1.

1 PROCESS COSTING
Process costing is a method used in a situation where production follows a series of sequential
processes. The method is used to ascertain the cost of a product or service at each stage of
production, manufacture or process.
1.1.1 Characteristics of Process Costing
a) Clearly defined process cost centres will normally be set up for each operational stage,
which can be identified. Expenditure for each cost centre is collected and, at the end of
the accounting period, the cost of the completed units are then transferred into a stock
account or to a further process cost centre.
b) The cost unit chosen should be relevant to the organisation.
c) The cost of the output of one process is the raw material input cost of the following
process.
d) Wastage due to scrap, chemical reaction or evaporation is unavoidable. The operation or
manufacturing should, however, be in such a way that wastage can be reduced to the
barest minimum.
e) Either the main product or by-product of the production process may require further
processing before reaching a marketable state.
1.1.2 Product Flow
As a product passes from one cost centre to another, per unit cost and total cost should be
determined. As shown in figure 2, the total cost incurred at the lower level of processing is to be
seen as the transferred in cost of the higher level to which cost of additional material and
conversion cost must be added before arriving at its total costs. That total cost may be a
transferred in cost, if the production process is not complete, or the final total cost of production,
if finished products have been arrived at. Product flows have to be accompanied by their total
costs at each level of processing.
Illustration III
A product passes through three distinct processes (A, B, and C) to completion. During the period
15th May, 2023, 1000 litres were produced. The following information is obtained:
Process A (Sh.) Process B (Sh.) Process C (Sh.)
Materials cost 40,000 15,000 5,000
Labour cost 20,000 25,000 15,000
Direct overhead expenses 5,000 3,000 3,000
Indirect overhead expenses for the period were Sh. 30,000 apportioned to the processes on the
basis of wages. There was no work-in-process at the beginning or end of the period.
Required:
Calculate the cost of output to be transferred to finished goods stock and the cost per litre.
SOLUTION
Process A
Details Cost/litre Total Details Cost/litre Total
Materials 40 40,000 Transferred in
Labour 20 20,000 to Process B 75 75,000
Dir. Exps. 5 5,000
Indir. Exps. 10 10,000
75 75,000 75 75,000
Process B
Details Cost/litre Total Details Cost/litre Total
Process A 75 75,000
Materials 15 15,000 Transferred in
Labour 25 25,000 to Process C 130.50 130,500
Dir. Exps. 3 3,000
Indir. Exps. 12.5 12,500
130.50 130,500 130.50 130,500
Process C
Details Cost/litre Total Details Cost/litre Total
Process B 130.50 130,500
Materials 5 5,000 Transferred in
Labour 15 15,000 to Process C 161 161,000
Dir. Exps. 3 3,000
Indir. Exps. 7.5 7,500
161 161,000 161 161,000
Note:
a) Indirect expenses were apportioned as follows:
Total Labour cost = 20,000 + 25,000 + 15,000 = Sh. 60,000
Process A = 20,000 x 30,000 = Sh. 10,000
60,000
Process B = 25,000 x 30,000 = Sh. 12,500
60,000
Process C = 15,000 x 30,000 = Sh. 7,500
60,000 Sh. 30,000
b) The cost per litre of the product is Sh. 161 and, so, the selling price must be higher than
that amount if the business is to make any profit.
c) Indirect expenses include all expenses that cannot be directly traced to the productive
process and, so, they include general administrative, selling and distributive cost.

1.1.3 Equivalent Units

At the end of a given period, in the course of the production process, it is virtually certain that
some items will only be partly completed (work in-process). Some of the cost of the period,
therefore, are attributable to these partly completed units as well as to those that are fully
completed. In order to spread the costs equitably over part-finished and fully completed units, the
concept of “equivalent units” is used.

Illustration III
For the calculation of costs, the number of equivalent units is the number of equivalent fully
completed units which the partly completed units represent. For example, in a given period
production was 3,000 completed units, and 1,600 partly completed were deemed to be 60%
complete.
Total equivalent production = COMPLETED UNITS plus EQUIVALENT UNITS
PRODUCED IN WORK-IN-PROGRESS (WIP).
= 3,000 + (60% of 1,600) = 3,000 + 960 = 3,960 units

The total costs for the period would be spread over the total equivalent production as follows:
Cost per unit = Total Costs
Total equivalent production (units)
In calculating equivalent units, it is more desirable to consider the percentage completion of each
of the cost elements: material, labour and overhead. Here, each cost element must be treated
separately and then the costs per unit of each element are added to give the cost of a complete
unit.

Illustration IV
The production and cost data of Umoja Carpentry for the month of January, 2025 were as
follows:
Sh.
Materials 422,400
Labour 395,600
Overhead 225,000
Total cost 1,043,000
Production was 8,000 fully completed units and 2,000 partly completed. The percentage
completion of the 2,000 units work-in process was:
Material 80%
Labour 60%
Overhead 50%.
Required:
Find the value of completed production and the value of work-in process (WIP).
SOLUTION
Cost Equiv. units Fully completed Total prod. Total cost Cost/unit
Element in WIP units
Material (80% x 2,000) 1,600 8,000 9,600 422,400 44
Labour (60% x 2,000) 1,200 8,000 9,200 395,600 43
Overhead (50% x 2,000) 1,000 8,000 9,000 225,000 25
1,043,000 112
Value of completed units = Sh. 112 x 8,000 = Sh. 896,000
Value of WIP = Total Cost – Value of completed units
= 1,043,000 - 896,000 = Sh. 147,000
To check the value of WIP, the cost per each cost element is to be multiplied by the number of
equivalent units of production in WIP related to each cost element.
Element of No. of equiv. Cost/unit Value
units in WIP WIP
Material 1,600 44 70,400
Labour 1,200 43 51,600
Overhead 1,000 25 5,000
Sh. 147,000
Process Account
Elements Units Total Elements Units Total
Materials 10,000 422,400 Goods Transferred
Labour 395,600 next stage 8,000 896,000
Overhead 225,000 WIP c/d 2,000 147,000
10,000 1,043,000 10,000 1,043,000
WIP b/d 2,000 147,000

1.1.4 Transferred In
Output of one process level forms the input material to the next process level. The full cost of the
completed units transferred forms the input material cost of the subsequent process and, by its
nature, must be 100% complete.
Material introduced is an extra material required by the process and should always be shown
separately. If there are partly completed units at the end of one period, there will be opening WIP
at the beginning of the next period. The values of the cost elements of the brought forward WIP
are normally known and they are to be added to the costs incurred during the period.

1.1.5 Accounting Treatment of Spoilages

In many industries, the amount of the process output will be less than the amount of the materials
input. Such shortages are known as process losses or spoilages, which may arise due to a variety
of factors such as evaporation, scrap, shrinkage, unavoidable handling, breakages, etc.
If the losses are in accordance with normal practice they are known as normal process losses.
But where losses are above expectation, they are known as abnormal losses, and as such they
should be charged to an appropriate account pending investigation.
Normal process spoilages are unavoidable losses arising from the nature of the production
process and, so, it is logical and equitable that the cost of such losses is included as part of the
cost of good production. This is because in the production of good units normal spoilage occur.
Since the spoilage arises under efficient operating conditions, it can be estimated with some
degree of accuracy.
Abnormal process spoilages are those above the level deemed normal in the production process.
Abnormal spoilage cannot be predicted and may be due to special circumstances such as plant
breakdown, inefficient working, or unexpected defects in materials. Abnormal spoilage is the
difference between actual spoilage in the period and the normal (estimated) spoilage.
Abnormal gain is where the actual spoilage is less than the normal spoilage.
The cost of abnormal spoilage is to be charged to the profit and loss account unlike the cost of
normal spoilage which is to be part of the good product’ total cost. Process account is to be
credited as abnormal loss account is debited. The abnormal loss account is then to be closed to
the profit and loss account.
Abnormal gain realized is to be credited to the abnormal gain account as process account is
debited. The abnormal gain account is to be closed to the credit of profit and loss account.

Illustration V
A process has a normal spoilage of 5% which has a resale value of Sh. 150 per kg. Find the cost
per kg of goods production, if material cost is Sh. 27,000 and conversion cost is Sh. 13,000 of
producing 100 kg.
SOLUTION
Units produced (100 kg) Cost (Sh.)
Material 27,000
Conversion 13,000
100 40,000
Less Normal spoilage (5%) 5 750 (5 x 150 = 750)
Good Production 95 39,250
Cost per kg of good production = Sh. 39,250 = Sh. 413.16
95
Illustration VI
Using the information given in Illustration V, find the abnormal spoilage and its value if good
production was 91 kg and cost per kg of good production is the same (that is Sh. 413.16 per kg).
SOLUTION
Abnormal spoilage = 9 kg - 5 kg = 4 kg
Process Account
Kg Value Kg Value
Process Account
Elements Units Total Elements Units Total
Materials 100 27,000 Goods Production 91 37,598
Conversion 13,000 Normal Spoilage 5 750
Abnormal spoilage 4 1,652
100 40,000 100 40,000
Note:
Abnormal spoilage cost was determined as follows:
Total cost - (cost of good prod. + Cost of normal spoilage)
40,000 – [(91 x Sh. 413.16) + (5 x Sh. 150)]
40,000 - (37,598 + 750)
40,000 - 38,348 = Sh. 1,652
Abnormal Spoilage Account
 Process A/c 1,652 Profit & Loss a/c 1,652

1.1.6 Valuation Process for Cost Statement

A number of stages are passed through in the valuation process for cost statement. First, the
physical flow of the units of production must be calculated having regards to the total number of
units to be accounted for, regardless of the degree of completion.
Secondly, the equivalent units involved in the physical flow are to be calculated. In this respect,
it is often necessary to divide the flow into its material cost element and conversion cost element
as the degree of completion may vary between them.
Thirdly, having already established the physical units to be accounted for by means of the first
two stages, the total equivalent units and the current equivalent units involved are to be
calculated. These are to be accounted for in respect of the cost elements (transferred in cost,
material cost and conversion cost).
Fourthly, the unit costs are to be calculated, paying attention to the stock valuation method
assumed (FIFO, WAP, LIFO, etc.).
Fifthly and finally, the total cost of the transferred out products and work-in-process are to be
calculated, ensuring that all costs are accounted for.
1.1.7 Cost of Production Report
This report is to show the number of units of output to be accounted for, the total equivalent units
of completed output, the cost statement showing the impact of all the cost elements and the cost
of completed units as well as that of the work-in-progress at the end of the reporting period.

Illustration VII
This illustration uses two methods of stock valuation, FIFO (First In First Out) and WAP
(Weighted Average Price) and it assumes two processes of production.
Within the production department of Sony Sugar Company Limited, there are two processes
which produce the finished product.
Raw materials are introduced initially at the commencement of Process 1 and further raw
materials are added at the end of process 2. Conversion costs accrue uniformly throughout both
processes. The flow of the product is continuous, the completed output of process 1 passes
immediately into process 2 and the completed output of process 2 passes immediately into the
finished goods warehouse. The following information is available for the month of June:
Process 1
Opening WIP 35,000 units
Materials Sh. 210,000
Conversion (2/5 complete) Sh. 52,500
Completion of units in June 168,000 units
Units commenced in June 140,000 units
Closing WIP (½ complete as to conversion) 7,000 units
Material introduced in June Sh. 770,000
Conversion cost added in June Sh. 630,000
 Process 2
Opening WIP 42,000 Units
Material from process 1 Sh. 343,000
Conversion (2/3 complete) Sh. 392,000
Completion of units in June 154,000 Units
Units commenced in June
Closing WIP (2/8 complete as to conversion) 56,000 Units
Material introduced in June Sh. 462,000
Conversion costs added in June Sh. 2,205,000
Required:
Give the production report of Sony Sugar Company Limited for the month of June, using each of
the WAP and FIFO methods, and showing clearly the cost of finished production and WIP at end
of the period.

SOLUTION
The units to be accounted for, total equivalent units and current equivalent units are to be
determined before going to the cost statement, using each of the two stock valuation methods.
The heading of the report should be well expressed.

Production Report of Sony Sugar Company Limited for the month of June, using
Weighted Average Price (WAP) Method
Process 1
Physical flow of units of material:
WIP (beginning) 35,000
Material introduced 140,000
Total units to be accounted for 175,000
Equivalent Units
Units Accounted for; Material Conversion
Units completed & transferred out 168,000 168,000 168,000
WIP (ending) 7,000 7,000(100%) 3,500(1/2 of 7,000)
Total units accounted for 175,000
Total equivalent units (TEU) 175,000 171,500
Less WIP (beginning) 35,000 14,000
Current Equivalent units (CEU) 140,000 157,500

Note
(a) Conversion WIP ending = 1/2 x 7,000 = 3,500 units
(b) Conversion WIP beginning = 2/5 x 35,000 = 14,000 units
Cost Statement
Cost Element Cost of WIP Current Cost TC TEU
Cost/unit
 (beginning) (Sh.) (Sh.) (Sh.) (Sh.) (Sh.)
Material 210,000 770,000 980,000 175,000 5.60
Conversion 52,500 630,000 682,500 171,500 3.98
262,500 1,400,000 1,662,500 9.58

Cost of units completed and transferred out = 168,000 x Sh. 9.58 = Sh. 1,609,440
Cost of WIP (Ending)
Material 7,000 x 1 x Sh. 5.6 = Sh. 39,200
Conversion 7,000 x ½ x Sh. 3.98 = Sh. 13,930
Sh. 53,130
Another way (which is easier) of determining the cost of WIP ending is to find the difference
between total cost and cost of the completed units.
Cost of WIP (end) = TC – Cost of completed units
= 1,662,500 - 1,609,440 = Sh. 53,060
Note: The difference of N70 is due to the approximation made to two decimal places.

Cost of Production Report Using First-In-First-Out (FIFO) Method

Process 1
Current costs (Sh.) C.E. Units Units cost (Sh.)
Material 770,000 140,000 5.50
Conversion 630,000 157,500 4.00

Cost of Closing WIP

Material 7,000 x 1 x Sh. 5.5 = Sh. 38,500
Conversion 7,000 x ½ x Sh. 4.0 = Sh. 14,000
Sh. 52,500
Units completed & transferred out = 168,000 units
Cost of the completed unit = TC – cost of closing WIP = 1,662,500 – 52,500 = Sh. 1,610,000
Process 2, Using WAP Method
Physical flow of units of material
WIP (beginning) 42,000
Units transferred in 168,000
Units to be accounted for 210,000
Equivalent Units
Units Accounted for: Transferred in Material Conversion
Units completed in the period 154,000 154,000 154,000 154,000
WIP (ending): 56,000 56,000 0 21,000
Total units accounted for 210,000
Total equivalent units 210,000 154,000 175,000
Less WIP (beginning) 42,000 0 28,000
Current Equivalent units (CEU) 168,000 154,000 147,000
 Cost Statement
Cost Element Cost of WIP Current Cost TC TEU
Cost/unit
(beginning) (Sh.) (Sh.) (Sh.) (Sh.) (Sh.)
Transferred in 343,000 1,609,440 1,952,440 210,000 9.2973
Material 0 462,000 462,000 154,000 3.0000
Conversion 392,000 2,205,000 2,597,000 175,000 14.8400
735,000 4,276,440 5,011.440 TC/unit = 27.1373

Cost of complete units = 154,000 x Sh. 27.1373 = Sh. 4,179,144.20

Cost of WIP (Ending)
Transferred in 56,000 x 1 x Sh. 9.2973 = Sh. 520,648.80
Material 56,000 x 0 x Sh. 3 = Sh. 0
Conversion 56,000 x 3/8 x Sh. 14.84 = Sh. 311,640.00
Sh. 832,288.80
Another Way
Cost of Ending WIP = TC – Cost of completed units
= 5,011,440 – 4,179,144.20 = Sh. 832,295.80
Note that the difference of Sh. 7 is due to the approximation made to four decimal places.
Process 2: Using FIFO Method
Current Costs Current Equiv. Units (Sh.) Unit Cost
Transferred in 1,609,440 168,000 9.58
Material 462,000 154,000 3.00
Conversion 2,205,000 147,000 15.00
TC/C.E.U 27.58
Cost of Closing WIP
Transferred in 56,000 x 1 x 9.58 = Sh. 536,480
Material 56,000 x 0 x N3 = Sh. 0
Conversion 56,000 x 3/8 x 15 = Sh. 315,000
Sh. 851,480
Units completed and transferred out = 154,000 units
Cost of completed units = TC – Cost of ending WIP
= 5,011,440 – 851,480 = Sh. 4,159,960

1.2 JOINT AND BY-PRODUCT COSTING

The process costing principle discussed in this lesson is about determining the cost of processing
some inputs that yield the same type of product. At the end of the processing activities, only one
type of product would result from the processed raw material.
However, it is not always that we have only one type of product from a processing operation. It
is possible for a single raw material to yield two or more products simultaneously when
processed. Such products are known as joint products. For example, when crude oil (a single raw
material) is processed or refined, petrol, kerosine, gas, etc, could be obtained from it.
The cost of processing a production input (raw material) that would amount to joint products is
known as joint cost. The joint cost is to be restricted to the split-off point (point after which each
joint product would be incurring separate processing cost). Joint cost is not to be traced to any
particular product but rather to all the joint products as a group. There are many ways of
apportioning joint cost to joint products for financial accounting purposes.
In practice, it is normal to identify one product out of the joint products as the main or principal
product and the rest to be treated as joint products or as by-products. In the example above, it is
clear that petrol is the main product to be identified as crude oil is processed. Pairs of shoes
could be main products as leather is processed, while bags, wallets, etc, could be joint or by-
products.

1.2.1 Differentiating between By-Product and Joint Product

One way of differentiating between by-product and joint product is to consider their cost of
production or sales value. A product that cost between 10% to 15% of the main product cost
should be treated as a byproduct. Any product that costs between 15% to 40% of the main
product cost is a joint product. Any product that costs above 40% of the identified main product
cost should also be treated as a main product.
As a result of changes in price, therefore, a by-product can become a joint-product or even a
main product and vice versa.

1.2.2 By-Product and Its Accounting Treatment

A by-product is a secondary product arising as a result of a processing activity aimed at
producing a certain main product. The market value of a by-product less the processing cost after
the split off point is usually negligible, compared to the total market value of all the joint
products or the market value of the main product.
The usual treatment of by-product is to deduct its Net Realizable Value (NRV) from the total
joint cost (JC) and then divide the net joint cost among the joint or main products. The NRV of
the by-product is the difference between its market value and its separate processing cost.

Illustration VIII
Thika Shoemakers has a process that yields two main products: A and B and a by-product C at a
total cost of Sh. 3,000,000. There are 1000 units of C requiring no further processing and each
can be sold at Sh. 60 with negligible market cost. The two main products take equal share of
joint cost.
Required
What should be the share of Product A from the Joint Cost?
SOLUTION
The total market value of Product C = 1000 x Sh. 60 = Sh. 60,000. This is its NRV, since its
market cost is negligible.
Net Joint Cost = 3,000,000 – 60,000 = Sh. 2,940,000
Share of Product A = Sh. 2,940,000 = Sh. 1,470,000
2
Note; It can be concluded that in deducting the NRV of by-product C from the Joint Cost, we are
in effect assigning to the by-product a joint cost which is equal to its NRV.

1.2.3 Accounting Treatment of Joint Cost

There are three usual bases of sharing joint cost to the joint (or main) products. These are the
Physical Units Basis, Sales Value (at the point of separation) and Net Realization Basis.

 Physical Unit Basis

Under this method, the joint cost is shared among the joint products on the basis of the quantities
of physical units, provided all the products are measured by a common unit of measurement,
such as kilograms or litres. The problem with this method is that consideration is not given to
price and, so, it does not consider the value of the products. Usually, the value of products is the
most important factor to be considered.
Illustration IX
XYZ Company Ltd. has a processing system that produces three products: K, S and T with 5,000
kg, 3,000 kg and 2,000 kg, respectively, in a year. The total cost incurred up to the split off point
in the year 2012 was Sh. 1,000,000. Use the physical units basis to share the joint cost among the
three products. Calculate also their unit cost.
SOLUTION
(a) The Ratio
K = 5,000 x 100 = 50% S = 3,000 x 100 = 30% T = 2,000 x 100 = 20%
10,000 10,000 10,000
Share of joint cost
K = 50% of Sh. 1,000,000 = Sh. 500,000
S = 30% of Sh. 1,000,000 = Sh. 300,000
T = 20% of Sh. 1,000,000 = Sh. 200,000
(b) Unit Cost based on the share of joint cost
K = Sh. 500,000 = Sh. 100/unit S = Sh. 300,000 = Sh. 100/unit
5,000 3,000
T= Sh. 200,000 = Sh. 100/unit
2,000

 Sales Value (At The Point Of Separation)

Under this method, the joint cost is shared among the joint products on the basis of their sales
value before further processing. At the split off point, market value can be estimated per unit of
each of the joint products. The ratios of the sales value of the joint products are to be used as
basis of apportioning the joint cost.
The problems with this method are two-fold: One, a product may have zero value at the point of
separation but significant value with little processing cost after the split-off point.
Secondly, a product may have high selling price at the split-off point and hence high sales value
but may involve large selling and distribution cost (advert, carriage, etc) so that its value is much
less than it’s selling cost.

Illustration IX
Assuming that XYZ Company Ltd has estimated the following selling prices for its three
products at the point of separation: K = Sh. 400/unit S = Sh. 440/unit T = Sh.
340/unit
Use the Sales Value method to apportion the joint cost and determine the per unit cost of each of
the three products.

SOLUTION (a)
Product Unit SP/Unit (Sh.) Sales Value (Sh.) Ratio Share of JC (Sh.)
K 5,000 400 2,000,000 50% 500,000
S 3,000 440 1,320,000 33% 330,000
T 2,000 340 680,000 17% 170,000
4,000,000 1,000,000
(b) Unit cost based on the share of joint cost:
K = Sh. 500,000 = Sh. 100/Unit S= Sh. 330,000 = Sh. 110/Unit
5000 3000
T= Sh. 170,000 = Sh. 85/Unit
2000

 Net Realizable Value Basis

This method is used only when further processing is necessary or when high marketing and
distribution costs are involved. Net realization is sales value less the incremental cost of further
processing after the split-off point and any other cost necessary for the selling or distribution of
the product.

Illustration X
Assuming that the sales values in illustration are market prices after further processing and that
separate processing and marketing costs are as follows:
K = Sh. 200,000 S = Sh. 300,000 T = Sh. 160,000
Determine the share of the joint cost to the three (3) products. Show also the per unit cost of each
of the three products.
SOLUTION
Product Units SP/Unit (Sh.) Sales (Sh.) SPC Value (Sh.) NRV(Sh.) Share of JC(Sh.)
K 5,000 400 2,000,000 200,000 1,800,000 538,922
S 3,000 440 1,320,000 300,000 1,020,000 305,389
T 2,000 340 680,000 160,000 520,000 155,689
Total 10,000 4,000,000 3,340,000 1,000,000
Note:
(a) Net Realizable Value (NRV) = Sales Value Less separate processing costs (SPC).
(b) The total of the NRV of all the joint products is obtained and the joint cost is shared in
proportion to the NRV of each product.
(c) This method is the best as it considers the quantity (units) produced of all the joint products,
their sales values and their further processing costs.
Unit cost based on the share of joint cost:
K = Sh. 538,922 = Sh. 108/unit S= Sh. 305,389 = Sh. 102/unit
5,000 3,000
T= Sh. 155,689 = Sh. 78/unit
2,000

 Total Cost Per Unit Determination Using NRV Method

Total cost of a joint product is given by its share of joint cost plus its further processing and
marketing cost. To arrive at its total cost per unit, the total cost is divided by the units produced.
Using illustration X, total cost per unit could be determined for each of the three products as
follows:
K = Sh. 538,922 + Sh. 200,000 = Sh. 147.78 S = Sh. 305,389 + Sh. 300,000 = Sh. 201.80
5,000 3,000
T= Sh. 155,689 + Sh. 160,000 = Sh. 157.84
2,000
If there are closing inventory of Product K (900 units), S (500 units) and T (400 units), the value
of closing stock for reflection in the balance sheet could be determined as follows:
K = 900 x Sh. 147.78 = Sh. 133,002
S = 500 x Sh. 201.80 = Sh. 100,900
T = 400 x Sh. 157.84 = Sh. 63,136
Sh. 297,038
Note: It should be understood that profit is always the difference between total revenue (sales
value) and total cost. That economics principle is very much applicable in joint-product costing.
1.3 Review Questions
Exercise I
A Motor garage has just completed repair work on Car No. 111 of Mr. X. The parts used to
repair the vehicle cost Sh. 500. The company’s 40% markup rate on parts covers parts – related
overhead costs. Labour involved 9 hours of time from a Motor garage service engineer whose
wages are Sh. 50 per hour. The current overhead work up rate on labour is 80%. Compute how
much Mr. X will be billed for his car repairs.
(Hide Solution)
Computation of the amount Mr. X should be billed for his car repairs.
Parts charges: Sh. Sh.
Repairs parts used 500
Overhead charges
(40% of Rs. 500) 200
Total parts charges 700
Labour charges:
9 hours @ Sh. 50 per hour 450
Overhead charges
(80% of Sh. 450) 360
Total labour charges 810
Total billing amount 1510

Exercise II
An Oil Milling Company processes oil in two departments: A and B, before the final product is
made ready for consumption. The company uses process costing for its operations. You are given
the following information by the cost accountant of the company for the month ended 31
December, 2012.
Department A
Work-in-Process (beginning) 170,000 units
Units started during the year 430,000
Normal spoilage 1.5% of total
Unit completed 490,000
Work-in-Process (ending) 98,000
Stages of completion of Work-in-Process
WIP beginning: Material 100%
Direct labour 15%
Overhead 15%
WIP ending: Materials 100%
Direct labour 25%
Overhead 25%
Stages of Completion of Spoilage
Material 100%
Direct labour 30%
Overhead 30%
Costs
WIP beginning = Sh. 684,250
Cost incurred during the month = Sh. 3,459,700
(Material: Sh. 1,612,500; Direct Labour: Sh. 738,900; Overhead: Sh. 1,108,350)
Department B
Work-in-Process (beginning) 115,000 units
Transferred in 490,000
 Gain on efficiency = 5% of transferred in 24,500
Normal spoilage 3,000
Units completed 595,000
Work-in-Process (ending) 31,000
Stages of completion of WIP
WIP beginning: Transferred in 100%
Material 100%
Direct labour 45%
Overhead 45%
WIP ending: Transferred in 100%
Materials 100%
Direct labour 75%
Overhead 75%
Stages of Completion of Spoilage
Material 100%
Transferred in 100%
Direct labour 70%
Overhead 70%
Costs
WIP beginning = Sh. 1,259,250
Cost incurred during the month = Sh. 7,415,125
(material: Sh. 900,375; Transferred in: Sh. 3,670,000; direct labour: Sh. 1,137,900; Overhead:
Sh. 1,706,850)
Required:
Using the FIFO method, draw up a cost of production report showing the cost of completed
units, cost of normal and abnormal spoilages and the cost of closing inventory (WIP) of each of
the two departments. (Show all relevant computations in detail. Spoilages are detected at the end
of operations.)
(Hide Solution)
Cost of Production Report of Oil Milling Company for the month ended 31/12/2005, using
the FIFO method of stock Valuation
Department A’s Report
Physical flow of Units:
WIP beginning 170,000
Units started 430,000
Units to be accounted for 600,000
Equivalent Units
Units Accounted for Material Direct lab. Overhead
Units completed 490,000 490,000 490,000 490,000
Normal spoilage
(1.5% of 600,000) 9,000 9,000 2,700 2,700
WIP (end): 98,000 98,000 24,500 24,500
Abnormal spoilage 3,000 3,000 900 900
600,000 600,000 518,100 518,100
Less: Old equiv. units of
WIP (beginning) 170,000 25,500 25,500
Current Equivalent units (CEU) 430,000 492,600 492,600
Note that:
Abnormal spoilage is the difference between Actual spoilage and normal spoilage
= 12,000 – 9,000 = 3,000 units
Alternatively, abnormal spoilage
= 600,000 – (490,000 + 9,000 + 98,000) = 3,000 units
Cost Statement
Current Cost (Sh.) Current [Link] (Sh.) Cost/Unit (Sh.)
Direct material 1,612,500 430,000 3.75
Direct labour 738,900 492,600 1.50
Overhead 1,108,350 492,600 2.25
3,459,750
Add: Cost of WIP
(beginning) 684,250
Total cost 4,144,000
Cost of WIP (end)
Direct material = 98,000 x 1.00 x Sh. 3.75 = 367,500
Direct labour = 98,000 x 0.25 x Sh. 1.5 = 36,750
Overhead = 98,000 x 0.25 x Sh. 2.25 = 55,125
459,375
Cost of Spoilages
Direct material = 12,000 x 1.00 x Sh. 3.75 = 45,000
Direct labour = 12,000 x 0.3 x Sh. 1.5 = 5,400
Overhead = 12,000 x 0.3 x Sh. 2.25 = 8,100
Sh. 58,500
Apportionment
Normal spoilage = 9,000 x 58,500 = Sh. 43,875
12,000
Abnormal spoilage = 3,000 x 58,500 = Sh. 14,625
12,000
Cost of completed units transferred to Dept. B
= Total cost – (Cost of WIP end Plus cost of abnormal spoilage)
= 4,144,000 – (459,375 + 14,625) = Sh. 3,670,000
Note: The abnormal spoilage cost is to be charged to the profit and loss account, while the
normal spoilage cost is to be part of the good production cost.
Department B‟s Report
Physical flow of units
WIP beginning 115,000
Transferred in 490,000
Gain (5% of T. in) 24,500
Units to be accounted for 629,500
Equivalent Units
Units Units Direct Direct Overhead
Accounted for Transferred in mat. lab.
Units completed 595,000 595,000 595,000 595,000 595,000
Normal spoilage 3,000 3,000 3,000 2,100 2,100
WIP end 31,000 31,000 31,000 23,250 23,250
Abnormal spoilage 500 500 500 350 350
629,500 629,500 629,500 620,700 620,700
Less: Old equiv. unit
(WIP beginning) 115,000 115,000 51,750 51,750
Current Equivalent units 514,500 514,500 568,950 568,950
Cost Statement
Current Costs Current Equiv. units Cost/Unit
Transferred in 3,670,000 514,500 7.13
Direct material 900,375 514,500 1.75
Direct labour 1,137,900 568,950 2.00
Overhead 1,706,850 568,950 3.00
7,415,125
Add: cost of WIP
(beginning) 1,259,250
Total cost 8,674,375
Cost of WIP (end) Sh
Transferred in 31,000 x 1 x 7.13 = 221,030
Direct material 31,000 x 1 x 1.75 = 54,250
Direct labour 31,000 x .75 x 2.00 = 46,500
Overhead 31,000 x .75 x 3.00 = 69,750
Normal loss (apportionment) = 1,839
393,369
Costs of spoilage (losses) are determined as follows
Total spoilage = 3,000 + 500 = 3,500 units
Sh
Transferred in = 3,500 x 1 x 7.13 = 24,955
Direct material = 3,500 x 1 x 1.75 = 6,125
Direct labour = 3,500 x 0.7 x 2.00 = 4,900
Overhead = 3,500 x 0.7 x 3.00 = 7,350
Sh 43,330
Allocation of Spoilages cost
Normal spoilage = 3000 x Sh. 43,330 = Sh. 37,140
3,500
Abnormal spoilage = 500 x Sh. 43,330 = Sh. 6,190
3,500
The abnormal loss cost is to be debited to abnormal loss account and credited to process account
(or department B‟s account). The abnormal loss account is to be closed to the profit and loss
account.
As for the normal loss, the whole amount can be made to form part of the cost of units
transferred to store or be apportioned between the units transferred to the store for sale and the
WIP end. It is the second approach that is adopted in this example and, so, the figure charged to
WIP end (Sh. 1,839) was arrived at as follows:
Apportionment to units transferred in = 595,000 x Sh. 37,140 = Sh. 35,301
626,000
Apportionment to WIP end = 31,000 x Sh. 37,140 = Sh. 1,839
626,000 Sh. 37,140
Cost of units transferred (595,000 units)
= 8,674,375 – (393,369 + 6190) = 8,674,375 – 399,559 = Sh. 8,274,816
Exercise III
Maisha Company had 8,000 units of work-in-process in its Department M as on 1 August 2011,
which were 50% complete as to conversion costs. Materials are introduced at the beginning of
the process. During August, 17,000 units were started, 18,000 units were completed and there
were 2,000 units of normal spoilage. Maisha Company had 5,000 units of work-in-process at 31
August 2011, which were 60% complete as to conversion costs. Under Maisha’s cost accounting
system, spoiled units reduce the number of units over which total cost can be spread.
Required:
Compute, using the weighted average method, the equivalent units for August. (10 marks)
(Hide Solution)
Department M
Units Units
Opening W.I.P 8,000 Normal Spoilage 2,000
Input material 17,000 Good Output 18,000
Closing [Link] 5,000
25,000 25,000
Equivalent units for August conversion cost
Good Output 18,000
W.I.P 5,000 x 60% 3,000
21,000
Equivalent units for August material assuming all W.I.P is 100% complete for material.

Exercise IV
Mambo Ltd manufactures a product that passes through two processes, 1 and 2. All
manufacturing costs are added uniformly in Process 1, Information for Process 1 in May is as
follows
Work in Process May 1 units (30% complete) Sh. 30,000
Direct materials Sh. 4,000
Direct labour Sh. 3,000
Overhead Sh. 4,752
During May, 200,000 units were completed and transferred to Process 2.
The following costs were incurred by process 1 during May
Direct materials Sh. 32,210
Direct labour Sh. 55,400
Overhead Sh. 31,300
16,000 units that were 70% complete remained in the Process at May 31 using FIFO method
Required: a.) Equivalent units of production for May
b.) Total cost to account for
c.) Total cost per Equivalent unit of production
d.) The cost of goods transferred to Process 2
e.) The costs of May’s closing work in process

(Hide Solution)
a.) Costs were added uniformly; thus equivalent units for the elements of cost will be the
same. Physical Equivalent Units
Opening WIP 30,000 21,000 (70%)
Units started and completed 184,000 184,000 (100%)
214,000 205,000
Closing WIP 16,000 11,200 (70%)
230,000 216,200
b.) Total cost (32210+55400+31300) = Sh. 118,910
c.) Cost per Unit Sh. 0.55
d.) Cost of goods transferred: 205,000 x 0.55 = 112,750
Add: Cost of opening WIP 11,752
124,502
e.) Closing work in progress 0.55x11200 = 6160

Exercise V
Eldoret Limited, a textile company makes one of its product “ASO” in 3 main processes:
(a) Whapping;
(b) Knitting; and
(c) Finishing.
In a particular period, the cost of production were as follows:
 (W) Whapping (K) Knitting (F) Finishing Total
Sh. Sh. Sh. Sh.
Direct materials 10,000 16,000 17,310 43,310
Direct labour 15,000 20,000 25,000 60,000
Direct expenses 2,500 1,130 - 3,630
Production overhead 30,000

10,000 units at Sh. 5 each were introduced to whapping process, normal loss for W, K, F
processes were estimated at 10%, 5% and 10% respectively.
Output from whapping, knitting and finishing process were 9,200 units, 8,700 units and 8,000
units respectively, with the possibility of sales of scrap from W, K, and F at Sh.3, Sh.5, and Sh.6
respectively.
Stock of materials and work-in-progress are the same both at opening and closing production
overhead is absorbed by each process on a basis of 50% of Direct Labour cost.

Required:
(a) Prepare accounts for the three processes.
(b) Draw up an abnormal loss/gain account and explain how the gains and loss were arrived at.

(Hide Solution) A.
ELDORET LIMITED
Process Accounts (Whapping Process)
Units Unit Cost Value Units Unit Cost Value
Qty (Sh.) (Sh.) Qty (Sh.) (Sh.)
Input 10,000 5.00 50,000 Normal Loss 1,000 3.00 3,000
D. Material 10,000 Knitting 9,200 9.111 83,822
process
D. Labour 15,000
D. Expenses 2,500
Production Overheads 7,500
Abnormal Gain 200 9.111 1,822
10,200 86,822 10,20 86,822
0

Process Accounts (Knitting Process)

Units Unit Cost Value Units Unit Cost Value
Qty (Sh.) (Sh.) Qty (Sh.) (Sh.)
Whapping 9,200 9.111 83,822 Normal Loss 460 5.00 2,300
D. Material 16,000 Finishing process 8,700 14.72 128,063
D. Labour 20,000 Abnormal loss 40 14.72 589
D. Expenses 1,130
Production Overheads 10,000
9,200 130,952 9,200 130,952
 Process Accounts (Finishing Process)
Units Unit Cost Value Units Unit Cost Value
Qty (Sh.) (Sh.) Qty (Sh.) (Sh.)
Knitting 8,700 14.72 128,063 Normal Loss 870 6.00 5,220
D. Material 17,310 Finishing stock 8,000 22.69 181,510
D. Labour 25,000
Production Overheads 12,500
Abnormal Gain 170 22.69 3,857
8,870 186,730 8,870 186,730

B. Abnormal Loss Account

(Sh.) (Sh.)
Knitting Process 40 x 14.72 589 Cash 40 x 5.00 200
Profit & Loss Account 389
589 589

C. Abnormal Gain Account

(Sh.) (Sh.)
Whapping Process 200 x 3.0 600 Whapping Process 200 x 9.11 1,822
Finishing Process 170 x 6.00 1,020 Finishing Process 170 x 22.70 3,857
Profit & Loss Account 4,059
5,679 5,679
Statement Showing Gain or Loss from each Process
Whapping Process
Units (Sh.)
Input 10,000 Normal Cost 85,000
10% Normal Loss (1,000) Scrap Value @ Sh.3 (3,000)
Normal Output 9,000 82,000
Actual Output 9,200
Abnormal Gain 200 82,000/9,000 x 200 1,822
Knitting Process
Units (Sh.)
Input 9,200 Normal Cost 130,952
5% Normal Loss (460) Scrap Value @ Sh.5 (2,300)
Normal Output 8,740 128,652
Actual Output 8,700
Abnormal Loss 40 128,652/8,740 x 40 589
Finishing Process
Units (Sh.)
Input 8,700 Normal Cost 182,873
10% Normal Loss (870) Scrap Value @ Sh.6 (5,220)
Normal Output 7,830 177,653
Actual Output 8,000
Abnormal Gain 170 177,653/7,830 x 170 3,857