ACC2232 - Process Costing

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:

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

from readyratios.com

Illustration

Neo Pharma process a product through three distinct stages, these production of on process being passed on to the next process and so on to the finished product. Details of the cost incurred in each process are given below.

	Process A	Process B	Process C
Raw Material	1000	800	200
Direct Wages	500	600	700
Direct Expenses	150	250	500

The overhead expenses or the period amount to RM 3600 and is to be distributed to the process on the basis of direct wages.

There were no stocks in any of the process either at the beginning or at the close of the period.

Assuming the output was 1000 kilos, show the process cost of A, B and C indicating also the cost per kilo of each element of cost and the output in each process.

If 10% of the output is lost in storage and giving samples, what should be the selling price per unit to make a gross profit of 33.33% on the selling price.

Process A Account 

Debit	Amount	Credit	Amount
Raw Material	1000	Process B Account	2650
Direct wages	500
Direct Expenses	150
Overheads	1000
	2650		2650

Process B Account 

Debit	Amount	Credit	Amount
Process A Account	2650	Process C Account	5500
Raw Material	800
Direct Wages	600
Direct Expenses	250
Overhead	1200
	5500		5500

Process C Account 

Debit	Amount	Credit	Amount
Process B Account	5500	Finished Stock Account	8300
Raw Material	200
Direct Wages	700
Direct Expenses	500
Overhead	1400
	8300		8300

If 10% is lost

Total Output = 900 Kgs

Total Cost = RM 8300

Cost Per Kg = 8300 / 900 = RM9.22

Selling Price to earn 33.33% on Selling price

Cost price = 100 - 33.33 = RM66.67

If cost is RM66.67, sale value = 100

If cost is RM1, sale value = 100 / 66.67

If cost is RM 8300, sale value = 100/66.67 X 8300 = 12449.37

Selling price per unit = 12449.37/900 = RM 13.83

- from http://www.svtuition.org