Process Costing Flashcards
When is process costing used?
In continuous production where it is difficult to identify individual cost units. It allows for work in progress to be valued and takes in to account wastage.
What are the three key points to bear in mind when accounting for process costing?
Process accounts are like control accounts that have Dr and Cr
Accounts contain quantity and value columns that should balance
Simple set of rules applies to each procedure
What is the basic process costing approach?
1 Set up T accounts 2 Enter the information given 3 Balance accounts in terms of units 4 Calculate the cost per unit 5 Complete valuations & T-accounts
What are conversion costs?
Direct labour costs and manufacturing overhead. Assumed to be added evenly during each process accounted for.
What are the two types of losses that we account for?
Normal loss and Abnormal loss
What is normal loss?
Loss expected to occur, if the normal loss is sold the revenue (scrap revenue) is used to reduce the cost of the main process
How is the cost per unit of ‘good’ output calculated?
(Total costs - value of normal loss) / expected output units
expected output units = input units - normal loss
What is an abnormal loss?
Unexpected loss when actual output is less than expected output. Any units may be sold for scrap
How do we account for an abnormal loss?
1 Difference between actual good output and expected good output is calculated
2 Abnormal loss is recorded on Cr of process account at cost per unit value
3 Recorded on Dr of Abnormal loss/gain account
4 Scrap sales are increased by abnormal loss
5 Abnormal loss value calculated as:
(abnormal loss units x cost per unit) - scrap value of abnormal loss units
What is an abnormal gain?
Unexpected gain when actual output is more than expected output. Sold in the same manner as good units, but lose out on scrap revenue.
How do we account for an abnormal gain?
1 Difference between actual good output and expected good output is calculated
2 Abnormal gain is recorded on Dr of process account at cost per unit value
3 Recorded on Cr of Abnormal loss/gain account
4 Scrap sales are decreased by abnormal gain
5 Abnormal gain value calculated as:
(abnormal gain units x cost per unit) - scrap value of abnormal gain units
How do we value closing work in progress?
Costs apportioned between the inventory of part-finished work and finished output, which is done through converting part completed work into equivalent units of finished output.
How do we account for closing WIP?
Same basic process account with following steps:
1 Convert physical outputs to equivalent units through statement of equivalent units
2 Calculate the cost of equivalent units through statement of unit cost
3 Calculate value of each output by multiplying number of equivalent units in statement of valuation
What is the primary assumption to be made when there is opening and closing WIP?
Which units were completed first during the period, as this affects the calculation of EUs and therefore ouput, losses and closing WIP valuations.
What are the two methods for opening WIP?
Weighted average - no assumption is made that opening WIP units are completed first during the period
FIFO - it is assumed that opening WIP units are completed first during the period
