Process Costing

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Process costing is a costing method used when it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. Process costing traces and accumulates direct cost, and allocates indirect cost incurred during a manufacturing process.

The following are examples of some of the industries which use process costing:

  1. Oil refineries
  2. Soap manufacturers
  3. Paint manufacturers
  4. Sugar manufacturers

Features of Process Costing

The following features distinguish process costing from other costing methods:

a) The continuous nature of production in many processes means that there will usually be closing work in progress which must be valued. In process costing it is not possible to build up a cost record of the cost incurred on individual units of output because production in progress is an indistinguishable homogeneous mass.

b) The output of one process becomes the input of the next,unless it is the final process, culminating in the finish product.

c) Losses often occur during the process due to spoilage, wastage, evaporation and so on.

d) Output from production may be a single product, but depending on the industry there may also be by-products and joint products.

Process accounts are used to accumulate the cost incurred during a process. The following four step approach is used to complete the process accounts, minimizing the chances of error:

i. Determine output and losses

ii. Calculate cost per unit of output, losses and work in progress

iii. Calculate total cost of output, losses and work in progress

iv. Complete accounts

Example:

The input to a process is 2,000 units at a cost of $ 9,000. Normal loss is 10%. No opening and closing stocks. Complete the process accounts if output is 1660 units

Solution:

Before solving the example, the following points should be noted.

a. Normal loss is given no share of cost. Therefore, the cost of output will be based on 90% of units completed i.e. 2,000 @ 90% = 1,800

b. Abnormal loss will be given a cost. Abnormal loss = Total loss – Normal loss

Step 1:

Now, to complete the process account the first step is to determine output and losses

Total Input = 2,000
Output = 1,660
Normal Loss = 200
Abnormal Loss = 140

Step 2:

Calculate cost per unit of output and losses

Total Cost Incurred / Expected Output = 9,000 / 1,800 = $5 per unit

Step 3:

Calculate total cost of output and losses

Output = $8,300
Normal Loss = Nil
Abnormal Loss = $700

Step 4:

Process accounts

Particular

Units

Amount ($)

Particular

Units

Amount ($)

Cost Incurred

2,000

9,000

Normal Loss

200

0

Abnormal Loss

140

700

Output

1,660

8,300

2,000

9,000

2,000

9,000

Quote Guest, 14 March, 2012
Very helpful, thank you!
Quote Guest, 7 April, 2012
Grt job well done
Quote Guest, 29 April, 2012
Nice one, exactly the type of question that needed help on :)
Quote Guest, 18 May, 2013
nice and easily done. thanks!
Quote saad khatri, 27 May, 2013
Very helpful Thankyou!!

:)
Quote Humam, 2 February, 2014
thanks it is usefull
Quote Dian, 12 March, 2015
great job! been searching for problem solving like this for half an hour before i found this. thank u.. keep up the good work!
Quote Guest, 10 April, 2017
Can I please ask something, I follow the example but how did you get to the abnormal loss?
And if I give you my one, will someone be able to assist me please?

QUESTION 4 (30)




Edible Oils Ltd manufactures sunflower cake, a product used as live stock feed. The sunflower cake is manufactured in two different, consecutive processes. The output of process 1 is used in process 2 and the output from process 2, which is the final product, (C1) is sent to the packaging department.

The following information related to the week ended 5 October 2016 with regard to process 1 (C2):

Input:

Sunflower seed 60 000kg at R8 per kg

Ingredient X 20 000kg at R3 per kg

Labour 1 840 hours at R25 per hour

Normal loss 5% of input, considered to be scrap

Selling price of scrap R2, 80 per kg

Output: 77 500kg


During this week there was neither opening nor closing work-in-progress in process 1 (C3).

Total overheads charged to process 1 and 2 amounts to R280 000 for the week and were absorbed on the basis of labour hours. The labour hours worked in process 2 were 1 660 hours (C4).



All scrap was sold for cash on the last day of the week (C5). C1:2 processes. Completed output of process 1 goes into process 2. Completed output of process 2 is packaged and sold.
C 2: Make a note that this information is for 1 week.
C 3: No equivalent units.
C 4: Total labour hours required.

C5: This income must be recorded.

Required:

4.1 Prepare, using only the information provided above, the following accounts for the week ended 5 October 2016.
4.1.1 Process 1 account (6)
4.1.2 Abnormal loss/gain account (5)
4.1.3 Scrap proceeds account




Quote Jenita James, 10 April, 2017
Can someone please assist me with the below query
Quote Jenita James, 10 April, 2017
QUESTION 4 (30)




Edible Oils Ltd manufactures sunflower cake, a product used as live stock feed. The sunflower cake is manufactured in two different, consecutive processes. The output of process 1 is used in process 2 and the output from process 2, which is the final product, (C1) is sent to the packaging department.

The following information related to the week ended 5 October 2016 with regard to process 1 (C2):

Input:

Sunflower seed 60 000kg at R8 per kg

Ingredient X 20 000kg at R3 per kg

Labour 1 840 hours at R25 per hour

Normal loss 5% of input, considered to be scrap

Selling price of scrap R2, 80 per kg

Output: 77 500kg

During this week there was neither opening nor closing work-in-progress in process 1 (C3).

Total overheads charged to process 1 and 2 amounts to R280 000 for the week and were absorbed on the basis of labour hours. The labour hours worked in process 2 were 1 660 hours (C4).



All scrap was sold for cash on the last day of the week (C5). C1:2 processes. Completed output of process 1 goes into process 2. Completed output of process 2 is packaged and sold.
C 2: Make a note that this information is for 1 week.
C 3: No equivalent units.
C 4: Total labour hours required.

C5: This income must be recorded.

Required:

4.1 Prepare, using only the information provided above, the following accounts for the week ended 5 October 2016.
4.1.1 Process 1 account (6)
4.1.2 Abnormal loss/gain account (5)
4.1.3 Scrap proceeds account  

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