220 o))) {2 estie i ctiraisiy isson eo ma Option B is incorrect because it results from calculating a 10% normal loss based on output of 2,750 units (275 units normal {oss), rather than on input of 3,300 units. Soa ee ene Scrap is Discarded material having some value.’ Loss or spoilage may have scrap value. ‘© The scrap value of abnormal loss (or abnormal gain) is usually set off against its cost, in an abnormal loss (abnormal gain) account. Separate the scrap value of normal loss from the scrap value of abnormal loss or gain. In effect, subtract the scrap value of normal loss from the cost of the process, by crediting it to the process account (as a value’ for normal oss). Either subtract the value of abnormal loss scrap from the cost of abnormal loss, by crediting the abnormal loss account. fr subtract the cost of the abnormal gain scrap from the value of abnormal gain, by debiting the abnormal gain account. Sorap value Normal loss/gain Abnormal loss/gain a oss 7 — GAIN Deduct scrap Deduct serap Deduct serap value from cost of value from cost of value from value process ie. Credit abnormal oss of abnormal gin process account Credit abnormal ie Debit with sorap value loss aocount abnormal gin of normal loss or account normal gain QUESTION Losses and scrap 2,000 units of material are input to a process, Process costs are as follows. Material $11,700 Conversion costs $6,300 Output is 2,000 units. Normal loss is 20% of input. The units of loss could be sold for $1 each. Prepare appropriate accounts. iCHAPTER 11 // PROCESS COSTING ANSWER Step 1 Determine output and losses Input 3,000 units Normal loss (20% of 3,000) {600 units Expected output 2,400 units Actual output 2,000 units Abnormal loss 200 units Calculate cost per unit of output and losses Sorap value of normal loss 600 Serap value of brormal loss 400 Total scrap (1,000 units x $1) T000 Coot por expect it = SA{L2, 700-600) 6,500] 2,400 Calculate total cost of output and losses 3 Output (2,000 x $7.25) 14,500 Normal loss (600 x $1.00) 600 Abnormal loss (400 x $7.25) Complete accounts PROCESS ACCOUNT Units Material 3,000 11,700 Output Conversion costs 6,300 Normal loss ‘Abnormal loss 16,000 ‘ABNORMAL LOSS ACCOUNT s Process ale 2,900 Scrap alc ine statement 2300 SCRAP ACCOUNT $s $s Normal toss 600 Cash 1,000 ‘Abnormal loss 400 QUESTION ‘Two processes, losses and scrap JJ has a factory which operates twa production processes, cutting and pasting. Normal loss in each. process Is 10%. Scrapped units out ofthe cutting process sell for $3 per unit whereas scrapped units Cut of the pasting process sell for $5. Output from the cutting process is transferred to the pasting, process: output from the pasting process is finished output ready for sale. Relevant Information about costs for control period 7 are as follows. 221cuarreR 11. / PROCESS COSTING Pee CRS te ntsls 4.1 Introduction ‘You must also be able to deal with losses which have a disposal cost. ‘The basic calculations required in such circumstances are as follows. (a) Increase the process costs by the cost of disposing of the units of normal loss and use the resulting cost per unit to value good output and abnormal lossygain. (b) The normal loss is given no value in the process account. (c} Include the disposal costs of normal loss on the debit side of the process account. (@) Include the disposal costs of abnormal loss in the abnormal loss account and hence in the transfer of the cost of abnormal loss to the income statement. 4.2 Example: Losses with a disposal cost ‘Suppose that input to @ process was 1,000 units at 2 cost of $4,500. Normal loss is 10% and there are ‘no opening and closing inventories. Actual output was 860 units and loss units had to be disposed of at a cost of $0.90 per unit. Normal loss = 10% x 1,000 = 100 units. -. Abnormal lass = 900 - 860 $4,500 +(100x$0.90) 10 units Cost per unit = = $5. bast per unit 900 $5.10 The relevant eccounts would be as follows. PROCESS ACCOUNT Units $ Units $ Cost of input 1,000 4,500 Output 860 4,386 Disposal cost of Normal loss 100 normal less 90 Abnormal loss 204 100 7550 4590 ABNORMAL LOSS ACCOUNT $ Process ale Income statement 240 Disposal cost (40 x $0.90) Valuing closing work in progress 5.1 Introduction 0))) esi iy cpio ht patel eo lig we porn | is nocessary to calculate the equivalent units of production in order to determine the cost of a + completed unit. 225226 nes In the examples we have looked at so far we have assumed that opening and closing inventories of work in process have been nil. We must now look at more realistic examples and consider how to allocate the costs incurred in a period between completed output (that fs, finished units) and partly completed closing inventory ‘Some examples will help to illustrate the problem, and the techniques used to share out (apportion) costs between finished output and closing inventories. Suppose that we have the following account for Process 2 for period 9, PROCESS ACCOUNT Units 8 Materials 1,000 6,200 Finished goods 800 Labour and overhead 2,850 Closing WIP 200 TO0O 9,050 T,000 How do we value the finished goods and cl 1g work in process? With any form of process costing involving closing WIP, we have to apportion costs between output and clasing WIP. To apportion costs fairly’ we make use of the concept of equivalent units of production. 5.2 Equivalent units Equivalent units are notional whole units which represent incomplete work, and which are used ta apportion costs between work in process and completed output ‘We will assume that in the example above the degree of completion is as follows. (a) Direct materials. These are added in full a the start of processing, and so any closing WIP will hhave 100% of their direct material content. (This is not always the case in practice. Materials ‘might be added gradually throughout the process, in which case closing inventory will only be @ certain percentage complete as to material content. We will look at this later in the chapter.) (b) Direct labour and production overhead. These are usually assumed to be incurred at an even rate through the production process, so that when we refer to a unit that is 50% complete, we ‘mean that itis half complete for labour and overhead, although it might be 100% complete for materials. Lt us also assume that the closing WIP is 100% complete for materials and 25% complete for labour and overhead) How would we now put a value to the finished output and the closing WIP? In Step 1 of our framework, we have been told what output and losses are. However we also need to calculate equivalent units. STATEMENT OF EQUIVALENT UNITS Materials Labour and overhead Degree of Equivalent Degree of Equivalent Total units completion units completion. units Finished output, ‘800 100% ‘800 100% 800 Closing WIP 200 100% 200 25% 50 850 In Step 2 the important figure is average cost per equivalent unit, This can be calculated as follows. STATEMENT OF COSTS PER EQUIVALENT UNIT Labour and Materials overhead Costs incurred in the period $6,200 $2,850 Equivalent units of work done 1,000 850 Cost per equivalent unit (approx) $6.20 $3.3529 To calculate total costs for Step 3, we prepare a statement of evaluation to show how the costs should be apportioned between finished output and closing WIP. Bey FCHAPTER 11 // PROCESS COSTING STATEMENT OF EVALUATION Meierials Labour and overheads Cost per Cost per Equivalen equivalent Equivalen equivelen Tota! t t t stem nits units Cast_—=— units, «units Cost cost $ $ ce $ Finished ‘output 800 6.20 4,960 800 3.3529 2,682 7,642 Closing WIP 200 «620-240 803.3529 168 1.408 7,000 6200 850 0 3,080 The process account (work in progress, or work In process account) would be shown as follows. PROCESS ACCOUNT Units: $ Units Materials 1,000 6,200 Finished goods 800 Labour overhead 2850 Closing WIP 200 1000 9,050, 7,000 QUESTION Equivalent units for closing WIP Ally Co has the following information available on Process 9 PROCESS 9 ACCOUNT $ $ Input 10, 000g 59,150 Finished goods _8,000kg 52,000 Closing WIP 2,000kg, How many equivalent units were there for Closing WIP? A 1,000 c 2,000 B 1,100 ANSWER ‘The correct answer is B. ‘Tris question requires you to work backwards. You can calculate the cost per unit using the Finished Goods figures. Cost of finished goods _ 52,000 _ Number of kg 8,000 If 2,000kg (Clasing WIP figure) were fully complete total cost would be 2,000 x $6.50 = $13,000 ‘Actual cost of Closing WIP = $7,150 7,150 2100 = 55% oo $6.50 Cost per unit = Degree of completion = Therefore equivalent units = 55% of 2,000 = 1,100kg, QUESTION Equivalent units Ashley Co operates a process costing system. The following details are available for Process 2. Materials input at beginning of process 12,000 kg, costing $18,000 Labour and overheads added $28,000 227230 ‘April 20X3 would be carried forward as opening inventory, value $1,440, atthe beginning of May 20%3. It therefore follows that the work required to complete units of opening inventory is 100% minus the ‘work in progress done in the previous period. For example, if 100 units of opening inventory are 70% complete at the beginning of June 20X2, the equivalent units of production would be as follows, Equivalent units in previous period (May 20x2) (70%) = 70 Equivalent units to complete work in current period (June 20X2) (30%) = 30 Total work done ‘The FIFO method of valuation deals with production on a first in, frst out basis. The assumption is that the first units completed in any period are the units of opening inventory that were held at the beginning of the period. 6.2 Example: WIP and FIFO ‘Suppose that information relating to process 1 of @ two-stage production process is as follows, for August 20%2. ‘Opening inventory 500 units: degree of completion 60% Cost to date $2,800 Costs incurred in August 20X2 8 Direct materials (2,500 units introduced) 13,200 Direct labour 6,600 Production overhead Closing inventory 300 units: degree of completion “There was no loss in the process. Required Prepare the process 1 account for August 20X2. Solution ‘As the term implies, frst in, frst out means that in August 20X2 the first units completed were the units of opening inventory. Opening inventories: work done to date = 60% plus work done in August 202. = 40% ‘The cost ofthe work done up to 1 August 20X2 is known to be $2,800, so that the cost of the units, completed will be $2,800 plus the cost of completing the final 40% ofthe work on the units in August 20X2. Once the opening inventory has been completed, all other finished output in August 20X2 will be work started as well as finished in the month. Units Total cutput in August 20X2 * 2,700 Less opening inventory, completed first 500 Work started and finished in August 202 200 (* Opening inventory plus units introduced minus closing inventory = 500 + 2,500 - 300) ‘What we are doing here is taking the total output of 2,700 units, and saying that we must divide it into ‘wo parts as follows. (@) The opening inventory, which was first in and so must be first out. (b) The rest of the units, which were 100% worked in the period, Dividing finished output into two parts in this way is a necessary feature of the FIFO valuation method. Continuing the example, closing inventory of 300 units will be started in August 20X2, but not yet completed. Bey