Posted by Chester Morton / Wednesday 22 June 2016 / No comments
Process costing
It is a continuous operation
costing method that is applied where homogeneous or standard products are
produced in a series of repetitive operations. Examples of industries that use
process costing are pharmaceuticals,
Some
Process Costing Terms
1.
Normal
loss: It is the loss that is expected to
occur in a production process. It is an expected loss because it cannot be
prevented from occurring. Normal loss units are not given cost. Instead, cost
of normal loss is borne by the good output produced. It is normally given as a
percentage of input. Normal loss is also known as expected loss.
2. Abnormal loss: It
is any excess loss incurred in a production process over that which is
expected. It is calculated as the difference between actual loss and expected
loss. It can also be calculated as the difference between expected output and
actual output.
3. Abnormal gain: This
refers to any savings in losses in a production process. It is a gain that
occurs when actual loss is less than expected loss or when actual output is
more than expected output.
4.
Joint products: These
are two or more products produced simultaneously in a single process each
having significantly high saleable value to merit recognition as a main
product. That is, they are two or more products that are produced together in a
single production process and each product has a high saleable value that
is equal or almost equal to one another, each can be considered a main
product. Examples include petrol and diesel
fuel, etc.
5. By product: It
is any product produced incidentally to the production of a main product and
has minor saleable value relative to the main product.
Examples include off-cuts of wood in wood processing; bitumen, petroleum jelly,
etc. in oil refining and so on. Revenue generated from the sale of by-product
can be treated either,
·
as sundry income and thus credited directly
to the income statement or
·
by using it to reduce the process cost
before determining cost per unit.
6. Joint cost: This
is the cost incurred in single process that yields two or more products
simultaneously. Example can be cost of crude oil used in producing various
types of fuel.
7. Equivalent
units: It is a number of fully completed units that represents a given number
of uncompleted units. For example, 1,000 units of a particular product that are
40% complete will be equivalent to 400 (1,000 × 40%) fully completed units.
8. Process scrap: This
refers to discarded materials, products or residue from a production process
having relatively minor saleable value. Scrap may be sold or reintroduced into
the production process. The proceeds from the sale of scrap are normally used
to reduce the total process cost before calculating cost per unit. Example
of scrap may be the off-cuts of wood in wood processing, etc.
9. Process waste: This
refers to discarded materials, products or residue from a production process
without saleable value. Scrap may be sold or reintroduced into the production
process. Example may be saw dust in wood
processing, etc.
10. Reworked units:
These are substandard products that require further processing before sale.
11. Split-off point or point of separation: This
is a stage in a production process where all the individual products being produced
together are separately indentified. For example, the
stage in the oil refining process where petrol is separated from diesel fuel.
12. Further processing cost: It
is any cost incurred after the split-off point to make a product complete for
sale. That is, the cost incurred in a production process from the
split-off point to the point when the final product is ready for consumption.
Some products may either be sold immediately after the split-off point or
processed further before sale so that they can attract a high selling price.
Where process costing is applied,
a factory may be divided into different cost centres with each cost centre
taking charge of a distinct process. A process account is opened to record the
cost incurred in the production process and the value of output transferred. A
simple process account may be as follows:
Process Account
Input
Units
|
Cost Per Units
|
Amount
|
Output
Units
|
Cost Per Unit
|
Amount
|
||
$
|
$
|
$
|
$
|
||||
Direct
material
|
x
|
x
|
x
|
Normal
loss
|
x
|
x
|
x
|
Direct
labour
|
-
|
-
|
x
|
Abnormal
loss
|
x
|
x
|
x
|
Production
overhead
|
-
|
-
|
x
|
Transferred
output
|
x
|
x
|
x
|
Abnormal
gain
|
x
|
x
|
x
|
_
|
_
|
||
x
|
x
|
x
|
x
|
Note
1. Abnormal
gain and abnormal loss cannot occur together in the same process.
2. Any
scrap value realized from the sale of normal loss is credited to the process
account to reduce the total cost of the process. The scrap revenue is matched
with any normal loss units in the process account.
3. Abnormal
loss, abnormal gain and transferred output units are valued using the same cost
per unit calculated as follows:
Cost per unit =
Input units less normal loss
units are known as expected output.
EXERCISE 1
The following data relates to
the processing activities of Beulah Enterprise.
Direct material (20,000 units)
|
$40,000
|
Direct labour
|
$80,000
|
Production overhead
|
$50,000
|
Normal loss
|
10%
of inputs
|
Process scrap per unit
|
$
0.5
|
Actual output
|
17,000
units
|
Required: Prepare a process
account to record the above data.
EXERCISE 2
Record the following data in the
process account of ABC limited.
Input
|
10,000
kilogram
|
Direct material cost
|
$85,000
|
Conversion cost
|
$120,000
|
Normal loss
|
5%
|
Finished goods
|
9,800
kilogram
|
Scrap value per kilogram
|
$0.20
|
EXERCISE 3
The following data relates to
the processing activities of Beulah Enterprise.
Direct material (20,000 units)
|
$40,000
|
Direct labour
|
$80,000
|
Production overhead
|
$50,000
|
Normal loss
|
10%
of inputs
|
Actual output
|
20,000
units
|
Required: Prepare a process
account to record the above data.
EXERCISE 4
Sappho Limited produces drinks and uses process costing to
ascertain the cost of its products. The data below was in respect of its
operations for the past month.
Process 1
|
Process 2
|
|
Input
|
40,000 litres
|
-
|
Direct material
cost
|
$5,400,000
|
$2,400,000
|
Direct labour cost
|
$3,500,000
|
$1,200,000
|
Production
overhead
|
$2,500,000
|
$900,000
|
Expected output
|
38,000 litres
|
37,500 litres
|
Actual loss
|
1,500 litres
|
1,000 litres
|
Scrap value of
losses
|
$5 per litre
|
-
|
You are required to prepare the
two process accounts for the month.
Labels:
PRINCIPLES OF COST ACCOUNTING
Related Posts