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Part Two:

Cost accumulation for


inventory valuation and profit measurement
Chapter Five:
Process costing

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.1

PROCESS COSTING
1. Job costing assigns costs to each individual unit of output because
each unit consumes different quantities of resources.
2. Process costing does not assign costs to each unit of output because
each unit is identical. Instead, average unit costs are computed.

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.2a

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ISBN 9781408041802
2012 Colin Drury

5.2b

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ISBN 9781408041802
2012 Colin Drury

5.3a
Normal and abnormal losses
Normal losses cannot be avoided Cost is absorbed by good
production.
Abnormal losses are avoidable Cost is recorded separately
and treated as a period cost.
Example
Input
Normal loss
Actual output
CPU
Cost of completed
production
Cost of abnormal loss

= 1 200 litres at a cost of 1 200


= 1/6 of input
= 900 litres
= 1 200/Expected output (1 000 litres) = 1.20
= 1 080 (900 1.20)
= 120 (100 1.20)

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.3b

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2012 Colin Drury

5.4a
Sale proceeds from normal losses

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ISBN 9781408041802
2012 Colin Drury

5.4b

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ISBN 9781408041802
2012 Colin Drury

5.5a

Sale proceeds (normal and abnormal losses)


Example 2
As example 1 but output
CPU as example 1

= 900 litres (abnormal loss = 100 litres)


= 1.10 per litre

The sales value of the abnormal loss should be offset against the
cost of the abnormal loss.

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.5b

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ISBN 9781408041802
2012 Colin Drury

5.5c

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.6a
Abnormal gains
Example
Input
Output
Normal loss
Scrap value

= 1 200 litres at a cost of 1 200


= 1 100 litres
= 1/6 of input
= 0.50 per litre

CPU = Cost of production less scrap value of normal loss


Expected output
= 1 100 /1 000 = 1.10 per litre

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.6b

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ISBN 9781408041802
2012 Colin Drury

5.6c

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.7a

Equivalent production & closing WIP


Partly completed units are expressed as fully completed equivalent
units in order to compute CPU (e.g. 1000 units 50% complete equals
500 equivalent production).
Example
Opening WIP
Units introduced into the process
Units completed and transferred to next process
Closing WIP (50% complete)
Materials cost (introduced at start)
Conversion cost

Nil
14 000
10 000
4 000
70 000
48 000

Note that materials are 100% complete.

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.7b

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.8
Equivalent production and closing WIP

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.9a

Previous process cost


Costs transferred from a previous process are treated as a separate element of cost
(100% complete)

Example
Opening WIP
Units transferred
Closing WIP *50% complete)
Completed units transferred to finished goods stock
Previous process cost
Conversion costs
Materials (introduced at end of process)

Nil
10 000
1 000
9 000
90 000
57 000
36 000

Note materials are zero complete and previous process cost 100% complete.
Use with Management and Cost Accounting 8e by Colin Drury
ISBN 9781408041802
2012 Colin Drury

5.9b

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2012 Colin Drury

5.10
Previous process cost

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2012 Colin Drury

5.11
Example to illustrate weighted average and FIFO

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ISBN 9781408041802
2012 Colin Drury

5.12

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5.13

Note the weighted average method assumes that the opening WIP is
merged
with the units produced in the current period.

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.14a

Opening WIP FIFO method


The FIFO method assumes opening WIP is the first group of units to be completed.
Therefore, opening WIP is charged separately to completed production and CPU is
based on current period costs.

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

5.14b

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2012 Colin Drury

5.15a
Opening WIP FIFO method

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ISBN 9781408041802
2012 Colin Drury

5.15b

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ISBN 9781408041802
2012 Colin Drury

5.15c

Use with Management and Cost Accounting 8e by Colin Drury


ISBN 9781408041802
2012 Colin Drury

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