CIMA - C1 Fundamentals of Management Accounting
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280
12: Process costing ⏐ Part D Costing and accounting systems
Step 4
Complete accounts
The process account would be shown as follows.
PROCESS ACCOUNT
Units
$
Units
$
Direct materials
5,000
16,560
Output to next process
4,000
25,600
Direct labour
7,360
Closing inventory c/f
1,000
3,840
Production o'hd
5,520
5,000
29,440
5,000
29,440
5.2 A few hints on preparing accounts
When preparing a process account, it might help to make the entries as follows.
(a) Enter the units first. The units columns are simply memorandum columns, but they help you to make sure
that there are no units unaccounted for (for example as loss).
(b) Enter the costs of materials, labour and overheads next. These should be given to you.
(c) Enter your valuation of finished output and closing inventory next. The value of the credit entries should,
of course, equal the value of the debit entries.
5.3 Different rates of input
In many industries, materials, labour and overhead may be added at different rates during the course of production.
(a) Output from a previous process (for example the output from process 1 to process 2) may be introduced
into the subsequent process all at once, so that closing inventory is 100% complete in respect of these
materials.
(b) Further materials may be added gradually during the process, so that closing inventory is only partially
complete in respect of these added materials.
(c) Labour and overhead may be 'added' at yet another different rate. When production overhead is absorbed
on a labour hour basis, however, we should expect the degree of completion on overhead to be the same
as the degree of completion on labour.
When this situation occurs, equivalent units, and a cost per equivalent unit, should be calculated separately for each
type of material, and also for conversion costs.
5.4 Example: equivalent units and different degrees of completion
Suppose that Shaker Co is a manufacturer of processed goods, and that results in process 2 for April 20X3 were as
follows.
Opening inventory nil
Material input from process 1 4,000 units
Costs of input:
$
Material from process 1 6,000
Added materials in process 2 1,080
Conversion costs 1,720
Output is transferred into the next process, process 3.
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Part D Costing and accounting systems ⏐ 12: Process costing
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Closing work in process amounted to 800 units, complete as to:
%
Process 1 material 100
Added materials 50
Conversion costs 30
Required
Prepare the account for process 2 for April 20X3.
Solution
Step 1
Determine output and losses
STATEMENT OF EQUIVALENT UNITS (OF PRODUCTION IN THE PERIOD)
Equivalent units of production
Process 1
Added
Labour and
Input
Output
Total
material
materials
overhead
Units
Units
Units
%
Units
%
Units
%
4,000
Completed
3,200
3,200
100
3,200
100
3,200
100
production
Closing inventory
800
800
100
400
50
240
30
4,000
4,000
4,000
3,600
3,440
Step 2
Calculate cost per unit of output, losses and WIP
STATEMENT OF COST (PER EQUIVALENT UNIT)
Equivalent production
Cost per
Input
Cost
in units
unit
$
$
Process 1 material
6,000
4,000
1.50
Added materials
1,080
3,600
0.30
Labour and overhead
1,720
3,440
0.50
8,800
2.30
Step 3
Calculate total cost of output, losses and WIP
STATEMENT OF EVALUATION (OF FINISHED WORK AND CLOSING INVENTORIES)
Number of
Cost per
equivalent
equivalent
Production
Cost element
units
unit
Total
Cost
$
$
$
Completed
production
3,200
2.30
7,360
Closing inventory:
process 1 material
800
1.50
1,200
added material
400
0.30
120
labour and
240
0.50
120
overhead
1,440
8,800
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12: Process costing ⏐ Part D Costing and accounting systems
Step 4
Complete accounts
PROCESS ACCOUNT
Units
$
Units
$
Process 1 material
4,000
6,000
Process 3 a/c
3,200
7,360
Added material
1,080
(finished output)
Conversion costs
1,720
Closing inventory c/f
800
1,440
4,000
8,800
4,000
8,800
5.5 Closing work in progress and losses
The previous sections have dealt separately with the following.
(a) The treatment of loss and scrap.
(b) The use of equivalent units as a basis for apportioning costs between units of output and units of closing
inventory.
We must now look at a situation where both problems occur together. We shall begin with an example where loss has no
scrap value.
The rules are as follows.
(a) Costs should be divided between finished output, closing inventory and abnormal loss/gain using
equivalent units as a basis of apportionment.
(b) Units of abnormal loss/gain are often taken to be one full equivalent unit each, and are valued on this
basis, ie they carry their full 'share' of the process costs.
(c) Abnormal loss units are an addition to the total equivalent units produced but abnormal gain units are
subtracted in arriving at the total number of equivalent units produced.
(d) Units of normal loss are valued at zero equivalent units, ie they do not carry any of the process costs.
5.6 Example: changes in inventory level and losses
The following data have been collected for a process.
Opening inventory none Output to finished goods 2,000 units
Input units 2,800 units Closing inventory 450 units, 70% complete
Cost of input $16,695 Total loss 350 units
Normal loss 10%; nil scrap value
Required
Prepare the process account for the period.
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Solution
Step 1
Determine output and losses
STATEMENT OF EQUIVALENT UNITS
Equivalent units
of work
done this
Total units
period
Completely worked units
2,000
(× 100%)
2,000
Closing inventory
450
(× 70%)
315
Normal loss
280
0
Abnormal loss
70
(× 100%)
70
2,800
2,385
Step 2
Calculate cost per unit of output, losses and WIP
STATEMENT OF COST PER EQUIVALENT UNIT
Costs incurred
Equivalent units of work done
=
$16,695
2,385
Cost per equivalent unit = $7
Step 3
Calculate total cost of output, losses and WIP
STATEMENT OF EVALUATION
Equivalent
units $
Completely worked units 2,000 14,000
Closing inventory 315 2,205
Abnormal loss
70
490
2,385
16,695
Step 4
Complete accounts
PROCESS ACCOUNT
Units
$
Units
$
Opening inventory
–
–
Normal loss
280
0
Input costs
2,800
16,695
Finished goods a/c
2,000
14,000
Abnormal loss a/c
70
490
Closing inventory c/d
450
2,205
2,800
16,695
2,800
16,695
5.7 Closing work in progress, loss and scrap
When loss has a scrap value, the accounting procedures are the same as those previously described. However, if the
equivalent units are a different percentage (of the total units) for materials, labour and overhead, it is a convention that
the scrap value of normal loss is deducted from the cost of materials before a cost per equivalent unit is calculated.
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12: Process costing ⏐ Part D Costing and accounting systems
Question
Closing work in progress
Complete the process account below from the following information.(Hint. Not all boxes require entries.)
Opening inventory Nil
Input units 10,000
Input costs
Material $5,150
Labour $2,700
Normal loss 5% of input
Scrap value of units of loss $1 per unit
Output to finished goods 8,000 units
Closing inventory 1,000 units
Completion of closing inventory 80% for material
50% for labour
PROCESS ACCOUNT
Units $ Units $
Material
Completed production
Labour
Closing inventory
Abnormal gain
Normal loss
Abnormal loss
Answer
Step 1
Determine output and losses
STATEMENT OF EQUIVALENT UNITS
Equivalent units
Total
Material
Labour
Units
%
Units
%
Units
Completed production
8,000
100
8,000
100
8,000
Closing inventory
1,000
80
800
50
500
Normal loss
500
Abnormal loss
500
100
500
100
500
10,000
9,300
9,000
Step 2
Calculate cost per unit of output, losses and WIP
STATEMENT OF COST PER EQUIVALENT UNIT
Cost per
Equivalent
equivalent
Cost
units
unit
$
$
Material ($(5,150 – 500))
4,650
9,300
0.50
Labour
2,700
9,000
0.30
7,350
0.80
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Step 3
Calculate total cost of output, losses and WIP
STATEMENT OF EVALUATION
Cost per
Equivalent equivalent
units
unit
Total
$
$
$
Completed production
8,000
0.80
6,400
Closing inventory: material
800
0.50
400
labour
500
0.30
150
550
Abnormal loss
500
0.80
400
7,350
Step 4
Complete accounts
PROCESS ACCOUNT
Units
$
Units
$
Material
10,000
5,150
Completed production
8,000
6,400
Labour
2,700
Closing inventory
1,000
550
Abnormal gain
0
0
Normal loss
500
500
Abnormal loss
500
400
10,000
7,850
10,000
7,850
6 Valuing opening work in progress
The weighted average cost method of valuing opening WIP makes no distinction between units of opening WIP and
new units introduced to the process during the current period.
6.1 Weighted average cost method
The weighted average cost method of inventory valuation is a inventory valuation method that calculates a weighted
average cost of units produced from both opening inventory and units introduced in the current period. (We studied this
method earlier in the Study Text in Chapter 5.)
With the weighted average cost method no distinction is made between units of opening WIP and new units introduced
to the process during the current period. The cost of opening WIP is added to costs incurred during the period, and
completed units of opening WIP are each given a value of one full equivalent unit of production.
6.2 Example: weighted average cost method
Magpie Co produces an item which is manufactured in two consecutive processes. Information relating to Process 2
during September 20X3 is as follows.
Opening inventory 800 units
Degree of completion:
%
$
process 1 materials
100
4,700
added materials
40
600
conversion costs
30
1,000
6,300
Important!
FA
S
T F
O
RWAR
D
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12: Process costing ⏐ Part D Costing and accounting systems
During September 20X3, 3,000 units were transferred from process 1 at a valuation of $18,100. Added materials cost
$9,600 and conversion costs were $11,800.
Closing inventory at 30 September 20X3 amounted to 1,000 units which were 100% complete with respect to process 1
materials and 60% complete with respect to added materials. Conversion cost work was 40% complete.
Magpie Co uses a weighted average cost system for the valuation of output and closing inventory.
Required
Prepare the Process 2 account for September 20X3.
Solution
Step 1
Determine output and losses
Opening inventory units count as a full equivalent unit of production when the weighted average cost
system is applied. Closing inventory units are assessed in the usual way.
STATEMENT OF EQUIVALENT UNITS
Equivalent units
Total
Process 1
Added
Conversion
units
material
material
costs
Output to finished goods*
2,800
(100%)
2,800
2,800
2,800
Closing inventory
1,000
(100%)
1,000
(60%)
600
(40%)
400
3,800
3,800
3,400
3,200
* 3,000 units from Process 1 minus closing inventory of 1,000 units plus opening inventory of 800 units.
Step 2
Calculate cost per unit of output and WIP
The cost of opening inventory is added to costs incurred in September 20X3, and a cost per equivalent
unit is then calculated.
STATEMENT OF COSTS PER EQUIVALENT UNIT
Process 1 Added Conversion
material materials costs
$ $ $
Opening inventory 4,700 600 1,000
Added in September 20X3
18,100
9,600
11,800
Total cost
22,800
10,200
12,800
Equivalent units 3,800 units 3,400 units 3,200 units
Cost per equivalent unit $6 $3 $4
Step 3
Calculate total cost of output and WIP
STATEMENT OF EVALUATION
Process 1
Added
Conversion
Total
material
materials
costs
cost
$
$
$
$
Output to finished goods
(2,800 units)
16,800
8,400
11,200
36,400
Closing inventory
6,000
1,800
1,600
9,400
45,800
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Part D Costing and accounting systems ⏐ 12: Process costing
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Step 4
Complete accounts
PROCESS 2 ACCOUNT
Units
$
Units
$
Opening inventory b/f
800
6,300
Finished goods a/c
2,800
36,400
Process 1 a/c
3,000
18,100
Added materials
9,600
Conversion costs
11,800
Closing inventory c/f
1,000
9,400
3,800
45,800
3,800
45,800
You must be prepared to deal with assessment questions which have opening WIP, closing WIP and losses all occurring
together in the same process.
6.3 A final question
The following question involves the following process costing situations.
•
Normal loss (with and without sale of scrap)
•
Abnormal loss
•
Abnormal gain
•
Opening work in progress
•
Closing work in progress
Take time to work through this question carefully and to check your workings against the answer given below. This is an
excellent question which should help you to consolidate all of the process costing knowledge that you have acquired
while studying this chapter.
Question
Watkins Co
W Co has a financial year which ends on 30 April. It operates in a processing industry in which a single product is
produced by passing inputs through two sequential processes. A normal loss of 10% of input is expected in each
process.
The following account balances have been extracted from its ledger at 31 March 20X0.
Debit Credit
$ $
Process 1 (Materials $4,400; Conversion costs $3,744) 8,144
Process 2 (Process 1 $4,431; Conversion costs $5,250) 9,681
Abnormal loss 1,400
Abnormal gain 300
Overhead control account 250
Sales 585,000
Cost of sales 442,500
Finished goods inventory 65,000
W Co uses the weighted average method of accounting for work in process.
During April 20X0 the following transactions occurred.
Process 1 Materials input (kg, $) 4,000 kg 22,000
Labour cost $12,000
Transfer to process 2 2,400 kg
Assessment
focus point
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12: Process costing ⏐ Part D Costing and accounting systems
Process 2 Transfer from process 1 2,400 kg
Labour cost $15,000
Transfer to finished goods 2,500 kg
Overhead costs incurred amounted to $54,000
Sales to customer were $52,000
Overhead costs are absorbed into process costs on the basis of 150% of labour cost.
The losses which arise in process 1 have no scrap value: those arising in process 2 can be sold for $2 per kg.
Details of opening and closing work in process for the month of April 20X0 are as follows.
Opening Closing
Process 1 3,000 kg 3,400 kg
Process 2 2,250 kg 2,600 kg
In both processes closing work in process is fully complete as to material cost and 40% complete as to conversion cost.
Inventories of finished goods at 30 April 20X0 were valued at cost of $60,000.
Required
(a) In an account for process 1, the monetary and quantity values for:
(i) transfers to process 2 are
kgs at $
(ii) normal loss are
kgs at $
(iii) abnormal loss are
kgs at $
(iv) abnormal gain are
kgs at $
(v) WIP materials are
kgs at $
(vi) WIP conversion costs are
kgs at $
(b) In an account for process 2, the monetary and quantity values for:
(i) finished goods are
kgs at $
(ii) normal loss are
kgs at $
(iii) WIP from process 1 are
kgs at $
(iv) WIP from process 2 are
kgs at $
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Answer
(a) Process 1
STATEMENT OF EQUIVALENT UNITS
Equivalent units
Conversion
Total units
Material costs
costs
Transfers to process 2
2,400
2,400
2,400
Closing WIP
3,400
(100%) 3,400
(40%) 1,360
Normal loss (10% × 4,000)
400
0
0
Abnormal loss
800
800
800
7,000
6,600
4,560
STATEMENT OF COSTS PER EQUIVALENT UNIT
Costs incurred
Equivalent units
= Cost per equivalent unit
∴Materials cost per equivalent unit =
+$4,400 $22,000
6,600
=
$26,400
6,600
= $4
∴ Conversion costs per equivalent unit =
++$3,744 $12,000 $18,000
4,560
=
$33,744
4,560
= $7.40
STATEMENT OF EVALUATION
Materials
Conversion cost
s
Total
$
$
$
Transfers to process 2
9,600
17,760
27,360
Abnormal loss
3,200
5,920
9,120
Closing WIP
13,600
10,064
23,664
26,400
33,744
60,144
PROCESS 1 ACCOUNT
Kg
$
Kg
$
WIP materials
3,000
4,400
Process 2
2,400
27,360
WIP conversion costs
–
3,744
Normal loss
400
–
Materials
4,000
22,000
Abnormal loss
800
9,120
Labour
–
12,000
WIP materials
3,400
13,600
Overhead
–
18,000
WIP conversion costs
–
10,064
7,000
60,144
7,000
60,144
The monetary and quantity values for:
(i) transfer to process 2 are
2,400
kgs at $
27,360
(ii) normal loss are
400
kgs at $
0
(iii) abnormal loss are
800
kgs at $
9,120
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