Processing Costing and Equivalent Units

Processing Costing and Equivalent units

Process costing is an average cost of the units but we have partly completed units in the opening and closing balance it is difficult to calculate the average cost. Therefore the concept of equivalent unit is introduced in the processing cost.

The average cost is calculated by dividing the total cost with the equivalent unit.

Formula of equivalent unit

Physical unit X % of completion

The physical units are multiplied with percentage degree of completion to get the equivalent units.

Example of equivalent unit

We have work in progress which is 100% complete with respect of material and only 40% complete with respect of conversion cost and number of units are 1200.

Solution

                                                                     Equivalent units

Material   1200 X 100 %                                           1200

Conversion Cost  1200X 40%                                      480

Process Costing and Normal Loss

Process Costing

Process costing is used where there are homogeneous product of either the product cannot be separated from the other product or there are a large number of product with small value. The typical example is liquid product like oil industry, paint industry and stationary items etc.

The paint and oil industry are the examples where the product cannot be separated from each other and stationary industry is typical example of small items are produced with small cost.

Normal Loss with no scrape value

The normal is the expected loss in the process of production. This is a loss which is expected in industry. This loss cannot be avoided and therefore may be called as inherent loss. The accounting treatment the normal loss is not valued at output. The process costing is done to assign average value of per unit.in case of normal loss the average value is calculated by actual cost by normal out i.e an output does not include the normal loss. The normal output may also be called as expected output.

Example Normal Loss with no scrape value

Input (material) 3000 units        $ 5000

Labour                                        $ 500

Overheads cost                          $ 500

Actual output is 2700 units

Solution

Out put

                           Units      Cost      Total Cost

Material             2,700       2.2              6000

Loss                      300

Total                   3000                           6000

 Total input Cost/ Normal output

= 6000/2700

=  2.2

Normal with Scrape Value

When there is scrape value of normal loss than normal loss is valued at given value. The average cost of per unit is reduced by that value.

Average Cost per unit = Input Cost – Scrape value/Normal Output

Example of normal loss with scrape value

Example Normal Loss

Input (material) 3000 units   $ 5000

Labour                                        $ 500

Overheads cost                        $ 500

Actual output is 2700 units and normal loss is value at $ 3 per unit

Solution

=   (6000- 900)/2700

=  1.889 Average cost

= 2700 unit X 1.889

= 5,100 (Output)

=  300 units  X 3 = 900 (Normal Loss)