Process Costing Flashcards
What are the features of Process Costing?
- Unit pass through a series of stages of production/processes where the output of one stage (process) becomes the input of the next stage (process).
- The product is produced in one single process
- There is simultaneous production, at one or more processes, of different products.
- Simultaneous production of identical products, products are not distinguishable from each other.
- Completed output is transferred to stock as a single commodity.
What is Process Costing?
Used to find the unit cost of making a product which passes through several processes. It is used to firms which mass-produce identical or standardised products eg canning/bottling.
What is Process Production?
Involves a continuous sequence of operations. Each operation is a distinct stage in the manufacturing process in which the output of one stage becomes the input of the next stage. Completed output is transferred to stock as a single commodity.
What are industries that use process costing?
- Chemical works, oil refining, soap making and distillation processes such as whiskey.
- Food processing, canning factories, biscuit works, meat products, milk and dairy.
- Textiles, weaving and spinning
- Paper mills, paint, ink and varnishing
What is a Normal Loss? (MAIN)
This is an expected loss which will be incurred during the production process. Some losses will be scrap while other loses will be waste. This Normal loss quantity can be calculated in advance either by using a formula or based on previous processing experience, e.g. Normal Loss is 5% of total materials input.
Normal loss is the loss that is expected to occur under normal operating procedures. It may be caused by:
- evaporation or
- off-cut of materials.
The cost of the loss is simple absorbed into normal production costs and increase the cost per unit of the good output as it will reduce the number of goods units produced and hence increase the cost of output.
What is Scrap?
This refers to discarded materials which have some recovery value however they can no longer be used for their original purpose.
What is Spoilage?
This is a form of scrap. It is spoiled work which is partly complete and doesn’t reach the standard required. It may be sold as sub-standard materials.
This will also reduce the numbers of good units produced and hence will increase the cost per unit of output.
What is Waste?
This is discarded substances which have no value eg if broken glass fell into a tank of soup then the soup would be considered unfit for human consumption and would have to be destroyed.
What is Abnormal Loss? (MAIN)
An abnormal loss is caused by unexpected or abnormal conditions, such as inferior materials, or carelessness by workers. All losses under this category must be thoroughly investigated and steps taken to prevent any recurrence.
With a normal loss the cost is absorbed into the cost of production, but when an abnormal loss occurs a separate Abnormal Loss Account must be opened and the total cost of the abnormal loss charged to it.
An Abnormal loss may or may not have a value, but this does not matter in the process account as it is valued at the same unit amount as the good output using your Cost per unit/kg/litre formula answer.
Abnormal Losses do not affect the overall cost of good output.
What are some reasons for Abnormal Losses? (google searches)
- faulty goods
- unplanned activities
- accidents
- theft
- failure in equipment.
What is Work-In-Progress? (MAIN)
This refers to partly finished materials/products. These partly completed products need to be valued and the quantity accounted for. There may be opening stock of work in progress and closing stock of work in progress. The closing stock of work in progress will affect your cost per unit/kg/litre calculation and should be part of your formula as illustrated below:
Total Cost - (Normal Loss Value + Closing stock of work in progress value)
Total Quantity input - (Normal Loss Quantity + Closing stock of work in progress quantity)
= Cost per unit/kg/litre.
