Ms.
Isuri Udawaththa
MSc. (USJP), BSc.Acc (WUSL), AMA, MAAT,
6/16/2025 2
Lecturer, SAB Campus
Intended Learning Outcomes
• The basics of process costing, losses and gains
• Losses with scrap value
• Valuing opening work in progress: FIFO method
• Valuing opening work in progress: weighted average cost method (AVCO)
• Joint products costing
• By-products costing
Process Costing
• Costing method used where it is not possible to identify separate units
of production or jobs, usually because of the continuous nature of the
production processes involved.
• Eg:-………………………………………………………………
• Process costing may also be associated with the continuous production
of large volumes of low-cost items, such as cans or tins.
Features of Process Costing
a) The output of one process becomes the input to the next until the
finished product is made in the final process.
b) The continuous nature of production in many processes means that
there will usually be closing work in progress (WIP) which must be
valued. In process costing it is not possible to build up cost records of
the cost per unit of output or the cost per unit of closing inventory
because production in progress is an indistinguishable homogeneous
mass.
Features of Process Costing
c) There is often a loss in process due to spoilage, wastage, evaporation
and so on.
d) Output from production may be a single product, but there may also be
a byproduct (or by-products) and/or joint products.
Process
Account
Process Account
• Where a series of separate processes is required to manufacture the finished
product, the output of one process becomes the input to the next until the final
output is made in the final process.
Description Units Amount Description Units Amount
(Rs.) (Rs.)
Inputs x xxx Output x xxx
Process Account
Framework for dealing with process costing
Process costing is centered around four key steps.
The exact work done at each step will depend on whether there are normal losses,
scrap, opening or closing work in progress.
• Step 1 Determine output and losses
• Step 2 Calculate cost per unit of output, losses and WIP
• Step 3 Calculate total cost of output, losses and WIP
• Step 4 Complete accounts
Losses and Gains in process costing
• Losses may occur in process. If a certain level of loss is expected, this is known as
normal loss.
• If losses are greater than expected, the extra loss is abnormal loss. If losses are
less than expected, the difference is known as abnormal gain.
• Since normal loss is not given a cost, the cost of producing these units is borne by
the 'good' units of output.
• Abnormal loss and gain units are valued at the same unit rate as 'good' units.
• Abnormal events do not, therefore, affect the cost of good production. Their
costs are analysed separately in an abnormal loss or abnormal gain account.
Losses and gains in process costing
Example 01 : (Abnormal losses and gains )
Suppose that input to a process is 1,000 units at a cost of Rs. 45,000. Normal loss is
10% and there are no opening or closing stocks.
Required:
Prepare the accounting entries for the cost of output and the cost of the loss if
actual output were as follows.
(a) 860 units (so that actual loss is 140 units)
(b) 920 units (so that actual loss is 80 units)
Losses and gains in process costing
Example 02:
Shiny LLC has two processes, Y and Z. There is an expected loss of 5% of input in
process Y and 7% of input in process Z. Activity during a four-week period is as
follows.
Y Z
Material input (kg) 20,000 28,000
Output (kg) 18,500 26,100
Required:
Assess whether there is an abnormal gain or abnormal loss for each process.
Losses with scrap value and disposal costs
• Scrap is 'Discarded material having some value.’
• The scrap value of normal loss is usually deducted from the cost of materials.
• The scrap value of abnormal loss (or abnormal gain) is usually set off against its
cost, in an abnormal loss (abnormal gain) account
Example 03
3,000 units of material are input to a process.
Process costs are as follows.
Material Rs. 11,700
Conversion costs Rs. 6,300
Output is 2,000 units. Normal loss is 20% of input.
The units of loss could be sold for Rs. 1.
Required : Prepare appropriate accounts
Example 04: (Two processes, losses and scrap )
JJ has a factory which operates two production processes, cutting and pasting. Normal loss in each
process is 10%. Scrapped units out of the cutting process sell for Rs. 30 per unit, whereas scrapped
units out of the pasting process sell for Rs. 50. Output from the cutting process is transferred to the
pasting process: output from the pasting process is finished output ready for sale.
Relevant information about costs for control period 7 are as follows.
Cutting Process Pasting Process
Units Rs. Units Rs.
Input materials 18,000 540,000
Transferred to pasting process 16,000
Materials from cutting process 16,000
Added materials 14,000 700,000
Labor and overheads 324,000 1,350,000
Output to finished goods 28,000
Required: Prepare accounts for the cutting process, the pasting process, abnormal loss, abnormal
gain and scrap.
Valuing closing work in progress
• When units are partly completed at the end of a period (and hence there is
closing work in progress), it is necessary to calculate the equivalent units of
production in order to determine the cost of a completed unit.
• Equivalent units are notional whole units which represent incomplete work, and
which are used to apportion costs between work in process and completed
output.
• Account can be taken of opening work in progress using either the First in, First
out (FIFO) method or the weighted average cost method (AVCO).
Example 05: (WIP and First in First Out Method )
Suppose that information relating to process 1 of a two-stage production process is as follows, for
August 2023.
Opening inventory 500 units: degree of completion 60%
Cost to date Rs. 28,000
Costs incurred in August 2023 Rs
Direct materials (2,500 units introduced) 132,000
Direct labour 66,000
Production overhead 66,000
264,000
Closing inventory 300 units: degree of completion 80%
There was no loss in the process.
Required: Prepare the process 1 account for August 2023.
Example 06: (WIP and Weighted Average Cost Method )
Magpie produces an item which is manufactured in two consecutive processes. Information relating
to process 2 during September 2023 is as follows.
Opening inventory 800 units
Degree of completion: Rs
Process 1 materials 100% 47,000
Added materials 40% 6,000
Conversion costs 30% 10,000
63,000
During September 2023, 3,000 units were transferred from process 1 at a valuation of Rs. 181,000.
Added materials cost Rs. 96,000 and conversion costs were Rs. 118,000.
Closing inventory at 30 September 2023 amounted to 1,000 units which were 100% complete with
respect to process 1 materials and 60% complete with respect to added materials. Conversion cost
work was 40% complete. Magpie uses a weighted average cost system for the valuation of output and
closing inventory.
Required: Prepare the process 2 account for September 2023.
Joint Product and By Product
Joint products and By-products
• Joint products are two or more products which are output from the same
processing operation, but which are indistinguishable from each other up to their
point of separation.
• A by-product is a supplementary or secondary product (arising as the result of a
process) whose value is small relative to that of the principal product.
a. Joint products have a substantial sales value. Often they require further processing
before they are ready for sale. Joint products arise, for example, in the oil refining
industry where diesel fuel, petrol, paraffin and lubricants are all produced from the
same process.
b. The distinguishing feature of a by-product is its relatively low sales value in comparison
to the main product. In the timber industry, for example, byproducts include sawdust,
small offcuts and bark.
What exactly separates a joint product from a by-product?
a. A joint product is regarded as an important saleable item, and so it should be
separately costed. The profitability of each joint product should be assessed in
the cost accounts.
b. A by-product is not important as a saleable item, and whatever revenue it earns
is a 'bonus' for the organisation. Because of their relative insignificance, by-
products are not separately costed.
Example 07: (Joint products and process accounts)
Three joint products are manufactured in a common process, which consists of two consecutive
stages. Output from process 1 is transferred to process 2, and output from process 2 consists of the
three joint products, Hans, Nils and Bumpsydaisies. All joint products are sold as soon as they are
produced.
Data for period 2 of 2023 are as follows.
Example 07: (Joint products and process accounts)
Selling prices are Rs. 18,000 per unit of Han, Rs. 20,000 per unit of Nil and Rs. 30,000 per unit of
Bumpsydaisy.
Required:
a. Prepare the process 1 account.
b. Prepare the process 2 account using the sales value method of apportionment.
c. Prepare a profit statement for the joint products.
Example 08: (Methods of accounting for by-products )
During November 2023, Splatter LLC recorded the following results.
Opening stock main product P, nil
by-product Z, nil
Cost of production Rs. 120m
Sales of the main product amounted to 90% of output during the period, and 10% of production was
held as closing inventory at 30 November.
Sales revenue from the main product during November 2022 was Rs. 150m.
A by-product Z is produced, and output had a net sales value of Rs. 1m. Of this output, Rs. 700,000
was sold during the month and Rs. 300,000 was still in inventory at 30 November.
Required:
Calculate the profit for November using the four methods of accounting for byproducts.
References
• BPP Learning Media, 2023. ACCA Approved Workbook Foundation in
Accountancy/ACCA Management Accounting (FMA/MA). 3rd ed.
London: BPP Learning Media Ltd.
• Kaplan Financial Limited, 2020. ACCA Applied Knowledge ACCA
Diploma in Accounting and Business (RQF Level 4) Management
Accounting (MA/FMA) Study Text. Berkshire: Kaplan Publishing UK.
Thank You.
