CA Intermediate · Cost and Management Accounting

Process & Operation Costing: formula sheet

Full chapter guide

Key formulas

Cost per unit of a process: Cost per unit = (Total process cost − Realisable value of normal loss) ÷ Expected output units; Expected output = Input − Normal loss units. Use it when there is no opening or closing WIP.
Total process cost: Material + Labour + Direct expenses + Absorbed overheads + Cost transferred from previous process; The previous process transfer is treated as material in the next process.
Normal loss rule: Normal loss is borne by good units; its scrap value is credited to the process account; Normal loss is unavoidable under normal conditions. Its cost is not charged separately.
Equivalent units (basic idea): Equivalent units = Physical units × Percentage of completion; Needed when closing WIP exists. Detailed method is in the equivalent production topic.
Expected (normal) output: Input units − Normal loss units; Normal loss is usually a percentage of input units, unless the question says otherwise. Read the base carefully.
Cost per unit of good output: (Total process cost − Scrap value of normal loss) ÷ (Input units − Normal loss units); Total cost includes opening WIP, materials, labour and overheads of the process. Use this when there is no closing WIP, or after equivalent units are worked out.
Abnormal loss units: Normal output expected − Actual output (when actual is less); Equivalently, actual loss units − normal loss units.
Value of abnormal loss: Abnormal loss units × Cost per unit of good output; Credit the process account, debit Abnormal Loss account. Scrap realised on these units is credited to Abnormal Loss account. Valuing abnormal loss and abnormal gain at the cost per unit of good output assumes the loss is recognised at the end of the process. If it is recognised at an earlier stage, use equivalent units instead.
Net abnormal loss to Costing P&L: Abnormal loss units × cost per unit − Scrap value realised on them; This is a loss, debited to Costing Profit and Loss Account.
Abnormal gain units: Actual output − Expected output (when actual is more); Equivalently, normal loss units − actual loss units.
Value of abnormal gain: Abnormal gain units × Cost per unit of good output; Debit the process account, credit Abnormal Gain account. As with abnormal loss, this assumes the gain is recognised at the end of the process; otherwise use equivalent units.
Net abnormal gain to Costing P&L: Abnormal gain units × (Cost per unit − Scrap rate per unit); The scrap value of these units was never received, so it is adjusted through Normal Loss account.
Normal loss account: Dr: Normal loss units × scrap rate (from the process account). Cr: Actual scrap sales of the normal loss units; and, if there is abnormal gain, the scrap value of the gain units (gain units × scrap rate).; This is a clearing account in the ledger. The Abnormal Gain account is debited with the same scrap value of the gain units that is credited here. So the Normal Loss account closes to nil. In the case of abnormal loss, the scrap on the abnormal loss units is credited to the Abnormal Loss account, not to the Normal Loss account.
Equivalent units: Equivalent units = Units × % completion (for that cost element); Work this out separately for each material and for conversion cost.
Cost per equivalent unit: Cost per equivalent unit = Cost of the element ÷ Equivalent units of the element; Do this element by element. Add the elements to get the total cost per unit.
Weighted average: equivalent units: Units completed and transferred out + (Closing WIP units × % completion); Opening WIP is treated as if it were started and finished this period, so it is not shown separately.
Weighted average: cost: Cost = Opening WIP cost of the element + Current period cost of the element; Divide this total by the equivalent units of the element.
FIFO: equivalent units: Opening WIP units × % still to be completed + Units started and completed + Closing WIP units × % completion; Units started and completed = Units transferred out − Opening WIP units.
FIFO: cost: Cost used = Current period cost of the element only; Opening WIP cost is carried to the transferred-out value as a separate lump, not used in the rate.
FIFO: cost of transferred-out units: Opening WIP cost + Cost to complete opening WIP + Started and completed units × current cost per unit; Cost to complete opening WIP = Equivalent units of work done now × current rate.
Units reconciliation: Opening WIP + Units introduced = Units transferred out + Closing WIP + Normal and abnormal loss; Check this before you start. A units mismatch ruins every later step.
Cost check: Cost of units transferred out + Closing WIP value (+ abnormal loss) = Opening WIP cost + Current period cost; Use this to check your final answer.
Transfer price (profit on cost): Transfer price = Cost × (1 + profit % on cost); Example: 25% on cost means transfer price = 125% of cost.
Transfer price (profit on transfer price): Transfer price = Cost ÷ (1 − profit % on transfer price); 25% on transfer price means cost is 75% of transfer price, so profit = 1/3 of cost.
Profit in the transfer: Profit = Transfer price − Cost; This is the profit shown in the transferring process account.
Unrealised profit in stock: Unrealised profit = Stock value at transfer price (transferred-in portion) × Profit ÷ Transfer price; For 25% on cost, the fraction is 25/125 = 20% of transfer price. Apply only to the transferred-in portion.
Adjustment in provision: Adjustment = Closing provision − Opening provision; An increase reduces profit. A decrease adds to profit.
Cost-based profit: Cost-based profit = Profit as per books − Increase in provision (or + decrease); This is the real profit of the firm.
Physical units method: Share of joint cost = (Units of product ÷ Total units of all joint products) × Joint cost; Use one common unit. Gives the same cost per unit to every product.
Sales value at split-off method: Share of joint cost = (Sales value of product at split-off ÷ Total sales value at split-off) × Joint cost; Use only when the product is saleable at split-off.
Net realisable value (NRV) method: NRV = Final sales value − Further processing cost − Selling and distribution cost (if given); Share of joint cost = (NRV of product ÷ Total NRV) × Joint cost.
Net joint cost after by-product: Joint cost to apportion = Total joint cost − Net by-product income; Net by-product income = By-product sales − its separate processing and selling costs.
Average (constant gross margin) idea: Margin % = (Total final sales − Joint cost to apportion − Total further cost) ÷ Total final sales, where Joint cost to apportion = Total joint cost − Net by-product income. Then, for each product: Joint cost = Product's final sales − (Margin % × Product's final sales) − Product's further cost; This method needs the final sales value of every joint product. Every product is given the same margin % on its own final sales. Joint cost to apportion is the total joint cost after deducting net by-product income. Each product's joint cost is what remains of its final sales after the common margin and its own further cost. The shares add up to the joint cost to apportion.
Cost per unit of an operation: Cost per unit of operation = Total cost of the operation ÷ Units processed in the operation; Use units that actually pass through that operation. Normal loss adjustments, if given, come first.
Operation cost for a batch: Operation cost for a batch = Cost per unit of operation × Units of the batch passing through it; Charge only the operations the batch actually goes through.
Total cost of a product or batch: Total cost = Material cost + Σ (Operation cost per unit × Units); Σ means the sum over all operations used. Material is normally charged directly to the batch.
Overhead rate per unit for an operation: Overhead rate = Overhead of the operation ÷ Units (or hours) of the operation; Use the same base for absorption as given in the question, such as machine hours or units.

Quick revision

Process costing suits continuous production of identical units, with cost collected process by process.
Normal loss is expected and unavoidable; its cost is borne by good units, and any scrap value reduces process cost.
Abnormal loss is valued at the cost per unit of good output and is written off to the costing profit and loss account.
Abnormal gain is also valued at the cost per unit of good output and is credited to the costing profit and loss account.
Cost per unit = (total process cost − scrap value of normal loss) ÷ (input units − normal loss units).
Equivalent units = units × percentage of completion, worked out separately for material, labour and overheads.
FIFO treats opening work-in-progress as completed first, so only its remaining work is costed at current rates.
Weighted average merges opening work-in-progress cost with current cost and uses one blended rate.
Inter-process profit makes the closing stock overvalued, so you create a reserve for the unrealised profit.
Joint products are valued by apportioning common cost; by-product income is usually credited to the main process or treated as other income.
Operation costing finds the cost of each operation in mass or batch production and then adds up the cost to the finished unit.

Common mistakes

Treating process costing as the same as batch costing because both deal with identical units. Fix: Batch costing treats a batch as a job with its own cost sheet. Process costing collects cost per process per period with no batch identity.
Saying that cost is collected for each unit or each order in process costing. Fix: Say that cost is collected per process for a period, and unit cost is an average.
Dividing total cost by input units instead of expected output units. Fix: Always write the denominator as input − normal loss units before dividing.
Forgetting to deduct the scrap value of normal loss from total cost. Fix: Credit normal loss scrap to the process account and subtract it in the cost per unit formula.
Using one completion percentage for all cost elements. Fix: Read the question for each element. When materials are added at the start, WIP is 100% complete for materials. Use separate columns.
Using the full opening WIP units in FIFO equivalent units. Fix: In FIFO, count only the balance of work done on opening WIP this period: units × (100% − % already done).
Taking the provision on the whole closing stock value. Fix: Split stock into transferred-in value and own-process cost. Apply the profit fraction only to the transferred-in value.
Using 25% of stock value when the margin is 25% on cost. Fix: Convert first. Profit on cost of 25% means profit is 25/125 = 20% of transfer price.
Apportioning the total joint cost without deducting by-product income. Fix: Read the output list first. Subtract net by-product income, then apportion the balance.
Using final sales value instead of NRV when further processing costs are given. Fix: Deduct further processing (and selling cost if stated) from final sales before finding the ratio.

Exam tips

Theory questions often ask for the meaning, features and a contrast with job or batch costing. Prepare a ready five-point comparison.
Name at least four industries and one process flow, such as cane to juice to sugar, to show real understanding.
In a numerical, always show normal loss units, scrap value and expected output before you divide.
Check units balance in the process account. Most arithmetic slips show up there.
For MCQs, one keyword (continuous, homogeneous, order) usually decides the answer.
Start every answer with the units statement. Even if the rupee figures go wrong, you still earn marks for correct units, normal loss and abnormal item.
Read whether normal loss is a percentage of input, of output, or of units passing through a stage. This changes the denominator and the whole answer.
Show the Normal Loss, Abnormal Loss or Abnormal Gain accounts when the question asks to 'prepare accounts'. A process account alone will not earn full marks.