Explain the Frequently Used Terms In Process Costing

January 24th, 2009 Comments off
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Append below a snapshot of some frequently used terms in process costing. Before we go further, we should first understand the term process costing which is “the costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced the period”

Snapshot of Frequently Used Terms in Process Costing:

Equivalent Unit

  • Number of units in relation to given percentage e.g. opening work-in-progress 5000 units valued at $15,000 with a degree of completion being materials 100%, labor 80% and overheads 75%. The balance equivalent units to be completed will then be:
  • Materials: Nil
  • Labor:20/100 x 5,000 = 1,000
  • Overheads:25/100 x 5,000 =1,250

Waste

  • The loss incurred during the process

Abnormal Loss

  • Is the difference between actual loss and normal loss where actual loss is greater than the normal loss provided for.

By-Product

  • The product generated in the process of producing the main product e.g. groundnut chunks are generated in the process of producing groundnut oil

Joint Costs

  • The cost that is incurred together in the process of producing the main product

Split-Off Point

  • The point at which the output is split into different varieties e.g after Process 1 and Process 2, there are 2 products as shown.
  • Process 1 & Process 2 à Output, 300 kg split into Product A,200kg and Product B,100kg

Scrap

  • The loss that is sold as scrap. The scrap value is always very low in comparison with the cost.

Degrees Of Completion

  • The percentage of units completed e.g. closing work-in-progress-materials 100%, labor 70% and overheads 50%

Notional (Or Net) Sales Value

  • The sales value after deducting the sale of scrap

Joint Products

  • Products that are jointly produced in the process of producing the main product

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