Process Costing Part1

ACCA F2 - Management Accounting

IAS -2

12. The cost of conversion of inventories include costs directly related to the units of production, such as direct labor. They also include systematic allocation of fixed and variable production overhead that are incurred in converting material into finished goods…………

13. The allocation of fixed production overhead to the cost of conversion is based on the normal capacity of the facilities. …………

14. The production process may result in more than one product being produced simultaneously…

joint product …… by product…….

25. The cost of inventories, other than those dealt with in paragraph 23(not ordinarily interchangeable), shall be assigned by using the first-in, first-out or weighted average cost formula. ……..

This is just a incomplete preamble to hook readers to this article. By now, it should be clear that any process accounting is the accounting of inventory, which absorbs labor and overhead costs passing through the different conversion phases.

Simple example with normal loss (expected loss under normal operating environment) having scrap value (revenue from sales of material wastage)

Production Situation:

Process 1	Process 2
Material X - 10kg @ $10/kg Conversion charge - $4.5 per kg of material X Scrap produced =10% and can be sold at $1/kg	Material Y - 2kg @ $20/kg Conversion charge -$12 per kg of material Y

Process 1 account
	kg	$		kg	$
Material	10	100	Normal loss	1	1
Conversion		45	Transfer to process 2	9@$16**	144
	10	145		10	145

Average cost per unit = ($145-$1)/(10-1) =144/9 = $16**

Scrap account
	kg	$		kg	$
Process 1(Normal Loss)	1	1	Bank	1	1
	1	1		1	1

Process 2 account
	kg	$		kg	$
Transfer form process 1	9	144
Material	2	40	Normal loss	-	-
Conversion		24	Finished goods	11	208
	11	208		11	208

Average cost per unit = 208/11 = 18.9091

Process Costing