CHAPTER NO. 06

Processing Costing

PROCESS COSTING  It is a costing method used where products are produced in large quantities in a continues process e.g. production of bars of choclate, cans of soup or tins of paint etc.

 In process costing all products are identical and indistinguishable from each other.

 For this reason an average cost per unit is calculated for each process is: Average cost per unit: Cost of production Expected or normal output

 Another main feature of process costing is that the output of one process forms the material input of next process.

Input

Process 1

output

Process 2

output

Process 3

Labour Materials Overheads Additional Labour Materials overheads Additional Labour Materials overheads  Where there is closing work in progress at the end of one period, this forms the opening WIP at the beginning of the next period.

EXAMPLE: PROCESS COSTING WITH ENDING WORK IN PROGRESS AND NORMAL LOSS ONLY. Following details are about Blending Departent of Clonex Corporation for the month of January,19-:   Units Started: 50,000 Output units: 45,000 fully worked units transferred to next department, 4,000 units only 50% complete with respect to Labour and Factory overhead and 100% complete with respect to materials.

  Cost of Production Raw Material: $24,500 Direct Labour: $29,140 Overheads: $28,200 Required: 1.

There are 1000 units lost in process.

Prepare the cost of production report for the month of January 19--.

2.EQUIVALENT PRODUCTION UNITS Output Materials % EUs Conversion cost % EUs Fully worke units WIP 45000 4000 100% 100% 45000 4000 100% 40% 45000 2000 Total 49000 49,000 47,000

3. COST PER UNIT Costs Materials $24,500 Labour Cost $29,140 FOH 28,200 E.P.U

49,000 47,000 47,000 Cost Per Unit Total Cost Per Unit $24,500/490 00 =$0.50

$29,140/47 000 = $0.62

$28,200/ 49,000 = $0.60

= $0.50 + $0.62+0.60 = $1.72

THE CLONEX CORPORATION COST OF PRODUCTION REPORT

FOR BLENDING DEPARTMENT FOR THE MONTH OF JANUARY,19--

Quantitative schedule:

Units started Units Transferred 45,000 Units lost in the process 1,000 Work in progress 4,000 ( All Material and ½ Labour and Factory overhead) 50,000 50,000

Cost Charged to the Department:

Cost Added by Department: Materials Labour Factory overhead Total cost to be accounted for Total Cost $ 24,500 29,140 28,200 81,840 Unit Cost $ 0.50

0.62

0.60

1.72

Cost accounted for as:

Transferred to next department: Units transferred x total cost per unit 45000 x $1.72 = Work in progress: Materials: 4000x0.50

Labour: 4000x1/2x0.62

=$2000 = 1240 $77,400 Factory overhead4000x1/2x0.60 = 1200 Total cost accounted for 4440 81,840

QUESTIONS

EXERCISE NO.01

Read Inc instituted a new process in October , during which it started 10,000 units in Department A. of these units started, 1000 units are normal loss during the process, 7000 units were transferred to Department B and remaining 2000 units in process at the end of month, 100% complete as to materials and 50% complete to conversion cost. Cost charged during the month in department A were materials $27,000 and conversion costs 40,000.

Required: Prepare cost of production report for the month of October of Department A.

EXERCISE NO.02

Carola Company ‘s Department 2 costs for December were: Units received from Dept 1: 55,000 Litres Units transferred to Dept 3: 39,500 Units in process at end: 10,500 (with 1/3 Labour and FOH) Costs from department 1 Cost added in department 2: Labour Factory overhead $1.80 per unit $27520 $15480

Required: Prepare cost of production report for the month of December of Department 2.

EXERCISE NO.03

Brooks Inc ‘s Department 2 costs for December were: Units received from Dept 1:5,000 Litres Units transferred to Dept 3:4,000 Units in process at end: Costs from department 1 1,000 (the degree of completion of work in process as to costs in Dept 2 was 50% of the units were 40% complete: 20% were 30% complete and balances were 20% complete) $20,000 Cost added in department 2: Materials Labour Factory overhead $21,816 $7776 $4104 Required: Prepare cost of production report for the month of December of Department 2.

EXERCISE NO.04

During April, 20,000 units were transferred in from Dept A at a cost of $39,000. Materials cost of $6,500 and conversion cost of $9,000 were added in Dept B. on 30th April Dept B had 5,000 units of work in process; 60% complete as to conversion cost and 100% as to materials in Dept B.

Required: Prepare: 1. Equivalent production units.

2. Cost per unit for conversion cost.

EXERCISE NO.05

Assembly Department’s data for February were: Units received from Cutting Dept : 60,000 units Units transferred : 50,000 Units in process at end: (All Materials and 2/3 Labour and FOH) 9,000 Abnormal Loss:(1/2 complete to Material and Conversion Cost) 1000 units $3.54 per unit Costs from Cutting Dept Cost added in Assembly Dept: Materials Labour Factory overhead $41,650 $101,700 $56,500 Required: Prepare cost of production report for the month of February of Assembly Department .