FINANCIAL MANAGEMENT (AFM 221E)

Chapter 5

PROCESS COSTING

READINGS Chapters 5 (Management and Cost Accounting, 10th Edition –

Drury

CONTENTS

Lecture slides
Notes - Video
Tutorial

Financial Management 2B 1
Chapter 5 – BASIC PROCESS COSTING PRINCIPLES

OUTCOMES:

 The ability, in relation to process costing, to calculate:

- The number of equivalent units produced during a particular period, and
- The cost per unit during a particular period;

 The ability to draw up a production cost statement for a particular

period, reflecting the cost of finished goods and the cost of work-in-progress at
the end of the period;

 An understanding of the impact of both normal and abnormal

losses, or abnormal gains, in a process during a particular period;

 The ability to account for abnormal losses or gains in determining

the equivalent number of units produced during a period, the unit cost of the units
produced and to draw up a production cost statement reflecting

- the cost of finished goods;

- the cost of work-in-progress at the end of the period; and
- the cost (or reduction in cost) relating to abnormal losses (or gains);

 an understanding of the impact of the point in the process at which the units in
process are inspected and losses in process identified on

- the equivalent production;

- the unit cost; and
- the production cost statement reflecting the cost of finished goods, closing
work-in-progress and abnormal losses or gains;

 an understanding of the difference between the weighted average method of

calculating the cost of production and of work-in-progress and the first-in-first-out
(FIFO) method, and when it is appropriate to use a particular method;

 an understanding of the effect of the sale of discarded units on the unit cost and
the production cost.

Financial Management 2B 2
LECTURE EXAMPLE 1

[No losses – No WIP]

Details relating to ABC Ltd’s production during November:

UNITS: Started and completed 20 000

COST: Direct materials R40 000

Direct labour R190 000
Manufacturing overhead (cost driver = DLH) R70 000

UNITS SOLD: 18 000

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 3
SOLUTION – LECTURE EXAMPLE 1

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

20 000 Completed 20 000 20 000 20 000

UNIT COST
STATEMENT:

Direct materials R40 000 R40 000

Conversion:
Labour R190 000 R190 000
Overheads R 70 000 R 70 000
R300 000 R40 000 R260 000

Per unit: R15.00 R2.00 R13.00

PRODUCTION COST STATEMENT – NOVEMBER

Finished goods R
20 000 units x R15.00 each 300 000 *

Note: * The total of the production cost statement must always be equal to the
total input cost of materials, labour and overheads.

Process account
Direct material 40,000 Finished goods 300,000
Direct labour 190,000
manufacturing overheads 70,000

300,000 300,000

Financial Management 2B 4
LECTURE EXAMPLE 2

[No losses – No Opening WIP]

Details relating to ABC Ltd’s production during December:

UNITS: Started 14 000

Completed 13 000
50% Complete 1 000

COST: Direct materials R14 000

Direct labour R55 980
Manufacturing overhead (cost driver = DLH) R27 990

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 5
SOLUTION – LECTURE EXAMPLE 2

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

14 000 Units started

Completed 13 000 13 000 13 000
WIP (50%
Complete) 1 000 1 000 500
14 000 14 000 14 000 13 500

UNIT COST
STATEMENT:

Direct materials R14 000 R14 000

Conversion:
Labour R 55 980 R 55 980
Overheads R 27 990 R 27 990
R 97 970 * R14 000 R 83 970

Per unit: R7.22 R1.00 R6.22

Notes:

1. The total input column and the total output columns must balance.
2. The equivalent of only 13 500 full units have been converted.
3. Materials is added at the beginning (otherwise what would the labour be applied
to?) and therefore all units are complete in respect of material.
4. The total cost column cannot be divided by the total output column to arrive at
unit cost.

PRODUCTION COST STATEMENT – NOVEMBER

Finished goods R R
13 000 units x R7.22 each 93 860

Work-in-progress
1 000 units x material cost of R1.00 1 000
500 units x conversion cost of R6.22 3 110 4 110

97 970

Financial Management 2B 6
Notes:
1. The total of the production cost statement must always be equal to the total input
cost of materials, labour and overheads.
2. The work-in-progress cost must be shown separately in the production cost
statement (do not simply put all calculation into the final column) because
finished goods and work in progress are reflected in different ledger accounts.
[Simply extending all calculations into the final column tests your command of
arithmetic and will earn no marks]

Process account
Direct material 14,000 Finished goods 93,860
Direct labour 55,980 Closing WIP c/fwd 4,110
manufacturing overheads 27,990

97,970 97,970

Financial Management 2B 7
THE PROBLEM OF LOSSES (GAINS) IN PROCESS

Many production processes involve normal anticipated losses. These losses could arise
due to evaporation of liquids (loss in volume), due to shrinkage from the drying out of
materials (loss in mass or volume), due to discarding waste materials or cut-off’s or due
to faulty finished goods being rejected. These losses are referred to as normal losses
because they are an inevitable result of the process and are anticipated and provided for
in the production planning and budgeting.

Where the actual losses during the production process exceed (or are less than) the
planned losses, these are referred to as abnormal losses (or gains). Unlike normal losses,
abnormal losses or gains must be reflected separately in the production statement and
written off as abnormal period costs (or revenues) in the costing income statement. How
they are dealt with in the annual financial statements will depend on the reason for their
occurrence (for example, a machine may have broken down, or a batch of raw material
may have been faulty or of inferior quality), as well as the monetary amount involved. If
of an immaterial amount, the abnormal losses or gains could be transferred to the
overhead account and re-allocated as part of the over/under recovery of overheads. If the
amount is material, separate disclosure may be required.

The way in which losses are identified is by inspection of the production output. Units
would be counted, measured or weighed and inspected for faults. Normally, inspection
takes place at the end of the process. However, inspections could occur at any point in
the process.

Financial Management 2B 8
LECTURE EXAMPLE 3

[No WIP, Normal losses only. Inspection at end of process].

Details relating to DEF Ltd’s production during January:

UNITS: Units introduced on 1 January 3 000

Anticipated normal losses – 10%

Inspection point – at the end of the process

No opening or closing work-in-progress
No abnormal losses or gains

COST: Direct materials R 5 400

Conversion R48 600

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 9
SOLUTION – LECTURE EXAMPLE 3

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

3 000 Started
Normal loss
10% x 3 000 300 300 300
Completed 2 700* 2 700 2 700
3 000 3 000 3 000

UNIT COST
STATEMENT:

Current cost 54 000 5 400 48 600

Per unit: R18.00 R1.80 R16.20

PRODUCTION COST STATEMENT – NOVEMBER

Finished goods R
2 700 units x R18.00 each R48 600
Normal loss (300 units x R18.00) R 5 400
R54 000

Process account
Direct material 5,400 Finished goods 54,000
Conversion 48,600

54,000 54,000

Notes:

1. The normal loss is calculated on the total units worked on during the month as
inspection takes place only at the end of the process:

Financial Management 2B 10
LECTURE EXAMPLE 4

[Closing WIP, Normal losses only. Inspection at the 50% completion process].

Details relating to MNO Ltd’s production during December:

UNITS: Units introduced on 1 December 10 000

Anticipated normal losses – 5%

Inspection point – at the 50% stage of the process

Completed units 7 600
Closing work-in-progress 2 000 (40% complete)
No opening work-in-progress
No abnormal losses or gains

COST: Direct materials R 28 800

Conversion R 37 800

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 11
SOLUTION – LECTURE EXAMPLE 4

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

10 000 Started
Normal loss* 400 400 200
WIP (40%
Complete) 2 000 2 000 800
Completed 7 600 7 600 7 600
10 000 10 000 8 600

UNIT COST
STATEMENT:

Current cost 66 600 28 800 37 800

Per unit: R7.28 R2.88 R4.40

Notes:

1. Because the work-in-progress units have not yet reached the inspection point
(these units have only reached the 40% completion point and inspections are
carried out at the 50% point), normal losses are calculated on the units started,
less the units that have not yet reached this point of inspection:
(10 000 – 2 000) x 5%
2. Work-in-progress is only 40% complete in respect of conversion.

PRODUCTION COST STATEMENT – DECEMBER

Finished goods R R
7 600 units x R7.28 each 55 328
Normal loss
Material (400 units x R2.88) 1 152
Conversion (200 units x R4.40) 880 57 360

Closing WIP
Material : 2 000 x R2.88 5 760
Conversion: 800 x R4.40 3 520 9 280
66 640

Financial Management 2B 12
 Process account
Direct material 28,800 Finished goods 57,360
Conversion 37,800 Closing WIP c/fwd 9,280
Rounding 40

66,640 66,640

Financial Management 2B 13
LECTURE EXAMPLE 5

[CLOSING WORK-IN-PROGRESS, NORMAL LOSSES AT THE END OF THE

PROCESS, ABNORMAL LOSSES]

Details relating to PQR Ltd’s production during January:

New units introduced: 10 000 units

Normal losses (at end of process) 10%

Closing work-in-progress:
(40% complete) 3 000 units

Completed units: 6 000 units

Current costs:
Material R39 060
Conversion R24 000

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 14
SOLUTION – LECTURE EXAMPLE 5

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

10 000 Started
Normal loss* 700 700 700
WIP (40%
Complete) 3 000 3 000 1 200
Abnormal loss
(balancing figure) 300 300 300
Completed 6 000 6 000 6 000
10 000 10 000 8 200

UNIT COST
STATEMENT:
R R R
Current cost 63 060 39 060 24 000

Per unit: R6.84 R3.91 R2.93

Notes:

1. Because the work-in-progress units have not yet reached the inspection point
(these units have only reached the 40% completion point and inspections are
carried out at the end), normal losses are calculated on the units started, less the
units that have not yet reached this point of inspection: (10 000 – 3 000) x 10%
2. Work-in-progress is only 40% complete in respect of conversion.

PRODUCTION COST STATEMENT – JANUARY

Finished goods R R
6 000 units x R6.84 each 41 040
Normal loss (700 units x R6.84) 4 788 45 828

Closing WIP
Material : 3 000 x R3.91 11 730
Conversion: 1 200 x R2.93 3 516 15 246
Abnormal loss
300 x R6.84 2 052
63 126

Financial Management 2B 15
 Process account
Direct material 39,060 Finished goods 45,828
Conversion 24,000 Abnormal loss 2052
Closing WIP
Rounding 66 c/fwd 15,246

63,126 63,126

Financial Management 2B 16
OTHER ISSUES IN PROCESS COSTING

1. NORMAL AND ABNORMAL LOSS UNITS SOLD AS SCRAP

In many processes, loss units which are damaged or of unacceptable quality can be
sold as second, if they are still functional, or as scrap. The income from the sale of
these rejected units is dealt with as follows:

 Normal loss units

Units which are within the planned normal loss limits and which are sold as
seconds or as scrap, give rise to anticipated “normal” revenue. This income
must be deducted from the cost of the normal loss for the period. It will
usually be deducted from the cost of finished goods, particularly if the
inspection point is at the end of the process, in which case the closing work-
in-progress units will not yet have been inspected.

 Abnormal loss units

The revenue from the sale of abnormal loss units will be deducted from the
cost of the abnormal losses as reflected in the production statement.

An interesting problem arises when there are abnormal gains in process. This,
in effect, means that the normal loss planned for is lower than anticipated.
The following brief example will illustrate the problem:

Units started 1 000

Planned normal losses 10%

Planned scrap sales from normal and abnormal

Losses amount to R3 per unit

Units completed 920

No opening or closing work-in-progress

Inspection point at the end of the process

Current cost:
Material: R2 700
Conversion: R4 050

Financial Management 2B 17
Equivalent units:

Input Total Material Conversion

1 000 Started
Completed 920 920 920
Normal loss 100 100 100
Abnormal gain (20) (20) (20)
1 000 1 000 1 000

Current cost:
R R R
Material 2 700 2 700
Conversion 4 050 4 050
6 750 2 700 4 050

Unit cost R6.75 R2.70 R4.05

Production Statement
R
Finished goods
920 x R6.75 6 210
Normal loss
100 x R6.75 675
Proceeds on disposal of loss (300) 6 585

Abnormal gain
20 x R6.75 (135)
6 450 .

Financial Management 2B 18
LECTURE EXAMPLE 6

[NO LOSSES, OPENING AND CLOSING WIP]

Details relating to XYZ Ltd’s production for January are as follows:

Opening Work-in-progress

2 800 units, 60% complete in relation to conversion –

 Direct material cost 2 464

 Direct labour cost 6 888
 Manufacturing overhead cost 3 024

New units started – 14 000

Current cost –

 Direct materials 14 000

 Direct labour 57 652
 Manufacturing overhead 30 040

Units completed – 14 680

Closing work-in-progress
30% complete

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 19
SOLUTION – LECTURE EXAMPLE 6

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

2 800 Opening WIP
14 000 Started
WIP (30%
Complete) 2 120 2 120 636
Completed 14 680 14 680 14 680
16 800 16 800 16 800 15 316

UNIT COST
STATEMENT:

Opening WIP 12 376 2 464 9 912

Current cost 101 692 14 000 87 692
114 068 16 464 97 604
Per unit: R7.35 R0.98 R6.37

Note: This method of calculating the unit cost is the weighted average method. The
opening inventory of partly completed units carried forward from the previous reporting
period, together with the cost associated with the inventory, are simply added to the
current units introduced and the current costs incurred to establish an average cost per
unit. This method is acceptable for the purposes of AC 108. The alternative method –
the first-in-first-out method is discussed later.

PRODUCTION COST
STATEMENT:

Finished goods
(14 680 x R7.35) 107 898

Work-in-progress
Material (2 120 X R0.98) 2 078
Conversion (636 x R6.37) 4 051 6 129

114 027

Note: The difference between the production cost statement total and the total input cost
relates to rounding of the final digit for unit conversion cost.

Financial Management 2B 20
 Process account
Opening WIP
b/fwd 12376 Finished goods 107,898
Direct material 14,000
Conversion 87,692 Closing WIP c/fwd 6,129
Rounding 41
114,068 114,068

Financial Management 2B 21
LECTURE EXAMPLE 7

[OPENING AND CLOSING WORK-IN-PROGRESS, NORMAL LOSSES AT THE

END OF THE PROCESS, ABNORMAL LOSSES]

Details relating to PQR Ltd’s production during January:

Opening work-in-progress on 1 January 2 000 units

(60% complete)
Material R8 000
Conversion R3 800

New units introduced: 8 000 units

Normal losses (at end of process) 10%

Closing work-in-progress:
(40% complete) 3 000 units

Completed units: 6 000 units

Current costs:
Material R31 060
Conversion R20 200

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 22
SOLUTION – LECTURE EXAMPLE 7

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

2 000 Opening WIP

8 000 Started
Normal loss 700 700 700
WIP (40%
Complete) 3 000 3 000 1 200
Abnormal loss
(balancing figure) 300 300 300
Completed 6 000 6 000 6 000
10 000 10 000 8 200

UNIT COST
STATEMENT:
R R R
Opening work-in-progress 11 800 8 000 3 800
Current cost 51 260 31 060 20 200
63 060 39 060 24 000

Per unit: R6.84 R3.91 R2.93

Notes: As the inspection point is at the end of the process, the previous month’s closing
work-in-process (this month’s opening work-in-process) would not have been inpected in
December. The losses will only be identified when the completed units are inspected at
the end of January. (2 000 + 8 000 –3 000) x 10%
As the inspection point is at the end of the process, the abnormal loss units would have
been fully converted before the inspection point.

PRODUCTION COST STATEMENT – JANUARY

Finished goods R R
6 000 units x R6.84 each 41 040
Normal loss (700 units x R6.84) 4 788 45 828
Closing WIP
Material : 3 000 x R3.91 11 730
Conversion: 1 200 x R2.93 3 516 15 246
Abnormal loss
300 x R6.84 2 052
63 126

Financial Management 2B 23
 Process account
Opening WIP b/fwd 11800 Finished goods 45,828
Direct material 31,060 Abnormal loss 2052
Closing WIP
Conversion 20,200 c/fwd 15,246
Rounding 66
63,126 63,126

Financial Management 2B 24
LECTURE EXAMPLE 8

Using the same information as in lecture example 7 except assume that the inspection
point is at the 30% stage of completion.

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

EQUIVALENT PRODUCTION STATEMENT

INPUT OUTPUT UNITS

TOTAL MATERIAL CONVERSION

2 000 Opening WIP

8 000 Started
Normal loss 800 800 240
WIP (40%
Complete) 3 000 3 000 1 200
Abnormal loss
(balancing figure) 200 200 60
Completed 6 000 6 000 6 000
10 000 10 000 7 500

UNIT COST
STATEMENT:
R R R
Opening work-in-progress 11 800 8 000 3 800
Current cost 51 260 31 060 20 200
63 060 39 060 24 000

Per unit: R7.11 R3.91 R3.20

Notes: As the inspection point is at 30% stage of completion, the previous month’s
closing work-in-process (this month’s opening work-in-process) would have been
inspected in December as it is already 60% complete. It is not necessary therefore to
include the opening WIP when calculating the normal loss. The closing WIP as it is at
the 40% stage of completion would have been inspected during the current period. It is
therefore not necessary to take this out of the units started. The normal loss is therefore
calculated on the new units introduced. Ie 8 000 x 10% = 800. The value of the normal
loss however needs to be allocated between completed units and closing WIP.

Financial Management 2B 25
As the inspection point is at the 30% stage of completion, the abnormal loss units would
have been fully complete with regards to material however only 30% complete with
regards to conversion.

Calculation of normal loss

Material (800 x R3.91) R3 128

Conversion (240 x R3.20) R 768
R3 896

This needs to be allocated between units completed and closing work in progress.

Completed products 4 000

Closing work-in-progress 3 000
7 000

Normal loss allocated to finished goods = 4/7 x R3 896 = R2 226

Normal loss allocated to closing WIP = 3/7 x R3 896 = R1 670

PRODUCTION COST STATEMENT – JANUARY

Finished goods R R
6 000 units x R7.11 each 42 660
Normal loss 2 226 44 886
Closing WIP
Material : 3 000 x R3.91 11 730
Conversion: 1 200 x R3.20 3 840
Normal loss 1 670 17 240
Abnormal loss
Material (200 x R3.91) 782
Conversion (60 x R3.20) 192 974
63 100

Process account
Opening WIP b/fwd 11800 Finished goods 44,886
Direct material 31,060 Abnormal loss 974
Conversion 20,200 Closing WIP c/fwd 17,240
Rounding 40
63,100 63,100

Financial Management 2B 26
PROCESS COSTING OVER TWO PERIODS

LECTURE EXAMPLE 5 EXPANDED (INSPECTION AT END OF THE

PROCESS)

PERIOD 2

Opening work in progress : 3 000 units

(40% complete)

Current period:

New unit introduced 10 000 units

Normal loss (at end of process) 10%

Closing work in progress

(60% complete) 5 000 units

Completed units 7 000 units

Current costs:
Material R40 000
Conversion R26 000

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

SOLUTION - PERIOD 2 INSPECTION AT END OF THE PROCESS

INPUT OUTPUT
TOTAL MATERIAL CONVERSION
3 000 O WIP
10 000 NEW UNITS
COMPLETED 7 000 7 000 7 000
CWIP 5 000 5 000 3 000
NORMAL LOSS 800 800 800
ABNORMAL LOSS 200 200 200
13 000 13 000 13 000 11 000

UNIT COST STATEMENT:

Opening cost R15 246 R11 730 R 3 516

Financial Management 2B 27
Current cost R66 000 R40 000 R26 000
R81 246 R51 730 R29 516

R6.66 R3.98 R2.68

PRODUCTION COST STATEMENT:

Finished goods R R
(7 000 x R6.66) 46 620
Normal loss
(800 x R6.66) 5 328 51 948

Work in progress:
Material (5 000 x R3.98) 19 900
Conversion (3 000 x R2.68) 8 040 27 940

Abnormal loss
(200 x R6.66) 1 332
81 220

Normal loss:

Total units 13 000

Owip (incl as passed inspection
This period) -
Closing WIP
(Exclude as not yet reached
Inspection) (5 000)
8 000 - units which passed through inspection
During current period
Normal loss at 10% 800

LECTURE EXAMPLE 5 EXPANDED (INSPECTION AT BEGINNING OF THE

PROCESS)

To do this question you need to have done example 5 with inspection being at the
beginning of the process.

PERIOD 2

Opening work in progress : 3 000 units

(40% complete)

Current period:

New unit introduced 10 000 units

Financial Management 2B 28
Normal loss (at beginning of process) 10%

Closing work in progress

(60% complete) 5 000 units

Completed units 7 000 units

Current costs:
Material R40 000
Conversion R26 000

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 29
SOLUTION – EXAMPLE 5 – PERIOD 1 INSPECTION AT BEGINNING OF THE
PROCESS

INPUT OUTPUT
TOTAL MATERIAL CONVERSION
10 000 NEW UNITS
COMPLETED 6 000 6 000 6 000
CWIP (40%) 3 000 3 000 1 200
NORMAL LOSS 1 000 1 000 0
ABNORMAL LOSS 0 0 0
10 000 10 000 10 000 7 200

UNIT COST STATEMENT:

Current cost R63 060 R39 060 R24 000

R7.24 R3.91 R3.33

PRODUCTION COST STATEMENT:

Finished goods R R
(6 000 x R7.24) 43 440
Normal loss (material 2 607 46 047

Work in progress:
Material (3 000 x R3.91) 11 730
Conversion (1 200 x R3.33) 3 996
Normal loss (material) 1 303 17 029

63 076

Normal loss:

Total units 10 000

Closing WIP
(include as passed inspection this period 0
Units which passed through inspection this period 10 000
Normal loss at 10% 1 000

Valuation of normal loss:

Material (1 000 x R3.91) = R3 910 - WIP (x3/9) = R1 303

- FG (x 6/9) = R2 607
Conversion (0 x R3.33) = 0 - WIP (x3/9) = R 0
- FG (x6/9) = R 0
R3 910

Financial Management 2B 30
SOLUTION - PERIOD 2 INSPECTION AT BEGINNING OF THE PROCESS

INPUT OUTPUT
TOTAL MATERIAL CONVERSION
3 000 O WIP
10 000 NEW UNITS
COMPLETED 7 000 7 000 7 000
CWIP 5 000 5 000 3 000
NORMAL LOSS 1 000 1 000 0
13 000 13 000 13 000 10 000

UNIT COST STATEMENT:

Opening cost R17 029 R13 033 R 3 996

Current cost R66 000 R40 000 R26 000
R83 026 R53 033 R29 996

R7.08 R4.08 R3.00

PRODUCTION COST STATEMENT:

Finished goods R R
(7 000 x R7.08) 49 560
Normal loss (Material) 1 813 51 373
Work in progress:
Material (5 000 x R4.08) 20 400
Conversion (3 000 x R3.00) 9 000
Normal loss (material) 2 267 31 667

83 040
Normal loss:

Total units 13 000

Owip (excl as passed inspection
In period 1) (3 000)
Closing WIP
(include as inspection in current
Period) 0
10 000 - units which passed through inspection
During current period
Normal loss at 10% 1 000
Valuation of normal loss:
Material (1 000 x R4.08) R4 080 - WIP x(5/9) = R2 267
- FG x (4/9) = R1 813
Conversion (0 x R3) R 0
R4 080

Financial Management 2B 31
NORMAL AND ABNORMAL LOSS UNITS SOLD FOR SCRAP

EXAMPLE 4 BUT ASSUME THAT THE NORMAL LOSS UNITS CAN BE

SOLD FOR
R1 PER UNIT

Statement of equivalent units stays the same

(see page 11 for detail)
MATERIA
TOTAL L CONVERSION

10000 10000 8600

Unit cost statement stays the same

(see page 11 for detail) R 7.28 R 2.88 R 4.40

Production cost statement - December

Finished goods
7 600 x R7.28 each 55328

Normal loss
Material (400 units x R2.88) 1152
Labour (200 units x R4.40) 880
Scrap on disposal of loss -400 56960

Closing WIP
(see page 11 for detail) 9280

(66640-400) 66240

Lecture example 4 - with scrap value

Process account
Direct material 28,800 Finished goods 56,960
Conversion 37,800 Normal loss 400
Closing WIP
Rounding 40 c/fwd 9,280

66,640 66,640

Income from normal loss

Process account 400 Bank 400

Financial Management 2B 32
Lecture example 5 - Abnormal loss account

Abnormal loss account

process account 2052 Profit and loss 2052

If you assume that the abnormal loss units are sold for R1 per unit

Equivalent production statement stays the same

Unit cost statement stays the same

Production cost statement:

Abnormal loss would reduce by R300 (ie from R2052 to R1 752)

The abnormal loss account would look like this:

Abnormal loss account

process account 2052 Bank 300
profit and loss 1752
2052 2052

Example on abnormal gain (page 16)

Abnormal gain account

Normal loss account 60 Process account 135
Profit and loss 75
135 135

Proceeds from normal loss

Process account 300 Bank 240
Abnormal gain account 60
(income lost as loss not as
anticipated)

Process account
Material 2700 Finished good 6585
Conversion 4050 Normal loss 300
Abnormal gain 135

6885 6885

Financial Management 2B 33
PROCESS COSTING USING THE FIRST-IN-FIRST-OUT (FIFO) METHOD

The weighted average method of process costing has been used for all the examples up to
this point. In terms of the weighted average method opening work-in-progress together
with the related costs is simply added to the current month’s production and costs and the
final unit cost calculated as an average. This method is perfectly adequate for the
purposes of valuing inventory for financial reporting purposes. It is not necessarily
adequate for all decision-making and if a company operates a standard costing system but
values inventory at actual cost, it cannot be used. The alternative is the first-in-first-out
(FIFO) method.

The following example illustrates this method.

FIFO Eg.

A Company (Pty) Ltd provides the following details for the month of December:

Opening work-in-progress 1 000 units

(40% complete)
Material cost R4 000
Conversion cost R6 000

New units started: 10 000 units

Normal losses: 10% of units

At the 80% stage

Units completed: 8 100 units

Closing work-in-progress 2 000 units

(60% complete)

Current costs:
Material R 34 580
Conversion R142 400

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

Financial Management 2B 34
EQUIVALENT UNIT STATEMENT

Input units Output units

Total Material Conversion

1 000 Opening WIP

10 000 New units

Opening WIP (40%) 1 000 - 600

Started and completed 7 100 7 100 7 100
Normal loss
(1 000 + 10 000 –2000) x 10% 900 900 720
Closing WIP (60%) 2 000 2 000 1 200
11 000 11 000 10 000 9 620

UNIT COST STATEMENT

R R R

Current cost 176 980 34 580 142 400

Unit cost R18.26 R3.46 R14.80

Notes

1. Although 8 100 units were completed, because we work on a first-in-first-out cost

system, we assume that the opening work-in-progress units are completed first.
The units brought forward were 100% complete in relation to material (what
would they be working on if the material is not added right at the beginning?).
No further material costs are incurred on these units. However, they were only
40% complete in respect of conversion. The other 60% of conversion will be
done during the current month and the associated costs incurred.
2. Normal losses are identified at the 80% stage of the process. The opening work-
in-process had not yet reached the inspection point during the previous month and
the closing work-in-process has not yet reached the inspection point at the end of
the current month.
3. Normal loss is calculated as follows:
Material (900 x R3.46) R 3 114
Conversion (720 x R14.80) R 10 656
R 13 770
As the closing work in progress has not yet passed the inspection point, the
normal loss does not have to be apportioned between closing WIP and finished
goods.

Financial Management 2B 35
PRODUCTION COST STATEMENT

Finished goods
Previous costs R 10 000
Current costs
OWIP
Conversion (600 x R14.80) R 8 880
New units (7 100 x R18.26) R 129 646
Normal loss R 13 770 R162 296

Closing work in progress

Material (2000 x R3.46) R 6 920
Conversion (1200 x R14.80) R 17 760 R 24 680
R186 976 *

* This needs to be reconciled to the current costs plus the opening costs
Ie R10 000 + R176 980 = R186 980

Process account
Opening WIP
b/fwd 10000 Finished goods 162,296
Direct material 34,580 Abnormal loss 0
Conversion 142,400 Closing WIP c/fwd 24,680
Rounding 4
186,980 186,980

Financial Management 2B 36
PROCESS COSTING WITH TWO PROCESSES

The Baltic Company has two processes, X and Y. Material is introduced at the start of
process X, and additional material is added to process Y when the process is 70%
complete. Conversion costs are applied uniformly throughout both processes. The
completed units of process X are immediately transferred to process Y, and the
completed production of process Y is transferred to finished goods stock. Data for the
period include the following:

Process X Process Y

Opening work in progress 6000 units 60% 2000 unit 80%

Converted, consisting converted, consisting
of materials R72,000 of previous process
and conversion cost cost of R91,800,
of R45,900 materials of R12,000
and conversion costs
of R38,400.

Units started during the period 16,000 units 18,000 units

Closing work in progress 4,000 units (75% comp) 8000 units (50%)
Material costs added during
the period R192,000 R60,000
Conversion costs added during
the period R225,000 R259,200

DRAW UP THE FOLLOWING:

 Statement of equivalent production

 Unit cost statement
 Production cost statement

WEIGHTED AVERAGE

Financial Management 2B 37
STATEMENT OF EQUIVALENT UNITS

PROCESS X

INPUT OUTPUT
TOTAL MATERIAL CONVERSION
6000 OWIP (60%)

16000 Units started

Completed 18,000 18,000 18,000

CWIP (75%) 4,000 4,000 3,000

22000 22,000 22,000 21,000

UNIT COST STATEMENT R R R

Opening WIP 117,900 72,000 45,900

Current costs 417,000 192,000 225,000
534,900 264,000 270,900

Unit cost 24.90 12.00 12.90

PRODUCTION STATEMENT R

Finished goods (18000 x

R24.90) 448,200

Work in progress
Material (4000 x R12) 48,000
Conversion (3000 x R12.90) 38,700 86,700

534,900

STATEMENT OF EQUIVALENT UNITS

Financial Management 2B 38
PROCESS Y

INPUT OUTPUT
PROCESS
TOTAL X MATERIAL CONVERSION
2,000 OWIP (80%)

18,000 Units started

Completed 12,000 12,000 12,000 12,000

CWIP (50%) 8,000 8,000 0 4,000

20,000 20,000 20,000 12,000 16,000

UNIT COST STATEMENT R R R R

Opening WIP 142,200 91,800 12,000 38,400

Current costs 767,400 448,200 60,000 259,200
909,600 540,000 72,000 297,600

Unit cost 51.60 27.00 6.00 18.60

PRODUCTION STATEMENT R R

Finished goods (12000 x R51.60) 619,200

Work in progress
Process X (8000 x R27) 216,000
Material (0) 0
Conversion (4000 x R18.60) 74,400 290,400

909,600

FIFO

Financial Management 2B 39
STATEMENT OF EQUIVALENT UNITS

PROCESS X

INPUT OUTPUT
TOTAL MATERIAL CONVERSION
6,000 OWIP (60%) 6000 0 2400

16,000 Units started

Started and completed 12,000 12,000 12,000

CWIP (75%) 4,000 4,000 3,000

22,000 22,000 16,000 17,400

UNIT COST STATEMENT R R R

Current costs 417,000 192,000 225,000

417,000 192,000 225,000

Unit cost 24.93 12.00 12.93

PRODUCTION STATEMENT R

Finished goods
Opening work in progress 117,900
Opening WIP completed (2400 x
R12.93) 31,034
Units started and completed (12000x R24.93) 299,172 448,107

Work in progress
Material (4000 x R12) 48,000
Conversion (3000 x R12.93) 38,793 86,793

534,900

STATEMENT OF EQUIVALENT UNITS

Financial Management 2B 40
PROCESS Y

INPUT OUTPUT
PROCESS
TOTAL X MATERIAL CONVERSION

2,000 OWIP (80%) 2000 0 0 400

18,000 Units started

Started and completed 10,000 10,000 10,000 10,000

CWIP (50%) 8,000 8,000 0 4,000

20,000 20,000 18,000 10,000 14,400

UNIT COST STATEMENT R R R R

Current costs 767,307 448,107 60,000 259,200

767,307 448,107 60,000 259,200

Unit cost 48.89 24.89 6.00 18.00

PRODUCTION STATEMENT R R

Finished goods
Opening WIP 142,200
Opening WIP completed (400 x R18) 7,200
Units started and completed (10 000 x R48.89) 488,948 638,348

Work in progress
Process X (8000 x R24.90) 199,159
Material (0) 0
Conversion (4000 x R18.00) 72,000 271,159

909,507

Financial Management 2B 41