Chapter 11
Process costing
Study guide
 Describe the characteristics of process costing. [k]
 Describe the situations where the use of process costing
would be appropriate. [s]
 Explain the concepts of normal and abnormal losses and
abnormal gains.[k]
 Calculate the cost per unit of process outputs.[s]
 Prepare process accounts involving normal and
abnormal losses and abnormal gains.[s]
 Calculate and explain the concept of equivalent units.[s]
 Apportion process costs between work remaining in
process and transfers out of a process using the
weighted average and FIFO methods. [s]
 Prepare process accounts in situations where work
remains incomplete. [s]
 Prepare process accounts where losses and gains are
identified at different stages of the process. [s]
1. The basics of process costing
P212
Process costing is a costing method 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.
Features of process costing
 The output of one process becomes the input to the
next.
 There will usually be closing work in progress which
must be valued. And production in progress is an
indistinguishable homogeneous mass.
 There is often a loss in process
 Output from production may be a single product, but
there may also be a by-product (or byproducts) and/or
joint products.
2. Losses in process costing
2.1 Loss and normal loss P214
 Loss may occur in process.
 Normal loss is the loss expected during a
process. It is not given a cost
 Costs of normal loss are spread across expected
units of output. (Since normal loss is not given a
cost, the cost of producing these units is borne
by the 'good' units of output.)
 Cost per unit (normal loss) = $NIL
2.2 Abnormal losses and gains
 Abnormal loss arises when actual loss is
greater than expected loss. It is given a cost
 Abnormal gain arises when actual loss is less
than expected loss. It is given a ‘negative cost’
 Abnormal losses and gains are valued at the
same cost per unit as good units
 Abnormal losses/gains are taken to the income
statement for the period
3. Losses with scrap value
P220
 Scrap is 'Discarded material having some value.'
 Loss or spoilage may have scrap value.
 The scrap value of normal loss Is usually
deducted from the cost of materials.
 The scrap value of abnormal loss (or abnormal
gain) is usually set off against its cost, in an
abnormal loss (abnormal gain) account,



For normal loss scrap value:
Material costs of process reduced by scrap value of
normal loss
DR Scrap account
CR Process account
For abnormal loss scrap value:
Cost of abnormal loss is reduced by the scrap value
of abnormal loss
DR Scrap account
CR Abnormal loss account
For abnormal gain scrap value:
Scrap value is less than expected because there is
no normal loss
DR Abnormal gain account
CR Scrap account
4. Losses with a disposal cost
 Increase the process costs by the cost of disposing of
the units of normal loss and use the resulting cost per
unit to value good output and abnormal loss/gain.
 The normal loss is given no value in the process
account.
 Include the disposal costs of normal loss on the debit
side of the process account.
 Include the disposal costs of abnormal loss in the
abnormal loss account and hence in the transfer of the
cost of abnormal loss to the income statement.
5. Equivalent units
P226
 Units of product which have not been completed
at the end of the period are known as closing
work in progress (WIP)
 They cannot be valued at the cost of a complete
unit therefore they are valued as an equivalent
unit
 Equivalent units of production provide a basis
for apportioning costs between closing WIP and
finished goods
Equivalent units are notional 估计的，想象的 whole units
which represent incomplete work, and which are used to apportion
costs between work in process and completed output.
 Direct materials. These are added in full at the start of
processing, and so any closing WIP will have 100% of their
direct material content. (This is not always the case in
practice)
 Direct labour and production overhead. These are
usually assumed to be incurred at an even rate through the
production process, so that when we refer to a unit that is
50% complete, we mean that it is half complete for labour
and overhead, although it might be 100% complete for
materials.
6. Valuing opening work in
progress: FIFO method P229
There are two methods of dealing with opening work in
progress –So,
the total
FIFO costs
methodofand
the weighted
average method
finished
output
Under the FIFO method the assumption is that the first units
+①+②
completed in any=opening
period are WIP
the units
of opening inventory
Spreads costs incurred in the period over work done in that
period
① FG（finished good）/ output （started and finished)
② Opening WIP (finished)
③ Closing WIP (started)
7. Valuing opening work in progress:
weighted average cost method
 An alternative to FIFO is the weighted average cost method
of inventory valuation which calculates a weighted average
cost of units produced from both opening inventory and units
introduced in the current period.
 By this method no distinction is made between units of
opening inventory and new units introduced to the process
during the accounting period. The cost of opening inventory is
added to costs incurred during the period, and completed units
of opening inventory are each given a value of one full
equivalent unit of production.
小结：Process costing framework
P213
Process costing is centred around 4 steps：
Step 1 - Determine output and losses
 Determine expected output
 Calculate losses and gains
 Calculate equivalent units if there is WIP
Step 2 - Calculate cost per unit of output, losses and WIP
Calculate cost per unit or cost per equivalent unit
Step 3 - Calculate total cost of output, losses and WIP
 If there is opening and/or closing WIP, a statement
of evaluation will have to be prepared
Step 4 - Complete accounts
 Complete the process account
 Write up any other accounts required by question
Chapter roundup
 Process costing is a costing method 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.
 Process costing is centred around four key steps. The exact
work done at each step will depend on whether there are normal
losses, scrap, opening and closing work in progress.
Step 1. Determine output and losses
Step 2. Calculate cost per unit of output, tosses and Wl P
Step 3. Calculate total cost of output, losses and WIP
Step 4. Complete accounts
 Losses may occur in process. If a certain level of loss is
expected, this is known as normal loss. If losses are
greater than expected, the extra loss is abnormal loss.
If losses are less than expected, the difference is known
as abnormal gain.
 The scrap value of normal loss is usually deducted
from the cost of materials.
 The scrap value of abnormal loss (or abnormal gain) is
usually set off against its cost, in an abnormal loss
(abnormal gain) account
 Abnormal losses and gains never affect the cost of good
units of production. The scrap value of abnormal loss is
not credited to the process account, and abnormal loss
and gain units carry the same full cost as a good unit of
production.
 When units are partly completed at the end of a period
(and hence there is closing work in progress), it is
necessary to calculate the equivalent units of production
in order to determine the cost of a completed unit.
 Account can be taken of opening work in progress using
either the FIFO method or the weighted average.