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. Show
In process costing it is the process that is costed (unlike job costing where each job is costed separately). The method used is to take the total cost of the process and average it over the units of production. Important terms to understand Normal loss Abnormal loss Abnormal gain Work in progress (WIP) Scrap value Equivalent units How to approach process accounting questions Note: Although this proforma includes both losses and WIP, the Paper F2/FMA syllabus specifically excludes situations where both occur in the same process. Therefore, don’t expect to have to complete all of the steps in the questions. Normal loss example Mr Bean’s chocolate Wiggly bars pass through two processes. The data for the month just ended are: Mr Bean allows the staff to eat 5%
of the chocolate as they work on Process 1. There was no work in progress at the month end. Prepare the two process accounts and calculate the cost per kg. Workings
Abnormal gain example There is a heat wave and staff have eaten less chocolate. At the end of Process 1, 3,810 units are transferred to Process 2. Cost of units transferred to Process 2 = $2.89 x 3,810 = $11,029 (using $2.894736842 to avoid rounding differences). Scrap value example Workings Here we need to calculate the scrap value. The value of units transferred to Process 2 is a balancing figure.
Be careful here! The scrap value also affects the abnormal gain or loss accounts. Since the staff didn’t eat the number of bars that they were entitled to, the scrap value (the 40c per bar) is lower than 200 40c. In fact, it is 10 x 40c = $4 lower (the abnormal gain). This needs to be reflected in the scrap account and the abnormal gain account. Work in progress example For questions that include WIP, we need to calculate equivalent units. First, we need to choose the method of valuing WIP. In an exam, use the first in first out (FIFO) method if the percentage completion of each element of opening WIP is given. Use the weighted average (WA) method if the value of each element of opening WIP is given. [Note that the two methods give different valuations for the closing WIP.] In the weighted average method, no distinction is made between units of opening inventory and new units introduced to the process during the accounting period. Heather Freer is management accounting technical author at BPP Learning Media Which of the following is the second step of the 5 step process costing procedure?2. Convert inventory costs. The second step in calculating process costing is to convert any inventory that was considered as in-process at the end of the period to an amount of equal units.
What are the five steps to summarize total costs to account when using the process costing system?5 Steps for Process Costing. Analyze inventory flow.. Convert in-process inventory to equivalent units.. Compute all applicable costs.. Calculate the cost per unit of finished and in-process inventory.. Allocate costs to units of finished and in-process inventory.. Which of the following is the first step of the 5step process costing procedure?The first step of the 5-step process costing procedure is to summarize the flow of physical units. The last step of the 5-step process costing procedure is to assign total costs to units completed and to units in ending Work in Process inventory.
What is the first step of process costing?Step 1: summarize the flow of physical units. Step 2: Compute output in terms of equivalent units. Step 3: Calculate costs per equivalent unit costs. Step 4: Summarize total costs to account for.
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