PROCESS COSTING (PC)

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 process involved.
E.g. oil refining, chemicals, food and drinks and paper. Process costing is also used in a situation
where production follows a series of sequential processes.

FEATURES OF PROCESS COSTING

 The output of one process becomes the input of another
 There will always be closing work in progress (WIP) which must be valued
 There is often a loss in process due to spoilage, wastage, evaporation and so on
 Output from production may be a single product, but there may be a by product or joint
product.

PROCESS ACCOUNT
All expenses are debited to Process account while output are credited to process account

Process Account 1
Units N Units N
Direct materials 1,000 50,000 Output to Process 2 1,000 90,000
Direct labour 20,000
Production overhead . 20,000 . .
1,000 90,000 1,000 90,000

Process Account 2
Units N Units N
Direct materials from P1 1,000 90,000 Output to finished 1,000 150,000
Added materials 30,000 goods
Direct labour 15,000
Production overhead 15,000 . .
.
1,000 150,000 1,000 150,000

FRAMEWORK FOR DEALING WITH PROCESS COSTING

Process costing is centered on four key steps
i. Determine output and losses
ii. Calculate cost per unit of output and losses
iii. Calculate total cost of output and losses
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 iv. Complete/ Prepare the process account

LOSSES IN PROCESS COSTING

Losses may occur in process. If a certain level of loss is expected, it is known as NORMAL
LOSS.
 Normal loss is the loss expected during a process. It is not given a cost.
 Abnormal loss is the extra loss resulting when actual loss is greater than normal or
expected loss. It is given a cost.
 Abnormal gain is the gain resulting when actual loss is less than the normal or expected
loss. It is given a negative cost.

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

Illustration 1: Abnormal losses and gains

Suppose that an input to a process is 1,000 units at a cost of N4, 500. Normal loss is 10% and
there is no opening or closing inventory.

Determine the accounting entries for the cost of output and the cost of the loss if actual output
were as follow:
(a) 860 units
(b) 920 units

Solution to Illustration 1a
Step 1: Determine output and losses
Material input 1000
Normal loss (10%) (100)
Expected units 900*
Actual Units (860)
Abnormal loss 40

Step 2: Determine cost/ unit

= Total cost = N 4,500
Expected units 900 = N5/unit

2
Step 3: Determine Total cost of output & Losses
N
Actual output 860 x N5 = 4,300
Normal loss 100 x N0 = 0
Abnormal loss 40 x N5 = 200
1,000 4,500

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finish goods 860 4,300
Normal loss 100 0
Abnormal loss 40 200
1,000 4,500 1,000 4,500

Solution to Illustration 1b
Step 1: Determine Output & Loss
Material input 1000
Normal Loss (10%) (100)
Expected unit 900 *
Actual unit (920)
Abnormal gain (20)

Step 2: Determine Cost/unit

= Total cost = N 4,500
Expected units 900 = N5/unit

Step 3: Determine total cost of output & Losses

N
Actual output 920 x N5 = 4,600
Normal loss 100 x N0 = 0
Abnormal gain (20) x N5 = (100)
1,000 4,500

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finish goods 920 4,600
Abnormal gain 20 100 Normal loss 100 0
1,020 4,600 1,020 4,600

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Class work
Ade Guru has two processes, F and G. there is an expected loss of 5% of input in process F and
7% of input in process G. activity during a four week period is s follows:
F G
Material input (kg) 20,000 28,000
Output (kg) 18,500 26,100

Is there an abnormal gain or abnormal loss for each process?

Determine Output & Loss F G

Material input 20,000 28,000
Normal Loss (5%) (1,000) (7%) (1,960)
Expected unit 19,000 26,040
Actual unit (18,500) (26,100)
Abnormal loss /(gain) 500 (60)

Illustration 2
During a four week period, period 3, costs of input to a process were N29,070. Input was 1,000
units, output was 850 units and normal loss is 10%. During the next period,

Period 4, costs of input were again N29,070. Input was 1,000 units, but output was 950 units and
normal loss is 10%. There were no units of opening or closing inventory.

Required
Prepare the process account and abnormal loss or gain account for each period.

Illustration 2

Period 3
Step 1: Determine output and losses
Material input 1,000
Normal loss (10%) (100)
Expected units 900*
Actual units (850)
Abnormal Loss 50

Step 2: Determine cost/ unit

= Total cost N29,070
Expected unit 900 = N32.3/unit

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Step 3: Determine total cost of output & Losses
N
Actual output 850 x N32.3 = 27,455
Normal loss 100 x N0 = 0
Abnormal loss 50 x N32. 3 = 1,615
1,000 = 29,070

Step 4: Prepare the Process Account

Period 3 Process Account
Particulars Units N Particulars Units N
Material input 1,000 29,070 Output to finish goods 850 27,455
Normal loss 100 0
Abnormal loss 50 1,615
1,000 29,070 1,000 29,070

Abnormal Loss Account

Particulars N Particulars N
Period 3 process a/c 1,615 Income statement 1,615

Period 4
Step 1: Determine output and losses
Material input 1000
Normal loss (10%) (100)
Expected units 900*
Actual units (950)
Abnormal gain (50)

Step 2: Determine cost/ unit

Total cost N29,070
Expected unit 900 = N32.3/unit

Step 3: Determine total cost of output & Losses

N
Actual output 950 x N32.3 = 30,685
Normal loss 100 x N0 = 0
Abnormal gain (50) x N32. 3 = (1,615)
1000 = 29,070

Step 4: Prepare the Process Account

Period 4 Process Account

Particulars Units N Particulars Units N
Material input 1,000 29,070 Output to finish goods 950 30,685
Abnormal gain 50 1,615 Normal loss 100 0
1,050 30,685 1,050 30,685

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 Abnormal Gain Account
Particulars N Particulars N
Income statement 1,615 Period 4 Process a/c 1,615

Illustration 3
3,000 units of materials are input to a process. Process costs are as follows:
Materials N11,700
Conversion costs N6,300
Output is 2000 units. Normal loss is 20% of input

Required
Prepare a process account and abnormal loss or gain account

Step 1:
Determine output and losses
Material Input 3,000
Normal Loss (20%) (600)
Expected units 2,400*
Actual units (2000)
Abnormal Loss 400

Step 2: Determine cost/ unit

Cost/unit = Total Cost

Expected units

= N11,700 + N6,300 = N18,000 = N7.50/unit

2,400 2,400

Step 3: Determine total cost of output & Losses

N
Actual output 2,000 x N7.5 = 15,000
Normal loss 600 x N0 = 0
Abnormal loss 400 x N7.5 = 3,000
3,000 18,000

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 3,000 11,700 Output to finish goods 2,000 15,000
Normal loss 600 0
Conversion cost 6,300 Abnormal loss 400 3,000
3,000 18,000 3,000 18,000

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 Abnormal Loss Account
Particulars N Particulars N
Process a/c 3,000 Income statement 3,000
3,000 3,000

LOSSES WITH SCRAP VALUE

When there is scrap value for normal loss, then the normal loss will be given a cost equivalent to
the scrap value. This will reduce the cost of processing. That is to say, you will deduct the scrap
value of normal loss from the process cost and also credit process account with the value.
Steps involved are:
i. Separate scrap value of normal loss from scrap value of abnormal loss or gain
ii. Subtract the scrap value of normal loss from process cost before you determine the cost
of good units. Credit process account to reflect this.
iii. Either subtracts the scrap value of abnormal loss from abnormal loss account by crediting
abnormal loss account. Or subtract the scrap value of abnormal gain from abnormal gain
account by debiting abnormal gain account.

Illustration 4
3,000 units of materials are input to a process. Process costs are as follows:
Materials N11,700
Conversion costs N6,300
Output is 2000 units. Normal loss is 20% of input
The units of loss can be sold for N1 each

Required
Prepare appropriate accounts.

Step 1: Determine output and losses

Material Input 3,000
Normal Loss (20%) (600)
Expected units 2,400*
Actual units (2,000)
Abnormal Loss 400

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 600 x N1 = 600*
Abnormal loss 400 x N1 = 400
1,000

= N11,700 + N6,300 – N600* = N17,400 = N7.25/unit

2,400 2,400
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Step 3: Determine total cost of output & Losses
N
Actual output 2,000 x N7.25 = 14,500
Normal loss 600 x N1 = 600
Abnormal loss 400 x N7.25 = 2,900
3,000 18,000

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 3,000 11,700 Output to finished goods 2,000 14,500
Normal loss (Scrap val. A/C) 600 600
Conversion cost 6,300 Abnormal loss 400 2,900
3,000 18,000 3,000 18,000

Abnormal Loss Account

Particulars N Particulars N
Process a/c 2,900 Scrap value a/c 400
Income statement 2,500
2,900 2,900

Scrap Value Account

Particulars N Particulars N
Process a/c 600
Abnormal loss 400 Cash 1,000
1,000 1,000

Illustration 5
Ayomide has a factory which operates two production processes, cutting and pasting. Normal
loss in each process is 10%. Scrapped units of the cutting process sell for N3 per units whereas
scrapped units of pasting process sell for N5. Output from the cutting process is transferred to the
pasting process. Output from the pasting process is finished output ready for sale.
Relevant information about costs for control period 7 is as follows:

Cutting Process Pasting Process

Units N Units N
Input materials 18,000 54,000
Material transferred to pasting 16,000
Materials from cutting process 16,000
Added materials 14,000 70,000
Labour and overheads 32,400 135,000
Output to finished goods 28,000

Required

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Prepare account for the cutting process, pasting process abnormal loss, and abnormal gain and
scrap value.

Cutting process
Step 1: Determine output and losses
Material Input 18,000
Normal Loss (10%) (1,800)
Expected units 16,200*
Actual units (16,000)
Abnormal loss 200

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 1,800 x N3 = 5,400*
Abnormal loss 200 x N3 = 600
2,000 6,000

:. Cost/ Unit = N54,000 + N32,400 – N5,400 = N81,000 = N5/unit

16,200 16,200

Step 3: Determine total cost of output & Losses

N
Actual output 16,000 x N5 = 80,000
Normal loss 1,800 x N3 = 5,400
Abnormal loss 200 x N5 = 1,000
18,000 86,400

Step 4: Prepare the Process Account

Cutting Process Account
Particulars Units N Particulars Units N
Material input 18,000 54,000 Output to pasting process 16,000 80,000
Normal loss (Scrap val. 1,800 5,400
Labour and overheads 32,400 A/C) 200 1,000
18,000 86,400 Abnormal loss 18,000 86,400

Abnormal Loss Account

Particulars N Particulars N
Scrap value a/c 600
Cutting Process a/c 1,000 Income statement 400
1,000 1,000

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 Scrap Value Account
Particulars N Particulars N
Cutting Process a/c 5,400
Abnormal loss 600 Cash 6,000
6,000 6,000

Pasting process
Step 1: Determine output and losses
Material from cutting process 16,000
Added materials 14,000
30,000
Normal loss (10%) (3,000)
Expected units 27,000*
Actual units (28,000)
Abnormal gain (1000)

Step 2: Determine cost/ unit

Cost/unit = Total Cost – Scrap Value of Normal loss
Expected units
N
Scrap value: Normal loss 3,000 x N5 15,000*
Abnormal gain (1,000) x N5 (5,000)
2,000 10,000

Cost/unit = N80,000 + N70,000 + N135,000 – N15,000 = N270,000 = N10/unit

27,000 27,000

Step 3: Determine total cost of output & Losses

N
Actual output 28,000 x N10 = 280,000
Normal loss 3,000 x N5 = 15,000
Abnormal gain (1,000) x N10 = (10,000)
30,000 285,000

Step 4: Prepare the Process Account

Pasting Process Account
Particulars Units N Particulars Units N
Material from cutting Output to finished goods 28,000 280,000
process 16,000 80,000
Added material 14,000 70,000
Labour and 135,000
overheads 1,000 10,000 Normal loss (Scrap val. 3,000 15,000
Abnormal gain 31,000 295,000 A/C) 31,000 295,000

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 Abnormal Gain Account
Particulars N Particulars N
Scrap value a/c 5,000
Income statement 5,000 Pasting Process a/c 10,000
Cutting 10,000 10,000

Scrap Value Account

Particulars N Particulars N
Abnormal gain 5,000
Pasting Process a/c 15,000 Cash 10,000
15,000 15,000

Abnormal Loss / Gain Account

Particulars N Particulars N
Cutting process 1,000
Scrap value a/c 5,000 Pasting Process a/c 10,000
Income statement 4,600 Scrap value 600
Cutting 10,600 10,600

Scrap Value Account

Particulars N Particulars N
Abnormal loss 600 Abnormal gain 5,000
Cutting process 5,400
Pasting Process a/c 15,000 Cash 16,000
21,000 21,000

LOSSES WITH A DISPOSAL COST

 When normal loss is disposed off with a cost, the cost should be added to increase the
cost of process and divided by the expected good units to give unit cost.
 The normal loss is given no value in the process account
 Include the disposal costs of normal loss on the debit side of process account
 Include the disposal costs of abnormal loss in abnormal loss account and transfer the
balance to income statement.

Illustration 6: Losses with a disposal cost

Suppose that an input to a process is 1,000 units at a cost of N4,500. Normal loss is 10% and
there is no opening or closing inventory. Actual output was 860 units and loss units had to be
disposed off at a cost of N0.90 per unit. Prepare the process account.

11
LOSSES WITH DISPOSAL COST

Illustration 6
Step 1: Determine output and losses
Material Input 1,000
Normal loss (10%) (100)
Expected units 900*
Actual units (860)
Abnormal loss 40

Step 2: Determine cost/ unit

Cost/ unit = Total cost + Disposal Cost of Normal loss
Expected units
N
Disposal Cost: Normal loss 100 x N0.9 = 90*
Abnormal Loss 40 x N0.9 = 36
126
:. = N4,500 + N90*
900 = N5.10/unit

Step 3: Determine total cost of output & Losses

N
Actual output 860 x N5.10 = 4,386
Normal loss 100 x N0 = 0
Abnormal loss 40 x N5.10 = 204
1,000 4,590

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material input 1,000 4,500 Output to finished goods 860 4,386
Normal loss 100 0
Disposal cost 90 Abnormal loss 40 204
1,000 4,590 1,000 4,590

Abnormal Loss Account

Particulars N Particulars N
Process a/c 204
Disposal a/c 36 Income statement 240
240 240

Disposal Account
Particulars N Particulars N
Process a/c 90
Cash a/c 126 Abnormal loss 36
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 126 126
VALUING CLOSING WORK IN PROGRESS
When units are partially completed at the end of a period (and hence there is closing WIP), it is
necessary to calculate the equivalent units of production in order to determine the cost of a
completed units and also value WIP.

EQUIVALENT UNITS
These are notional whole units which represent incomplete work, and which are used to
apportion cost between WIP and completed work.

Illustration 7
1,000kg of materials was input to a process. The process costs are: material N6,200 and labour
and overheads costs N2,850. 800kg were completed during the period. Closing WIP was 100%
complete for materials and 25% complete for labour and overheads.

Required
Prepare the process account.

Solution to Illustration 7

Step 1a: Determine Output and Losses

There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material Labour and Overheads
Input Degree of Equivalent Value degree of Equivalen Value
Completion Units N Completion t Units N
FG 800 100% 800 4,960 100% 800 2,682
CWIP 200 100% 200 1,240 25% 50 168
1,000 1,000 6,200 850 2,850

FG = Finished goods
CWIP = Closing Work-In-Progress

Step 2: Determine Cost/ Equivalent Unit

= Total cost of each element
Equivalent units

= N6,200 N2,850
1,000 = N6.2 850 = N 3.3529

Step 3: Determine Total Cost of Output & Losses

N N
FG 4,960 + 2,682 = 7,642
CWIP 1,240 + 168 = 1,408
9,050

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Step 4: Prepare the Process Account
Process Account
Particulars Units N Particulars Units N
Material input 1,000 6,200 Output to finish goods 800 7,642
Labour & Overheads 2,850 Closing work-in-progress 200 1,408
1,000 9,050 1,000 9,050

Class work
Mary K. operates a process costing system. The following details are available for process 2.
Materials input at the beginning of process 12,000kg costing N18,000
Labour and overheads added N28,000
10,000kg were completed and transferred to the finished goods account. The remaining units
were 60% complete with regard to labour and overheads. There were no losses in the period.

Required
What is the value of closing WIP in the process account?

Solution to Class work

Statement of equivalent unit
Material Labour and Overheads
Input Degree of Equivalent Value degree of Equivalen Value
Completion Units N Completion t Units N
FG 10,000 100% 10,000 15,000 100% 10,000 25,000
CWIP 2,000 100% 2,000 3,000 60% 1,200 3,000
12,000 12,000 18,000 11,200 28,000

Closing inventory (12,000kg – 10,000kg) 2,000kg

Equivalent units of closing inventory = 2,000kg x 60% = 1,200

Cost /Equivalent unit = 18,000 1.5 28,000 = 2.5

12,000 11,200

Total cost
Finished goods 15,000 + 25,000 40,000
Closing WIP 3,000 + 3,000 6,000
46,000

Illustration 8
Suppose that a company is a manufacturer of processed goods, and that results in process 2 for
April 2019 were as follows:
Opening inventory nil
Material input from process 1 4,000 units
Costs of input: N
14
Materials from process 1 6,000
Added materials in process 2 1,080
Conversion costs 1,720
Closing WIP amounted to 800 units, complete as to:
Process 1 material 100%
Added materials 50%
Conversion costs 30%

Required
Prepare the account for process 2 for April 2019.

Solution to Illustration 8
Step 1a: Determine Output and Losses
There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material from Process 1 Added Material Conversion Cost
Input DOC EU Value DOC EU Value DOC EU Value
N N N
FG 3,200 100% 3,200 4,800 100% 3,200 960 100% 3,200 1,600
CWIP 800 100% 800 1,200 50% 400 120 30% 240 120
4,000 4,000 6,000 3,600 1,080 3,440 1,720

FG = Finished goods
CWIP = Closing Work-In-Progress
DOC = Degree of Completion
EU = Equivalent Units

Step 2: Determine cost/ Equivalent unit

= Total cost of each element
Equivalent units

= N6,000 N1,080 N1,720

4,000 = N1.5 3,600 = N0.3 3,440 = N0.5

Step 3: Determine Total Cost of Output & Losses

N N
FG 4,800 + 960 + 1,600 = 7,360
CWIP 1,200 + 120 + 120 = 1,440
8,800

Step 4: Prepare the Process Account

Process Account
Particulars Units N Particulars Units N
Material from process 1 4,000 6,000 Output to finished goods 3,200 7,360
Added materials 1,080
Conversion cost 1,720 Closing work-in-progress 800 1,440
15
 4,000 8,800 4,000 8,800
EQUIVALENT UNITS WITH LOSSES

Illustration 9
A process manufacturing company makes product H using two processes, 1 and 2. The following
figures are available for the last processing period:
Process 1
N
Input materials: 24,000 kg costing 168,000
Labour 52,800
Overheads 13,200
There were no process losses and 19,000 kg were transferred to process 2.
The unfinished production was completed as to materials and 60% complete as to labour and
overheads.

Process 2
N
Completed good production was 15,200 kg
Labour 45,752
Overheads 27,353

Normal loss was 5% of input which was exactly achieved in the period.
The unfinished production was estimated to be 40% completed as to labour and overheads.

You are required to write up the transactions, showing the statement of equivalent units, costs
and cost per unit of each process. Show all workings. (15 Marks)

Solution to Illustration 9
Process 1
Step 1a: Determine Output and Losses
There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material Labour and Overheads
Input Degree of Equivalent Value degree of Equivalent Value
Completion Units N Completion Units N
FG 19,000 100% 19,000 133,000 100% 19,000 57,000
CWIP 5,000 100% 5,000 35,000 60% 3,000 9,000
24,000 24,000 168,000 22,000 66,000

FG = Finished goods
CWIP = Closing Work-In-Progress

Step 2: Determine Cost/ Equivalent Unit

= Total cost of each element
Equivalent units
16
 = N168,000 N52,800 + N13,200
24,000 = N7 22,000 = N3

Step 3: Determine Total Cost of Output & Losses

N N
FG 133,000 + 57,000 = 190,000
CWIP 35,000 + 9,000 = 44,000
234,000

Step 4: Prepare the Process Account

Process 1 Account
Particulars Units N Particulars Units N
Material input 24,000 168,000 Output to process 2 19,000 190,000
Labour 52,800
Overheads 13,200 Closing work-in- 5,000 44,000
24,000 234,000 progress 24,000 234,000

Process 2
Step 1a: Determine Output and Losses
Material from Process 1 19,000
Normal loss (5%) (950)
Expected units 18,050
Actual units:
Finished goods (15,200)
Closing work-in-progress (2,850)
Abnormal loss / (gain) Nil

Step 1b: Prepare Statement of Equivalent Units

Material from Process 1 Labour and Overheads
Input Degree of Equivalent Value degree of Equivalent Value
Completion Units N Completion Units N
FG 15,200 100% 15,200 160,000 100% 15,200 68,005
NL 950 0% 0 0 0% 0 0
CWIP 2,850 100% 2,850 30,000 40% 1,140 5,100
19,000 18,050 190,000 16,340 73,105

FG = Finished goods
NL = Normal Loss
CWIP = Closing Work-In-Progress

Step 2: Determine Cost/ Equivalent Unit

= Total cost of each element
Equivalent units
17
 = N190,000 N45,752 + 27,353
18,050 = N10.5263 16,340 = N4.4740

Step 3: Determine Total Cost of Output & Losses

N N
FG 160,000 + 68,005 = 228,005
NL 0+0 = 0
CWIP 30,000 + 5,100 = 35,100
263,105

Step 4: Prepare the Process Account

Process 2 Account
Particulars Units N Particulars Units N
Material from Process 19,000 190,000 Output to finished goods 15,200 228,005
1 45,752 Normal loss 950 0
Labour 27,353 Closing work-in- 2,850 35,100
Overheads 19,000 263,105 progress 19,000 263,105

VALUING OPENING WORK IN PROGRESS: FIFO METHOD

FIFO means first in first out. This means that it is assumed that the opening WIP are completed
first as to the degree of completion left to make it finished goods before others completed during
the period.

Illustration 10
Suppose that information relating to process 1 of a two stage production is as follows for August
2019:
Opening inventory 500 units: degree of completion 60%
Costs to date N2,800
Costs incurred in August 2019 N
Direct materials (2,500 units introduced) 13,200
Direct labour 6,600
Production overheads 6,600
26,400
Closing inventory 300 units: degree of completion 80%
There was no loss in the process

Required
Prepare process 1 account for August 2019.

18
Solution to Illustration 10
Step 1a: Determine Output and Losses
There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material, Labour and Overhead Costs
Input Degree of Completion Equivalent Value N
Units
FG OWIP 500 (100% - 60%) 40% 200 2,000
New 2,200 100% 2,200 22,000
2,700 2,400 24,000
CWIP 300 80% 240 2,400
3,000 2,640 26,400

FG = Finished goods
OWIP = Opening Work-In-Progress
CWIP = Closing Work-In-Progress

Total units for the period = opening inventory + newly introduced materials
= 500 + 2,500 = 3,000 units

Out of the 3,000 units, 300 units were in closing inventory. This means that 2,700 units were
completed in the period i.e. (3,000 units – 300 units)

When using FIFO inventory valuation method, it is assumed that units in the opening inventory
are completed first with the degree of completion left to make them finished goods before any
other units in the current period.

The 2,700 units completed in the period are divided into units in the opening inventory and units
started and completed in the new period.
Therefore:

500 units The 500 in the opening inventory were 60% completed in the
belong to previous period which means only 40% is left to complete them
opening to finished goods. Therefore the equivalent unit of the 500 units
inventory in this current period is 40% x 500 units = 200

While 2,200 The 2,200 were units started and completed 100% in this current
units belong to period. So their equivalent unit is 100% x 2,200. This 2,200 is
the current derived by deducting the opening inventory of 500 units from the 2,200
period 2,7000 units of finished goods
Total finished Finished goods in the current period is 2,700 but the equivalent
goods in the unit is 2,400 as determined in the statement of equivalent units 2,400
period is
2,700
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Step 2: Determine cost/ Equivalent unit
= Total cost in the New period (Note that cost brought forward is not included)
Equivalent unit

= N13,200 + N6,600 + N6,600

2,640 = N10

Step 3: Determine Total Cost of Output & Losses

N N
FG: OWIP Cost B/F + New Cost 2,800 + 2,000 = 4,800
New 22,000
26,800
CWIP 2,400
29,200

Step 4: Prepare the Process Account

Process 2 Account
Particulars Units N Particulars Units N
Opening work-in-progress 500 2,800 Output to finished goods 2,700 26,800
Material introduced 2,500 13,200
Direct labour 6,600
Production overhead 6,600 Closing work-in- 300 2,400
3,000 29,200 progress 3,000 29,200

Illustration 11
The following information relates to process 3 of a three stage process for the month of January
2020:
Opening inventory 300 units complete as to:
N
Material from process 2 100% 4,400
Added materials 90% 1,150
Labour 80% 540
Production overhead 80% 810
6,900

In January 2020, a further 1,800 units were transferred from process 2 at a valuation of N27,000.
Added materials amounted to N6,600 and direct labour to N3,270. Production overhead is
absorbed at the rate of 150% of direct labour cost. Closing inventory at 31 January 2020
amounted to 450 units, complete as to:
Process 2 materials 100%
Added material 60%
Labour and overheads 50%

Required
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 Prepare the process 3 account for January 2020 using FIFO valuation method.
Solution to Illustration 11
Step 1a: Determine Output and Losses
There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material from Process Added Material Direct labour & POH
Input 2
DOC EU Value DOC EU Value DOC EU Value
N N N
FG : OWIP 300 0% 0 0 10% 30 120 20% 60 300
New 1,350 100% 1,350 20,250 100% 1,350 5,400 100% 1,350 6,750
1,650 1,350 20,250 1,380 5,520 1,410 7,050
CWIP 450 100% 450 6,750 60% 270 1,080 50% 225 1,125
2,100 1,800 27,000 1,650 6,600 1,635 8,175

FG = Finished goods
OWIP = Opening Work-In-Progress
CWIP = Closing Work-In-Progress
DOC = Degree of Completion
EU = Equivalent Units

Step 2: Determine cost/ Equivalent unit

= Total cost in the New period (Note that cost brought forward is not included)
Equivalent unit

= N27,000 N6,600 N3,270 + (150% of N3,270)

1,800 = N15 1,650 = N4 1,635 = N5

Step 3: Determine Total Cost of Output & Losses

N N
FG: OWIP Cost B/F + New Cost 6,900 + 0+ 120 + 300 = 7,320
New 20,250 + 5,400 +6,750 = 32,400
39,720
CWIP 6,750 + 1,080 + 1,125 = 8,955
48,675

Step 4: Prepare the Process Account

Process 2 Account
Particulars Units N Particulars Units N
Opening work-in-progress 300 6,900 Output to finished goods 1,650 39,720
Material from process 2 1,800 27,000
Added materials 6,600
Direct labour 3,270
Production overhead _____ 4,905 Closing work-in- 450 8,955

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(150% of labour cost) 2,100 48,675 progress 2,100 48,675

Note Opening Work-In-Progress 300

Material transferred from process 2 1,800
Material Available 2,100
Closing work-in-progress (450)
Finished goods divided into: 1,650:
Opening Work-In-Progress 300
New finished goods 1,350

VALUING OPENING WORK IN PROGRESS: WEIGHTED AVERAGE METHOD

Using this method, there is no difference between opening WIP and finished goods started and
completed fully in the new process. The total output is given a common cost. To arrive at this
cost, the cost brought forward for opening WIP is added to cost incurred in the new process with
the assumption that the opening WIP has just started and completed in the new process.
Note that when using weighted average method, opening WIP units count as full equivalent unit
of production while closing WIP is assessed the same way it used to be i.e. applying the degree
of completion to determine the equivalent units.

Illustration 12
Opening WIP 300 units completed as to 70% costing N1,000
Added material during the period (700 units) N5,000
Output for the period was 800 units and closing WIP was 80% complete.

Required
Prepare the process account

Solution Illustration 12
Step 1a: Determine Output and Losses
There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Input Material, Labour and Overhead Costs
Degree of Completion Equivalent Value N
Units
FG 800 100% 800 5,000
CWIP 200 80% 160 1,000
1,000 960 6,000

Step 2: Determine cost/ Equivalent unit

= Cost brought forward + New Cost
Equivalent unit

= N1,000 + N5,000

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 960 = N6.25
Step 3: Determine Total Cost of Output & Losses
N
FG 5,000
CWIP 1,000
6,000

Step 4: Prepare the Process Account

Process 2 Account
Particulars Units N Particulars Units N
Opening work-in-progress 300 1,000 Output to finished goods 800 5,000
Added material 700 5,000 Closing work-in-progress 200 1,000
1,000 6,000 1,000 6,000

Illustration 13
Guress produces an item which is manufactured in two consecutive processes. Information
relating to process 2 during February 2019 is as follows:
Opening inventory 800 units
Degree of completion: N
Process 1 materials 100% 4,700
Added materials 40% 600
Conversion cost 30% 1,000
6,300
During February 2019, 3000 units were transferred from process 1 at a valuation of N18,100.
Added materials cost N9,600 and conversion costs were N11,800.
Closing inventory at 28 February 2019 amounted to 1,000 units which were 100% complete with
respect to process 1 materials and 60% complete with respect to added materials. Conversion
cost was 40% complete.
Guress uses a weighted average cost method for the valuation of output and closing inventory.

Required
Prepare the process 2 account for February 2019.

Solution Illustration 13

Step 1a: Determine Output and Losses

There are no losses in this question

Step 1b: Prepare Statement of Equivalent Units

Material from Process 1 Added Material Conversion Cost
Input DOC EU Value DOC EU Value DOC EU Value
N N N
FG 2,800 100% 2,800 16,800 100% 2,800 8,400 100% 2,800 11,200
CWIP 1,000 100% 1,000 6,000 60% 600 1,800 40% 400 1,600
3,800 3,800 22,800 3,400 10,200 3,200 12,800

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Step 2: Determine cost/ Equivalent unit
= Cost brought forward + New Cost
Equivalent unit

= N4,700 + N18,100 N600 + N9,600 N1,000 + N11,800

3,800 = N6 3,400 = N3 3,200 = N4

Step 3: Determine Total Cost of Output & Losses

N N
FG 16,800 + 8,400 + 11,200 = 36,400
CWIP 6,000 + 1,800 + 1,600 = 9,400
45,800

Step 4: Prepare the Process Account

Process 2 Account
Particulars Units N Particulars Units N
Opening work-in-progress 800 6,300 Output to finished goods 2,800 36,400
Material from process 1 3,000 18,100
Added materials 9,600
Conversion cost _____ 11,800 Closing work-in-progress 1,000 9,400
3,800 45,800 3,800 45,800

Note: Opening Work-In-Progress 800

Material transferred from process 1 3,000
Material available 3,800
Closing work-in-progress (1,000)
Finished Goods 2,800

WHICH METHOD SHOULD BE USED?

FIFO inventory valuation is more common than the weighted average method, and should be
used unless an indication is given to the contrary. You may find that you are presented with
limited information about the opening inventory, which forces you to use either the FIFO or the
weighted average method. The rules are as follows:
(a) If you are told the degree of completion of each element in opening inventory, but
not the value of each cost element, then you must use the FIFO method
(b) If you are not given the degree of completion of each cost element in opening
inventory, but you are given the value of each cost element, then you must use the
weighted average method.

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