Process Costing
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:
- Oil refineries
- Soap manufacturers
- Paint manufacturers
- 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 |
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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
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