CHAPTER 7 JOB, BATCH AND PROCESS COSTING

Question 1

what are he costing systems involved in different types of production

Answer 1

Specific order costing is the costing system used when the work done by an organisation consists of separately identifiable jobs or batches.
Continuous operation costing is the costing method used when goods or services are produced as a direct result of a sequence of continuous operations or processes, for example process and service costing.

Question 2

what is job costing and its purpose/aims

Answer 2

Job costing is a form of specific order costing and it is used when a customer orders a specific job to be done. Each job is priced separately and each job is unique.
The main aim of job costing is to identify the costs associated with completing the order and to record them carefully.
Individual jobs are given a unique job number and the costs involved in completing the job are recorded on a job cost sheet or job card.
The selling prices of jobs are calculated by adding a certain amount of profit to the cost of the job.
Job costing could be used by landscape gardeners where the job would be to landscape a garden; or decorators where the job would be to decorate a room.

Question 3

what is batch costing and its purpose/aims

Answer 3

Batch costing is also a form of specific order costing. It is very similar to job costing.
Within each batch are a number of identical units but each batch will be different.
Each batch is a separately identifiable cost unit which is given a batch number in the same way that each job is given a job number.
Costs can then be collected for each batch number. For example materials requisitions will be coded to a batch number to ensure that the cost of materials used is charged to the correct batch.
When the batch is completed the unit cost of individual items in the batch is found by dividing the total batch cost by the number of items in the batch.
Batch costing is very common in the engineering component industry, footwear and clothing manufacturing industries where identical items are produced; for example a batch could contain 100 pairs of size 6(UK) trainers for a retailer outlet.
The selling prices of batches are calculated in the same ways as the selling prices of jobs, i.e. by adding a profit to the cost of the batch.

cost per unit in batch = total production cost of batch/number of units in batch

Question 4

what is process costing

Answer 4

Process costing is the costing method applicable when goods or services result from a sequence of continuous or repetitive operations or processes. Process costing is used when a company is mass producing the same item and the item goes through a number of different stages.
Process costing is an example of continuous operation costing.
Examples include the chemical, cement, oil refinery, paint and textile industries.
One of the features of process costing is that in most process costing environments the products are identical and indistinguishable from each other. For this reason, an average cost per unit is calculated for each process.

Question 5

how is process costing calculated

Answer 5

average cost per unit = net costs of inputs/expected output

Expected output is what we expect to get out of the process.
Another feature of process costing is that the output of one process forms the material input of the next process.
When there is closing work-in-progress (WIP) at the end of one period, this forms the opening WIP at the beginning of the next period.
The details of process costs and units are recorded in a process account which shows the materials, labour and overheads input to the process and the materials output at the end of the process.

Question 6

what losses and gains are often associated with process costing

Answer 6

Sometimes in a process, the total of the input units may differ from the total of the output units.
Losses may occur due to the evaporation or wastage of materials and this may be an expected part of the process.
Losses may sometimes be sold and generate a revenue which is generally referred to as scrap proceeds or scrap value.

Question 7

what is normal loss in process costing and how is it calculated

Answer 7

Normal loss is the loss that is expected in a process and it is often expressed as a percentage of the materials input to the process.
If normal loss is sold as scrap the revenue is used to reduce the input costs of the process. The formula for calculating the average cost of the units output is:

average cost per unit = net cost of inputs/expected output

average cost per unit = (total cost of inputs - scrap value of normal loss)/(input unit - normal loss units)

If normal loss has a scrap value, it is valued in the process account at this value.
If normal loss does not have a scrap value, it is valued in the process account as $Nil.

Question 8

what are abnormal losses and gains in process costing

Answer 8

Normal loss is the expected loss in a process. If the loss in a process is different to what we are expecting then we have an abnormal loss or an abnormal gain in the process.

Abnormal loss is more loss than expected
Abnormal gain is less loss than expected

Question 9

abnormal losses and gains and the process account

Answer 9

The costs associated with producing abnormal losses or gains are not absorbed into the cost of good output.
Abnormal loss and gain units are valued at the same cost as units of good output in the process account.

Question 10

abnormal losses and gains and the scrap account

Answer 10

Losses and gains are transferred from the process account to the abnormal loss/gain account.
If there is no scrap value the losses or gains are transferred to the statement of profit or loss at the value given in the process account.
If there is a scrap value then:
the abnormal loss is transferred from the abnormal loss/gain account to the scrap account at the scrap value. The cost of the loss transferred to the statement of profit or loss is reduced by the scrap value of these loss units and the cash received for scrap sales is increased by the same amount.
the abnormal gain is transferred from the abnormal loss/gain account to the scrap account at the scrap value. The saving associated with the gain is transferred to the statement of profit or loss but it also reduces the cash received for the scrap sale.

Question 11

suggested approach for answering normal loss, abnormal loss/gain questions

Answer 11

1Calculate any normal loss units and value
2Balance the units (input units = output units)
3Calculate the net cost of inputs and expected output units
4Calculate the average cost per unit: net costs of input/expected output
5Value the good output and abnormal loss or gain at this average cost per unit.
6Transfer the abnormal loss or gain to the abnormal loss/gain account.
7Transfer the normal loss to the scrap account (if any).
8Transfer the abnormal loss or gain to the scrap account at the scrap value (if any).
9Balance the abnormal loss/gain account and the scrap account.

Question 12

what is WIP at the end of an accounting period

Answer 12

At the end of an accounting period there may be some units that have entered a production process but the process has not been completed. These units are called closing work in progress (CWIP) units.
The output at the end of a period will consist of the following:
fully-processed units
part-processed units (CWIP).
CWIP units become the Opening WIP (OWIP) units in the next accounting period.
It would not be fair to allocate a full unit cost to part-processed units and so we need to use the concept of equivalent units (EUs) which shares out the process costs of a period fairly between the fully-processed and part-processed units.

Question 13

what is the concept of EUs

Answer 13

Process costs are allocated to units of production on the basis of EUs.
The idea behind this concept is that a part-processed unit can be expressed as a proportion of a fully-completed unit.
For example, if 100 units are exactly half-way through the production process, they are effectively equal to 50 fully-completed units. Therefore the 100 part-processed units can be regarded as being equivalent to 50 fully-completed units or 50 EUs.

Question 14

what are the consequences of different degrees of completion in process costing

Answer 14

For most processes the material is input at the start of the process, so it is only the addition of labour and overheads that will be incomplete at the end of the period.
This means that the material cost should be spread over all units, but conversion costs (labour and overheads combined) should be spread over the EUs.
This can be achieved using an expanded Statement of EUs which separates out the material, labour and overhead costs.

Question 15

what is opening work in progress (OWIP)

Answer 15

If OWIP is present there are two methods that can be used to calculate the equivalent units and calculate the cost per equivalent unit:
Weighted average method
FIFO method.

Question 16

what is the weighted average cost of production method (OWIP)

Answer 16

In the weighted average method no distinction is made between units in the process at the start of a period and those added during the period.
Opening inventory costs are added to current costs to provide an overall average cost per unit.
Imagine a bottle with some water in, when more water is added to the bottle it is not possible to tell which ‘bit’ of water was present as OWIP and what is ‘new’ water. The OWIP and material input into the process have mixed together.

Question 17

What is the FIFO cost of production method (OWIP)

Answer 17

With the FIFO method it is assumed that the OWIP units need to be completed first before any more units can be started, for example cars on a production line. Therefore:
completed output is made up of OWIP that has been finished in the period and units that have been made from beginning to end in the period
if OWIP units are 75% complete with respect to materials and 40% complete with respect to labour, only 25% more work will need to be carried out with respect to materials and 60% with respect to labour
the OWIP b/f costs are included in the final valuation of the completed units
This means that the process costs in the period must be allocated between:
finishing the OWIP units
units started and completed in the period (fully-worked units)
CWIP units.

Question 18

what happens in a scenario where losses are made part way through production

Answer 18

It is possible for losses or gains to be identified part way through a process. In such a case, EUs must be used to assess the extent to which costs were incurred at the time at which the loss/gain was identified.

Question 19

how are joint and by-products involved in process costing

Answer 19

The nature of process costing is such that processes often produce more than one product. These additional products may be described as either joint products or by-products. Essentially joint products are main products whereas by-products are incidental to the main products.

Question 20

what are joint products in process costing

Answer 20

Joint products are two or more products separated in the course of processing, each having a sufficiently high saleable value to merit recognition as a main product.
Joint products include products produced as a result of the oil-refining process, for example, petrol and paraffin.
Petrol and paraffin have similar sales values and are therefore equally important (joint) products.

Question 21

what are by-products in process costing

Answer 21

By-products are outputs of some value produced incidentally in manufacturing something else (main products).
By-products, such as sawdust and bark, are secondary products from the timber industry (where timber is the main or principal product from the process).
Sawdust and bark have a relatively low sales value compared to the timber which is produced and are therefore classified as by-products.

Question 22

how are joint products treated in terms of accounting

Answer 22

The distinction between joint and by-products is important because the accounting treatment of joint products and by-products differs.
Joint process costs occur before the split-off point. They are sometimes called pre-separation costs or common costs.
The joint costs need to be apportioned between the joint products at the split-off point to obtain the cost of each of the products in order to value closing inventory and cost of sales.
The basis of apportionment of joint costs to products is usually one of the following:
sales value of production (also known as market value)
production units
net realisable value.

Question 23

how are by-products treated in terms of accounting

Answer 23

By-products are of less significance than the main products and may not require precise cost allocation. Factors that can influence the valuation and accounting treatment of by-products:
Is the value of the by-product known at the time of production?
Could the by-product be used in other production?
Is the by-product an alternative to the main products?
Is there a need for separate profit calculations for sales incentives or for control?

by-products can be accounted for using both non-cost and cost methods

Question 24

what are non-cost methods of accounting for by-products

Answer 24

Non-cost methods make no attempt to allocate joint cost to the by-product but instead the proceeds either increase income or to reduce the cost of the main product.
Other income– The net sales of by-products for the current period is recognised as other income and is reported in the income statement. This method is used where there is little value to the by-product, where any other method would be more expensive than the benefits received, or carrying by-products with the main products would not really affect the cost of the main product.
By-product revenue deducted from the main product(s) cost – The net sales value of the by-products will be treated as a deduction from the cost of the main product(s). This is similar to the accounting treatment of normal loss. This is the most common method of accounting for by-product income.

Question 25

what are cost methods of accounting for by-products

Answer 25

Cost methods attempt to allocate some joint costs to by-products and to carry inventories at the allocated cost levels.
Replacement cost method – values the by-product inventory at its opportunity cost of purchasing or replacing the by-products.
Total costs less by-products valued at standard price method – By-products are valued at a standard price to avoid fluctuations in by-product value. This means that the main product cost will not be affected by any fluctuations in the by-product price. The standard price may be set arbitrarily, or it may reflect an average price over time. A variance account is used to account for the difference between actual and standard prices.
Joint cost pro-rata method – allocates some of the joint cost to the by-product using any one of the joint cost allocation methods. This method is rarely used in practice.

Question 26

how are joint and by-products treated when preparing process accounts

Answer 26

You may be required to deal with joint and by-products when preparing process accounts. Joint products should be treated as ‘normal’ output from a process. The treatment of by-products in process accounts is similar to the treatment of normal loss.
The by-product income is credited to the process account and debited to a by-product account.
To calculate the number of units in a period, by-product units (like normal loss) reduce the number of units output.
When by-products are produced, the cost per unit is calculated as follows:

net costs of inputs/expected output