tr"nsferre to Process 8 Ae "teri"l (Units "teri"l t- "teri"l

Price) L"*o&r (Units L"*o&r Ho&rs L"*o&r R"te) "ri"*le O'er%e"s (Units L"*o&r Ho&rs

OH R"te) /ie O'er%e"s (Units L"*o&r Ho&rs

/OH R"te)

PROCESS 8 ACCOUNT

5 5"teri"l Tr"nsferre fro# Process 2 S"le of - ? Pro&cts Ae "teri"l (Units "teri"l t- "teri"l

Price) Nor#"l Losses L"*o&r (Units L"*o&r Ho&rs L"*o&r R"te)

/inis%e Goos . +oint Pro&cts . J .

"ri"*le O'er%e"s (Units L"*o&r Ho&rs OH R"te)

/ie O'er%e"s (Units L"*o&r Ho&rs

/OH R"te) Wor$ in Progress c


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ASTER UDGETED COST STATEENT . PROCESS 15

"teri"l (St Units St "teri"l t- St "teri"l Price) L"*o&r (St Units St L"*o&r Ho&rs St W"ge R"te) "ri"*le O'er%e"s (St Units St L"*o&r Ho&rs St OH R"te) /ie O'er%e"s (St Units St L"*o&r Ho&rs St /OH R"te)

Tr"nsferre to Process 2

ASTER UDGETED COST STATEENT . PROCESS 25

"teri"l Tr"nsferre fro# Process 1 Ae "teri"l (St Units St "teri"l t- St "teri"l Price) L"*o&r (St Units St L"*o&r Ho&rs St W"ge R"te) "ri"*le O'er%e"s (St Units St L"*o&r Ho&rs St OH R"te) /ie O'er%e"s (St Units St L"*o&r Ho&rs St /OH R"te) /inis%e Goos


/LEJED UDGETED COST STATEENT . PROCESS 1 (ACTUAL J STANDARD)5

"teri"l (Act&"l Units St"n"r "teri"l t- St"n"r "teri"l Price) L"*o&r (Act&"l Units St L"*o&r Ho&rs St W"ge R"te) "ri"*le O'er%e"s (Act&"l Units St L"*o&r Ho&rs St OH R"te) /ie O'er%e"s (Act&"l Units St L"*o&r Ho&rs St /OH R"te) Tr"nsferre to Process 2

/LEJED UDGETEDCOST STATEENT . PROCESS 2 (ACTUAL J STANDARD)5

"teri"l Tr"nsferre fro# Process 2

Ae "teri"l (Act&"l Units St "teri"l t- St "teri"l Price) L"*o&r (Act&"l Units St L"*o&r Ho&rs St W"ge R"te) "ri"*le O'er%e"s (Act&"l Units St L"*o&r Ho&rs St OH R"te) /ie O'er%e"s (Act&"l Units St L"*o&r Ho&rs St /OH R"te) /inis%e Goos


ACTUAL COST STATEENT . PROCESS 15

"teri"l (Act&"l Units Act&"l "teri"l t- Act&"l "teri"l Price) L"*o&r (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l W"ge R"te)

"ri"*le O'er%e"s (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l OH R"te) /ie O'er%e"s (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l /OH R"te) Tr"nsferre to Process 2

ACTUAL COST STATEENT . PROCESS 25

"teri"l Tr"nsferre fro# Process 1 Ae "teri"l (Act&"l Units Act&"l "teri"l t- Act&"l "teri"l Price) L"*o&r (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l W"ge R"te)



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"ri"*le O'er%e"s (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l OH R"te) /ie O'er%e"s (Act&"l Units Act&"l L"*o&r Ho&rs Act&"l /OH R"te) /inis%e Goos

PROCESS COSTING P"ge :

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