(80)---TREATMENTS FOR WORKING PROGRESS IN PROCESS COSTING

Opening and closing working progress

If opening or closing stocks of work in progress exist; the calculations of the cost per unit required some additional computations. It is obvious that partly completed production working progress will have a lower unit cost than fully completed production.
Consequently, when opening and closing stocks of work –in-progress exist unit costs cannot be computed by simply dividing the total cost by the number of units still in the process. For example, if 8,000 units were started a completed during period and another 2,000 units were partly completed, than then these two items cannot be added together to ascertain the unit cost. We must convert the work in progress into finished equivalents also referred to as equivalent production so that the unit cost can be obtained.

Elements of costs with different degrees of completion

A complication which may arise concerning equivalent units is that in any given stock of work in work in process into all of the elements which make up the total cost may have reached the same degree of completion. For example, materials may be added at the start of the process and are thus fully complete, whereas labor and manufacturing overheads may be added throughout the process. Materials may be 100% complete, while labor and overheads may only be partially complete. Where the situation arises separate equivalent production calculation must of each element of cost.

Previous process cost

As production moves through processing, the outputs of one process become the input of the next process. The next process will carry out additional conversion work and may add this achieved by labeling the transferred cost form the previous process ‘previous process cost’ and treating this item as a separate element of cost. Note that this element of cost will always be fully complete as far as closing work in progress in concerned.

Opening Working progress

When opening stocks of working progress exist an assumption must be made regarding the allocation of this opening stock to the current accounting period to determine the unit cost for the period. Two alternative assumptions are possible.

First one may assume the opening work-in progress is inextricably merged with the units introduced in the current period and can no longer be identifies separately the weighted average method.

Second one may assume that the opening work in progress is the first group of units to be processed and completed during the current month the first in first out method.

(79)---TREATMENTS FOR LOSSES IN PROCESS COSTING

Normal and abnormal losses.

Certain losses are inherent in the production process and cannot b eliminated.
These losses occur under efficient operating conditions and are referred to as Normal or uncontrollable losses.

In addition to losses which cannot be avoided, there are some losses which are not expected to occur under efficient operating conditions, for example the improper mixing of ingredients, the use of inferior materials and the incorrect cutting of cloths. These losses are not an inherent part of the production process and are referred to as abnormal or controllable losses.

• Normal loss is the loss expected during a process. It is not given a cost.
• Abnormal losses is the extra loss resulting when actual loss is greater than normal or expected loss ,and it is given a costs.
• Abnormal l gain is the gain resulting when actual loss in less than the normal or expected loss ,and it is given a ‘negative cost’

Since an abnormal loss is not given a cost, the cost producing these units is borne by the good units of output.
Abnormal loss and gain units are valued at the same rate as “good” units. Abnormal events do not therefore affect the cost of good production. Their costs are analyzed separately in an abnormal loss or abnormal gain account.

Scrap value of loss.

Loss may have a scrap value. For scrap value the following basic rules are applied in accounting for this value in the process accounts.

• Revenue from scrap is treated, not as an addition to sales revenue, but as a reduction in costs.
• The scrap value of normal loss is therefore used to reduce the material costs of the process.
  DEBIT Scrap account
  CREDIT Process loss account
• The scrap value of abnormal loss is used to reduce the costs of abnormal loss
  DEBIT Scrap account
  CREDIT Abnormal loss account
  With the scrap value of abnormal loss, this therefore reduces the write off of cost to the profit and loss account.
• The scrap value of abnormal gain rises because the actual units sold as scrap will be less than the scrap value of normal loss. Because there are fewer units of scrap than expected, there will be less revenue from scrap as a direct consequence of the abnormal gain. The abnormal gain account should therefore be debited with the scrap value.
• The scrap account is completed by recording the actual cash received from the sale of scrap.
  DEBIT Cash received
  CREDIT Scrap account
  With the cash received from the sale of the actual scrap.

(78)---PROCESS COSTING

Process Costing.

Process costing / continuous operational costing is defined in as “The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or process. Costs are averaged over the units produced during the period”.
Process costing is used where it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. It is common (but not essential) to identify process costing which continuous production such as the following.

• Oil refining.
• Paint.
• The manufacture of soap.
• Food and drink.

The features of process costing which make it different from specific order costing methods such as job costing or batch costing are as follows.

1. The output of one process is the input to subsequent process unit a completed product is produced.
2. The continuous nature of production in may processes means that there will usually be closing work in progress which must be valued. In process costing it is not possible to build up cost records of the cost of each individual unit of output because production in progress is an indistinguishable homogeneous mass.
3. There is often a loss in process due to spoilage, wastage, evaporation and so on.
4. Output from production may be a single product, but there may also be a by product (or by products) and joint products.

Framework for dealing with process costing.
Process costing is centered on four steps. The exact work done at each step will depend on the circumstances of the question, but the approach can always be used.

Step 1- Determine output and losses.

• Determine expected output.
• Calculate normal loss and abnormal loss and gain.
• Calculate equivalent units if there is closing or opening work in progress.

Step 2- Calculate cost per unit of output, losses and WIP.

• Calculate cost per unit or cost per equivalent unit.

Step 3- Complete accounts.

• Complete the process account.
• Write up the other accounts required by the question such as abnormal loss/gain accounts, scrap accounts and so on.