CSR - Process Costing and O/Heads

mrb82
mrb82 Well-KnownRegistered Posts: 147
Morning all,

I'm currently working through process costing at college and I'm getting really confused about overheads, WIP and equivelant units.

In a two process, er, process, output from process 1 is, say £10,000 (this includes the output, direct labour and o/heads (which is 200% of prime cost). Direct Labour for process 2 is £2,000. We have been told that the o/heads for process two is p1 o/put plus DL x 200%, but then we are adding DL of £2,000 to this figure again. I don't undderstand why we are including the DL twice for process 2? Does this make sense?

Also, Equivelent WIP units and assigning conversion costs throw me completely, but that's a seperate issue! :)

Thanks if any one can help explain this!

Comments

  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    Have a look on the Chichester thread for example this posting

    There are a couple of aat-interactive links too
    This is one:
    http://www.aat-interactive.org.uk/elearning/learning_zone/AAT750018_E0902/
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    mrb82 wrote: »
    Morning all,

    In a two process, er, process, output from process 1 is, say £10,000 (this includes the output, direct labour and o/heads (which is 200% of prime cost). Direct Labour for process 2 is £2,000. We have been told that the o/heads for process two is p1 o/put plus DL x 200%, but then we are adding DL of £2,000 to this figure again. I don't undderstand why we are including the DL twice for process 2? Does this make sense?

    In process 2 do you have the following inputs?
    from Process 1 units not stated cost £10,000
    Direct Labour ................................. £2,000
    Overheads .................................... £4,000

    If so, we are not charging labour twice - the £4,000 is simply the overhead and labour cost was the basis for recovery.

    If not, please spell out what labour costs are being charged to process 2.
    Sandy
    [email protected]
    www.sandyhood.com
  • mrb82
    mrb82 Well-Known Registered Posts: 147
    Hello!

    Thank you for replying!

    This is the actual question (I used £10,000 as a general figure previously):

    Materials Input to Process 1 : 6,000 ltr @£2.00
    Direct Labour: Process 1 : £3,000
    Process 2 : £2,000
    Production Overheads for each Dept. : 200% of Prime Cost
    Transfer from Process 1 to Process 2 : 5,540 ltr *The value of this figure is £46,166.66
    Final Product output from Process 2 : 5,010 ltr
    Normal Loss in processing : Process 1 : 10% *This is 600 ltr and there is an Abnormal Gain of 140 ltr, £1,166.66
    Process 2 : 6%
    There was no opening or closing WIP in either department.


    If you need anything explaining, let me know as I understand it's hard to understand what people are trying to say sometimes. Also, apologies for the formatting! It looks fine as I type this :)

    Many thanks
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    Does this help?

    I think you need to get to grips with the sequence in process costing questions.
    I've suggested a Chichester student might like to help

    Attachment not found.
    Sandy
    [email protected]
    www.sandyhood.com
  • mrb82
    mrb82 Well-Known Registered Posts: 147
    Thank you for replying Sandy.

    I understand the sequence of process costing and how to write up the accounts, it's just in this particular excercise I don't understand why we are adding on two lots of labour costs to process two. I have put down what we got in class as the process 1 and 2 accounts (took some reworking from my colleague's paper as the rounding is all over the place).

    If I understood why there are two lots of Labour assigned to Process 2, I'd be a happy bunny as I understand the rest!
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    If I understood why there are two lots of Labour assigned to Process 2, I'd be a happy bunny as I understand the rest!

    Look at the input cost again:
    Labour is charged at £2,000 and that is the [size=+1]only[/size] labour cost

    Overheads (i.e. credit overhead control account and debit process 2 account) is £96,333.33 and has been calculated as:
    PRIME COST (material + labour) x 200%

    If you went out with a group of people for your Christmas meal and everyone worked out their individual food cost, which for an extreme example came to £120 for 12 people (one person might be £8, another £14 etc but the total is £120) and the bill came (and it cost £360 because of wine, joint items on the table eg breadsticks, olives, tip etc) Then one solution is to say
    OK - bill is £360, food cost was £120 - so everyone has to pay 3x their food cost

    The person who had the £8.00 meal would then pay:
    Food £8.00
    Other items £16.00
    Total £24.00

    He or she hasn't paid for any more food than he or she had, it is just that the other items (overheads) have been divided up (absorbed) on the basis of the food cost.

    In the process account the labour cost is £2,000
    the overhead is (£46,166.66 + £2,000.00 = £48,166.66 x 200%) £96,333.33
    And this pays for the non-specific costs in the process (not the direct labour)
    Sandy
    [email protected]
    www.sandyhood.com
  • mrb82
    mrb82 Well-Known Registered Posts: 147
    Thank you Sandy. I still don't quite get it, but I've printed your Christmas meal example so I can mull it over.

    I'm sure it will click :)

    Thanks again
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    there are two lots of Labour assigned to Process 2

    Well, where is the second one?
    Labour is charged at £2,000 and that is the only labour cost
    Sandy
    [email protected]
    www.sandyhood.com
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