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CIMA C1Fundamentals of Management AccountingProcess Costing, Joint & By-productsCIMA C1Fundamentals of Management AccountingClass Slides Ian Wilson

Prepare ledger accounts for job, batch & process costing systemsCalculate the impact of:Normal LossAbnormal LossAbnormal GainEquivalent UnitsWork in Progress ValuationsBy-products & Joint products

Learning Aims (CIMA)

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 manufactureUsing process costing it becomes possible to derive a cost for both output and closing stocks. Context & Introduction

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!

Process Costing Features1) 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 ConceptsManufacturing processes require INPUTSRaw MaterialsLabour Overheads related to the production process

Note: sometimes Labour & Overheads are added together & is called CONVERSION COSTSBasic ConceptsWhat does a process costing question look like?Your answer will require a T Account

Questions Exercise 1

Process Account: Phase 1DebitCreditWhat comes into the process as Inputs.Has to come out of the process & be accounted forOutputGiven that output from Cutting is fed into Forming, write up the process accounts.

You need 2 process AccountsExercise 1Registers e-mails phones breaksRe-Cap from last week:Process Costing:Key features?What goes in.must come out!.Today:Losses (Normal/Abnormal) & GainsEquivalent UnitsValuation of WIPDepending on time. BudgetsPlan for todayMost 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 LOSSConsider each in detail:Losses & GainsNORMAL 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:

Losses & GainsCost per unit of good units: Total costs Value of Normal Loss Expected Output Units

Where:Expected Output = Input Units Normal Loss UnitsNormal LossLossCostOf InputsCostOf InputsUnits Of InputUnitsOutputOutput reduced due to Normal lossAt input stage & start of processAfter processingCosts remainsSame but forProceeds of Sales, IF anyInput Cost less sale proceedsDivided by:Input volume lessNormal lossvolumesMaterialsConversionInputvolumesThe 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 outputWrite up the T accounts also Normal LossWhat 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 OUTPUTNote:Abnormal loss units can be sold for scrap proceedsAbnormal LossCredit 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/CAbnormal Loss valued as 1) aboveRecord Abnormal Loss as debit in Abnormal loss/Gains A/CIncrease scrap sales by Abnormal Loss amountScrap value cost value reported in P/L

Abnormal Loss RulesOur chance to practice Normal & Abnormal Loss calculationsYou have 3 ledger Accounts to write upMost of the information is the same from exercise 2The output is now assumed to be 150 tonnesExercise 3What is this?Abnormal gains takes place when ACTUAL good output is GREATER than expected outputAbnormal 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 salesThis is measured in the Abnormal Loss/Gain A/C

Abnormal GainCredit 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/CAbnormal gain is valued at cost per unit value in process A/CRecord Abnormal Gain as a credit in Abnormal Loss/Gain A/CDecrease scrap sales by Abnormal GainScrap value cost value reported in P/L

Abnormal Gain RulesData as per Exercise 2, prepare process accounts but with output at 156 tonnesYou will have 3 T accounts to write up

We can now try Exercise 5 which pulls everything together for us.Exercise 4 & 5Review 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?

Process Costing

Work-in-progressAt 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 inevitableSome 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 UNITSIf 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 thereforeWork-in-progress - exampleInstead 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 three-stage process.

Work-in-progress3 stages of EUs calculation:Convert physical outputs to equivalent units by constructing a statement of equivalent units.Calculate the cost of equivalent units by constructing a statement of unit cost.Calculate the value of each output by multiplying the number of equivalent units by unit cost in a statement of valuation.

Work-in-progressCalculate the cost per Equivalent Unit:1000 units fully completed, 200 50% completed:Total costs 5500

Cost = 5500/1100 EUs = 5 per unit

Exercise 6 easy question!units% complete EUs1000 units100%1000 units200 units50%100 unitsTotals 1100 EU unitsExercise 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 caseFollow logical steps:Statement of Equivalent Units:2100 fully completed 100% Output Units 700 partially completed, 80%/60%/50% for Mats/Lab/O/HIdentify the Costs for Mats/Lab/O/HsCalculate the cost per EU for Mat/Lab/O/HStatement of Valuation for completed & W.I.P. goodsComplete Process T Account

Exercise 8 complex question!Having calculated the CLOSING W.I.P. value, we can assume that these values become the OPENING WORK IN PROGRESS for the next period.Opening work-in-progressThe 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:Statement of EUs Units of Output x 100% + closing W.I.P. x % completion, all of which is equal to = Total EUs (units)Cost per EU, this is calculated as follows: Total cost of work done = current period costs + value of opening WIPValuation of EUs Weighted Average ValuationYou have 2 parts to the question:Cost per EU for Materials & Conversion Costs (remember those costs labour + Overheads)Total value of Units completed last monthRemember this is a W.A. question:Exercise 9 advanced question!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 togetherLets have a look at some rules to help us solve this question:Losses & W.I.P.Costs divided between Finished Output, Closing Stock & Abnormal Loss/Gain based on Equivalent Units as the basis of apportionmentUnits of Abnormal Loss/Gain are often taken to be 1 full EU & valued accordinglyAbnormal loss units are ADDED to EU produced but Abnormal gains are SUBTRACTED in arriving at Total EUsUnits of normal loss have a zero value of EU

Key rules for Losses & W.I.P.Produce a Process A/C for the period in question:Good practice to balance inputs & outputsFrom 1 above, Abnormal loss/gain is a balancing figureStatement of Valuation balance to 4000 unitsCost per EU watch for Normal Loss proceedsStatement of Valuation put costs to item 1 above

Exercise 10 final question!

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 & By-ProductsItems 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.

Joint Products - examplesProcess AJoint CostsProduct 1Product 2Slit off point where products become identifiableSometimes a product is made by accident or we can sell wastage from a process. This is known as a by-productMarmite is a well known example of a by-product:

By-products

Marmite is dark brown-colored savory spread made from the yeast that is a by-product of the brewing industry. It has a very strong, slightly salty flavor. It is definitely a love-it-or-hate-it type of food.

Marmite famous exampleTo distinguish between joint & by-products:A joint product is an important saleable item in its own right, production is geared to its manufacture.A by-product is something produced which is a bonus to a company, it would not be produced as a main product.Remember the rulesUp 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 problem:2 methods to split costs:Physical quantities: costs apportioned in proportion to their physical weight or volume of output.Sales Value: costs apportioned in proportion to their sales value of production, or final sales value after further processing costs have been removed.

The solution:2 parts to question:Physical unitsSales ValueExercise 112 parts to question:Physical unitsSales Value

Exercise 12