# Process costing

Introduction
Process costing is a form of costing where production follows a series of sequence or processes. In process costing the output of any given process becomes the input of the next process.

It‟s used in such industries as oil refineries, food processing, paper processing etc

Process losses
With many forms of production processes the quantity of output could be less than the input quantity. This may be due to loses through evaporation, breakages, withdrawal for testing and inspection etc.

Process losses are classified into 2:
a) Normal process losses
b) Abnormal process losses

Normal process losses
These are unavoidable loses arising from the nature of the production process and it‟s therefore logical that the cost of such losses be included as part of good production cost (i.e. as part of the cost of good output)

If any value can be recovered (salvaged) from the sale of normal loss items, then this should be credited to the process a/c thereby reducing the overall process cost.

Illustration
A food manufacturing process has a normal wastage of 8% of the input which can be sold as animal feed for ksh 5 per kg.
In a given period, the following was recorded:
Input material 160kg @ Ksh 23/kg Labour and overhead Ksh 2,896 Losses were at normal level

Required:
Compute the cost per tone of the good output and prepare the process a/c

Solution

Abnormal process losses and gains
These are losses above the level deemed to be normal. They are unforeseen losses which occur due such factors as plant breakdown, industrial accidents, defective materials, labour strikes etc.

They can be avoided. The cost of producing abnormal loss units are therefore allocated to such units. I.e. they bear their own cost

On the other hand, unexpected favourable conditions may apply in a given period and the actual losses may be lower than the normal losses. This gives rise to abnormal gain.

Illustration II
Consider the facts as in illustration (I) except that the actual output was 148 kg

Required
Calculate the cost per unit and prepare the process a/c, abnormal loss a/c and scrap debtors‟ a/c.

Illustration III
Prepare the relevant accounts based on the facts in illustration (i) only that the actual output is 155kgs

The 8 units do not truly belong to normal loss since the total loss is only 5 given an actual output of 155 kgs. Thus the credit entry in the normal loss account reduces the amount that can be transferred to the scrap sales account to represent the actual loss units which are only 5kgs.

Profit & loss a/c (extract)
Income: Ksh.
Abnormal gain a/c 114

Activity 1:
Consider the following facts:
Input material – 2,000 kg @ Ksh 50 per kg Labour cost ksh 65,000
OH cost ksh 35,000 Normal loss – 10% of input
Scrap value of normal losses -ksh 10 per kg

Required:
(i) Compute the cost per unit
(ii) Prepare the relevant a/c assuming the actual output is
a) 1,750kgs
b) 1,860kgs

Activity 2:
The manufacture of product “zed” requires four distinct processes. On completion the processes passes from process 4 to finished goods stock. During the first quarter the following information was obtained

Production overhead is absorbed by each process on the basis of 300% of direct wages. Production during the period was 1,000 units.

Required:
Prepare the process accounts and transfer the finished output to the finished stock account.

Activity 3:
“Easy Go” is an industrial lubricant produced in two successive chemical processes. The output of process one is passed to process two for further processing.

You are given the following information with regard to the month of October 2010:

General overheads amounted to ksh.357 and are absorbed into process costs on a prices labour basis.

The normal output of process one is 80% input and of process two 90% of input.
Waste matter from process one is sold at 20 cents per kg. and that from process two for 30 cents per kg.

The output for October was as follows: Process one: 2,300 kg
Process two: 4,000 kg

There was no stock or work in progress at either the beginning or the end of the month. In addition all the available waste has been sold.

Required:
(a) Process one
(b) Process two
(c) Finished goods stock