ACCA Process Costing, Joint Product and Further Processing Notes by PW

Process costing is used when a business produces large quantities of similar or identical products through a continuous production process. Unlike job costing, costs are collected for each process and then assigned to the units produced.

For ACCA Management Accounting preparation, it is important to understand process costing, equivalent units, joint products, by-products and the decision to sell a product at the split-off point or process it further. These concepts help students apply the right costing method to different production situations.

The Process Costing, Joint Product and Further Processing PDF by PW covers the main concepts and calculations related to process costing, joint products and by-products, accounting for by-products and further processing decisions.

Process Costing

Process costing is a costing method used when products are produced continuously and individual units are not separately identifiable. Costs are collected for each process over a period and then divided between the units produced.

Process costing is commonly used in industries such as:

• Oil refining

• Chemical manufacturing

• Food processing

• Cement production

• Paint manufacturing

• Paper manufacturing

In process costing, each process is treated as a separate cost centre. The cost of materials, labour and production overheads is collected for the process and then assigned to the output.

Process Costing and Equivalent Units

In some cases, all units are not fully completed at the end of an accounting period. Some units may still be in progress.

Equivalent units are used to express partially completed units as an equivalent number of fully completed units.

For example, if 500 units are 60% complete, they represent:

500 × 60% = 300 equivalent units

The level of completion may be different for materials and conversion costs, so the information given in the question needs to be checked carefully.

Process Costing Calculation

A basic process costing calculation can be represented as:

Cost per equivalent unit = Total process cost ÷ Total equivalent units

The cost is then assigned between completed units and closing work in progress based on their equivalent units.

Students preparing for the ACCA MA exam should practise these calculations regularly because process costing questions can involve several stages and different levels of completion.

Joint Product Costing

Joint products are two or more products that are produced from the same production process. They are usually significant products that generate revenue for the business.

For example, an oil refinery may produce petrol, diesel and other products from the same initial process.

The costs incurred before the products become separately identifiable are known as joint costs.

The point where the products become separately identifiable is called the split-off point.

A simple production flow can be shown as:

Common Production Process → Split-off Point → Product A + Product B

Joint product costing is used to determine how the common costs should be allocated between the different products.

Methods of Allocating Joint Costs

Joint costs may be allocated using different methods, depending on the information available in the question.

Common methods include:

• Sales value at split-off

• Physical units

• Net realisable value

For example, under the sales value method, a product with a higher sales value will receive a larger share of the joint cost.

Students should read the question carefully to identify which method is required before starting the calculation.

Joint Products and By-Products

Joint products and by-products are not the same.

Joint products are the main products produced from a common production process and generally have significant sales values.

By-products are secondary outputs that arise from the production process and normally have a lower value than the main products.

For example, a production process may create one main product and a smaller quantity of a secondary product that can also be sold. The secondary product may be treated as a by-product.

Accounting for By-Products

Although a by-product is not the main output, it can still generate income for the business.

One common approach is to use the net realisable value of the by-product to reduce the cost of the main product.

The net realisable value can be calculated as:

NRV = Selling price − Further processing costs − Selling costs

For example, if a by-product can be sold for $10,000 and requires $2,000 of further processing costs, its NRV would be:

$10,000 − $2,000 = $8,000

Depending on the method specified in the question, this amount may be deducted from the cost of the main product.

Further Processing Decision

After products reach the split-off point, a business may have two choices. It can sell the product immediately or process it further before selling it.

This is known as the further processing decision.

The business should compare the additional revenue from further processing with the additional costs required to process the product further.

The basic calculation is:

Incremental profit = Additional revenue − Additional processing cost

If the additional revenue is greater than the additional cost, processing the product further is financially beneficial.

If the additional processing cost is greater than the additional revenue, the product should normally be sold at the split-off point.

Sell or Process Further ACCA

The sell or process further ACCA decision is based on relevant costs and revenues.

For example:

A product can be sold at the split-off point for $30,000.

If it is processed further, it can be sold for $42,000.

The additional processing cost is $7,000.

Additional revenue:

$42,000 − $30,000 = $12,000

Additional cost:

$7,000

Additional profit:

$12,000 − $7,000 = $5,000

Since the additional revenue is higher than the additional processing cost, the business should process the product further.

Why Are Joint Costs Ignored?

Joint costs incurred before the split-off point are not relevant to the further processing decision.

These costs have already been incurred and cannot be changed by deciding whether to sell the product now or process it further.

Therefore, the decision should focus only on the costs and revenues that will change because of the decision.

This is an important point to remember when solving further processing decision ACCA questions.

Process Costing, Joint Products and Further Processing PDF Download

The Process Costing, Joint Product and Further Processing PDF by PW covers the key concepts required to revise these areas for ACCA Management Accounting. It includes process costing, joint products and by-products, accounting for by-products and evaluating whether further processing is financially worthwhile.

How to Use PW’s ACCA Process Costing, Joint Product and Further Processing Notes in Your Preparation?

The Process Costing, Joint Product and Further Processing PDF by PW brings together the main costing concepts related to continuous production and multiple outputs. Revising these topics can help you understand how costs are calculated and how relevant information is used when making further processing decisions.

Understand Process Costing in the ACCA MA Syllabus

Process costing is an important part of cost accounting techniques in Management Accounting. It involves process costs, equivalent units and the treatment of work in progress.

Students can also refer to the ACCA MA syllabus to understand where process costing and other costing techniques fit into the overall exam preparation.

Revise Formulas for ACCA MA

Process costing and joint product costing involve several calculations. Further processing questions also require students to identify relevant costs and additional revenue.

The ACCA MA Formula List can be used alongside these notes to revise important formulas and calculations before solving practice questions.

Connect with Other Management Accounting Topics

Process costing is one of several methods used to calculate and assign costs. Revising it alongside job, batch and service costing can help you understand how the choice of costing method depends on the nature of production.

Students can continue their preparation with the ACCA Management Accounting (MA) complete guide to revise other topics covered in the subject.

Apply Concepts During ACCA MA Preparation

Questions on joint products, by-products and further processing require you to identify the relevant information before calculating the answer. Regular practice can help you recognise whether a question requires joint cost allocation, by-product treatment or an incremental decision.

You can also use the ACCA Management Accounting preparation tips to continue practising MA concepts and calculations.

Process costing, joint product costing and further processing decisions deal with different stages of production and cost analysis. Knowing how to calculate equivalent units, allocate joint costs and identify relevant costs can help you approach ACCA MA questions more confidently.

The Process Costing, Joint Product and Further Processing PDF by PW can be used to revise these concepts, formulas and calculations as part of your ACCA Management Accounting preparation.

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