1. avatar says

    Sir pl
    Help me with this question on process costing
    A company expect normal
    Loss of 10% of input in a process
    Mat. Input 400 liter $8
    Conversion cost $4800 output 330 liter,
    Losses are identified when the process is 60% complete. There was no opening or closing wip
    What is the value of the completed output?
    Pl. help not sure how to work the problem with the 60% complete

  2. Profile photo of Stephen says

    Hello Sir. First of all thank you very much for your lectures. I believe I might have a little out of the box question here though. I understand with expected (normal) loss, at times you get to sell back these units at a scrap value, which you would then minus this amount from the cost of the process, then you calculate, the cost per unit, by dividing total cost of the process by expected output. But won’t it be prudent not to minus this sale of scrap units from the total cost of the process until you get this sale, because you might not get this sale?

    • Profile photo of John Moffat says

      If we were preparing financial accounts then you would have a point, and prudence is relevant.
      However the purpose of management accounting is not to calculate the profit that has been made in the past, but make decisions for the future. For example, to help decide on a selling price we need to estimate what the cost is likely to be. To be able to prepare budgets for next year we need to estimate what the costs are likely to be.
      So, in estimating the costs we not only need to estimate how much we will have to spend but also need to estimate how much we expect to receive back from scrap.

    • Profile photo of 6shahir says

      Sir my Question may be silly for U, but I really need an answer… I somehow want to get a world prize for any units in ACCA…
      Sir How hard should I work?… Im ready to study even 10hrs a day
      Sometimes things are forgetting especially F1 notes….
      Its not sticking into the mind..
      Pls help me sir, How did u manage these constraints?

      • Profile photo of John Moffat says

        The best and only advice I can give you is practice. You must have Revision/Exam Kits from one of the approved publishers (they contain lots of exam-standard questions) and you must practice and practice and practice.
        When you are confident that you can get the questions right, then you must practice them again under time pressure.
        With the first three papers, one of the biggest problems is the time pressure in the exam – it is when you are rushing in the exam that you misread questions and make silly mistakes, however good you may be at the subject.

  3. Profile photo of John Moffat says

    You are correct that the total loss is 15%, but it is 15% of the input (not the output).

    So….for every 100 litres input it would mean 15 are lost and therefore 85 are output.
    Or (putting it the other way round) for every 85 output there must be 100 input.

    For 340 output therefore, the input must be 340 x 100/85 = 400 litres.
    Now you will find it works :-)

    Hope that helps!

  4. avatar says

    Hi, I am practicing some questions and I got stuck at this particular one. It seems easy but I am not confident if my ans was right.

    “A company needs to produce 340 litres of chemical X. There is a normal loss of 10% of the material input into the process. During a given month, the company did produce 340 litres of good production although there was an abnormal loss of 5% of the material input into the process. How many litres of material were input into the process during the month?”

    a) 357 litres
    b) 375 litres
    c) 391 litres
    d) 400 litres

    I tried doing it backwards by using 340 x 1.15 = 391. But when I used 391 x 0.75, the ans (output) does not tally to 340. Pls help!

  5. avatar says

    could you help me please, to understand one question from course book.
    The question says “ABC manufactures a single product. Normal loss (scrap) in the process is 10% of output and scrapped units can be sold off for 4$/unit.
    Process costs of direct materials, labour, production overheads totalled 184 800 $.
    Input to the process in the month was 13 200 units

    What was the cost/unit produced?

    The questions seems very easy, but i don’t get, why do we calculated output as ” 13 200 * 10/110 = 12000 -> finished units” ?

    • Profile photo of John Moffat says

      If the loss is 10% of output, then for every 100 units output the loss will have been 10 units and therefore the input will have been 110 units.

      So……if the input was 13,200 unit then the output must have been 100/100 x 12000 units.

      (and the loss is 10% x 12,000 units = 1200 units, which checks OK. 13,200 input – 12000 input does equal a loss of 1200 which is 10% of the output of 12000!)

  6. avatar says

    Hi. I understand everything except the (non-exam related) Income statement reference in the T-Account. Is it correct to say that the 1750 would be a debit entry in the Income statement and seen as an ?expense?. Would you please be so kind as to draw up what an income statement with the above figures (in your lecture clip) would look like? I’ve had to do Income statements before – never with losses. I have no idea how that would go? If it wouldn’t be asking too much, please.

    • Profile photo of John Moffat says

      It would be wasting your time to produce an income statement (and impossible anyway since this would only be an extract).

      The abnormal loss would appear as an expense in the income statement.
      However this is completely irrelevant for the exam.
      This exam is about management accounting – not financial accounting!

      • Profile photo of John Moffat says

        In the question it says that the actual output is 850kg (not that the loss is 850).

        The input is 1000kg and so the total loss is 1000 – 850 = 150 kg.
        The normal loss is 100kg (10% x 1000) and so the extra 50kg is the abnormal loss.

    • Profile photo of John Moffat says

      @merryjxm, I am not sure that I understand your question.
      The normal loss is the average/expected loss, and this is decided by the company.
      The total loss is a matter of fact – some months they will lose more than expected and some months less. The difference is the abnormal loss or an abnormal gain.

  7. Profile photo of onyxera says

    Process costing is a costing technique where all you are trying to do is get cost per unit for similar items manufactured in processes (i.e. expected cost per unit).Abnormal losses are not expected hence they are excluded from the computation of cost per unit. The rule here is: to get cost per unit you only consider normal (expected) losses.

    450 is not credited to the process account, it is rather credited to loss account.The accounting entry for cash from scrap is CR:Loss a/c, DR:Cash/Receivables.

    Anyway, don’t let the a/c entries bug you. Learn the rule.
    (1) Abnormal loss is not considered to get cost p.u
    (2) Abnormal loss is the difference between expected output and actual output
    (3) Abnormal loss is valued @ cost p.u
    (4) Net loss is normal loss valued @ scrap value + abnormal loss valued @ cost p.u – total cash from scrap sales
    (5) The credit entries in the process T- accounts are
    (i) Actual output unit @ cost p.u.
    (ii) normal loss unit @ scrap value
    (iii) abnormal loss @ cost p.u

    This is what I understood from the lectures and notes.
    Thanks open tuition for the wonderful lectures and notes.

  8. Profile photo of nzeadall says

    very nice explanation, thank you very much Open Tuition, however I have one question, in the process a/c on the credit side, shouldn’t we credit the $450 for abnormal loss (scrap value) as well, it is an income that the company will eventually gain, right? so the cost per unit should be less? I was expecting $ 43.47 per unit instead of $ 44. I would be very grateful if someone would help me on this.

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