W3 - Process Costing Flashcards
Average Unit Cost
Suited to mass production where the cost of one product cannot be identified individually.
This is because all the units are produced in same manner and repetitive processes and operations
Costs of production/expected (normal) output
Process Account
Create table in T-Account Style
Left side (Debit):
All the costs of process 1 e.g.:
Materials 1000 £10,000
Labour £8,000
Overheads £6,000
Total: Units 1,000, £24,000
Right side (Credit):
Process 2: Units 1,000, £24,000
Find average unit cost of this process e.g. £24k / 1,000 units = £24
For the next Process, Process 2, we add Process 1.
e.g.
Left Side:
Process 1: Units 1,000, £24,000
Material TC from P2:
Labour TC from P2:
Overheads TC from P2:
Right Side (credit):
Finished goods: units 1,000, £36,000
Where does the process account go in statements
Process Account is an account within the Work In Progress
section of the inventory, within the Statement of Financial Position.
Process Costing with normal losses
Certain losses are inherent in the production process and cannot be
eliminated (e.g., liquids may evaporate, materials may be wasted)
Average cost per unit = Total cost of inputs/(Units input - Normal loss)
Create Process account, Left side remains standard
Right side Process 2 unit amount should be less than total units inputted on left side. e.g. Left side units = 1,000, the right side units for Process 2 row should be 960 (if 4% normal loss)
Under process 2 row, add new row titled Normal Loss: Units 40, £0
Total amount of units and £’s on Right side should equal same as left side always
Calculate average unit cost with normal losses included in formula
Scrap Value of normal loss def., table and formula
IF the wastage has a value, this is known as the scrap value.The scrap value of the normal loss is not treated as a revenue, but
as a reduction in cost.
The average cost per unit is now:
Average cost per unit =
Total cost of inputs – scrap value of the normal loss / (Units input – normal loss)
Table looks same as normal loss account, but the NL should now have a £value, where usually it doesn’t. This value should just be the number of NL x scrap value per unit.
Remember total has to add up on both side, so we reduce the value of process 2 by the value of scrap so the total is the same as Left side
Scrap Account
LEFT SIDE SHOULD HAVE ROWS OF pROCESS 1 & pROCESS 2
Units and £, and a total.
Right side should be identical, but process 1 and 2 changes to Cash.
This is because right hand side is what goes out and into the statements, in this case Cash from the scrap
Abnormal loss def. and formula
These arise when actual losses are either more or less than
expected. As a result, the actual output will be different from the expected output (i.e., “units of input less normal loss”). *If actual output is less than expected output, an abnormal loss occurs. *If actual output is more than expected output, an abnormal gain occurs.
Expected output = Units input – normal loss
Abnormal Gain/Loss = Actual output - Expected output = Actual output – (Units input – Normal Loss)
In the table, left hand side stays as standard. Right side changes.
Process 2 units change to the actual units. Multiply this amount by the average cost per unit (from formula) to get the £ value.
NL units and £
Abnormal Loss: Units and £ value
an ABNORMAL GAIN changes the left side. We add a new column of Abnormal Gain, with Units and £ value (which is the AG x Average cost per unit)
How is an abnormal loss or gain recognised in statements
Recognised in the income statement as a loss/gain
BUT we must remember if we have a gained good production, then we have lost the opportunity to scrap the unit and obtain money for the
scrap. The gain to IS is thus as follows:
Abnormal gain:
Less scrap proceeds foregone (AG units x Scrap proceeds e.g. £3)
Deducted from Cost of Sales:
Work in Progress of a Process
At period end, there are likely to be incomplete items, and these cannot have incurred 100% of the unit costs, so to spread costs fairly between finished and unfinished goods we use Equivalent Units
Equivalent units example
In Process 1 in ABC Ltd the following data applies to the last period:
Period costs £4,440
Input 800 units
Output 600 completed units
200 units 70% complete
There were no process losses
Required
1. Calculate the number of equivalent units
2. Calculate the cost per equivalent unit
3. Prepare the process account
- Calculate the number of equivalent units
EU = 600 x 100% + 200 x 70% = 740 EU - Calculate the cost per equivalent unit
Cost per EU = £4,440 / 740 EU = £6 per EU - Process Account
Left side is standard: Units 800, £4,440
Right Side:
Process 2: Units 600, £3,600 (600 x £6)
WIP: Units 200, £840 (200 x 70% x £6)
Equivalent Units table WEEK 3 Lecture 4
… Check if this is necessary to know when past papers come out
