CHAPTER

Certificate in Accounting and Finance

Cost and management accounting

Process costing
Contents
1 Introduction to process costing
2 Normal loss
3 Abnormal loss
4 Abnormal gain
5 Process costing with closing work in progress
6 Opening work in progress: weighted average cost
method
7 Opening work in progress: FIFO method
8 Work in progress and losses
9 Losses and gains at different stages in the process
10 Process costing: joint products and by-products

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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with techniques of cost
accounting to provide a knowledge base for decision making skills.
Costing systems
LO 2

On the successful completion of this paper, candidates will be able to

demonstrate an understanding of different costing systems

LO 2.5.1

Describe process costing including the treatment of normal / abnormal loss /

gain

LO 2.5.2

Calculate cost of product and inventories by application of process costing

LO 2.5.3

Prepare accounting entries under the process costing system

LO 2.6.1

Describe joint and by products using examples

LO 2.6.2

Allocate joint production costs using sales value, physical units, average units
and weighted average methods

LO 2.6.3

Account for by-products using recognition of gross revenue, recognition of net

revenue and replacement cost approaches.

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Chapter 7: Process costing

INTRODUCTION TO PROCESS COSTING

Section overview

Process costing

Situations where process costing might be appropriate

Process costing issues introduced

1.1 Process costing

Process costing provides a system of costing where any or all of these
characteristics occur.
Output is continually produced from the manufacturing process and is
normally measured in total quantities, such as tonnes or litres produced, or in
very large quantities of small units (such as the number of cans or tins).
Materials might be added in full at the start of a process or might be added
gradually throughout the process. The materials are processed to produce the
final output. In a process costing system, it is usual to distinguish between:

direct materials; and

conversion costs, which are direct labour costs and production

overheads.

There might be losses in the process (due to evaporation or chemical

reaction) so the quantity of output might therefore be less than the quantity of
materials input. Process costing provides a system of costing that allows for
expected losses in the manufacturing process.
When there is a continuous production process, it is difficult to measure the
quantity of work-in-process (incomplete production) at the end of a financial
period. Process costing provides a method of measuring and costing
incomplete WIP.
In some processes, more than one product might be output from the same
process. When more than one product is output, they might be called joint
products or a by-product. Process costing offers methods of costing each of
the different products.
In some process manufacturing systems, there is a series of sequential
processes. For example a manufacturing system might consist of three
consecutive processes: raw materials are input to Process 1, then the output
from Process 1 goes onto the next process (Process 2) and the output from
Process 2 then goes into a final process, Process 3. The output from Process
3 is the final product.
Each process is different and all these characteristics do not occur in all
processes.

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1.2 Situations where process costing might be appropriate

Process costing is used when output is produced in a continuous process
system, and it is difficult to separate individual units of output.
Examples of manufacturing where process costing is used are:
chemicals manufacture;
the manufacture of liquids; and
the continuous manufacture of high volumes of low-cost food items such as
tins of peas or beans, or bottles of tomato ketchup.
In these types of production process, losses in process might occur and there are
often problems in measuring exactly the amount of unfinished work-in-process at
the end of a period.
The basic principle of costing is the same as for other types of costing. The cost
of a unit of output from a process is measured as the total cost of resources input
to the process divided by the total units produced.

1.3 Process costing issues introduced

Process costing can be quite tricky at first. It is often helpful to draw a process
account as this helps to focus ones mind on the main issue which is that costs
are collected on the debit side of the account and they must be allocated to
whatever passes out of the account. This is more complex than it sounds.
We will proceed to give an overview of the issues before starting to look at the
detailed calculations.
Consider the following:
Example: Simple process account
Process
Units
Materials

100

Conversion cost

Rs.

Units

1,000
500 Output

100

Rs.

1,500

100

1,500

100

1,500

This is very straight forward. The total costs input to the process are Rs. 1,500.
This represents 100 units of raw material at a cost of Rs. 1,000 and the cost of
work that has been carried out on the raw materials. This cost Rs. 500 so the
total costs input are Rs. 1,500. 100 units are transferred out of the process and
these must have cost Rs. 1,500 or Rs. 15 per unit.
It might seem strange to labour this point but this is what process costing is
always trying to do. It collects costs of input and then allocates them to the output
from the process.

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Chapter 7: Process costing

Now lets add a complication.

Example: Process account losses
Process
Units
Materials

100

Conversion cost
100

Rs.
1,000 Output
500 Loss
1,500

Units
90

Rs.

10
100

1,500

The input costs are still the same but now there are two lines on the credit side of
the account to which we could allocate cost, the good output and the loss.
A decision needs to be made. Should some of the cost relate to the loss or
should all of it relate to the good output? The answer to this question depends on
whether the loss is considered to be normal or abnormal. This will be explained
shortly.
Now lets add another complication.
Example: Process account closing WIP
Process
Units
Materials

100

Conversion cost
100

Rs.

Units

1,000 Output
500 Closing WIP
1,500

Rs.

90
10
100

1,500

Again the input costs are still the same but now there are two types of output
from the process, the good output and the closing WIP.
We must decide how to allocate the input costs to the good output which is
complete and the closing WIP which is incomplete. How we do this is explained
later in the chapter.
Now lets add yet another complication.
Example: Process account opening WIP
Process
Units
Opening WIP
Materials

10

Rs.

Units

100

100

1,000 Output
500 Closing WIP

110

1,600

Conversion cost

Rs.

95
15
110

1,600

The opening WIP is a cost that was input in the previous period. We still face the
same basic problem. The total costs on the debit side have to be allocated to
output. However, the existence of opening WIP means that we must have a
policy for dealing with it. Do we treat it just like any other costs and average all of

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the input costs out or do we operate a FIFO system and simply allocate the cost
of opening WIP to the first units produced? This will be answered later.
The following proforma process account is provide as a reference.
Example: Proforma process account
Process
Units
Opening WIP

Direct material

Rs.

Units
X Good output
X Normal loss

Direct labour

Direct expense

Overheads
Abnormal gain

X
X Abnormal loss

Good output
Closing WIP
X

Rs.

X-

X
X

X
X

Note that it is not possible to have abnormal loss and gain on the same account
in the same period.
Whatever the complications, the task that sits at the heart of process costing is
always to allocate the costs collected on the debit side of the account to the
possible outputs (good output, closing WIP and lost units) on the credit side.
In all questions you will need to:
Identify the losses and output;
Calculate the cost of good output, losses and WIP;
Use the costs you have calculated to assign values to the good output, losses
and WIP;
Complete the process account.

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Chapter 7: Process costing

NORMAL LOSS
Section overview

Normal loss

Normal loss with no recovery value

Normal loss with recovery value

Normal loss with cost of disposal

2.1 Normal loss

A feature of process manufacturing is that there is often some loss or wastage in
production and output quantities are less than input quantities of materials.
Losses might be normal or abnormal.
Normal loss is the expected loss in processing.
Formula: Normal loss
Normal loss = Quantity of material input Expected output
or
Quantity of material input = Normal loss + Expected output
or
Expected output = Quantity of material input Normal loss
Normal loss is usually expressed as a percentage of the input units of materials.
Example: Normal loss
Normal loss of a process is 10%.
A company puts 5,000 litres into the process.
Normal loss is 10% of 5,000 = 500.
Expected output from the process would be 90% of 5,000 litres = 4,500 litres
Normal loss is unavoidable in the normal course of events. It is inherent in the
physical and chemical reactions that take place in a process.
Example:
A person buys a one litre tin of soup.
The soup must be heated but heating will cause evaporation.
When the soup is ready to eat there will be less than a litre left.
Normal loss is how much evaporation would normally be expected.

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2.2 Normal loss with no recovery value

Example:
Returning to the soup example.
A person buys a one litre tin of soup for Rs. 500.
Normal evaporation during cooking is 10%.
When the soup is ready to eat there is 0.9 litres left.
The person has paid Rs. 500 for 0.9 litres and this is unavoidable.
The implication of this simple example is as follows. The normal loss is
something that is unavoidable in order to get the good output. The cost of the lost
units is part of the cost of obtaining the good output.
All of the cost should be assigned to the good output and none to the normal
loss.
If the normal loss has no scrap value it is given a nil value. This means that all of
the costs of input must be recognised as part of good output.
Formula: Cost of good output
Cost of good output =

Total process costs

Expected units of output

Example: Normal loss no scrap recovery value

The following information relates to a production process:
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,800 litres

Direct materials cost

Rs. 3,600

Direct labour cost

Rs. 300

Production overhead absorbed

Rs. 600

The cost per unit produced can be calculated as follows:

Direct materials
Direct labour
Production overheads
Total production cost
Expected output (90% of 2,000)
Cost per litre

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3,600
300
600
4,500
1,800 litres
Rs.2.50

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Chapter 7: Process costing

Process account in the cost ledger

The process cost account (shown below) is a work-in-progress account for the
process. The debit side of the account records direct materials, direct labour
costs and production overheads absorbed. The credit side of the WIP account
records the cost of the finished output.
The account also includes memorandum columns for the quantities of direct
materials input and the quantities of output and loss. Normal loss is shown so
that the quantities columns add up to the same amount on the debit or credit
sides, but the normal loss has no cost.
Example: Process account with normal loss (no scrap recovery)
The following information relates to a production process X.
The process account can be completed as follows
Process X
Litres
Materials

2,000

Direct labour

Rs.

Litres

Output (actual) at
3,600 Rs. 2.5 each
300
600 Normal loss

Prod. Ohd
2,000

4,500

Rs.

1,800

4,500

200

4,500

2,000

Note that it is always useful to draft a process account at the start of an answer
as it focusses the mind on what needs to be done.

2.3 Normal loss with recovery value

In some cases, losses in a process have a scrap value. The normal loss quantity
might not be physically lost but is changed in some way, so that it is not the same
as good output. For example, there might be some kind of chemical separation
with a substance scraped off the top of the liquid in the process and whatever is
scraped off might have a scrap value.
If normal loss has a scrap value the company is able to recover some of the input
costs to the process. The scrap value reduces the cost of the process.
To reflect this in the process account the normal loss is measured at its scrap
value and the calculation of the cost of good output becomes:
Formula: Cost of good output
Cost of good output =

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Expected units of output

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Example: Normal loss with scrap recovery value

The following information relates to a production process X.
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,800 litres

Scrap value of normal loss

Rs. 0.9 per

litre

Direct materials cost

Rs. 3,600

Direct labour cost

Rs. 300

Production overhead absorbed

Rs. 600
Rs.

The cost per unit produced can be calculated as follows:

Direct materials

3,600

Direct labour

300

Production overheads

600

Total production cost

4,500

Less scrap value of normal loss (200 litres 0,9)

(180)
4,320

Expected output (90% of 2,000)

1,800 litres

Cost per litre

Rs.2.40

The process account can be completed as follows

Process X
Litres
Materials

2,000

Rs.

Litres

Output (actual) at
3,600 Rs. 2.4 each

Direct labour

300

Prod. Ohd

600 Normal loss

2,000

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4,500

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Rs.

1,800

4,320

200

180

2,000

4,500

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Chapter 7: Process costing

2.4 Normal loss with cost of disposal

In other cases a company might have to pay to dispose of losses in a process.
The substance scraped off the top of the liquid in the process might be poisonous
and might have to be disposed of safely.
The cost of disposal represents an additional cost to the process.
To reflect this in the process account the normal loss is measured at zero but the
expected costs of disposal are debited to the process account.
Formula: Cost of good output
Cost of good output =

Total process costs + Disposal costs of the normal loss

Expected units of output

Example: Normal loss no scrap disposal cost

The following information relates to a production process X.
Input quantities
Normal loss

2,000 litres
10%

Therefore expected output

1,800 litres

Actual output

1,800 litres

Disposal cost of normal loss

Rs. 1 per litre

The cost per unit produced can be calculated as follows:

Direct materials
Direct labour
Production overheads

Rs.
3,600
300
600

Total production cost

Disposal costs of normal loss (200 litres 1)

4,500
200
4,700
1,800 litres

Expected output (90% of 2,000)

Cost per litre

Rs. 2.6111

The process account can be completed as follows

Process X
Litres
Materials

2,000

Direct labour
Prod. Ohd
Disposal cost of
normal loss

Litres

Output (actual) at
3,600 Rs. 2.6111 each
300

Rs.

1,800

4,700

200

4,700

600
200 Normal loss
2,000

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Cost and management accounting

ABNORMAL LOSS
Section overview

Introduction to abnormal loss

Accounting for abnormal loss

Abnormal loss with recovery value

3.1 Introduction to abnormal loss

Normal loss is the expected amount of loss in a process. Actual loss might be
more than the expected or normal loss. When actual loss exceeds normal loss,
there is abnormal loss. The difference between total actual loss and normal loss
is abnormal loss.
Formula: Abnormal loss
Abnormal loss = Actual loss Expected (normal) loss
From earlier:
Quantity of material input = Normal loss + Expected output
But:
Expected output = Actual output + Abnormal loss
Therefore:
Quantity of material input = Normal loss + Actual output + Abnormal loss
Total loss = Normal loss + Abnormal loss.
Abnormal loss is not expected and should not happen. It therefore makes sense
to give it a cost. By giving a cost to abnormal loss, management information
about the loss can be provided, and management can be made aware of the
extent of any problem that might exist with excessive losses in process.

3.2 Accounting for abnormal loss

If it is assumed that all losses in process occur at the end of the process, units of
abnormal loss are costed in exactly the same way in the as units of finished
output. This might seem a little strange but the idea is to highlight the impact of
the loss.
The cost per unit of abnormal loss is therefore the same as the cost of units of
good output. This is exactly the same as before.
Formula: Cost of good output
Cost of good output =

Total process costs Scrap value of the normal loss

Expected units of output

The cost of units of abnormal loss is treated as an expense for the period, and
charged as an expense in the income statement for the period.

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Example: Abnormal loss

The following information relates to a production process X.
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,700 litres

Therefore abnormal loss

100 litres
Rs.

The cost per unit produced can be calculated as follows:

Direct materials

3,600

Direct labour

300

Production overheads

600

Total production cost

4,500

Expected output (90% of 2,000)

1,800 litres

Cost per litre

Rs. 2.5

Costing:
Cost of finished output = 1,700 units Rs.2.50 = Rs.4,250.
Cost of abnormal loss = 100 units Rs.2.50 = Rs.250.
The process account can be completed as follows
Process X
Litres
Materials

2,000

Rs.

Litres

Output (actual) at
3,600 Rs. 2.5 each

Direct labour

300 Abnormal loss

Prod. Ohd

600
Normal loss
2,000

4,500

Rs.

1,700

4,250

100

250

200

2,000

4,500

Note that the abnormal loss is included in the credit side of the account, in the
same way that normal loss is shown on the credit side. However whereas normal
loss has no value/cost, abnormal loss has a cost.

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The appropriate double entry in the cost ledger is:

Illustration: Abnormal loss double entry
Debit
Abnormal loss account
Process account

Credit

X
X

Example: Abnormal loss account

Continuing from the example above.
Abnormal loss account
Litres
Process X account

100

Rs.

Litres

Rs.

250

At the end of the financial period, the balance on the abnormal loss account is
written off as a cost in the costing income statement.

3.3 Abnormal loss with recovery value

When loss has a scrap value, the scrap value of normal loss is deducted from
the process cost, as explained earlier.
Abnormal loss will also have a scrap value but this is treated differently to the
scrap value of normal loss.
The cost of expected units of output is calculated in the usual way.
The scrap value of normal loss is normal loss units scrap value per unit (as
usual).
In the process account the cost of abnormal loss is measured at the cost of
expected units (just as before).
Periodically the units in the normal loss account are transferred to a scrap
account at scrap value.
The balance on the abnormal loss account is an expense for the period
(measured at the cost of the units less the scrap value).
This means that scrap value of abnormal loss is set off against the cost of
abnormal loss in the abnormal loss account, not the process account.
Illustration: Abnormal loss scrap value double entry
Debit
Cash (money from the sale of scrapped units)
Abnormal loss account

Credit

X
X

The net cost of abnormal loss (cost of abnormal loss minus its scrap value) is
then transferred as a cost to the cost accounting income statement at the end of
the accounting period.

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Example: Abnormal loss

The following information relates to a production process X.
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,700 litres

Therefore abnormal loss

100 litres

Scrap value of normal loss

Rs. 0.9 per litre

The cost per unit produced can be calculated as follows:

Direct materials

Rs.
3,600

Direct labour

300

Production overheads

600

Scrap value of normal loss (200 Rs.0.90)

Total production cost

(180)
4,320

Expected output (90% of 2,000)

1,800 litres

Cost per litre

Rs. 2.4

Costing:
Cost of finished output = 1,700 units Rs. 2.40 = Rs. 4,080.
Cost of abnormal loss = 100 units Rs. 2.40 = Rs. 240.
Normal loss = 200 units Rs. 0.9 = Rs. 180
The process account can be completed as follows
Process X
Litres
Materials

2,000

Rs.

Litres

3,600 Output

Rs.

1,700

4,080

Direct labour

300 Abnormal loss

100

240

Prod. Ohd

600 Normal loss

200

180

2,000

4,500

2,000

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Example: Accounting for the losses

The double entry to account for the losses can be completed as follows
Abnormal loss account
Litres
Process X
account

100

Rs.

Litres

240 Scrap account

100

Income statement
100

240

Rs.
90
150

100

240

Scrap account
Litres

Rs.

Process X
account (normal
loss)

200

Abnormal loss
account

100

90

300

270

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180 Cash

168

Rs.

300

270

300

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Chapter 7: Process costing

ABNORMAL GAIN
Section overview

Abnormal gain

Accounting for abnormal gain: no scrap value for loss

Abnormal gain where loss has a scrap value

4.1 Abnormal gain

Abnormal loss occurs when actual loss is more than the expected (normal) loss.
Abnormal gain occurs when the actual loss is less than normal loss. Abnormal
gain is the difference between the normal loss (expected loss) and the actual
loss.
Formula: Abnormal gain
Abnormal gain = Expected (normal) loss Actual loss

From earlier:
Expected output = Actual output + Abnormal loss
Gain is opposite in sign so goes to the other side of the expression:
Expected output + Abnormal gain = Actual output

Actual loss = Normal loss Abnormal gain

4.2 Accounting for abnormal gain: no scrap value for loss

The method of costing for abnormal gain is the same in principle as for abnormal
loss. If it is assumed that all losses occur at the end of the process, the cost per
unit of finished output and the value/cost of abnormal gain are calculated as the
cost per expected unit of output. (i.e. the cost of good output)
The cost per unit of abnormal loss is therefore the same as the cost of units of
good output. This is exactly the same as before.
Formula: Cost of good output
Cost of good output =

Total process costs Scrap value of the normal loss

Expected units of output

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The differences between costing for abnormal loss and costing for abnormal gain
are that:
Abnormal gain is a benefit rather than a cost. Whereas abnormal loss is
written off as a cost at the end of the financial period, abnormal gain is an
adjustment that increases the profit for the period.
Abnormal gain is recorded as a debit entry in the process account, because it
is a benefit.
The other half of the double entry is recorded in an abnormal gain account. At
the end of the period, the balance on the abnormal gain account is then
transferred to the income statement as a benefit for the period, adding to
profit.
Example: Abnormal gain
The following information relates to a production process X.
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,850 litres

Therefore abnormal gain

50 litres

The cost per unit produced can be calculated as follows:

Rs.

Direct materials
Conversion costs (direct labour + production overheads)

3,600
900

Total production cost

4,500

Expected output (90% of 2,000)

1,800 litres

Cost per litre

Rs. 2.5

Costing:
Cost of finished output = 1,850 units Rs. 2.50 = Rs. 4,625.
Cost of abnormal gain = 50 units Rs. 2.50 = Rs. 125.
Normal loss = zero (as there is no scrap value).
The process account can be completed as follows
Process X
Litres
Materials

2,000

Conversion cost
Abnormal gain

Litres

3,600 Output

Rs.

1,850

4,625

200

nil

2,050

4,625

900
50
2,050

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Rs.

125 Normal loss

4,625

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Accounting for abnormal gain: ledger entries

The abnormal gain is shown on the debit side of the account, and the total
number of units in the memorandum column for quantities (2,050) is larger than
the actual quantity of units input to the process (2,000).
The appropriate double entry in the cost ledger is:
Illustration: Abnormal gain double entry
Debit
Process account

Credit

Abnormal gain account

Example: Abnormal gain account

Continuing from the example above.
Abnormal gain account
Litres

Rs.

Litres
Process X account

50

Rs.
125

The balance on this account is taken to the costing income statement at the end
of the period, and added to the reported profit.

4.3 Abnormal gain where loss has a scrap value

When loss has a scrap value, the value of abnormal gain is actually less than the
amount shown in the process account. The process has been more efficient and
produced more good output but there are less normal loss units so the scrap
recovery is less than expected.
Accounting for the scrap value of abnormal gain is similar to accounting for the
scrap value of abnormal loss.
In the process account (WIP), abnormal gain is valued at the cost per
expected unit of output.
The scrap value of normal loss is normal loss units scrap value per unit (as
usual).
The scrap value of abnormal gain is recorded as a debit entry in the abnormal
gain account (in a similar way to recoding the scrap value of abnormal loss as
a credit entry in the abnormal loss account).
The scrap value of the abnormal gain is set off against the value of the
abnormal gain in the abnormal gain account, not the process account.
The balance on the abnormal gain account is the net value of abnormal gain
(value of abnormal gain minus the scrap value not earned from the normal
loss). This balance is transferred as a net benefit to the cost accounting
income statement at the end of the accounting period.

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Example: Abnormal gain where loss has recovery value

The following information relates to a production process X.
Input quantities

2,000 litres

Normal loss

10%

Therefore expected output

1,800 litres

Actual output

1,850 litres

Therefore abnormal gain

50 litres

Scrap value of normal loss

Rs. 0.9 per litre

The cost per unit produced can be calculated as follows:

Direct materials

Rs.
3,600

Direct labour

300

Production overheads

600

Scrap value of normal loss (200 Rs.0.90)

Total production cost

(180)
4,320

Expected output (90% of 2,000)

1,800 litres

Cost per litre

Rs. 2.4

Costing:
Cost of finished output = 1,850 units Rs. 2.40 = Rs. 4,440.
Cost of abnormal gain = 50 units Rs. 2.40 = Rs. 120.
Normal loss = 200 units Rs. 0.90 = Rs. 180.
The process account can be completed as follows
Process X
Litres
Materials

2,000

Conversion cost
Abnormal gain

Litres

3,600 Output

Rs.

1,850

4,440

200

180

2,050

4,620

900
50
2,050

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120 Normal loss

4,620

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Chapter 7: Process costing

Example: Accounting for the abnormal gain and the normal loss
The double entry to account for the losses can be completed as follows
Abnormal gain account
Litres
Scrap account

Rs.

50

Litres

45 Process X account

Income
statement

Rs.

50

120

100

250

75
40

120

The balance on this account is Rs.75. This is treated as an addition to profit in the
cost accounting income statement for the period.

Scrap account
Litres
Process X a/c
(normal loss)

200

Rs.

Litres

Abnormal gain
180 account
Cash

300

270

Rs.

50

45

150

135

300

270

The company expected to be able to sell 200 litres of scrap product. The abnormal
gain means that they only have 150 litres to sell.

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Cost and management accounting

PROCESS COSTING WITH CLOSING WORK IN PROGRESS

Section overview

Sharing out process costs between finished units and unfinished inventory

Equivalent units

A three-stage calculation

Introduction to opening work in progress

5.1 Sharing out process costs between finished units and unfinished inventory
When manufacturing is a continuous process, there may be unfinished work-inprogress (WIP) at the start and end of a period. This section looks at closing WIP.
In all the examples in this section it is assumed that there is no opening WIP.
Also note that the examples in this section assume that there are no losses.
This means that some units have been started and finished in the year and
others have been started but not finished.
It stands to reason that the cost or value of an unfinished unit is less than the
cost of a completed unit. The costs of the process must be shared between
finished output and unfinished work-in-process on a fair basis.
Previous sections have explained that costs are allocated to output by calculating
a cost per unit. This involves dividing a cost figure by the number of units of
expected output.
In order to do this when there is closing work in progress we use the concept of
equivalent units.

5.2 Equivalent units

An equivalent unit means equal to one finished unit of output. This is quite a
simple idea. A number of partially complete units is the equivalent of a number of
complete units depending on their degree of completion.
Illustration:
200 units that are 50% complete are equivalent to 100 (50% 200)
complete units
400 units that are 20% complete are equivalent to 80 (20% 400) complete
units

Costs are shared between finished units and inventory by calculating a cost per
equivalent unit.
Complication
In all of the previous examples a cost per unit was calculated by dividing the total
process costs (perhaps adjusting for expected normal loss or cost of disposal) by
the expected number of units.

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The existence of work in progress complicates this because the work in progress
might be complete to different degrees in respect of different cost inputs. For
example a unit in the closing work in progress might be 80% complete with
respect to material but only 50% complete with respect to labour.
In this case the number of equivalent units of direct materials cost in a period will
therefore differ from the number of equivalent units of labour.
A cost per unit is calculated for each type of cost using the equivalent units for
that cost. The cost of output is then based on these individual costs.
Costs for finished output and closing inventory can be calculated from the
number of equivalent units and the cost per equivalent unit.

5.3 A three-stage calculation

We recommend a three-stage calculation:
Prepare a statement of equivalent units to calculate the equivalent units for
each type of cost in the output from the process and for closing WIP
Next, prepare a statement of cost per equivalent unit for each type of cost.
Third, prepare a statement to calculate the cost of finished output and closing
WIP from the statement of equivalent units and statement of cost per
equivalent unit.
Example: Closing work in progress
The following information relates to a production process X.
Input quantities

4,000 units

Completed output

3,500 units

Closing WIP

500 units

All the direct materials are added to production at the beginning of the
process.
Closing inventory of 500 units is therefore 100% complete for materials but
is only 40% complete for conversion.
The costs incurred in the period were:

Rs.

Direct materials

24,000

Converison costs:

7,400

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Answer
Statement of equivalent units

Output
Finished output
Closing WIP:
Materials
Conversion

Percentage
complete
100%

Total units
3,500
500

Equivalent units
Direct
Conversion
materials
costs
3,500
3,500

100%
40%

4,000

500
200
4,000

3,700

Statement of cost per equivalent unit

Direct
materials
Rs.24,000
4,000
Rs.6

Total costs
Equivalent units
Cost per equivalent unit

Conversion
costs
Rs.7,400
3,700
Rs.2

Statement of evaluation
Rs.
28,000

Cost of finished goods (3,500 (Rs. 6 + Rs. 2))

Cost of closing WIP
Materials (500 units Rs. 6)
Conversion (200 units Rs. 2)

3,000
400
3,400

These costs would be recorded in the process account as follows.

Process (WIP) account
Direct materials
Conversion costs

units
4,000
-

Rs.
24,000 Finished goods
7,400 Closing WIP

units
3,500
500

Rs.
28,000
3,400

4,000

31,400

4,000

31,400

5.4 Introduction to opening work in progress

Opening work in progress adds another level of complexity.
When there is opening work in progress there are two types of cost on the debit
side of the account. These are the costs that were incurred last period and
brought forward as work in progress and the costs that were incurred in the
current period. The issue is whether they should be treated together or
separately. This question is addressed in the accounting policy adopted for
opening work in progress.
weighted average cost method treats all costs on the debit side of the account
in the same way.
first-in, first-out (FIFO) method allocates the costs in opening WIP to the
finished goods and then spreads the remaining costs elsewhere.

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OPENING WORK IN PROGRESS: WEIGHTED AVERAGE COST METHOD

Section overview

The underlying principle

The three-stage calculation

Weighted average cost method: summary

6.1 The underlying principle

When the weighted average cost method is used, the assumption is that all units
produced during the period and all units of closing inventory should be valued at
the same cost per equivalent unit for materials and the same cost per equivalent
unit for conversion costs.
An average cost per equivalent unit is calculated for all units of output and
closing inventory. This includes the units that were partly-completed at the
beginning of the period (and which were therefore valued as closing WIP at the
end of the previous period).
The calculation of equivalent units is based on the number of units finished in the
period (it does not matter when they were started) and the number of units in
closing WIP.

6.2 The three-stage calculation

The costs are worked out in a similar way to the previous example (where there
was no opening WIP).
Statement of equivalent units. Prepare a statement of equivalent units for
finished output and for closing WIP.
Statement of cost per equivalent unit. Calculate the cost per equivalent unit
for direct materials and the cost per equivalent unit for conversion costs.
However, remember to include the cost of the opening WIP. The materials
cost of the opening WIP should be included in the total direct materials cost,
and the conversion costs in the opening WIP should be added to the
conversion costs for the current period.
You will normally have to calculate a separate cost per equivalent units for
materials and for conversion costs. This is because the equivalent units of
closing inventory will be different for materials and conversion costs.
Statement of evaluation. Having calculated the equivalent units and a cost
per equivalent unit, prepare a statement of evaluation.
Example: Opening work in progress Weighted average method
The following information relates to a production process X.
Opening inventory

3,000 units

Material cost in opening WIP (100% complete)

Rs. 12,600

Conversion costs in opening WIP (30% complete)

Rs. 970

During the month

Input quantities

7,000 units

Completed output
Closing WIP (100% complete for direct materials and 60%
complete for conversion costs).

8,000 units

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Cost and management accounting

All the direct materials are added to production at the beginning of the
process.
Closing inventory of 2,000 units is therefore 100% complete for materials but
is only 60% complete for conversion.
The costs incurred in the period were:
Rs.
Direct materials
Converison costs:

28,000
17,430

Answer
Statement of equivalent units

Output
Finished output
Closing WIP:
Materials
Conversion

Percentage
complete
100%

Total units
8,000
2,000

Equivalent units
Direct
Conversion
materials
costs
8,000
8,000

100%
60%

2,000

10,000
Statement of cost per equivalent unit

10,000
Direct
materials

Total costs
Costs in opening WIP
Costs in the period

Conversion
costs

Rs. 12,600
Rs. 28,000
Rs. 40,600
10,000
Rs. 4.06

Equivalent units
Cost per equivalent unit
Statement of evaluation

1,200
9,200

Cost of finished goods (8,000 (Rs. 4.06 + Rs. 2))

Cost of closing WIP
Materials (2,000 units Rs. 4.06)
Conversion (1,200 units Rs. 2)

Rs. 970
Rs.17,430
Rs.18,400
9,200
Rs. 2
Rs.
48,480
8,120
2,400
10,520

These costs would be recorded in the process account as follows.

Process (WIP) account
units
Rs.
units
Opening WIP
3,000 13,570
Direct materials
7,000 28,000 Finished goods
8,000
Conversion costs
- 17,430 Closing WIP
2,000
10,000

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10,000

Rs.
48,480
10,520
59,000

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Chapter 7: Process costing

6.3 Weighted average cost method: summary

The weighted average cost method for process costing with opening WIP can be
summarised as follows.
All output and closing inventory is valued at the same cost per equivalent unit
Cost of opening inventory + Costs in the period = Total costs
Units of closing inventory + Units of output in the period = Total equivalent
units
Cost per equivalent unit = Total costs/Total equivalent units
Illustration: Summary of weighted average calculation of cost per unit
Direct
materials

Conversion
costs

Cost of opening inventory

Costs incurred in the period

Total costs

Xm

Xcc

Number of units output

Equivalent units of closing inventory

Total equivalent units

Ym

Ycc

(Xm/Ym)

(Xcc/Ycc)

Cost per equivalent unit

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Cost and management accounting

OPENING WORK IN PROGRESS: FIFO METHOD

Section overview

FIFO method in process costing

The three-stage calculation

FIFO method: summary

7.1 FIFO method in process costing

The first-in, first-out (FIFO) method of process costing is based on the
assumption that the opening units of work-in-process at the beginning of the
month will be the first units completed. The cost of these units is their value at the
beginning of the period plus the cost to complete them in the current period.
It is necessary to calculate the number of equivalent units of work done in the
period. This consists of:
The equivalent units of direct materials and conversion costs required to
complete the opening WIP. These are the first units completed in the period.
The equivalent units of finished output in the period that was started as well as
finished in the period. These have one equivalent unit of direct materials and
one equivalent unit of conversion costs. The total number of these units is:

the total finished output in the period

minus the quantity of opening WIP (which are completed first)

The equivalent units of closing WIP (calculated in the normal way).

7.2 The three-stage calculation

The three-stage calculation with the FIFO method is similar to the calculation
method previously described, with the exception that in the statement of
evaluation, the cost of finished output consists of:
The finished cost of opening WIP which is the sum of:

the costs in the opening WIP value at the start of the period; plus

the costs in the current period to complete these units; plus

the cost of finished output started as well as finished in the period.

Study the following example carefully.

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Example: Opening work in progress FIFO method

The following information relates to a production process X.
Opening inventory
Material cost in opening WIP (100% complete therefore
0% is needed in this period)
Conversion costs in opening WIP (30% complete
therefore 70% is needed in this period)

3,000 units
Rs. 12,600
Rs. 970
Rs. 13,570

During the month

Input quantities

7,000 units

Completed output
Closing WIP (100% complete for direct materials and 60%
complete for conversion costs).

8,000 units
2,000 units

All the direct materials are added to production at the beginning of the
process.
Closing inventory of 2,000 units is therefore 100% complete for materials
but is only 60% complete for conversion.
The costs incurred in the period were:
Direct materials
Converison costs:

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17,430

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Cost and management accounting

Answer
Statement of equivalent units
Total
units

Output
Started last period
Opening WIP
Materials
Conversion

Percentage
complete

Equivalent units
Direct
Conversion
materials
costs

3,000

Started and
finished in the
period
Finished in period
Closing WIP:
Materials
Conversion

0%
70%

nil

5,000
8,000

100%

5,000
5,000

2,000

100%
60%

2,000

10,000
Statement of cost per equivalent unit
Total costs in current period
Equivalent units
Cost per equivalent unit

2,100

5,000
7,100
1,200

7,000

8,300

Rs. 28,000
7,000

Rs.17,430
8,300

Rs. 4

Rs. 2.1

Statement of evaluation
Rs.
Cost of goods finished in the period (8,000 units)
Started in previous period but finished in this period
Opening WIP (3,000 units)
Conversion cost to finish opening WIP (2,100 Rs. 2.1)

13,570
4,410
17,980
30,500
48,480

Started and finished in this period (5,000 Rs. 4 + Rs. 2.1)

Cost of closing WIP
Materials (2,000 units Rs. 4)
Conversion (1,200 units Rs. 2.1)

8,000
2,520
10,520

These costs would be recorded in the process account as follows.

Process (WIP) account
Opening WIP
Direct materials
Conversion costs

units
3,000
7,000
10,000

Rs.
13,570
28,000 Finished goods
17,430 Closing WIP
59,000

units

Rs.

8,000
2,000

48,480
10,520

10,000

59,000

(Tutorial note: If you compare this example using FIFO with the previous
example using the weighted average cost method, you will see that the cost of
finished output and value of closing WIP is the same in each case. This is a
coincidence. Normally, the two methods provide different costs for finished output
and different closing WIP valuations.)

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7.3 FIFO method: summary

The first-in, first-out method for process costing with opening WIP can be
summarised as follows.
The cost of the opening units completed in the current period is calculated
separately from the cost of the units that are started and finished in the current
period.
A cost per equivalent unit is calculated for the current period, as follows:
Illustration: Summary of weighted average calculation of cost per unit

Costs incurred in the current period

Equivalent units of work in the current
period:
to complete opening WIP
to start and finish units
to make closing WIP
Total equivalent units of work in this
period
Cost per equivalent unit in the current
period

Direct
materials
TCm

Conversion
costs
TCc

X
X
X

Y
Y
Y

Xm

Ycc

TCm / Xm

TCc / Ycc

These costs are used to apportion the process costs in the current period
between:

the cost of completing the opening WIP

the cost of units started and finished in the current period

the value of closing inventory.

Having calculated costs for the current period, the valuation of output from the
process is calculated as follows:
Illustration: Summary of evaluation of outputs under the FIFO method
Rs.
Cost of Items started in the previous period and finished in
this period
Opening WIP
Cost of finishing the opening WIP
To complete material
To complete other costs
Cost of items started and finished in this period
Cost of items finished in the period
Cost of items started in this period
Material
Other costs
Total process costs

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X
X
X
X
X
X
X
X
X
X

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Cost and management accounting

WORK IN PROGRESS AND LOSSES

Section overview

Introduction

Opening WIP and losses (Weighted average)

Opening WIP and losses (FIFO)

8.1 Introduction
Questions might combine WIP and losses.
Earlier in the chapter, we explained that normal loss is measured at zero or its
scrap value if it has one. This recognised that the scrap recovery reduces the
overall cost of the process.
When a question requires the calculation of cost per unit by components of cost
the question arises as to what cost the expected scrap recovery should be set off
against. After all the value of the scrapped unit would lay partly in its material cost
but also partly in its conversion costs. The usual approach is to employ a
convention that ignores the complication, and offset the expected scrap recovery
against the material cost only.
We saw that abnormal loss is measured in the same way as good production.
The number of abnormal loss units are included in the expected good output
used in the cost per unit calculation.
The same principles are followed when a question requires the calculation of cost
per unit by component through the calculation of equivalent units. The number of
equivalent units taken to build the abnormal loss must be included in the total
number of equivalent units.
Example: Closing work in progress and losses
The following information relates to a production process X.
Input quantities
Normal loss (all units having a scrap recovery of Rs. 1)

4,000 units
10% of input

Completed output

3,000 units

Closing WIP

500 units

All the direct materials are added to production at the beginning of the
process.
Inspection of the units occurs when they are 50% complete. (Note that this
must relate to conversion as they are 100% complete for material).
Closing inventory of 500 units is therefore 100% complete for materials but
is 60% complete for conversion.
The costs incurred in the period were:
Direct materials
Converison costs:

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24,000
7,400

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Chapter 7: Process costing

It is useful to construct an extra working with these questions to show the

physical number of units.
Example: Closing work in progress and losses Preliminary working)
Units
0
4,000
4,000
(400)
3,600
(3,000)
(500)
100

Opening WIP
Input
Total possible units
Normal loss (10% of input)
Expected good output
Actual good output
Closing WIP
Abnormal loss

Example: Closing work in progress and losses

Statement of equivalent units

Output
Finished output
Closing WIP:
Materials
Conversion
Abnormal loss
Materials
Conversion

Percentage
complete
100%

Total units
3,000
500
100
3,600

Statement of cost per equivalent unit

Total costs
Expected scrap recovery of normal loss
(10% 4,000 units Rs. 1)
Equivalent units
Cost per equivalent unit

Equivalent units
Direct
Conversion
materials
costs
3,000
3,000

100%
60%

500

100%
50%

100

300

3,600

50
3,350

Rs.24,000

Rs.7,400

Rs. (400)
Rs.23,600
3,600
Rs.6.56

Rs.7,400
3,350
Rs.2.21

Statement of evaluation
Note that the costs per unit above have been rounded to two decimal places.
However, the calculations below are based on unrounded figures (23,600/3,600 and
7,400/3,350)
Rs.
26,294
Cost of finished goods (3,000 (Rs. 6.56 + Rs. 2.21))
Cost of closing WIP
3,278
Materials (500 units Rs. 6.56)
662
Conversion (300 units Rs. 2.21)
3,940
Cost of closing abnormal loss
656
Materials (100 units Rs. 6.56)
110
Conversion (50 units Rs. 2.21)
766
These costs would be recorded in the process account as follows.

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Direct materials
Conversion costs

Process (WIP) account

Rs.
24,000 Finished goods
Normal loss
7,400 Abnormal loss
Closing WIP
4,000 31,400
units
4,000

units
3,000
400
100
500
3,600

Rs.
26,294
400
766
3,940
31,400

8.2 Opening WIP and losses (Weighted average)

Example: Opening work in progress and losses Weighted average method
The following information relates to a production process X.
Opening inventory

3,000 units

Material cost in opening WIP (100% complete)

Rs. 12,600

Conversion costs in opening WIP (30% complete)

Rs. 970

During the month

Input quantities
Normal loss (all units having a scrap recovery of Rs. 1)

7,000 units
5% of input

Completed output
7,500 units
Closing WIP (100% complete for direct materials and 60%
complete for conversion costs).
2,000 units
All the direct materials are added to production at the beginning of the
process.
Inspection of the units occurs when they are 50% complete. (Note that this
must relate to conversion as they are 100% complete for material).
Closing inventory of 2,000 units is therefore 100% complete for materials but
is 60% complete for conversion.
Rs.
The costs incurred in the period were:
Direct materials
Converison costs:

28,000
17,430

Example: Opening work in progress and losses Weighted average method

Preliminary working)
Units
3,000
7,000

Opening WIP
Input
Total possible units

10,000

Normal loss (5% of input)

(350)

Expected good output

Actual good output

9,650
(7,500)

Closing WIP

(2,000)

Abnormal loss

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Example: Opening work in progress and losses Weighted average method

Statement of equivalent units

Output
Finished output
Closing WIP:
Materials
Conversion
Abnormal loss
Materials
Conversion

Percentage
complete
100%

Total units
7,500
2,000
150

Equivalent units
Direct
Conversion
materials
costs
7,500
7,500

100%
60%

2,000

100%
50%

150

1,200
75

9,650

9,650

8,775

Statement of cost per equivalent unit

Total costs
Costs in opening WIP
Costs in the period
Expected scrap recovery of normal loss
(5% 7,000 units Rs. 1)
Equivalent units

Direct
materials
Rs.
12,600
28,000

Conversion
costs
Rs.
970
17,430

(350)
40,250
9,650

Cost per equivalent unit

18,400
8,775

4.17

2.10

Statement of evaluation
Note that in costs per unit above have been rounded to two decimal
places. However, the calculations below are based on unrounded figures
(40,250/9,650 and 18,400/8,775)
Rs.
47,009
Cost of finished goods (7,500 (Rs. 4.17 + Rs. 2.1))
Cost of closing WIP
Materials (2,000 units Rs. 4.17)
Conversion (1,200 units Rs. 2.1

8,342
2,516
10,858

Abnormal loss
Materials (150 units Rs. 4.17)
Conversion (75 units Rs. 2.1

626
157
783

These costs would be recorded in the process account as follows.

Process (WIP) account
Opening WIP
Direct materials
Conversion costs

units
3,000
7,000
10,000

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13,570 Finished goods
28,000 Normal loss
17,430 Abnormal loss
Closing WIP
59,000

187

units
7,500
350
150
2,000

Rs.
47,009
350
783
10,858

10,000

59,000

The Institute of Chartered Accountants of Pakistan

Cost and management accounting

8.3 Opening WIP and losses (FIFO)

Example: Opening work in progress and losses FIFO method
The following information relates to a production process X.
Opening inventory

3,000 units

Material cost in opening WIP (100% complete therefore

0% is needed in this period)
Conversion costs in opening WIP (30% complete
therefore 70% is needed in this period)

Rs. 12,600
Rs. 970
Rs. 13,570

During the month

Input quantities
Normal loss (all units having a scrap recovery of Rs. 1)

7,000 units
5% of input

Completed output
Closing WIP (100% complete for direct materials and 60%
complete for conversion costs).

7,500 units
2,000 units

All the direct materials are added to production at the beginning of the
process.
Inspection of the units occurs when they are 50% complete. (Note that this
must relate to conversion as they are 100% complete for material).
Closing inventory of 2,000 units is therefore 100% complete for materials
but is 60% complete for conversion.
Rs.
28,000
17,430

The costs incurred in the period were:

Direct materials
Converison costs:

Example: Opening work in progress and losses FIFO method Preliminary

working)
Units
3,000
7,000

Opening WIP
Input
Total possible units

10,000

Normal loss (5% of input)

(350)

Expected good output

9,650

Actual good output:

Started in the previous period but finished in this period

(3,000)

Started and finished in this period

(4,500)

Output in this period

(7,500)

Closing WIP

(2,000)

Abnormal loss

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Example: Opening work in progress and losses FIFO method

Statement of equivalent units

Output
Started last
period
Opening WIP
Materials
Conversion
Started and
finished in the
period
Finished in
period
Closing WIP:
Materials
Conversion
Abnormal loss
Materials
Conversion

Percentage
complete

Total units

Equivalent units
Direct
Conversion
materials
costs

3,000

4,500

0%
70%

nil

100%

4,500

4,500

4,500

6,600

7,500
2,000
150
9,650

2,100

100%
60%

2,000

100%
50%

150

1,200
75
6,650

7,875

Statement of cost per equivalent unit

Direct
materials
28,000

Conversion
costs
17,430

Equivalent units

(350)
27,650
6,650

17,430
7,875

Cost per equivalent unit

Rs. 4.16

Rs. 2.21

Total costs in current period

Expected scrap recovery of normal loss
(5% 3,500 units Rs. 1)

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Example: Opening work in progress and losses FIFO method

Statement of evaluation
Note that the costs per unit above have been rounded to two decimal
places. However, the calculations below are based on unrounded figures
(27,650/6,650 and 17,430/7,875)
Rs.
Cost of goods finished in the period (8,000 units)
Started in previous period but finished in this period
Opening WIP (3,000 units)
13,570
4,648
Conversion cost to finish opening WIP (2,100 Rs. 2.21)
18,218
Started and finished in this period (4,500 (Rs. 4.16 + Rs. 2.21)) 28,671
46,889
Cost of closing WIP
Materials (2,000 units Rs. 4.16)
Conversion (1,200 units Rs. 2.21)

8,316
2,655
10,971

Cost of abnormal loss

Materials (150 units Rs. 4.16)
Conversion (75 units Rs. 2.21)

624
166
790

These costs would be recorded in the process account as follows.

Process (WIP) account
Opening WIP
Direct materials
Conversion costs

units
3,000
7,000
-

10,000

Emile Woolf International

Rs.
13,570
28,000 Finished goods
17,430 Normal loss
Abnormal loss
Closing WIP
59,000

190

units

Rs.

7,500
350
150
2,000

46,889
350
790
10,971

10,000

59,000

The Institute of Chartered Accountants of Pakistan

Chapter 7: Process costing

LOSSES AND GAINS AT DIFFERENT STAGES IN THE PROCESS

Section overview

Assumptions about when loss occurs

Equivalent units and abnormal loss part-way through the process

Equivalent units and abnormal gain part-way through the process

9.1 Assumptions about when loss occurs

In the earlier explanation of accounting for abnormal loss and abnormal gain, it
was assumed that losses occur at the end of the production process. This
assumption is not relevant for normal loss, but it is relevant for abnormal loss and
abnormal gain, because these are given a value.
If it is assumed that losses occur at the end of a process, units of abnormal loss
or gain are given a cost or value as if they are fully completed units and so one
equivalent unit each.
If losses occur at a different stage in the process, this assumption should not be
applied. Instead, the concept of equivalent units should be used to decide the
cost of the abnormal loss or the value of the abnormal gain. Equivalent units can
be used provided that an estimate is made of the degree of completion of units at
the time that loss occurs in the process. Differing degrees of completion might be
used for direct materials and conversion costs.

9.2 Equivalent units and abnormal loss part-way through the process
When loss occurs part-way through a process, the cost of any abnormal loss
should be calculated by:
establishing the equivalent units of direct materials and conversion costs for
the loss
calculating a cost per equivalent units
using the calculations of equivalent units and cost per equivalent unit to obtain
a cost for finished output and abnormal loss in the period.

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Cost and management accounting

Example: Abnormal loss and loss part-way through a process

The following information relates to a production process X.
Input quantities
Normal loss
Therefore expected output
Actual output
Therefore abnormal loss

10,000 units
10%
9,000 units
8,500 units
500 units

Direct materials are added in full at the beginning of the process, and loss
occurs 60% of the way through the process.
Rs.
27,000
13,200

The costs incurred in the period were:

Direct materials
Converison costs:

Answer
Statement of equivalent units
Percentage
complete
100%

Output
Total units
Finished output
8,500
Abnormal loss
Materials
500
Conversion
Expected output
9,000
Statement of cost per equivalent unit

Equivalent units
Direct
Conversion
materials
costs
8,500
8,500

100%
60%

Equivalent units
Cost per equivalent unit
Statement of evaluation

500
9,000

300
8,800

Direct
materials
Rs. 27,000
9,000
Rs. 3

Conversion
costs
Rs.13,200
8,800
Rs. 1.5
Rs.
38,250

Cost of finished goods (8,500 (Rs. 3 + Rs. 1.5))

Abnormal loss
Materials (500 units Rs. 3)
Conversion (300 units Rs. 1.5)

1,500
450
1,950

These costs would be recorded in the process account as follows.

Direct materials
Conversion costs

Emile Woolf International

units
10,000
10,000

Process (WIP) account

Rs.
27,000 Finished goods
Abnormal loss
13,200 Normal loss
40,200

192

units
8,500
500
1,000
10,000

Rs.
38,250
1,950
nil
40,200

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Chapter 7: Process costing

9.3 Equivalent units and abnormal gain part-way through the process
The same principles apply to the valuation of abnormal gain where the loss/gain
occurs part-way through the process. However, there is one important difference.
Equivalent units of abnormal gain are given a negative value and are subtracted
from the total equivalent units of output in the period.
Perhaps the easiest way to think of the reason for this is that abnormal gain is on
the opposite side of the process account (the debit side) from actual finished
output (credit side) and abnormal gain equivalent units are subtracted because
they offset the cost of the finished output.
Example: Abnormal gain part-way through a process
The following information relates to a production process X.
Input quantities

6,000 units

Normal loss

10%

Therefore expected output

5,400 units

Actual output

5,600 units

Therefore abnormal gain

200 units

Direct materials are added in full at the beginning of the process, and loss
occurs 40% of the way through the process.
The costs incurred in the period were:

Rs.

Direct materials

27,000

Converison costs:

11,040

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Cost and management accounting

Answer
Statement of equivalent units
Equivalent units
Output

Percentage
complete

Total units

Finished output

5,600

Abnormal gain

Direct
materials

100%

5,600

100%

(200)

Conversion
costs
5,600

(200)

Materials
Conversion

40%

Expected output

(80)

5,400

5,400

5,520

Statement of cost per equivalent unit

Direct
materials

Conversion
costs

Rs. 27,000

Rs.11,040

Equivalent units

5,400

5,520

Cost per equivalent unit

Rs. 5

Rs. 2

Statement of evaluation
Rs.
39,200

Cost of finished goods (5,600 (Rs. 5 + Rs. 2))

Cost of abnormal gain

1,000

Materials (200 units Rs. 5)

160

Conversion (80 units Rs. 2)

1,160
These costs would be recorded in the process account as follows.
Process (WIP) account
units
Direct materials
Conversion costs
Abnormal gain

6,000
200
6,200

Emile Woolf International

Rs.
27,000 Finished goods

units

Rs.

5,600

39,200

600

nil

6,200

39,200

11,040
1,160 Normal loss
39,200

194

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Chapter 7: Process costing

10 PROCESS COSTING: JOINT PRODUCTS AND BY-PRODUCTS

Section overview

Definition of joint products

Apportioning common processing costs between joint products

By-products

10.1 Definition of joint products

In some process manufacturing systems, two or more different products are
produced.
Definition: Joint products
Joint products are two or more products generated simultaneously, by a single
manufacturing process using common input, and being substantially equal in
value.
Until the joint products are produced in the manufacturing process, they cannot
be distinguished from each other. The same input materials and processing
operation produces all the joint products together.
Each joint product has a substantial sale value relative to each other joint
product.
Example: Joint products
The refining of crude oil produces a series of products fuel oil, gasoline, and
kerosene.
Domestic animals are grown for food and their hides are turned into leather.

10.2 Apportioning common processing costs between joint products

The costs of the common process that produces the joint products are common
costs. In order to calculate a cost for each joint product, these common costs
must be shared (apportioned) between the joint products. The common costs of
the process must be apportioned between the joint products on a fair basis, in
much the same way that overhead costs are apportioned between cost centres.
One of the following three methods of apportionment is normally used:
Units basis: Common costs are apportioned on the basis of the total number
of units produced. The cost per unit is the same for all the joint products. (This
is also described as the physical quantities basis).
Sales value at the split-off point basis: Common costs are apportioned on
the basis of the sales value of the joint products produced, at the point where
they are separated in the process (the split off point).
Net realisable value (sales value less further processing costs basis:
Common costs are apportioned on the basis of their eventual sales value after
they have gone through further processing to get them ready for sale.

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Cost and management accounting

Example: Joint products

Two joint products JP1 and JP2, are produced from a common process.
During March, 8,000 units of materials were input to the process. Total costs of
processing (direct materials and conversion costs) were Rs.135,880.
Output was 5,000 units of JP1 and 3,000 units of JP2.
JP1 has a sales value of Rs. 40 per unit when it is output from the process and
can be sold for Rs.120 per unit after further processing costs of Rs.25 per unit.
JP2 has a sales value of Rs. 55 per unit when it is output from the process and
can be sold for Rs.80 per unit after further processing costs of Rs.15 per unit.
Joint costs can be apportioned in one of the following ways.
Answer: Units basis
Output
JP1
JP2

Units
5,000
3,000
8,000

Costs:
JP1: 5,000 units/8,000 units Rs.135,880.
JP2: 3,000 units/8,000 units Rs.135,880.

Rs.
84,925
50,955
135,880
These costs would be recorded in the process account as follows.

Processing cost

Process (WIP) account

units
Rs.
8,000 135,880 JP1
JP2
8,000 135,880

units
Rs.
5,000 84,925
3,000 50,955
8,000 135,880

Answer: Sales value at point of split off

Sales value
JP1 (5,000 units Rs. 40)
JP2 (3,000 units Rs. 55)

Rs.
200,000
165,000
365,000

Costs:
JP1: Rs. 200,000/ Rs. 365,000 Rs.135,880.
JP2: Rs. 165,000/ Rs. 365,000 Rs.135,880.

Rs.
74,455
61,425
135,880
These costs would be recorded in the process account as follows.

Processing cost

Emile Woolf International

Process (WIP) account

units
Rs.
8,000 135,880 JP1
JP2
8,000 135,880

196

units
Rs.
5,000 74,455
3,000 61,425
8,000 135,880

The Institute of Chartered Accountants of Pakistan

Chapter 7: Process costing

Answer: Net realisable value at the point of split off

NRV value
JP1 (5,000 units Rs. 120 Rs. 25)
JP2 (3,000 units Rs. 80 Rs. 15)

Rs.
475,000
195,000
670,000

Costs:

Rs.

JP1: Rs. 475,000/Rs. 670,000 Rs.135,880.

JP2: Rs. 195,000/Rs. 670,000 Rs.135,880.

96,333
39,547
135,880

These costs would be recorded in the process account as follows.

Process account
Processing cost

units
Rs.
8,000 135,880 JP1
JP2

units
5,000
3,000

Rs.
96,333
39,547

8,000 135,880

8,000 135,880

10.3 By-products
When two or more different products are produced, any product that does not
have a substantial sales value is called a by-product.
Definition: By products
By products are outputs from a joint process that are relatively minor in quantity
and/or value.
A by-product has a small value relative to the joint products but it may have some
value.
The proceeds of sale of the by-product can be treated in a number of ways and
the method chosen has an implication for how the by-product is measured in the
joint process account.
Possible methods include:
Treatment of proceeds of sale
As revenue (adding it to the revenue
from sales of other products).
As other income
As a deduction from joint process
costs (this is the most commonly used
method).

Measurement of by-product in joint

process account
No cost is allocated to the by product.
No cost is allocated to the by product.
By-product is measured at scrap
value (the accounting treatment is
very similar to that used for normal
loss).

Since a by-product does not have any substantial value, there is no sense in
charging it with a share of the common processing costs.
Instead, the sales value of the by-product is usually deducted from the common
processing costs (just as for normal loss). If there are joint products, the common
processing costs are apportioned after deducting the sales value of the byproduct from the total costs of the process.

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Cost and management accounting

Example: By-product and joint products

Two joint products JP1 and JP2, are produced from a common process.
During March, 9,000 units of materials were input to the process. Total costs of
processing (direct materials and conversion costs) were Rs.135,880.
Output was 5,000 units of JP1 and 3,000 units of JP2 and 1,000 units of byproduct BP3.
JP1 has a sales value of Rs. 40 per unit when it is output from the process and
can be sold for Rs.120 per unit after further processing costs of Rs.25 per unit.
JP2 has a sales value of Rs. 55 per unit when it is output from the process and
can be sold for Rs.80 per unit after further processing costs of Rs.15 per unit.
BP3 has a sales value of Rs.1.58 per unit
The companys policy is to treat the proceeds of sale of a by-product as a
reduction of joint process costs
Apportion the process costs between the joint products on the basis of net
realisable sales value at the split off point.
Answer: Net realisable value at the point of split off
Common process costs
Total process costs
Deduct: Sales value of by-product (1,000 Rs.1.58)

Rs.
135,880
(1,580)
134,300

Answer: Net realisable value at the point of split off

NRV value
JP1 (5,000 units Rs. 120 Rs. 25)
JP2 (3,000 units Rs. 80 Rs. 15)

Rs.
475,000
195,000
670,000

Costs:

Rs.

JP1: Rs. 475,000/Rs. 670,000 Rs. 134,300.

JP2: Rs. 195,000/Rs. 670,000 Rs. 134,300.

95,213
39,087
134,300

These costs would be recorded in the process account as follows.

Process account
Processing cost

Emile Woolf International

units
Rs.
9,000 135,880 JP1
JP2
By product

units
5,000
3,000
1,000

9,000 135,880

9,000 135,880

198

Rs.
95,213
39,087
1,580

The Institute of Chartered Accountants of Pakistan

Chapter 7: Process costing

Example: By-product and joint products

Two joint products XX and YY, are produced from a common process.
During July, 11,000 units of materials were input to the process. Total costs of
processing (direct materials and conversion costs) were Rs.100,000.
Output was 6,000 units of XX and 4,000 units of YY and 1,000 units of by-product
Q.
XX has a sales value of Rs. 24 per unit when it is output from the process.
YY has a sales value of Rs. 12 per unit when it is output from the process.
Q has a sales value of Rs.1 per unit
The companys policy is to apportion joint costs based on sales value at the point
of split off.
80% of the output of both XX and YY was sold by the month end.
The proceeds of sale of the by-product could be treated in one of the following
ways.
Answer: Sales value at point of split off deducting proceeds of sale of the byproduct from the joint process cost (as before)
Sales value
XX (6,000 units Rs. 24)
YY (4,000 units Rs. 12)
1

Rs.
144,000
48,000
192,000

By-product deducted from costs

Costs:

Rs.

XX:
(Rs.100,000 Rs. 1,000)
YY: Rs. 48,000/ Rs. 192,000 (Rs.100,000 Rs. 1,000).
Rs. 144,000/ Rs. 192,000

74,250
24,750
99,000

These costs would be recorded in the process account as follows.

Process (WIP) account
Processing cost

units
Rs.
11,000 100,000 XX
YY
Q

units
6,000
4,000
1,000

11,000 100,000

Rs.
74,250
24,750
1,000

11,000 100,000

The income statement would show the following:

Rs.
Revenue:
Sales of XX (80% 6,000 units Rs. 24)
Sales of YY (80% 4,000 units Rs. 12)
Cost of sales:
Production costs
Less: Closing inventory (20% 99,000)
Profit

Emile Woolf International

199

115,200
38,400
153,600
99,000
(19,800)
(79,200)
74,400

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Cost and management accounting

Answer: Sales value at point of split off treating proceeds of sale of the by-product
as other income
Sales value
XX (6,000 units Rs. 24)
YY (4,000 units Rs. 12)
1

Rs.
144,000
48,000
192,000

By-product deducted from costs

Costs:

Rs.

XX: Rs. 144,000/ Rs. 192,000 Rs.100,000

YY: Rs. 48,000/ Rs. 192,000 Rs.100,000

75,000
25,000
100,000

These costs would be recorded in the process account as follows.

Process (WIP) account
Processing cost

units
Rs.
11,000 100,000 XX
YY
Q

units
6,000
4,000
1,000

11,000 100,000

Rs.
75,000
25,000
nil

11,000 100,000

The income statement would show the following:

Rs.
Revenue:
Sales of XX (80% 6,000 units Rs. 24)
Sales of YY (80% 4,000 units Rs. 12)
Cost of sales:
Production costs
Less: Closing inventory (20% 100,000)
Gross profit
Other income
Profit

115,200
38,400
153,600
100,000
(20,000)
(80,000)
73,600
1,000
74,600

The profit in the above example is higher than the profit in the previous example
by Rs. 200.
This is because the whole sales proceeds from the sale of the by-product has
been recognised as other income.
When the sales proceeds from the sale of the by-product are deducted from the
joint process cost part of that deduction is carried forward to the next period in
the valuation of closing inventory. The deduction in joint process costs was Rs.
1,000 and 80% of the inventory to which it relates has been sold leaving 20%
(Rs. 200) to be carried forward to the next period.

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