CMA Intermediate · Cost Accounting

Process 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) ÷ (Input units − Normal loss units); Basic idea. Details and the treatment of work-in-progress are in the later process costing topics.
Cost transferred to next process: Transfer = Units completed × Cost per unit; The transfer becomes the opening input cost of the next process.
Process account structure: Debit: opening WIP, materials, labour, direct expenses, overheads, abnormal gain. Credit: normal loss (at scrap value), abnormal loss, closing WIP, transfer to next process or finished goods.; The units and the amounts on the two sides must balance. Abnormal loss is debited to the Abnormal Loss account and credited to the process account.
Cost per unit of a process: Cost per unit = (Total process cost − Scrap value of normal loss) ÷ (Units input − Normal loss units); Total process cost includes the cost transferred in from the previous process. Use expected output, which is units input less normal loss.
Normal loss units: Normal loss units = Normal loss % × Units input; Read the question carefully. Normal loss is usually a percentage of input, unless it says otherwise.
Value of abnormal loss: Abnormal loss value = Abnormal loss units × Cost per unit; Credit the process account. Debit Abnormal Loss Account. If the lost units have scrap value, credit Abnormal Loss Account and debit Scrap or Cash for it.
Value of abnormal gain: Abnormal gain value = Abnormal gain units × Cost per unit; Debit the process account. Credit Abnormal Gain Account. Scrap value that normal loss would have given on those units is then adjusted in the gain account.
Abnormal loss or gain units: Abnormal loss or gain = Actual output − Expected output; If actual output is less than expected, it is abnormal loss. If more, it is abnormal gain.
Process account journal entries: Dr Process A/c, Cr Stores / Wages / Overhead control; Dr Process B/c, Cr Process A/c for transfer; Dr Finished Goods, Cr last Process A/c; Also: Dr Scrap/Cash, Cr Process A/c for normal loss scrap. Dr Abnormal Loss A/c, Cr Process A/c for abnormal loss.
Normal loss units: Normal loss units = Normal loss % × Input units; Apply the percentage to input unless the question says otherwise, for example to good output. Read the wording carefully.
Cost per unit: Cost per unit = (Total process cost − Scrap value of normal loss) ÷ (Input units − Normal loss units); Total process cost includes opening WIP, materials, labour and overheads. The denominator is expected good output.
Abnormal loss units: Abnormal loss units = Actual loss units − Normal loss units; Applies when actual loss is more than normal loss. Actual loss = Input − Actual output (with no WIP).
Abnormal gain units: Abnormal gain units = Normal loss units − Actual loss units; Applies when actual loss is less than normal loss.
Value of abnormal loss or gain: Value = Abnormal units × Cost per unit; The same rate as good output. Scrap is not deducted in this rate.
Net abnormal loss: Net abnormal loss = Abnormal loss units × (Cost per unit − Scrap value per unit); Transferred to Costing Profit and Loss Account as a loss.
Net abnormal gain: Net abnormal gain = Abnormal gain units × (Cost per unit − Scrap value per unit); Transferred to Costing Profit and Loss Account as a gain.
Equivalent units: Equivalent units = Physical units × % completion; Work this out separately for materials and for conversion cost. Use the % for each element.
Equivalent units: weighted average: EU = Units completed and transferred out + (Closing WIP units × % completion); Opening WIP is ignored in the count. Its full work is already inside the completed units.
Equivalent units: FIFO: EU = Work to finish opening WIP + Units started and completed + (Closing WIP units × % completion); Work to finish opening WIP = opening WIP units × (100% − % already done).
Units started and completed (FIFO): Started and completed = Units transferred out − Opening WIP units; Valid when all opening WIP is completed and transferred out in the period.
Cost per equivalent unit: weighted average: (Opening WIP cost + Current period cost) ÷ Equivalent units; Calculate for each cost element.
Cost per equivalent unit: FIFO: Current period cost ÷ Equivalent units; Opening WIP cost is not in the rate. It is added to the cost of units transferred out.
Valuation of closing WIP: Closing WIP = Σ (Closing WIP equivalent units of each element × cost per equivalent unit of that element); Check: total cost charged to the process = cost of units transferred out + closing WIP (+ abnormal loss, − abnormal gain, where they arise).
Transfer price: Transfer price = Cost + Profit; The profit is a given percentage, either on cost or on transfer price. Read the wording carefully.
Profit on cost to profit on transfer price: Profit as % of transfer price = x ÷ (100 + x) when the margin is x% on cost; Example: 25% on cost means 25 ÷ 125 = 20% of transfer price, or 1/5.
Profit on transfer price: Profit = p% × Transfer price when the margin is p% on transfer price; Example: 20% on selling (transfer) price means profit is 1/5 of the transfer price.
Unrealised profit in stock: Unrealised profit = Transferred-in portion of stock (at transfer price) × Profit ÷ Transfer price; Apply it only to the portion that came from the earlier process. Do not apply it to cost added in the current process.
Cumulative unrealised profit: Total unrealised profit in stock = Σ (Profit of each earlier process in the output × Fraction of output held in stock); Use this for multi-process questions where the stock carries profit from several transfers.
Adjustment for the year: Charge to P&L = Closing provision − Opening provision; A positive result reduces profit. A negative result increases profit.
Stock at true cost: Stock at cost = Stock at book value − Provision for unrealised profit; Use this to cross-check your answer.
Physical unit method: Joint cost share of a product = Joint cost × Units of product ÷ Total units of all joint products; Gives the same cost per unit to every product. Use it when products are alike in units and value.
Sales value at split-off: Share = Joint cost × Sales value of product at split-off ÷ Total sales value at split-off; Use when every product can be sold at split-off point.
Net realisable value (NRV) method: NRV = Final sales value − Further processing cost − Selling and distribution cost after split-off; Apportion joint cost in the ratio of NRV. Use it when products need processing after split-off.
Constant gross margin NRV method: Joint cost of a product (balancing figure) = Final sales value − Gross profit at the common percentage − Further processing cost; Overall gross profit % = (Total final sales value − Total joint cost − Total further processing cost) ÷ Total final sales value. Here the total joint cost is net of any by-product credit. Every product gets the same gross profit %. The joint cost of each product is the balancing figure, and the shares must add up to the net joint cost.
By-product: credit to process: Net joint cost = Total joint cost − Net realisable value of by-product; NRV of by-product = Sale value − its separate processing, selling and distribution costs.
By-product: reinstated cost: By-product value = Selling price − Estimated profit − Selling and distribution costs − Post-split-off cost; This is the reverse cost method. Use it when the question gives the profit margin to be allowed on the by-product.

Quick revision

Process costing suits continuous production of similar units across several processes.
The output of one process is the input of the next.
Normal loss is expected and its cost is absorbed by good units.
Scrap value of normal loss is credited to the process account.
Cost per unit = (total cost − scrap value of normal loss) ÷ (input units − normal loss units).
Abnormal loss is valued at the cost per unit of normal output. Its cost, net of any scrap value realised, is written off to the Costing Profit and Loss Account.
Abnormal gain is valued at the cost per unit of normal output. Its benefit, net of the scrap value not realised, goes to the Costing Profit and Loss Account.
Equivalent units = completed units + (units in WIP × percentage of completion).
Calculate equivalent units separately for materials, labour and overheads.
Unrealised profit in closing stock is removed to show stock at cost.
By-product income is either credited to the main process or treated as other income, as the question states.
Always prepare the quantity statement first, then the cost statement.

Common mistakes

Treating process costing as a technique like marginal costing. Fix: Remember: job, batch, contract, process and operating costing are methods. Marginal and standard costing are techniques.
Saying each unit's cost is found exactly in process costing. Fix: Say the cost is an average per unit, found by dividing process cost by output.
Dividing total cost by input units instead of expected output units. Fix: Always write the denominator as input minus normal loss. Write it out in a working line.
Forgetting to deduct the scrap value of normal loss from total cost. Fix: Credit normal loss at its scrap value in the account, and deduct it in the numerator of the rate.
Charging abnormal loss to good units by dividing cost by actual output. Fix: Divide by input minus normal loss only. Abnormal loss is valued at that rate and moved out of the process.
Deducting scrap value of abnormal loss when finding the cost per unit. Fix: Only the scrap of normal loss goes into the rate. Scrap on abnormal loss is credited to the Abnormal Loss Account.
Using the same % completion for all cost elements Fix: Read where materials are added. If materials are fully issued at the start, they are 100% complete even when conversion is only 40%. Keep separate columns.
Counting opening WIP twice in weighted average Fix: In weighted average, completed units already include opening WIP. Add only the closing WIP equivalent units.
Applying 25% on cost directly to the transfer price. Fix: Convert first. A margin of x% on cost is x ÷ (100 + x) of the transfer price. For 25% on cost, that is 1/5 of transfer price.
Charging the profit fraction on the whole stock value, including the current process's own cost. Fix: Split the stock into the transferred-in portion and the portion added in the current process. Apply the fraction only to the transferred-in portion.

Exam tips

Prepare a ready two-column table of job versus process costing. It is the most repeated question.
In MCQs, spot keywords: 'continuous', 'standard product', 'successive processes'.
Write at least four features and tie each to a one-line reason to earn full marks.
Name specific industries with their processes, not just the industry.
Do not spend long on this topic. Move on to normal loss and equivalent production, where numerical marks are.
Show a clear working note for normal loss units, expected output and cost per unit. Step marks are given for each of these even if a later figure is wrong.
Draw the account with separate quantity and amount columns. It makes the balance check easy and shows the examiner the units flow.
Read whether normal loss is a percentage of input, of transferred-in units, or of output. Mark the base in the question before you start.