Process costing
- Single product
- Joint product
Process costing is a method of costing used mainly in manufacturing where units are continuously
mass-produced through one or more processes.
Examples of this include the manufacture of erasers, chemicals or processed food.
Typical industries where process costing is suitable
- The production is of a number of identical units
- Production involves a number of processes and the output of one process forms the input of
another process
- Mass production is undertaken on a continuous basis
- It is difficult to establish the identity of individuals jobs
Process account
Units $ Units $
Input X X output X X
X X X X
Input = Resource Loss
✓ Material Transfer to process 2
✓ Labour Process ✓ Output
✓ Overhead Work in process
Finished goods
Note
Labour + Overhead = Conversion cost
Loss condition
Normal loss
This is the term used to describe normal expected wastage under usual operating conditions.
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This may be due to reasons such as evaporation, testing or rejects.
Abnormal loss
This is when a loss occurs over and above the normal expected loss.
This may be due to reasons such as faulty machinery or errors by labourers.
Abnormal gain
This occurs when the actual loss is lower than the normal loss.
This could, for example, be due to greater efficiency from newly-purchased machinery.
Work in progress (WIP)
WIP is units that are not yet complete at the end of the period.
Opening WIP is the number of incomplete units at the start of a process and
closing WIP is the number at the end of the process.
Equivalent units
This refers to a conversion of part-completed units into an equivalent number of wholly-completed
units. For example, if 1,000 cars are 40% complete then
the equivalent number of completed cars would be 1,000 x 40% = 400 cars.
Note: If 1,000 cars are 60% complete on the painting, but 40% complete on the testing, then
equivalent units will need to be established for each type of cost.
Process account
Units $ Units $
Opening WIP X X Normal loss X X
Materials X Transfer to Process 2 or X X
Finished goods
Labour X Abnormal loss X X
Overheads X Closing WIP X X
Abnormal gain X X
X X X X
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In exam
Question types
No WIP Question WIP Question
Only closing WIP include Both opening and closing WIP
include
1- FIFO method
2- Average method
For No WIP Question
Working plan
Step 1 – Draw Process account (mostly unit)
𝑷𝒓𝒐𝒄𝒆𝒔𝒔 𝒄𝒐𝒔𝒕−𝒔𝒄𝒓𝒂𝒑 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒏𝒐𝒓𝒎𝒂𝒍 𝒍𝒐𝒔𝒔
Step 2 – cost per unit =
𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒐𝒖𝒕𝒑𝒖𝒕 (𝑰𝒏𝒑𝒖𝒕−𝒏𝒐𝒓𝒎𝒂𝒍 𝒍𝒐𝒔𝒔)
Step 3 – cost valuation (output, abnormal loss and gain)
Step 4 – Complete process account
For WIP Question (only closing WIP includes)
Working plan
Step 1 – Draw Process account (mostly unit) Equivalent units for each element
Process cost for each element
Step 2 – cost per unit
𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
cost per unit =
𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
Step 3 – cost valuation (output, WIP, abnormal loss and gain)
Step 4 – Complete process account
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Format of cost per unit
Particular Total Process 1 Added material Labour overhead
Unit Unit % Unit % Unit % Unit %
Finished
goods
Add
Abnormal
loss
Less
Abnormal
gain
Add
Closing WIP
Equivalent XXX XXX XXX XXX
unit
Process cost XXX XXX XXX XXX
Scrap value (XXX)
of normal
loss
Net process XXX XXX XXX XXX
cost
Cost per unit 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
Cost valuation
The cost of output or finished goods
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
Total cost of output XXX
The cost of abnormal loss or gain
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of abnormal loss or gain XXX
4
The cost of closing WIP
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of closing WIP XXX
For WIP Question (both opening and closing WIP include)
For FIFO method
Working plan
Step 1 – Draw Process account (mostly unit) Equivalent units for each element
Process cost for each element
Step 2 – cost per unit
𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
cost per unit =𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
Step 3 – cost valuation (output, WIP, abnormal loss and gain)
Step 4 – Complete process account
Format of cost per unit
Particular Total Process 1 Added material Labour overhead
Unit Unit % Unit % Unit % Unit %
Output
Less b/d WIP
Current output
Add
Abnormal loss
Less
Abnormal gain
Add
Closing WIP
Equivalent unit XXX XXX XXX XXX
Process cost XXX XXX XXX XXX
Scrap value of (XXX)
normal loss
Net process cost XXX XXX XXX XXX
Cost per unit 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
5
Cost valuation (under FIFO method)
The cost of output or finished goods (current output + opening WIP)
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX Current output
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
b/d WIP XXX
Total cost of output XXX
The cost of abnormal loss or gain
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of abnormal loss or gain XXX
The cost of closing WIP
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of closing WIP XXX
For Average method
Working plan
Step 1 – Draw Process account (mostly unit) Equivalent units for each element
Process cost for each element
Step 2 – cost per unit
𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
cost per unit =𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
Step 3 – cost valuation (output, WIP, abnormal loss and gain)
Step 4 – Complete process account
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Format of cost per unit
Particular Total Process 1 Added material Labour overhead
Unit Unit % Unit % Unit % Unit %
Output
Add
Abnormal loss
Less
Abnormal gain
Add
Closing WIP
Equivalent unit XXX XXX XXX XXX
Process cost XXX XXX XXX XXX
b/d WIP XXX XXX XXX XXX
Scrap value of (XXX)
normal loss
Net process cost XXX XXX XXX XXX
Cost per unit 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝑐𝑜𝑠𝑡
𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑢𝑛𝑖𝑡
Cost valuation (under average method)
The cost of output or finished goods (current output + opening WIP)
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
Total cost of output XXX
The cost of abnormal loss or gain
Process 1 (number of unit x cost per unit) XXX
Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of abnormal loss or gain XXX
The cost of closing WIP
Process 1 (number of unit x cost per unit) XXX
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Added material (number of unit x cost per unit) XXX
Labour (number of unit x cost per unit) XXX
overhead (number of unit x cost per unit) XXX
The cost of closing WIP XXX
Summary
WIP (opening and closing )
- FIFO method (Two points – equivalent unit and the cost of finished goods)
- Average method (One point – Process cost)
Look at opening WIP (In exam) ဘယ် methods သုံးမလဲ
- % of each element ( FIFO method)
- Cost of each element ( Average method)
Normal loss account/ scrap account
Units $ Units $
Process account X X Abnormal gain X X
Abnormal loss account X X Balance (cash or receivable) X X
X X X X
Abnormal loss account (Expenses)
Units $ Units $
Process account X X Normal loss account X X
Balance (Profit or loss) X X
X X X X
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Abnormal gain account (Income)
Units $ Units $
Normal loss account X X Process account X X
Balance (Profit or loss) X X
X X X X
