Ch06 Equivalent Units

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WELCOME TO THE PROGRAM ON

PROCESS COSTING

BY

T.VENKATARAMANAN.FICWA.FCS.

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Chapter 6

Chapter 6

Process Costing

Key Topics:

Cost flows in mass productionSteps in preparing process cost reports (FIFOand weighted average)

Equivalent units

Applying costs

Spoilage in process costing

Uses, Uncertainties, and limitations

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Chapter 6

Process Costing

Process product-costing systems are usedfor costing inventories or services when

they are mass-produced, identical units.

These products differ from the custom-madeor unique goods that are assigned costsunder a job costing system

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Chapter 6

Mass Production

Many goods are produced using acontinuous process.

Examples:Processing : Raw milk >> cream ,butter ,

skimmed milk.

Coco beans: cocoa butter, cocoa powder,cocoa drink

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Process variants

Single RM>>>single process>>singleoutput

Single material>>single process>>multipleoutputs

Multiple inputs>>single process >>multipleout puts

Multiple inputs >.multiple process>multipleout puts.

Chapter 6 5


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Chapter 6

coal

Coke ,gas, Benzol, tar, ammonia,

petroleum Crude oil , natural gas, Lpg, etc

Raw LPG,

Butane, Ethane,

propane

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Chapter 6

Joint costs Material,

labor, etc

Presplitoff

Specific costs Material lab

etc

Post

split off

cost- basics

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Chapter 6

mainproduct Joint products byproductsHigh

spoilage Scrap,defectives waste

Low>0

Product classification

V

A

LU

E

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Approaches to allocating Joint

costs Sales value at split off Net realizable value Constant gross margin %

market

based

Volume-barrels, liters,

gallons etc Mass- weight ,kg, gm,

etc

Physicalmeasures

based

Chapter 6 9


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Chapter 6

Overview of Process Costing

Systems

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Chapter 6

Steps for Preparing a Process

Costing Report:

1. Summarize total costs to account for.

2. Summarize total physical and equivalentunits.

3. Compute cost per equivalent unit.

4. Account for cost of units completed andcost of ending WIP.

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Chapter 6

What Are Equivalent Units, and How

Do They Relate to the Production

Process?

Equivalent Units:

Measure the resources used in partially completed units

relative to the resources needed to complete the units.

Equivalent Units Depend on the Pattern of Cost Flow:

Direct Materials:

*A

dded at the beginning of the process* Added during the process

Conversion Costs:

* Incurred uniformly throughout the process

* Incurred non-uniformly12


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Chapter 6

How Is the Weighted Average

Method Used in Process Costing?

Weighted Average Method:

Costs from beginning WIP (performed lastperiod) are averaged with costs incurredduring the current period and then allocatedto all units completed and ending WIP.

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Chapter 6

Summaries of Physical Units and

Total Costs for Weighted AverageCalculations

(Assuming direct materials are added at the

beginning of the process)

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Chapter 6

Calculation of Equivalent Units Under

the Weighted Average Method

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Chapter 6

Equivalent Unit Costs

Weighted Average:

Direct materials = $6,000+$30,500 =$3.0417

12,000Conversion costs=$4,200+$76,680=$7.0947

11,400

Total cost per equivalent unit = $10.1364

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Chapter 6

Weighted Average Process Cost

Report Weighted Average

Computation Units Costs

Total unitscompleted andtransferred out (2,000+9,000)x$10.1364 11,000 $111,500

Ending WIP: 1,000Direct materials 1,000x$3.0417 3,042Conversion costs 400x$7.0947 2,838

Total ending WIPcost _____ 5,880

Total Accounted

For 12,000 $117,380

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Chapter 6

Summaries of Physical Units and Total

Costs for FIFO Calculations

(Assuming direct materials are added at thebeginning of the process)

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Chapter 6

Calculation of Equivalent Units Under the

FIFO Method

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Chapter 6

First-in, First-out (FIFO) Method

The current periods costs are used to

allocate cost to work performed this period

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Chapter 6

Calculation of Cost Per Equivalent Unit

Current Period Cost

Equivalent Units for Work Performed this Period

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Chapter 6

Equivalent Units Costs

FIFO:

Direct materials = $30,500 = $3.05

10,000Conversion costs=76,680 = $7.10

10,800

Total cost per equivalent unit = $10.15

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Chapter 6

FIFO Process Cost Report

First-in, First-OutComputation Units Costs

Beginning WIP 2,000 $ 10,200Costs to complete beginning WIP:

Direct materials 0x$3.05 0Conversion costs 1,400x$7.10 9,940

Total costs added this period _____ 9,940

Total cost of beginning WIP transferredout 2,000 20,140

New units started, completed, andtransferred out 9,000x$10.15 9,000 91,350

Total units completed and transferred out 11,000 111,490

Ending WIP: 1,000Direct materials 1,000x$3.05 3,050Conversion costs 400x$7.10 2,840

Total ending WIP cost _____ 5,890

Total Accounted For 12,000 $117,380

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Chapter 6

How Is Process Costing Performed for

Multiple Production Departments

Transferred-in Costs:

Costs of processing performed in a

previous department

Transferred-in costs are pooled separately

from other costs

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Chapter 6

Cost Flows in Process Costing With Costs Transferred from Another Department

Costs Assigned to Costs Allocated

Department WIP to Individual Units

Allocate Allocate

Trace Allocate

Trace

Trace Allocate

orAllocate

Direct Materials

OverheadIndirect materials,indirect labor, direct

department costs such assupervisorsalary and

equipment depreciation,and othercosts such as

rent and plant insurance

Direct Labor

IndividualUnits of

Product or

Service

DepartmentWork in Process

Direct

Materials

ConversionCosts

Transferred-in

Costs

Previous

Department WIP

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Chapter 6

How Are Spoilage Costs Handled in

Process Costing?

Normal Spoilage:

Defective units that arise as part of regular

operationsAbnormal Spoilage:

Spoilage that is not part of everyday

operations

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Chapter 6

Cost Flows with Spoilage in a Process Costing System

Costs Assigned to Costs Allocated

Department WIP to Individual Units

Trace

Trace

Trace

or Allocate

Direct Materials

OverheadIndirect aterials,

indirect labor, direct

depart ent costs such as

supervisor salary and

equip

ent depreciation,and other costs such as

rent and plant insurance

Direct Labor

DirectMaterials

ConversionCosts

Abnormal

Spoilage Loss

Allocate Cost ofGood Units and

Nor

al Spoilage

Allocate Cost of

Abnor

al Spoilage

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Chapter 6

Use Process Cost Information to:

Measure costs of products mass-producedproducts

Assign costs to inventory and cost of goods soldfor financial statements and income tax returns

Monitor operations and costs Develop estimates of future costs for decision

making Analyze the costs and benefits of quality

improvements Identify potential areas for process

improvements

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Before we proceed further a wordabout service costing

Also called operation costing, the cost ofspecific services & functions like canteen,hospital, maintenance , etc.

In this method all costs are collectedperiodically and the total operatingexpenses are divided by the quantity of

services rendered to arrive at the costs /unit.

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Before we proceed further a wordabout service costing

The main feature of services are 1) labor intensive 2)expenseoriented. 3)Inputs & outputs cannot be stored 4)use of compositecost units are more common than single cost units maintenance ,etc.

In this method all costs are collected under two broad heads i) fixedcharges or standing charges ii) operating charges e.g for transportservice:

Standing charges: 1)insurance 2) rent rates & taxes 3)wages ofmaintenance staff ,4) depreciation etc

Operating charges 1) petrol ,diesel, oil, lubricants, 2)semi variableexpenses like tyre , tube, battery etc

Additional records are to be maintained for operational details like i)log book ii) daily operational schedule iii) job no. etc.iv)cost sheet v)cost summary.

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Which of the following

statements are true/false 1)In process costing ordinarily no distinction is madebetween direct and indirect materials

2)The cost of abnormal loss is not included in the cost ofprocess.

3)Normal loss and abnormal loss are treated alike inprocess costing

4)Process a/c s should always be presented inconventional T a/cs.

5)In process cost normal loss is absorbed by good units

Chapter 6Ans 1) true 2)T, 3) F, 4) F, 5) T

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Which of the following

statements are true/false 1)sales realization from normal scrap iscredited to process a/c

2) waste has no market value.

3) there is no difference between the terms commoncosts and joint costs.

4)management may decide to treat a joint product as byproduct.

5)It is posible for main product of one industry to bebyproduct of another.

Chapter 6Ans 1) true 2)T, 3) F, 4) T, 5) T

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When FIFO method is used in process costing , theopening stock values are :

1)the cost of inventory brought forwardfrom the past ,is not added to cost of newperiod

2)added to the cost of the new period.

3)subtracted from the new period.

4)averaged with the new period

Chapter 6 36

Ans: 1


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When average method is used in process costing , theopening stock values :

1) from the past ,are kept separate fromthe cost of new period

2)added to the cost of the new period. 3)subtracted from the new period.

4)none of the above

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Ans: 2


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Under average cost method In process costing , the stageof completion of opening stock is considered of no

consequence.

1) true

2) false

Chapter 6 38

Ans: 1


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Chapter 6 39

Match The following

1 Rail & roadtransport

a No. .f.patients

2 Boiler house b Guest days

3 Power

house/ elecsupply

c No of meals

served

4 Canteens d KWH

5 hotels e Cubic meter of gas

6 hospitals f Passenger/km or ton -km


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Illustrations allocating joint costs

Incase of product X the input in process is1000 units ,normal loss = 2% of the input.ifthe output is 990 units there will bea)abnormal loss of 10 units. B)abnormalgain of 10 units. C)neither gain nor loss

d) None of the above.

ans : b 40


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Particulars L M N

SELLINGPRICE/KG

Rs 5 10 20

OUTPUT IN KG 2500 5000 15,000

POSTSEPARATIONCOSTS

10,000 5,000 15,000

PRESEPARATIONCOSTSRs20,000/=

? ? ?

Calculate pre separation costs by 1) wt. 2) NRV41


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Particulars L M N

SELLINGPRICE/KG

Rs 5 10 20

OUTPUT IN KG 2500 5000 15,000

POSTSEPARATIONCOSTS

10,000 5,000 15,000

PRESEPARATIONCOSTS by wt.basis20,000/=

?

Chapter 6BY

a)weight basis b) nrv-basis43


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Particulars L M N

SELLINGPRICE/KG

Rs 5 10 20

OUTPUT IN KG 2500 5000 15,000

POSTSEPARATIONCOSTS

10,000 5,000 15,000

PRESEPARATIONCOSTS by wt.basis20,000/=

?2222

4445 13333

Chapter 6BY

a)weight basis44


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Particulars L M N

SELLINGPRICE/KG

Rs 5 10 20

OUTPUT IN KG 2500 5000 15,000

POSTSEPARATIONCOSTS

10,000 5,000 15,000

PRESEPARATIONCOSTS by NRV.Basis20,000/=

150 2700 17150

Chapter 6

b)sales value at split off45


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Chapter 6 46

intr0duced 20000 @1.50 30,000

Labour cost 10,000

Overhead 7,000

Normal loss 10%

Scrap value Re 1/=

Completed &transferred

17500 @ ? ?

There was No opening & closing stock

Cost/unit ? NL/ANL ?


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Chapter 6 47

intr0duced 20000 @1.50 30,000

Labour cost 10,000

Overhead 7,000

Normal loss 10%

Scrap value Re 1/=


17500 @ ? ?

There was No opening & closing stock

Cost/unit 2.50 /ANL 500*2.5=1250


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intr0duced 9100 @27300 27300

Labour cost 12300

Overhead 8200

Normal loss 10% of total input

Scrap value Re 3/=


7800 @ ? ?

There was

Lab and

1000

ohs

& closing Stock

Complete80%

Cost/unit NL/ANL

Opening wip 900@4500/=complete

material -100% lab 60%

Units scrapped 1200.mat-100% l &oh 70%


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intr0duced 9100 @27300 27300

Labour cost 12300

Overhead 8200

Normal loss 10% of total input

Scrap value Re 3/=


7800 @ ? ?

There was

Lab and

1000

ohs

& closing Stock

Complete80%

Cost/unit 6.02 ANL 200/1024

Opening wip 900@4500/=complete

material -100% lab 60%

Units scrapped 1200.mat-100% l &oh 70%


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A transport company operates 4 buses betweencity a & b distance 50.Kms.seating cap .of buses

40.

The details of expenses for june 2009 are as follows:

1)wages of drivers cleaners etc. 4800

2) salaries of staff 2000

3)diesel oil& others 8000 4)rep & maintenance 1600

5)taxes & insurance 3200

6)depreciation 5200

7)interest & other charges 4000 Actual capacity only 75% of seats Each bus made one

round trip /month .calculate cost / passenger -mile

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Solution: passenger km = 4 X50 X 30 X 40= 2,40,000.

75% * 2 = 360,000.

Expenses for june 2009 are as follows:

1)wages of drivers cleaners etc. 4800

2) salaries of staff 2000

3)diesel oil& others 8000 4)rep & maintenance 1600

5)taxes & insurance 3200

6)depreciation 5200

7)interest & other charges 4000 Total = 28,800

Cost/passenger Km = 360,000/28800 =Re 0.08

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Ch06 Equivalent Units

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