Process costing explained with examples free of cost .It is for students of managerial accounting ,read this to quickly go through process costing. http://www.brightscholarships.com Twitter @scholarshipskys

1. Explained with examples
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1

2.  Process costing is adopted when there is
mass production through a sequence of
several processes
 Example include chemical, flour and
glass manufacturing
 It computes the average cost per unit by
dividing the costs or production for a
particular period by the number of units
produced during the period
2

3. 3
Process 1
Process 2
Process 3
Direct material
Direct labour
overheads
Finished goods Cost of goods sold
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads

4.  Costs are accumulated by each process
 Each process maintains its process
account
 The process account is debited with the
costs incurred and credited with goods
completed and transferred to other
process account
 When the goods are completed, they will
be transferred to finished goods account
 When the goods are sold, the amount will
be transferred to the cost of goods sold
account
4

5. 5
Process A
Material 500
Labour 100
Overhead200
Process B 800
800 800
Process B
Process A800
Material 50
Labour 150
Overhead100
Process C 1100
1100 1100
Process C
Process B 1100
Material 80
Labour 110
Overhead 210
Finished Gds 1500
1500 1500
Finished Goods
Process C 1500 Cost of GDs
Sold 1300
Bal c/d 200
1500 1500

6. 6

7.  In a production process, losses are inherent
and unavoidable
 Nature of losses
◦ Normal loss
◦ Abnormal loss
7

8.  Damaged goods may be sold as scrap
 Revenue arising from the scrap should be
treated as a reduction in cost rather than an
increase in sales revenue
8

9. Transactions Accounting
treatment
Accounting
entries
Normal loss Losses within
expected level
Not assigned cost
No entry
Abnormal loss Excess loss over
the expected level
Assigned cost
Dr. Abnormal
loss
Cr. Process
account
Abnormal gain Gain resulted when
the actual loss is
less than the
normal or
expected loss
Dr. Process
account
Cr. Abnormal
gain
9

10. Transactions Accounting
treatment
Accounting
entries
Scrap value of
normal loss
Reducing material
cost
Dr. Scrap
Cr. Process
account
Scrap value of
abnormal loss
Reduce cost of
abnormal loss
Dr. Scrap
Cr. Abnormal
loss
Loss of scrap
value due to
abnormal gain
The actual units
sold as scrap will
be less than the
scrap value of
normal loss
Dr. Abnormal
gain
Cr. Scrap
10

11. Transactions Accounting
treatment
Accounting
entries
Actual cash
received from
the sale of
scrap
Reducing material
cost
Dr. Cash
Cr. Scrap
11

12. 12

13. 13
Joyce Ltd. operates a factory involving two production
Processes. The output of process 1 is transferred to process
2. The information of production for January 2005 is as
follows:
• Cost for Process 1
Materials: 3000 units at $5 per unit
Labour $2400
• Cost for Process 2
Materials: 2000 unit at $8 per unit
Labour $1680
• No opening and closing work in progress
• Output for January 2005
Process 1: 2300 units
Process 2 4000 units

14. 14
• General overhead, for January 2005 amounted to $7140,
are absorbed into the process cost at a rate of 375% of
direct labour costs in process 1 and 496.4% of direct labour
cost in process 2.
• The normal output of process 1 and process 2 is 80% and
90% of input respectively
• Waste matters from process 1 and sold for $4 per unit
and those from process 2 for $6 per unit
Required:
(a) Process 1
(b) Process 2
(c) Scrap
(d) Abnormal loss
(e) Abnormal gain

15. 15
Process 1 account
Units $ Units $
Labour 2400
Materials 3000 15000
($5 *3000)
Overhead 9000
(2400*375%)
Process 2
($10*2300) 2300 23000
Abnormal loss
($10 *100) 100 1000
3000 264000 3000 26400
Scrap: normal loss
(4*600) 600 2400
Cost per unit
= Total expected cost
Total expected output
= $26400-$2400
3000-600
= $10 per unit

16. 16
Process 2 account
Units $ Units $
Labour 1680
Materials 2000 16000
Overhead 8340
(1680*469.4%)
Finished goods
($12*4000) 4000 48000
Abnormal gain
($12 *130) 130 1560
4300 49020
Scrap: normal loss
($6*430) 430 2580
Cost per unit
= = $49020-$2580
4300-430
= $12 per unit
Process 1 2300 23000
4430 50580 4430 50580

17. 17
Abnormal loss account
Units $ Units $
Process 1 100 1000 Scrap 100 400
Profit and loss 600
100 1000 100 1000
Abnormal Gain account
Units $ Units $
Process 2 130 1560Scrap: value of
abnormal gain 130 780
Profit and loss 780
100 1000 100 1000
Loss on scrap value due to abnormal gain

18. 18
Scrap account
Units $ Units $
Normal loss 430 2580
(Process 2)
Normal loss 600 2400
(Process 1)
Abnormal loss 100 400
(Process 1)
(100*$4)
Cash –process 1
(600+100)*$4 700 2800
1130 5380 1130 5380
Abnormal gain
(Process 2) 130 780
(130*$6)
Cash – process 2
(430-130)*$6 300 1800

19. 19
Wk 2:
Determining the output and loss:
Process 2
Input (2300+2000) 4300 units
Less: normal loss (10%)
Expected output
Actual output 4000 units
430 units
3870 units
Abnormal gain 130 units
Wk 1:
Determining the output and loss:
Process 1
Input 3000 units
Less: normal loss (20%)
Expected output
Actual output 2300 units
600 units
2400 units
Abnormal loss 100 units
Back 1 Back 2

20. 20

21.  If there is no opening or closing work in
progress (WIP) the unit cost of products can
be obtained as follows
21
Unit Cost = Sum of production costs
Production quantity

22.  However, If there is opening or closing work
in progress, the partly completed production
will have a lower cost than the fully
completed production
 We have to converted the work in progress
into finished equivalent units of production
(EUP)
22

23. 23

24. 24
The total production cost for January 2005 was $40000.
8000 units had been completed and 4000 units wee 50%
complete.
Equivalent units of production
8000 units completed 8000
4000 units were 50% completed 2000
10000
Finished goods =
Closing work in progress =
$40000/10000 * 8000 = $32000
$40000/10000*2000 = $8000

25.  Opening work in progress
 Started and completed units
 Closing work in progress
25

26.  These units were started in the previous
period and are to be completed in the current
period
26
1/3 EUP completed
In previous period
2/3 EUP completed
in current period

27.  These units are started and completed in
the current period
27
1 EUP completed
in current period

28.  These units are started in the current period
and are to be completed in the coming period
28
1/3 EUP completed
in current period
Incomplete part

29.  First in First out
 Weighted average cost
29

30. 30
First-in-first-out
method
Weighted average
method
The opening work in
progress is the first
group of units to be
processed and
completed during the
current period
The opening work in
progress is merged with
the production of the
current period to form
one batch of production
It separates the cost
computations of the
opening work in progress
and the current period
production
The average cost per
unit of the opening work
in progress and the
current period
production is the same

31. 31
First-in-first-out
method
Weighted average
method
The EUP computation
ignores the work
performed on the opening
work in progress during
the prior period
The EUP computation
includes all work
performed on the opening
work in progress during
the prior period
Cost per unit
= Current cost
EUP
Cost per unit
= Cost of OWIP + Current Cost
EUP

32. 32
FIFO Method WAVCO Method
10 units of OWIP
(60% completed
in previous
Period)
70 SACU
40 units of CWIP
(20% completed)
4 EUP
70 EUP
8 EUP
+
+
82 EUP
10 units of OWIP
(60% completed
in previous
Period)
70 SACU
40 units of CWIP
(20% completed)
10 EUP
70 EUP
8 EUP
+
+
88 EUP

33. 33

34. 34
Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion Cost
% $
Direct materials 100 6000
Conversion (labour + overhead) 60 1200
February production: 20000 units
$
Direct materials 30000
Conversion 52200
82200
7200
Closing work in progress: 3000 units (20% as complete as to
conversion

35. 35
You are required to :
Prepare Process 1 account using
(a)The FIFO method of valuation; and
(b)The weighted average method of valuation

36. First in First out
36

37. 37
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Closing work in progress
1000 0 400 (40%)
17000 17000 17000
18000 17000 17400
3000 3000 600 (20%)
21000 20000 18000
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
82200 30000 52200
4.4 1.5 2.9
20000-3000
No opening WIP

38. 38
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
17000 units completed
Transfer to finished goods
Closing WIP
7200 6000 1200
1160 1160
8360 6000 2360
74800 25500 49300
83160 31500 51660
6240 4500 1740
89400 36000 53400
Wk:4 Conversion: $2.9*400= 1160
(Wk 4)
Wk 5: Materials: 17000*$1.5 = $25500
Conversion: 17000*$2.9 = $49300
Wk 6: Materials: 3000*$1.5 = $4500
Conversion: 600*$2.9 = $1740
(Wk 5)
(Wk 6)

39. 39
Process account
Units $ Units $
Opening WIP 1000 7200
Materials 20000 30000
Conversion 52200
Finished goods 18000 83160
Closing WIP 3000 6240
21000 89400 21000 89400

40. Weighted average cost method
40

41. 41
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Closing work in progress
1000 1000 1000
17000 17000 17000
18000 18000 18000
21000 21000 18600
Wk 2:
Costs
Total Materials Conversion
$ $ $
Opening WIP
Costs incurred in the period
Costs per equivalent units
82200 30000 52200
4.5853 1.7143 2.8710
20000-3000
3000 3000 600 (20%)
7200 6000 1200
89400 36000 53400

42. 42
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Transfer to finished goods
Closing WIP
82535 30587 51678
6865 5143 1722
89400 35730 53400
(Wk 4)
Wk 4: Materials: 18000*$1.7143 = $30587
Conversion: 17000*$2.8710 = $51678
Wk 5: Materials: 3000*$1.7143 = $51678
Conversion: 600*$2.8710 = $1722
(Wk 5)

43. 43
Process account
Units $ Units $
Opening WIP 1000 7200
Materials 20000 30000
Conversion 52200
Finished goods 18000 82535
Closing WIP 3000 6865
21000 89400 21000 89400

44. 44

45.  Normal loss
 Abnormal loss
45

46.  Normal loss are the losses within the
expectation during the production
 Reasons:
◦ Low quality materials and workers are engaged
◦ There may be an inherent problem in production
process
46

47.  The lost units that is out of expectation
47

48.  Continuous losses occur evenly throughout
the production process
 For example, the weight loss in making mild
powder
48

49.  Discrete losses occur at the specific point
 A firm will not be aware of discrete losses
unless the products are inspected at the
inspection point
 For example, wrong buttons on a garment
and wrong colour of toy cars m
49

50. 50
Types and natures EUP calculation
Continuous normal loss Excluding the lost
units
Continuous and
abnormal loss
Including the lost
units
Discrete and normal
loss
Including the lost
units
Discrete and abnormal
loss
Including the lost
units

51. 51
Types and natures Treatments for losses and costs
Continuous normal loss Losses are included as product
costs
Costs are not assigned to the
lost units
Continuous and
abnormal loss
Losses are charged as period
cost
Costs are assigned to the lost
units
Abnormal loss will be written
off to the profit and loss

52. 52
Types and natures Treatments for losses and costs
Discrete and normal
loss
Loss are included as product
cost
Cost are assigned to lost units
Determining the point of work
in progress:
1. Before passing inspection
point, cost of lost units are
only assigned to units
transferred
2. After passing inspection point,
cost of lost units are
allocated between units
transferred and closing WIP

53. Types and natures Treatments for losses and costs
Discrete and abnormal
loss
Loss are charged as period
cost
Cost are assigned to lost units
Abnormal losses will be
written off to the profit and
loss account
53

54. 54

55. 55
Lucky Ltd. makes toys in a one-department production
process. The following information is available related
to the production in February 2005.
Opening work in progress: 1000 units
Degree of completion Cost
% $
Direct materials 100 6000
Conversion (labour + overhead) 60 1200
February production: 20000 units
$
Direct materials 30000
Conversion 52200
82200
7200
Closing work in progress: 3000 units (20% as complete as to
conversion

56. 56
Loss: 2000 units
You are required to :
Prepare Process 1 account using the FIFO method:
Case 1: Continuous normal loss
Case 2: Discrete normal loss
Case 3: Abnormal loss (both continuous and discrete
loss)

57. 57

58. 58
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss 2000
Closing work in progress
1000 0 400 (40%)
15000 15000 15000
16000 15000 15400
3000 3000 600 (20%)
21000 18000 16000
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
82200 30000 52200
4.9292 1.6667 3.2625
20000-3000-2000
No opening WIP

59. 59
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
7200 6000 1200
1305 1305
8505 6000 2505
73938 25000.5 48937.5
82443 31000.5 51442.5
6957 5000 1957
89400 36000.5 53399.5
Wk:4 Conversion: $3.2625*400= 1305
(Wk 4)
Wk 5: Materials: 15000*$1.6667 = $25000.5
Conversion: 15000*$3.2625 = $48937.5
Wk 6: Materials: 3000*$1.6667 = $5000
Conversion: 600*$3.2625 = $1957
(Wk 5)
(Wk 6)

60. 60
Process account
Units $ Units $
Opening WIP 1000 7200
Materials 20000 30000
Conversion 52200
Finished goods 16000 82443
Closing WIP 3000 6957
21000 89400 21000 89400
Normal loss 2000

61. It is assumed that the inspection point is set at
100% completion, all work has been performed.
As a result, the costs of lost units are assigned
to the units transferred
61
Material added
Closing WIP (20%)
Inspection point (100%)

62. 62
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss 2000 2000 2000
Closing work in progress
1000 0 400 (40%)
15000 15000 15000
16000 15000 15400
3000 3000 600 (20%)
21000 20000 18000
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
82200 30000 52200
4.4 1.5 2.9
20000-3000-2000
No opening WIP

63. 63
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
Normal loss
7200 6000 1200
1160 1160
8360 6000 2360
66000 22500 43500
74360 28500 45860
6240 4500 1740
89400 36000 53400
Wk:4 Conversion: $2.9*400= 1160
(Wk 4)
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740
(Wk 5)
(Wk 6)
8800 3000 5800

64. 64
Process account
Units $ Units $
Opening WIP 1000 7200
Materials 20000 30000
Conversion 52200
Finished goods 16000 74360
Closing WIP 3000 6240
21000 89400 21000 89400
Normal loss 2000 8800

65. For the discrete losses, it is assumed
that the inspection point is set at
100% completion
65

66. 66
Wk 1:
Number of Equivalent units (EU)
Total Materials Conversion
Units EU EU
Opening work in progress
Other completed units
Total completed units
Normal loss 2000 2000 2000
Closing work in progress
1000 0 400 (40%)
15000 15000 15000
16000 15000 15400
3000 3000 600 (20%)
21000 20000 18000
Wk 2:
Costs
Total Materials Conversion
$ $ $
Costs incurred in the period
Costs per equivalent units
82200 30000 52200
4.4 1.5 2.9
20000-3000-2000
No opening WIP

67. 67
Wk 3:
Cost of units transferred to finished goods and closing WIP
Total Materials Conversion
$ $ $
Opening WIP
Cost to complete
1000 units completed
15000 units completed
Transfer to finished goods
Closing WIP
Abnormal Normal loss
7200 6000 1200
1160 1160
8360 6000 2360
66000 22500 43500
74360 28500 45860
6240 4500 1740
89400 36000 53400
Wk:4 Conversion: $2.9*400= 1160
(Wk 4)
Wk 5: Materials: 15000*$1.5 = $22500
Conversion: 15000*$2.9 = $43500
Wk 6: Materials: 3000*$1.5= $4500
Conversion: 600*$2.9 = $1740
(Wk 5)
(Wk 6)
8800 3000 5800

68. 68
Process account
Units $ Units $
Opening WIP 1000 7200
Materials 20000 30000
Conversion 52200
Finished goods 16000 74360
Closing WIP 3000 6240
21000 89400 21000 89400
Abnormal
normal loss 2000 8800