1. 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!)

  2. Profile photo of elle 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.

  3. 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.

  4. 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.

Leave a Reply