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To whom it may concern,
As the title suggests, I need clarification on how abnormal loss, abnormal gain and normal loss is treated using FIFO and Weighted Average method when there is opening work in progress involved. How will these adjustments affect the costing and equivalent units using both methods? The lectures provided for opening work in progress are indeed very insightful, but fact remains that the examples used had an underlying assumption of having no losses at all. To make it simple for you to explain this is the format used:
FIFO
(Costs this month/Equivalent units= Cost per equivalent unit)WIP b/d (Completed this month)
+
Units started and finished (this month)
+
WIP c/d (Closing work in progress started this month)
= Equivalent unitsWeighted Average
(Costs last month+ Costs this month)/ Equivalent units= Cost per equivalent unitTotal output
+ WIP c/d = Equivalent unitsWhere do abnormal loss, abnormal gain and normal loss fit into the equation? How will they impact the costing?
I apologise for asking this if this was answered before and/or if the solution is obvious. Your help is immensely appreciated.
The syllabus specifically excludes questions with work-in-progress and losses in the same process.
You are likely to be tested on both problems, but not in the same question 🙂
I feel relieved now, although currently in my FMA revision kit (provided by my lecturer) there are a number of questions that combine abnormal loss with opening work in progress, which I find kind of baffling. I fail to comprehend why abnormal losses are added to output (net of normal loss) to derive equivalent units. What happens in the event of having an abnormal gain, how would the equivalent units be affected? Forgive me for my ignorance and I highly appreciate your help Sir John Moffat 😀
I don’t know which revision kit you have been supplied with, but there should not be questions combining the two. As I wrote before, having both problems in the same question is specifically excluded in the syllabus.
Calculating equivalent units is only relevant (for the exam) when there is work-in-progress and because of the above, there will not be abnormal losses or gains to worry about.
Having said that, the logic is that costings should be based on what normally happens (i.e. what happens on average). Obviously things are not perfect and some periods we will lose more than average (the extra is an abnormal loss) and some periods we will lose less than average (the difference being an abnormal gain). It would be silly if we ended up with different costs each period just because we lost a few more or a few less than average, so when we do the costings we only take into account the ‘average’ or normal losses.
(If you are still worried about dealing with abnormal gains and losses (without WIP), then do watch my free lectures on here.)
Thanks Sir John Moffat! With your help I was able to crack the conundrum. I forgot the most basic and fundamental principle of process costing- Output is net of both normal loss and abnormal loss (if any). We must only base our costing on expected loss (as you mentioned earlier). The reason we add abnormal loss to output is to derive normal output because Input= Output+ Normal loss +Abnormal loss,
Hence Input-Normal loss (Normal output) =Output+ Abnormal loss.
It was a matter of realization of the knowledge you have imparted in your process costing lectures (incredible videos by the way!) I’m very grateful for your help sir John Moffat. You are my favorite superhero.
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