Process Costing (LECTURE 3) Flashcards
ABNORMAL GAIN
A gain that occurs when the level of a normal loss is less than expected.
ABNORMAL LOSSES / CONTROLLABLE LOSSES
Losses that are not inherent to the production process and which are not expected to occur under efficient operating conditions.
BATCH COSTING / OPERATION COSTING
A method of costing that makes use of a combination of job costing and process costing techniques.
NORMAL LOSSES / CONTROLLABLE LOSSES
Losses that are not inherent to the production process and which are not expected to occur under efficient operating conditions.
CONVERSION COSTS
The sum of direct labour and overhead costs.
EQUIVALENT PRODUCTION
The term used when work in progress is converted into finished equivalents.
NORMAL LOSSES / UNCONTROLLABLE LOSSES
Unavoidable losses that are inherent to the production process and can be expected to occur in efficient operating conditions.
PREVIOUS PROCESS COST
The cost that is transferred from the previous process and is always fully complete in respect to closing WIP.
PROCESS COSTING
A method of costing by which costs are accumulated and split over production volume.
So if total costs are £1,000, and 1,000 items are made, cost is £1 each.
When is process costing used?
Where lots of identical items are made, such as food and drinks manufacture.
Pointless to calculate cost of one single tine of peaches or one door handle.
As inputs are identical, and as outputs are identical, it’s easier than job-order costing.
What do we normally identify as cost inputs in process costing?
Materials and conversion costs (labour and O/Hs combined)
NORMAL LOSSES EXAMPLE:
If 24,000 litres are input into a process, and it is known that losses are 1/8, then we anticipate output of 7/8x(24,000) = 21,000 litres.
Materials cost 50p/litre
Conversion costs were £30,000
What should cost per litre be?
Total cost of materials = £12,000
Conversion costs = £30,000
Total cost = £42,000
Should be split over 21,000 litres not 24,000 litres.
Unit cost of saleable output is £42,000/21,000 = £2
Process account for input: Materials: Litres: 24,000 Unit Cost: £0.5 Total Cost: £12,000
Conversion Cost:
Litres: /
Unit Cost: /
Total Cost: £30,000
Total Litres = 24,000
Total Cost = £42,000
Process account for output: Output of FG: Litres: 21,000 Unit Cost: £2 Total Cost: £42,000
Normal Loss:
Litres: 3,000
Unit Cost: /
Total Cost: /
Total Litres: 24,000
Total Cost: £42,000
How is abnormal loss charged?
Abnormal loss is charged to cost as if normal production.
How do you deal with normal loss with scrap value?
Poor production causes normal loss. Can be sold for a certain amount per litre (SCRAP).
The scrap value of the normal loss is netted against the input cost.
Next, the resulting amount is split over the anticipated output.
E.g. £(42,000-2,400)/21,600 = £1.8333 per unit of good production.
What is the convention for gains in production?
All gains in production are abnormal.
