Professional Documents
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PROCESS COSTING
BY
T.VENKATARAMANAN.FICWA.FCS.
Chapter 6 1
Chapter 6
Process Costing
Key Topics:
–Cost flows in mass production
–Steps in preparing process cost reports (FIFO
and weighted average)
•Equivalent units
•Applying costs
–Spoilage in process costing
– Uses, Uncertainties, and limitations
Chapter 6 2
Process Costing
Process product-costing systems are used
for costing inventories or services when
they are mass-produced, identical units.
Chapter 6 3
Mass Production
Many goods are produced using a
continuous process.
Examples:
Processing : Raw milk >> cream ,butter ,
skimmed milk.
Coco beans: cocoa butter, cocoa powder,
cocoa drink
Chapter 6 4
Process variants
• Single RM>>>single process>>single
output
• Single material>>single process>>multiple
outputs
• Multiple inputs>>single process >>multiple
out puts
• Multiple inputs >.multiple process>multiple
out puts.
Chapter 6 5
6 Chapter 6
• Butane, Ethane, Raw LPG,
• propane
• Crude oil , natural gas, petroleum
• Lpg, etc
• Coke ,gas, coal
• Benzol, tar, ammonia,
cost- basics
• Joint costs
Presplit • Material,
off labor, etc
• Specific costs
Post • Material lab
split off etc
Chapter 6 7
Product classification
• mainproduct
V • Joint products
A High • byproducts
L
U
E • spoilage
Low>0 • Scrap,defectives
• waste
Chapter 6 8
Approaches to allocating Joint
costs
• Sales value at split off
market • Net realizable value
based • Constant gross margin %
Chapter 6 9
Overview of Process Costing
Systems
Chapter 6 10
Steps for Preparing a Process
Costing Report:
Chapter 6 11
What Are Equivalent Units, and How
Do They Relate to the Production
Process?
Equivalent Units:
• Measure the resources used in partially completed units
relative to the resources needed to complete the units.
Chapter 6 13
Summaries of Physical Units and
Total Costs for Weighted Average
Calculations
(Assuming direct materials are added at the
beginning of the process)
Chapter 6 14
Calculation of Equivalent Units Under
the Weighted Average Method
Chapter 6 15
Calculation of Cost Per Equivalent Unit
Under the Weighted Average Method
Chapter 6 16
Equivalent Unit Costs
Weighted Average:
Direct materials = $6,000+$30,500
=$3.0417
12,000
Conversion costs=$4,200+$76,680=$7.0947
11,400
Total cost per equivalent unit = $10.1364
Chapter 6 17
Weighted Average Process Cost
Report
Weighted Average
Computation Units Costs
Total units
completed and
transferred out (2,000+9,000)x$10.1364 11,000 $111,500
Total Accounted
For 12,000 $117,380
Chapter 6 18
Summaries of Physical Units and Total
Costs for FIFO Calculations
(Assuming direct materials are added at the
beginning of the process)
Chapter 6 19
Calculation of Equivalent Units Under the
FIFO Method
Chapter 6 20
First-in, First-out (FIFO) Method
Chapter 6 21
Calculation of Cost Per Equivalent Unit
Chapter 6 22
Equivalent Units Costs
FIFO:
Direct materials = $30,500 = $3.05
10,000
Conversion costs=76,680 = $7.10
10,800
Total cost per equivalent unit = $10.15
Chapter 6 23
FIFO Process Cost Report
First-in, First-Out
Computation Units Costs
Beginning WIP 2,000 $ 10,200
Costs to complete beginning WIP:
Direct materials 0x$3.05 0
Conversion costs 1,400x$7.10 9,940
Total costs added this period _____ 9,940
Chapter 6 24
How Is Process Costing Performed for
Multiple Production Departments
Transferred-in Costs:
• Costs of processing performed in a
previous department
Chapter 6 25
Cost Flows in Process Costing With Costs Transferred from Another Department
Costs Assigned to Costs Allocated
Department WIP to Individual Units
Department Individual
Work in Process Units of
Product or
Service
Previous Allocate Transferred-in Allocate
Department WIP Costs
Trace
Direct Labor
Overhead Conversion
Trace Allocate
Indirect materials, Costs
indirect labor, direct or Allocate
department costs such as
supervisor salary and
equipment depreciation,
and other costs such as
rent and plant insurance
Chapter 6 26
How Are Spoilage Costs Handled in
Process Costing?
Normal Spoilage:
Defective units that arise as part of regular
operations
Abnormal Spoilage:
Spoilage that is not part of everyday
operations
Chapter 6 27
Cost Flows with Spoilage in a Process Costing System
Trace Direct
Direct Materials Materials Allocate Cost of
Good Units and
Normal Spoilage
Trace
Direct Labor
Overhead Conversion
Trace
Indirect materials, Costs
indirect labor, direct Allocate Cost of
or Allocate Abnormal Spoilage
department costs such as
supervisor salary and
equipment depreciation,
and other costs such as
Abnormal
rent and plant insurance
Spoilage Loss
Chapter 6 28
Use Process Cost Information to:
• Measure costs of products mass-produced
products
• Assign costs to inventory and cost of goods sold
for financial statements and income tax returns
• Monitor operations and costs
• Develop estimates of future costs for decision
making
• Analyze the costs and benefits of quality
improvements
• Identify potential areas for process
improvements
Chapter 6 29
Uncertainties and Measurement Errors in
Process Costing
Actual cost flows might not be known:
* When are direct materials added?
* When are conversion costs incurred?
* How complete are the units in ending
work in process?
* What amount of spoilage is normal?
Chapter 6 30
Before we proceed further – a word
about service costing
• Also called operation costing, “the cost of
specific services & functions” like canteen
,hospital, maintenance , etc.
• In this method all costs are collected
periodically and the total operating
expenses are divided by the quantity of
services rendered to arrive at the costs /
unit.
Chapter 6 31
Before we proceed further – a word
about service costing
• The main feature of services are 1) labor intensive 2)expense
oriented. 3)Inputs & outputs cannot be stored 4)use of composite
cost units are more common than single cost units maintenance ,
etc.
• In this method all costs are collected under two broad heads i) fixed
charges or standing charges ii) operating charges e.g for transport
service:
• Standing charges: 1)insurance 2) rent rates & taxes 3)wages of
maintenance staff ,4) depreciation etc
• Operating charges 1) petrol ,diesel, oil, lubricants, 2)semi variable
expenses like tyre , tube, battery etc
• Additional records are to be maintained for operational details like i)
log book ii) daily operational schedule iii) job no. etc.iv)cost sheet v)
cost summary.
Chapter 6 32
Which of the following
statements are true/false
• 1)In process costing ordinarily no distinction is made
between direct and indirect materials
• 2)The cost of abnormal loss is not included in the cost of
process.
• 3)Normal loss and abnormal loss are treated alike in
process costing
• 4)Process a/c s should always be presented in
conventional T a/cs.
• 5)In process cost normal loss is absorbed by good units
Ans: 1
Chapter 6 36
When average method is used in process costing , the
opening stock values :
Ans: 2
Chapter 6 37
Under average cost method In process costing , the stage
of completion of opening stock is considered of no
consequence.
• 1) true
• 2) false
Ans: 1
Chapter 6 38
Match The following
1 Rail & road a No. .f.
transport patients
2 Boiler house b Guest days
3 Power c No of meals
house/ elec served
supply
4 Canteens d KWH
5 hotels e Cubic meter
of gas
6 hospitals f Passenger/k
m or ton -km
Chapter 6 39
Illustrations allocating joint costs
• Incase of product X the input in process is
1000 units ,normal loss = 2% of the input.if
the output is 990 units there will be
a)abnormal loss of 10 units. B)abnormal
gain of 10 units. C)neither gain nor lossd)
None of the above.
ans : b 40
Illustrations allocating joint costs
Particulars L M N
SELLING Rs 5 10 20
PRICE/KG
PRE ? ? ?
SEPARATION
COSTSRs
20,000/=
PRE ? ? ?
SEPARATION
COSTS by -----.
basis
SELLING Rs 5 10 20
PRICE/KG
PRE ?
SEPARATION
COSTS by wt.
basis20,000/=
BY
Chapter 6 a)weight basis b) nrv-basis 43
Illustrations allocating joint costs
Particulars L M N
SELLING Rs 5 10 20
PRICE/KG
BY
Chapter 6 a)weight basis 44
Illustrations allocating joint costs
Particulars L M N
SELLING Rs 5 10 20
PRICE/KG
Cost/unit ? NL/ANL ?
Chapter 6 46
intr0duced 20000 @1.50 30,000
Labour cost 10,000
Overhead 7,000
Normal loss 10%
Chapter 6 47
Opening wip 900@4500/=complete
material -100% lab 60%
intr0duced 9100 @27300 27300
Labour cost 12300
Overhead 8200
Normal loss 10% of total input
Chapter 6 50
Solution: passenger –km = 4 X50 X 30 X 40
= 2,40,000.
75% * 2 = 360,000.
• Expenses for june 2009 are as follows:
• 1)wages of drivers cleaners etc. 4800
• 2) salaries of staff 2000
• 3)diesel oil& others 8000
• 4)rep & maintenance 1600
• 5)taxes & insurance 3200
• 6)depreciation 5200
• 7)interest & other charges 4000
• Total = 28,800
• Cost/passenger Km = 360,000/28800 =Re 0.08
Chapter 6 51