Two-stage process costing
When units made and units sold differ, costs are spread in two stages; the stock increase is valued at production cost.
Worked example
5,000 units were made and 4,100 sold; the rest goes into stock. Production costs £77,650.00, administration and selling costs £41,246.00. Use two-stage process costing.
Worked solution
- 1.Production cost per unit = £77,650.00 / 5,000 (units made) = £15.53
- 2.Admin and selling per unit = £41,246.00 / 4,100 (units sold) = £10.06
- 3.Total cost per unit = £15.53 + £10.06 = £25.59
- 4.Stock increase = 900 × £15.53 = £13,977.00
Typical mistake: Spreading administration and selling costs over units made instead of units sold.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
1,600 units were made and 1,400 sold; the rest goes into stock. Production costs £88,640.00, administration and selling costs £17,276.00. Use two-stage process costing.
Production cost per unit in £
Total cost per unit in £
Increase in stock (at production cost) in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Simple: cost per unit = total cost / output
- Two-stage: production cost / units made + admin and selling / units sold
- Equivalence numbers: equivalent units = Σ output × factor; cost per unit = cost per equivalent unit × factor
Typical mistake: Spreading administration and selling costs over units made instead of units sold.
Frequently asked questions
What is the typical mistake in "Two-stage process costing"?
Spreading administration and selling costs over units made instead of units sold.
When is two-stage costing needed?
When units made and units sold differ, i.e. stock is built up or run down.