CIMA C1

Fundamentals of Management Accounting

Process Costing, Joint & By-products

CIMA C1
Fundamentals of Management Accounting
Class Slides Ian Wilson

Learning Aims (CIMA)

Prepare ledger accounts for job, batch &
process costing systems
Calculate the impact of:
1. Normal Loss
2. Abnormal Loss
3. Abnormal Gain
4. Equivalent Units
5. Work in Progress Valuations
6. By-products & Joint products

Context & Introduction

In a significant number of manufacturing
processes it is NOT possible to identify
individual cost units because of the
continuous nature of production e.g. oil
refining, paint production, chemical
manufacture
Using process costing it becomes possible
to derive a cost for both output and closing
stocks.

Process Costing Features

Features:
a) Under continuous production there is
almost always work in progress to be
valued.
b) Wastage during a continuous production
process is common and has to be taken into
account (see later)

This is a DIFFICULT area for students, some

simple steps will help!

Basic Concepts
1) Process accounts are simple control
accounts that have debit and credit entries
and are nothing more than work in progress
accounts.
2) Ledger accounts contain quantity
columns that should be balanced off.
3) A set of rules applies to each procedure once learnt they always apply.

Basic Concepts
Manufacturing processes require INPUTS
Raw Materials
Labour
Overheads related to the production
process

Note: sometimes Labour & Overheads are

added together & is called CONVERSION
COSTS

Questions Exercise 1
What does a process costing question
look like?
Your answer will require a T Account

Debi
t

Process Account: Phase 1

What comes into the

process as Inputs.

Credi
t

Has to come out of

the process & be
accounted forOutput

Exercise 1

Given that output from Cutting is fed into

Forming, write up the process accounts.

You need 2 process Accounts

Losses & Gains

Most processes are NOT 100% efficient and
involve some form of loss in weight or
volume. This has to be accounted for. In
process costing, an important division is
made between NORMAL LOSS and
ABNORMAL LOSS
Consider each in detail:

Losses & Gains

NORMAL LOSS
These are losses that are expected as part
of the production process. The cost of a
normal loss is spread across the remaining
good units.
Any scrap revenue from an normal loss is
used to reduce the cost of the main process.
You have a formula to learn for calculating
the cost per unit of good material:

Normal Loss
Cost per unit of good units:

Total costs Value of Normal Loss

Expected Output Units

Where:
Expected Output = Input Units Normal
Loss Units

Loss
After
processing

At input stage &

start of process
Materials
Conversion

Cost
Of Inputs

Costs remains
Same but for
Proceeds of
Sales, IF any

Cost
Of Inputs

Input Cost
less sale
proceeds

Divided by:

Input
volumes

Units
Of
Input

Output
reduced due
to Normal
loss
Units
Output

Input
volume less
Normal loss
volumes

Normal Loss
The key to answering these questions
correctly is to calculate the cost of good
output.
Try Exercise 2:
You have to calculate the costs per tonne of
good output
Write up the T accounts also

Abnormal Loss
What is this?
Abnormal losses are unexpected losses.
You always assume losses take place at the
END of the period by the way.
An abnormal loss occurs when the ACTUAL
OUTPUT is LESS than EXPECTED OUTPUT
Note:
Abnormal loss units can be sold for scrap
proceeds

Abnormal Loss Rules

1.

2.

3.
4.

5.

6.

Credit process A/C with good output &

normal loss. Value at output cost value per
unit (see formula earlier).
Calculate Abnormal Loss amount & credit
process A/C
Abnormal Loss valued as 1) above
Record Abnormal Loss as debit in
Abnormal loss/Gains A/C
Increase scrap sales by Abnormal Loss
amount
Scrap value cost value reported in P/L

Exercise 3
Our chance to practice Normal & Abnormal
Loss calculations
You have 3 ledger Accounts to write up
Most of the information is the same from
exercise 2
The output is now assumed to be 150
tonnes

Abnormal Gain

What is this?
Abnormal gains takes place when ACTUAL
good output is GREATER than expected
output
Abnormal gain units represent extra good
units, they are COSTED at the SAME RATE as
other good units.
By making more good units, the company
looses out on scrap sales
This is measured in the Abnormal Loss/Gain
A/C

Abnormal Gain Rules

1.

2.

3.

4.

5.
6.

Credit process A/C with good output &

normal loss. Value good output at the cost
per unit value.
Calculate Abnormal Gain & enter on debit
side of process A/C
Abnormal gain is valued at cost per unit
value in process A/C
Record Abnormal Gain as a credit in
Abnormal Loss/Gain A/C
Decrease scrap sales by Abnormal Gain
Scrap value cost value reported in P/L

Exercise 4 & 5
Data as per Exercise 2, prepare process
accounts but with output at 156 tonnes
You will have 3 T accounts to write up

We can now try Exercise 5 which pulls

everything together for us.

Process Costing
Review from start of Session:
a) Under continuous production there is
almost always work in progress to be
valued. We need to consider W.I.P.
b) Wastage during a continuous production
process is common and has to be taken into
account we have covered this

WORK IN PROGRESS what is it?

Work-in-progress
At the end of an accounting period there is
likely to be some partly completed work
(W.I.P. - Work-in-progress)
A feature of process costing is the
continuous manufacturing process, some
part finished work is inevitable
Some of the costs for the period in question
have to be attributed to the W.I.P.
This is done on a basis called:
EQUIVALENT UNITS

Work-in-progress example
If 2,000 units had been introduced into a
process and only 1,500 had been completed
it would be unfair to apportion costs in the
ratio 3:1 between finished output and
closing stock as the part-finished goods
would not have 'received' their complete
amount of labour and materials.
We DO NOT use the above method
therefore

Work-in-progress
Instead we follow the principles below:
The previous problem is overcome by
converting part completed work into
EQUIVALENT UNITS of finished output. For
example, if 200 units were 70% completed,
they would be charged with the cost of 140
completed units.
Getting the right answer to a question
involving closing work in progress is a threestage process.

Work-in-progress
3 stages of EUs calculation:
1. Convert physical outputs to equivalent
units by constructing a statement of
equivalent units.
2. Calculate the cost of equivalent units by
constructing a statement of unit cost.
3. Calculate the value of each output by
multiplying the number of equivalent units
by unit cost in a statement of valuation.

Exercise 6 easy question!

Calculate the cost per Equivalent Unit:

1000 units fully completed, 200 50%
completed:
Total costs 5500
units

% complete

1000 units

100%

1000 units

200 units

50%

100 units

Totals

EUs

1100 EU units

Cost = 5500/1100 EUs = 5 per unit

Exercise 7 hard question!

In this example it is assumed that unfinished work was

completed to the SAME extent for Materials & Labour
in reality, this may not be the case

Exercise 8 complex
question!
1.
2.
3.
4.

5.
6.
7.

8.

Follow logical steps:

Statement of Equivalent Units:
2100 fully completed 100% Output Units
700 partially completed, 80%/60%/50%
for Mats/Lab/O/H
Identify the Costs for Mats/Lab/O/Hs
Calculate the cost per EU for Mat/Lab/O/H
Statement of Valuation for completed &
W.I.P. goods
Complete Process T Account

Opening work-in-progress

Having calculated the CLOSING W.I.P. value,

we can assume that these values become
the OPENING WORK IN PROGRESS for the
next period.

Weighted Average
Valuation

The W.A. method takes the total for each

element of cost which is divided by the
equivalent units to find the cost per EU.
You have 3 steps again to consider:
1. Statement of EUs Units of Output x 100%
+ closing W.I.P. x % completion, all of
which is equal to = Total EUs (units)
2. Cost per EU, this is calculated as follows:
Total cost of work done = current period
costs + value of opening WIP
3. Valuation of EUs

Exercise 9 advanced question!

You have 2 parts to the question:
1. Cost per EU for Materials & Conversion
Costs (remember those costs labour +
Overheads)
2. Total value of Units completed last month
3. Remember this is a W.A. question:

Losses & W.I.P.

For the Lectures to date, we have looked at
EUs & Losses separately.
In practice of course, both of these issues
would have to be accounted for at period
end.
Exercise 10 is called:
Pulling it all together
Lets have a look at some rules to help us
solve this question:

Key rules for Losses &

W.I.P.
1.

2.

3.

4.

Costs divided between Finished Output,

Closing Stock & Abnormal Loss/Gain based
on Equivalent Units as the basis of
apportionment
Units of Abnormal Loss/Gain are often
taken to be 1 full EU & valued accordingly
Abnormal loss units are ADDED to EU
produced but Abnormal gains are
SUBTRACTED in arriving at Total EUs
Units of normal loss have a zero value of
EU

Exercise 10 final
question!
Produce a Process A/C for the period in
question:
1. Good practice to balance inputs & outputs
2. From 1 above, Abnormal loss/gain is a
balancing figure
3. Statement of Valuation balance to 4000
units
4. Cost per EU watch for Normal Loss
proceeds
5. Statement of Valuation put costs to item 1
above

Joint & By-Products

Introduction:
Often when materials are input into a
process, more than one product emerges.
These are known as Joint products.
This can be defined as:
Two or more products separated in
processing, each having a sufficiently high
saleable value to merit recognition as a
main product.

Joint Products - examples

Items that have a relatively significant sales

value when two or more types are produced
simultaneously from the same input by a
joint process. For example, gasoline, fuel oil,
kerosene, and paraffin are the joint products
produced from crude oil.
Product 1

Joint Costs
Process A

Product 2
Slit off point where
products become
identifiable

By-products
Sometimes a product is made by accident
or we can sell wastage from a process.
This is known as a by-product
Marmite is a well known example of a byproduct:

Marmite famous example

Marmite is dark brown-colored savory

spread made from the yeast that is a byproduct of the brewing industry. It has a
very strong, slightly salty flavor. It is
definitely a love-it-or-hate-it type of food.

Remember the rules

To distinguish between joint & by-products:
1. A joint product is an important saleable
item in its own right, production is geared
to its manufacture.
2. A by-product is something produced which
is a bonus to a company, it would not be
produced as a main product.

The problem:
Up to the split off point all costs are
common or joint.
They are shared by ALL products difficult
to share between products!
After this point of split-off, additional costs
may have to be allocated to various
products easy to do!.
How do we split the joint costs on a fair
basis?

The solution:
2 methods to split costs:
1. Physical quantities: costs apportioned in
proportion to their physical weight or
volume of output.
2. Sales Value: costs apportioned in
proportion to their sales value of
production, or final sales value after
further processing costs have been
removed.

Exercise 11
2 parts to question:
1. Physical units
2. Sales Value

Exercise 12
2 parts to question:
1. Physical units
2. Sales Value