INTRODUCTION
MEANING
1) Process :A Process means a distinct manufacturing operation or stages. In Process Industries, the raw material goes through a number of processes in a sequence before the finished product is finally produced. For example production of coconut oil involve the following distinct processes:
(1) COPRA CRUSHING (2) REFINING AND (3) FINISHING. 2) Process Costing: Process costing is method of costing used to find out
the cost of the product in each process. wheldon has defined process costing as “a method of costing used to ascertain the cost of the product at each stage or operation of manufacture …..”According to CIMA, London-“it is that form of operation costing where standardized goods are produced”
3) Process Cost: According to CAS – 1 when the production process is such that goods are produced from a sequence of continues or repetitive operation or processes, the cost incurred during a period is considered as process cost.
Process Costing is applicable to several mining , manufacturing and public utility industries, e.g. mines and quarries producing minerals and ores; industries producing textiles , chemicals, soap, paper, plastics, alcohol, refined oil, electricity, gas and so on.
It becomes necessary to apply process costing to the Industries belonging to any of the following categories:
ONE PRODUCT, MANY PROCESSES: A factory may produce a
single item through a number of processes or departments. it becomes necessary to find out the cost of each process or department separately to control wastage etc.
MANY PRODUCTS, MANY CYCLES: A bakery can use the same
equipments to produce either bread or cakes. it may produced only bread in one cycle and change over to production of cakes in the next cycle. each cycle is treated as a separate process so as to find out the cost of the item produced in a particular cycle or process.
MANY PRODUCTS, SAME PROCESS: an oil refinery can obtain
many joint products such as refined oil, gas, steam etc. in the same process. Process Costing is employed to ascertain the individual cost of each such product.
(1) PERIODICAL DETERMINATION OF COSTS:Process costs can be
collected and determined for even a short period like a day, a week or a month. In Job Costing, on the other hand, costs can be collected and determined only after the job is complete, which may take months or evens years.
(2) SIMPLE AND CHEAP:Process costing is much simple, easy and less
expensive method of costing as compared to other methods. There is no need for an elaborate system of identifying the direct costs of a job or a batch.
(3) MANAGERIAL CONTROL:Being a simple system to establish and
operate, process costing facilitates greater control of the management over costs, wastage etc.
(4) STANDARD PROCESS AND PRODUCTS:Since the processes and
products are standard, it is easy to make decisions regarding pricing, quotations, tenders etc.
(1) NO DETAILED ANALYSIS: Process Costing does not give a details
analysis of the cost as (i) it emphasizes the period rather than the unit or the product, and (ii) it gives an average cost rather that the specific cost of the product.
(2) HISTORICAL COSTS: Process Costing gives only historical costs
which are not useful for forecast of future trends etc.
(3) ESTIMATES: The determination of percentages of normal loss,
wastage, distribution of costs over by – products and joint products, valuation of work in progress involve estimate based on arbitrary decision of the management.
NO. PROCESS COSTING JOB COSTING 1. 2. 3. 4. 5.
It is period costing i.e. costs of all processes during a period are ascertained.
Cost unit is each process.
Direct costs are much more than indirect.
It normally involves work in -process.
Cost of one process is transferred to next process.
It is specific costing; i.e. cost of job is ascertained till it ends, whatever the time it takes.
Cost unit is the job order.
Costs are directs as well as indirect.
It may not involve work - in – progress.
Cost of each job is separate.
Costing PROCUDER – SIMPLE
PROCESS
Accounting Procedure
The accounting prouder in process costing is as follows:
1. Separate Process A/c:the entire manufacturing operation is divided in
to separate stages or process. each process of production is treated as a distinct cost centre a separate process account is opened to record the cost incurred in such process.
2. Debit side of Process A/c:each process account is charged with the
expenses directly incurred for that process and plus its share of the overheads. the process account is debited with the direct and indirect expenses ( material, wages and overheads) pertain to that process.
a) Material:the raw material, sundry material and stores
required for a process are issued directly from the stores against a material requisition slip. in addition, the cost of units transferred from the earlier process, if any , also appears on the debit side of the process account.
b) Labour :wages paid to workers directly employed in a
process are debited to the process account. like material, the distinction between direct and indirect labour is not important in process costing. Indirect labour expenses (e.g. manager`s salary) may, if necessary, be debited on the basis of ratio of direct wages.
c) Expenses:the expenses directly related to the process such
as repairs of machinery, power etc. are debited to the respective process account. Indirect expenses are apportioned over and absorbed by various processes on a suitable basis such as ratio of material costs, labour costs or prime costs.
3.Credit side of Process A/c :The Process account is credited with tha
sale value of residue etc.
4. Net cost of Process: The net cost of the output of the process (total
cost less sale value of residue) is transferred to the next process. the cost of each process is thus made up of (i) cost brought forward from previous process and (ii) net cost of material, labourand overheads added in the process less sale value of residue. the net cost of the last process is transferred to finished goods account.
5. Average Unit Cost: The net cost is divided by the number of units
produced to determine the average cost per unit in that Process.
A PRO-FORMA PROCESS ACCOUNT WOULD APPEAR AS FOLLO:
Dr. Process Account Cr.
Particular
s
Unit
s
Rat
e
Particular
s
Unit
s
Rat
e
To
Transfer
from
(1)
Earlier
Process
To
Material
To Wages
To
Expenses
To
Overheads
By Sale of
Residue
By
Transfer
to next
process /
finished
goods
WASTE AND LOSSES
MEANING
A manufacturing process is likely to give rise to some waste and losses. let us first be clear about the exact meaning of these terms – viz waste and losses.
Waste: It represents the portion of basis raw materials lost in processing having no recoverable value. Waste may be visible -remnants of basis raw materials – invisible; e.g. disappearance of basic raw materials through evaporations, smoke etc. normal waste is absorbed in the cost of net output , whereas abnormal waste is transferred to the costing profit and loss account.
Spoilage: It is the term used for materials which are badly damaged in manufacturing operations, and they cannot be rectified economically and hence taken out of process to be disposed of in some manner without further processing. Spoilage may be either normal or abnormal. Normal spoilage costs are included in costs either charging the loss due to spoilage to the production order or by
charging it to production overhead so that it is spread over all products.
Salvage: It signifies those units or portions of production which can be rectified and turned out as good units by the application of additional material,labour or other service. For example, some mudguards produced in a bicycle factory may have dents; or there may be duplication of page or omission some pages in a book. Defectives arise due to sub-standards materials, bad – supervision, bad – planning, poor workmanship, inadequate – equipment and careless inspection.
Rectification: In the case of articles that have been spoiled, it is necessary to take steps to salvage/reclaim as much of the loss as possible. For this purpose : (i) all defective units should be sent to a place fixed for the purpose ;(ii) these should be dismantled ;(iii) goods and serviceable parts should be separated and taken into stock;(iv) parts which can be made serviceable by further work should separated and sent to the workshop for the purpose and taken in to stock after the defects have been removed; and (v) parts which cannot be made serviceable should be collected in one place for being melted or sold.
Scrap: It has been defined as the incidental residue from certain types of manufactures, usually of small amount and low value, recoverable without further processing. Scarp may be treated in cost accounts in the following
ways:-I. Where the value of scrap is negligible, it may be excluded from costs. In other words, the cost of scrap is borne by good units and income scrap is treated as other income.
II. The sale value of scrap net of selling and distribution cost is deducted from overhead to reduce the overhead rate. A variation of this method is to deductedthe net realizable value from material cost. This method is followed when scraps cannot be aggregated job or process-wise. III. When scrap is identifiable with a particular job or process and its
value is significant, the scrap account should be charged with full cost. The credit is given to the job or process concerned. The profit or loss in the scrap account, on realization, will be transferred to the costing profit and loss account.
CAS – 6
The provision of CAS – 6 (Material Cost) relating to scrap, waste, etc. are as follows –
Scrap : Scrap means discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production in place of raw material.
Waste:Waste means material los during production or storage due to various factors such as evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage, etc., and discarded material which may or may not have value.
Spoilage:Spoilage means production that does not meet with dimensional or quality standards in such way that it cannot be rectified economically and sold for a disposal value.
Marketable scrap:The production process may generate marketable scrap or waste. Realized or realizable value of scrap pr waste shall be credited to the cost of production.
Reprocessed scrap:In case, scrap or waste does not have ready market and it is used for reprocessing, the scrap or waste value is taken at a rate of input cost depending upon the stage at which such scrap or waste is recycled. The expenses incurred for making the scrap suitable for reprocessing shall be deducted from value of scrap or waste.
ACCOUNTING FOR LOSSES
Actual Basis : -
In this case, the actual sale value of scrap, spoilage or defectives is credited to the process account. Thus amount of loss ( cost less sale value) relating to defective units is wholly charged to the process account. This means that the amount of loss is absorbed by or spread over the good units. However, losses
are of two types, normal loss and abnormal loss. Normal loss denotes the unavoidable or uncontrollable loss .Abnormal loss on the other hand, denotes the avoidable or controllable loss.In actual basis , no distinction is made between normal and abnormal loss. Hence in this method, the cost per unit may vary from period to period. This vitiates or distorts the unit costs of process.
Normal Basis : -
The normal basis of scrap accounting seeks to * enable the management to control avoidable costs by distinguishing between the normal loss and the abnormal loss, and avoid variations in unit costs due to change in amounts of scrap. In this method of scrap accounting the figure of normal loss for each process is fixed on the basis of past experience or technical data. Any loss above this figure is treated as abnormal loss. Any loss below this figure is treated as abnormal gains. Normal loss is treated as normal cost of production. Normal loss is treated as normal cost of production. But cost of abnormal loss or gain is taken out from the process account. The net financial loss on account of abnormal loss is debited to the costing profit and loss account. The account of abnormal Gains is credited to the costing profit and loss account.
Worksheet : Calculation For Normal Loss
Etc.
Steps What is to be
calculated
How is it to be
calculated
1. 2. 3. 4. 5. 6. 7. Normal Loss Normal Output Unit Cost Abnormal Loss Or Abnormal Gains Cost of Actual Output Cost of Abnormal Loss Cost of Abnormal Gains
= Input x % of Normal Loss
= Input – Normal Loss
Normal Cost
= ---Normal Output
Cost of Process – Sale Value of Normal Loss
= Input – Normal Loss
= Normal Output – Actual Output
= Unit Cost X Units of Actual Output
= Unit Cost X Units of Abnormal Loss
= Unit Cost X Units of Abnormal Gains
NO.
Entry
Amount
1. Normal Loss Account Dr. To Process….Account
Sales Value of Normal Loss
2. Next Process Account Dr. To Process….Account
Cost of Good Output
3. Abnormal Loss Account Dr. To Process….Account
Cost of Abnormal Loss
4. Process …….. Account Dr. To Abnormal Gains Account
Cost of Abnormal Gain
5. Actual Sale Dr. To Normal Loss Account
Units of Normal Loss x Sale Price
6. Cash / Debtor
To Abnormal Loss Account
Sale Value of Abnormal Loss
7. Abnormal Gain Account Dr. To Normal Loss Account
Sale Value of Abnormal Gain
8. Costing P & L Account Dr. To Abnormal Loss Account
Cost – Sale Value of Abnormal Loss
9. Abnormal Gain Account Dr. To Costing P & L Account
Cost of Abnormal Gains – Sale Value of Abnormal Gains
Proforma
Process
Accounts
Process A Accounts ( Normal Loss )
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Material b/f To Direct Material To Direct Wages To DirectExpenses To Overheads By Normal Loss A/c By Transfer to next process
Process B Accounts ( Abnormal Loss )
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Material To DirectMaterial To Direct Wages To Direct Expenses To Overheads By Normal Loss A/c By Transfer to next process
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Transfer from (1) Earlier Process To Direct Material To Direct Wages To Direct Expenses To Overheads By Normal Loss A/c By Transfer to next process
Normal Loss Accounts
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Process A/c A To Process A/c B To Process A/c C By Actual Sale A By Actual Sale B By Actual Sale C By Abnormal Gain A/c
Abnormal Gain Account
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Normal Loss
A/c
To Costing Profit & Loss A/c
By Process A/c C
Abnormal Loss Account
Dr. Cr.
Particulars Units Rate Particulars Units Rate To Process B
( Cost ) By Actual Sale B
By Costing Profit & Loss A/c
Notes: 1.Quantity Reconciliation
Particulars
Process A Process B Process C Input (i) Less : Normal Loss= Normal Production (ii) Actual Production
Abnormal Loss Abnormal Gain Sale of Scrap (i – ii)
xx xx xx xx Xx xx Xx xx xx xx xx xx - xx -xx Normal Cost 2.Unit Cost = ---Normal Output
Cost of Process – Scrap Value of Normal Loss
2.Unit Cost = --- Input - Normal Loss
VALUATION OF WORK –IN-PROCESS
EQUIVALENT UNITSWe have studies earlier how work - in-progress is valued in case of Units Costing or Contract Costing. Let us now study how work-in-process is valid in case of process costing. In the process industries there is likely to be partly competed units at the end of accounting period that will be carried to the next accounting period. Such units of unfinished work are in different stages of completion .Hence they cannot be taken as full units for the purpose of calculation of units costs. Let us consider the following example:
Dr. PROCESS Cr.
Particulars Units Rs. Particular Units Completion Rs.
To Material To Labour To Overhead 40,000 50,000 10,000 10,000 By Transferred to Process B By Closing Work-in-process 30,00 0 10,00 0 100% 50% 40,000 70,000 40,00 0 70,000
The problem now is-how to compute the units cost of the output ? If we simply divided Rs.70,000 by 40,000,we get Rs. 1.75 per unit. But we value both the completed units at the same rate. Therefore , the unfinished units should be converted into completed units. In the above examples, 10,000 partly finished units on which 50% of the work has been completed are equivalent to 5,000 fully completed units. on which Such incomplete units
so computed in term of completed units are knows as equivalent units. The total output or production in terms of completed units is 30,000 + 5,000 = 35,000. Now we can divided the input cost Rs.70,000 by Produced units 35,000 to get the Units cost of Rs. 2.the output transferred to process B can be valued at Rs. 60,000 (30,000 x 2). The work-in-process can be valued at Rs. 10,000 (5,000 x 2).
STEPS
IN
CALULATION
OF
EQUIVALENT UNITS AND UNIT COST
The calculation of the equivalent units and cost of output transferred to process B will be worked out as follows:Step 1 : Reconcile Input and Output
We should consider the physical flow of production – the units of input and output. In the above example, Input is 40,000 units and output is (i) 30,000 units transferred to process B and (ii) 10,000 units of closing work –in – process. The total output of 40,000units agrees with the total input of 40,000 units. However, the output is not all of fully competed units. To make the output and input comparable, we must convert the production into Equivalent Units.
Step 2 : Calculate Equivalent Units.
Completed units = 30,000
Work-in-process units = 10,000 at 50%competion = 5,000
Equivalent Units = 35,000
Step 3 : Calculate Total Cost of Material, Labour and Overhead
50,000 + 10,000 + 10,000 = Rs.70,000
Step 4 : Calculate Cost of each Equivalent Unit
Step 5 : Calculate Cost of production and cost of Work –in-process
Cost of production transferred = 30,000 x Rs.2 = Rs.60,000 Cost of work-in-process = 10,000 x 50% x Rs.2 = Rs.10,000 =Rs.70,000
This cost of output (Rs.70,000) agrees with the total input cost (Rs.70,000).
Illustration 5 : (Work- Sheet Format : Only Closing Stock of WIP)
The above steps can be presented in a more refined format as shows below which can be used by the students for problem involving only closing work-in-process.
Solution:
[A] EQUVIVALENT UNITS (EU)
Particular Qty.Reconciliation Equivalent Units [EU]
Input Output Material[M] Labour[L] Overheads[O]
% EU % EU % EU
1. Fresh Units Introduced 2. Fresh Units Completed 3. Closing WIP 40,000 30,000 10,000 100 50 30,000 5,000 100 50 30,000 5,000 100 50 30,000 5,000 Total Units of [A] 40,000 40,000 35,000 35,000 35,000
[B] COST PER EU [CPEU]
Particulars Material Labour Overheads Total
1.Cost incurred during the process 2.Less: Sale of Normal Scrap
Total Cost [B]
Equivalent Units [A] Cost Per EU[C =B + A]
50,000 --10,000 --10,000 --70,000 --50,000 10,000 10,000 70,000 35,000 1.43 35,000 0.29 35,000 0.29 2.00
[C] COST APPORTIONMENT
Particulars EU CPU Rs. Total (Rs.)
1.Finished Units Tfd.to Next Process
2.Closing Work-in-process - Material
- Labour - Overheads
Total Cost [B] Apportioned
30,000 5,000 5,000 5,000 2.00 1.43 0.29 0.29 7,143 1,429 1,428 60,000 10,000 70,000
FLOW OF COST – AVERAGE OR FIFO
When there are no opening W-I-P units as in the example above, valuation of closing W-I-P is simple (see Para 6.3 below). In such cases, the entire closing W-I-P comes out of the current cost and is valued accordingly, However, when there is opening stock of work -in-process, the production completed during the period comes out of(i) units completed out of the opening stock of WIP; and (ii) units started and completed in the process in the current period. The cost of units completed out of the opening stock of WIP will include partly the cost carried over from the previous period .Since the input have different costs, the problem arises of which rate to use for valuation of the output. The unit cost such situation, may be calculated under either of the two method, viz, (i) the weighted average cost method or (ii) the first -in, first out (FIFO) method. AVERAGE METHOD
Under the Average Method, Total cost in the process is divided by the Total equivalent units produced by the process to ascertain the cost per equivalent unit. Total costs of the process mean the total of the current production costs and the cost of the opening work-in-process. Total Equivalent Units produced by the process mean the total of the units completed during the period and Equivalent Units of work performed on the opening and closing work-in-process. According to the Average Method (or, more accurately, the Weighted Average Method), the cost of the opening work –in-process is added to the cost incurred in the current period and average cost worked out. It should be noted that in the calculating the equivalent units under the weighted average method, the work done in the past is treated as if done in
the current period. The closing WIP under this method is made of the average costs of opening WIP and current production.
FIFO MEHTOD
The method is based on the assumption that the materials in process moves on a first-in, first-out basis. FIFO method assumes that the work on the opening stock is before the materials put into the process during the current period are taken up. The units completed during the process being usually more than the opening stock, it is assumed that no units from the opening work-in-process will be left incomplete and so none of them will find place in the closing work –in-process. Under the FIFO method, the cost of work completed in a period are worked out in two parts. i.e. separately for (a) opening work-in-process competed, and (b) units started and completed in the period. Under the FIFO method, cost of closing WIP is based on the cost of the current production only. In the FIFO method, the procedure of calculation of equivalent units is different as the units competed from opening work-in-process and from current production have to be accounted for separately.
ILLUSTRATIONS
Let us consider the following example to understand the procedure of valuation under these two methods.
Illustration 6: (Average)
Process A Period :
September, 2003
Opening Stock (work-in-process) 10,000 units, competed, Rs.10,000 Units brought into process- 50,000.
Cost incurred
- Material Rs. 60,000 - LabourRs. 25,000
- Overheads Rs. 15,000
Transfer to process: 40,000 Competed units (entirely competed production) Closing Stock (work-in-process) -20,000 units, 75% compete. Calculate the value of closing W-I-P.
Solution:
Step 1: Quantity Reconciliation:
Particulars Units Particulars Units
Opening work-in-process(40%) Units started 10,000 50,000 Units completed Closing work-in-process(75%) 40,000 20,000 60,000 60,000
Step 2: Computation of equivalent units:
Particulars Units Units competed Closing work-in-process (75%) 40,000 15,000 Equivalent Units 55,000
It should be noted that in calculating the equivalent units under the weighted average method, the work done in the past is taken to have been done in the current period.
Step 3: Total Cost = Rs.10,000 + Rs. 60,000 + Rs. 15,000 = Rs. 1,10,000. Step 4: Cost per equivalent unit = Rs. 1,10,000 ÷ 55,000 = Rs. 2
Step 5: Cost competed units transferred to process = 40,000×Rs.2 = Rs.
80,000
Cost of closing work-in-process = 20,000 × 75% × Rs.2 = Rs. 30,000
Rs. 1, 10,000
[Average Method]
[A] EQUVIVALENT UNITS (EU)
Particular Qty.Reconciliatio n
Equivalent Units [EU]
Input Output Material[M] Labour[L] Overheads[O]
% EU % EU % EU
1. Opening Work-in-Process 2. Fresh Units Introduced 3. Units Tfd. to Next Process 4. Closing Work-in-Process 10,000 50,000 40,000 20,000 100 75 40,000 15,000 100 75 40,000 15,000 100 75 40,000 15,000 Total Units of [A] 60,000 60,000 55,000 55,000 55,000
[B] COST PER EU [CPEU]
Particulars Material Labour Overheads Total
1.Cost of Opening WIP
2.Cost incurred during the process
Total Cost [B]
Equivalent Units [A] Cost Per EU[C =B + A]
10,000 60,000 --25,000 --15,000 10,00 0 1,00,00 0 70,000 25,000 15,000 1,10,00 0 55,000 1.27 55,000 0.45 55,000 0.27 2.00 [C] COST APPORTIONMENT
Particulars EU CPU Rs. Total
(Rs.) 1.Finished Units Tfd.to Next
Process
2.Work-in-process Closing Stock - Material
- Labour - Overheads
Total Cost [B] Apportioned
40,000 15,000 15,000 15,000 2.00 1.27 0.45 0.27 19,091 6,818 4,091 80,000 30,000 1,10,000
The Process Account will be shown as follows:
Dr. Process A Account Cr.
Particulars Units % Rs. Particulars Units % Rs.
Work-in-process(b/f) Material Labour Overhead 10,00 0 50,00 0 40% 10,000 60,000 25,000 15,000 Transferred to Process B Work-in-process(c/f) 40,00 0 20,00 0 100% 75% 80,000 30,000
60,00 0 1,10,000 60,00 0 1,10,000
ELEMENT – WISE COST OF WIP
Normally, It may be necessary to work out the unit process cost for each element of cost separately because material, labour and overhead may be in different stage of completion in the work-in-process inventory. All materials are usually you issued input and into the process in the beginning itself. Therefore, the closing work-in-process in generally taken as 100% compete in so far as the materials elements is concerned. For materials added at the end of the process, the percentage of completion will be zero.
EVALUATION OF METHOD
[1] Average Method:
(1) The weighted average method is simpler of the two and is widely used in practice
(2) But, Average method mixes up the costs in different period and does not correctly reflect the extent of change of costs from period to period.
[2] FIFO Method:
(1) FIFO method is more suitable from the point of view of control as the past and current costs are separated.
(2)FIFO method is,however,complicated and tracing out the costs in to two parts from process to process become tedious, particularly when the number of processes in many.
(3) FIFO system is neither suitable nor rational when spoiled units are involved because apportionment of such units between the opening the inventory and current production is not possible.
[3] When choice Becomes Unnecessary
The difference in the result obtained by the two method would not be signification or would disappear all together If :
(1) There is no opinion inventory, and so the question of first –in, first-out does not arise at all.
(2) Opening inventory very small, compared to the fresh units introduce in the process.
(3) The stage of completion of opening inventory is not sufficiently advance so that the previous costs have practically no effect on current costs.
PROCESS LOSSES/ GAINS
(1) Meaning: In many process, the physical quantity of output is found to be
less than that of the input, the difference being attributable to wastage, spoilage, shrinkage, evaporation etc. occurring in course of manufacture. In order to compute connect cost per unit. The units entering a process must be reconciled with the output coming out of the process, and the loss units, as they are called, must be analyzed to determine the factor leading to the loss. If a product passes through several processes, the lost units will have an effect not only on the unit cost of the process in which they arise but also on the cost of the subsequent processed on the cumulative unit cost of the final output.
(2) Normal Loss: Units may be lost at beginning of a process, during a
process, or at the end of a process. The treatment of normal spoilage costs in process accounts depends upon the stage at which the spoilage (rejection or loss) is assumed to occur.
(i) At Beginning: When normal spoilage occurs at the beginning of a
process, it is assumed that the lost units never entered in the process. In the Computation of equivalent units, the normal spoilage units are ignored with in the result that the cost of spoilage in charged to the production units
competed and to abnormal spoilage, if any , as well as the to the closing work-in-process.
(ii) At End:If the normal spoilage occurs at the end of a process, as is
more common, the spoiled units are taken into account for computing equivalent units so that to cost of normal spoilage in charged only to the good units produced as well as to abnormal spoilage, if any, but no amount is charged to the closing work-in-process. The usual practice is to determined the cost of normal spoilage separately add it back to the cost of good units produced. If the spoiled units can be sold scrap, the scrap value is credited to the process account as the cost of the spoilage or loss.
(3) Abnormal Loss: Abnormal spoilage of defective work may arise in a
process due to unforeseen factors. The cost of such abnormal loss in not include in the cost of the process but the average cost of the lost units is charge to an Abnormal Loss Account which is credited with the scrap and closed by transfer to the Profit and Loss Account. Thus, in computing the value of abnormal loss, scrap value of the abnormal lost units will be ignored but in working out the loss for charging to Profit and Loss Account, this will be taken into consideration.
(4) Abnormal Gains:Sometime, when the actual loss in process is less than
the anticipated loss, the difference between the two is considered to be abnormal gain. The value of the abnormal gain is calculated in the same way as described above for abnormal loss and is credited to an Abnormal Gain Account which is ultimately closed by transfer to the Profit and Loss Accounts. The scrap value of the normal anticipated loss in the process where abnormal gain occurs is credited to the process account with the result
that the net debit to the process is the cost of abnormal gains less the value of scrap for the normal loss.
Case study
VOX is a company that assembles camcorders from components bought in from suppliers. A camcorder component kit is issued from stores to the assembly line when another camcorder has to be assembled.
There are partially completed camcorders (WIP) at the end of each month. Incomplete camcorders are assembled in order of completeness, ie the one closest to completion is finished first, the second closest to completion next, etc.
The following data was obtained for June:
Opening WIP: 25 component kits - GBP2,000 (100% complete – all components issued to factory); assembly work done in the previous month - GBP1,800 (60% complete); total value of opening WIP: GBP3,800
Costs incurred: 100 components kits GBP8,200; assembly line -GBP10,450
Output: 95 camcorders
Closing WIP: 30 component kits 100% complete; assembly work -50% complete.
The value of WIP is determined in relation to the components issued to the factory and the extent to which a camcorder has been assembled. All components required to make a camcorder are issued to the factory at the start of the assembly process. So opening and closing WIP are 100% complete in terms of components.
However, opening WIP is only 60% complete in terms of assembly and closing WIP is 50% complete. The figures relating to the completion percentages for assembly will be an average since some items may be 40% complete and others 80% complete.
The cost for component kits is the actual cost (GBP8,200) of the 100 component kits issued to the factory in June. The cost for assembly work is the actual cost (GBP10,450) of the work undertaken by the factory in June. The first step is to calculate how many camcorders were started and completed in June. Table 1 shows that 70 camcorders fall into this category since 25 of the completed camcorders were started in May.
Table 1: started and completed in current period
Total output
Opening WIP
95 25
Started and completed in June 70
The next step is to calculate the number of equivalent units for components. The figure for opening WIP is 0, since no more components were issued to these partially completed products. A figure of 70 is included for the 70 camcorders started and completed in June; 30 is included for closing WIP since all the components required to assemble these camcorders were issued in June. The total equivalent units for components is 100 (table 2).
The calculation of equivalent units for assembly is not as simple since the assembly work is not 100% for opening and closing WIP. A figure of 10 is
included for opening WIP since this represents the remaining work (40%) that had to be done in June ie 25 x (100% - 60%); 70 is included for the camcorders started and completed in June; 15 (30 x 50%) is included for the assembly work undertaken in June in relation to the closing WIP. The total equivalent units for assembly work is 95 (table 2).
Table 2: equivalent units
Components Assembly
Opening WIP
Started and completed in June
0 70 10 70 Output Closing WIP 70 30 80 15 100 95
The cost of an equivalent unit for components and assembly for June is:
Component kits: GBP8,200 / 100 ie GBP82 per equivalent unit
Assembly: GBP10,450 / 95 ie GBP110 per equivalent unit.
The value of output is obtained by multiplying the equivalent units by the cost per equivalent unit for components and assembly then adding these figures to opening WIP:
Output: GBP3,800 + (10 x GBP110) + (70 x GBP82) + (70 x GBP110) ie GBP18,340 (Table 3).
The value of closing WIP is obtained by multiplying the equivalent units by the cost per equivalent unit for components and assembly:
Closing work: (30 x GBP82) + (15 x GBP110) ie GBP4,110 (Table 3).
Total Component s
Assembly
Opening WIP
Work to complete opening WIP Started and completed in June
GBP3,800 GBP1,100 GBP13,44 0 GBP0 GBP5,740 GBP1,10 0 GBP7,70 0 June output GBP18,34 0 Closing WIP GBP4,110 GBP2,460 GBP1,65 0
The above figures are then used to prepare the process account for June (Table 4).
Table 4: Process account June process account
Opening WIP Components Assembly costs GBP3,800 GBP8,200 GBP10,450 Output Closing WIP GBP18,340 GBP4,110 GBP22,450 GBP22,450
Process costing uses actual costs to value output and closing WIP. It consequently provides little information about performance since it doesn’t compare actual performance against a benchmark, ie standard cost.
An analysis must be undertaken to gain an insight into performance. The analysis for June revealed:
Average cost of a component kit has increased from GBP80 (Opening WIP: GBP2,000 / 25) to GBP82
Cost of an equivalent unit of assembly work has decreased from GBP120 (Opening WIP: GBP1,800 / 25 / 0.6) to GBP110.
While this analysis is useful, it only highlights trends since it does not compare performance against a standard. A company must operate a standard costing system to obtain control information.