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Hi!
Q) A chemical refining process incurred the following costs in a month:
Materials – 8,000 kg at a total cost of $20,000.
Conversion costs are $15,000.
The actual output from the process during this month was 7000 kg. There were no opening or closing inventories. The normal loss from the process is 18% of the input weight and this can be sold as scrap for $0.5 per kg.What is the net value of abnormal gain recorded in the company’s cost accounts?
Solution:
Cost per unit= 34280/6560=5.226
Abnormal gain= 440(5.226-0.5)=2079.My doubt is: why did they subtract the scrap (p.u.) value from the cost per unit? Isn’t abnormal gain/loss valued at the cost of good production? Does “net” value have something to do with it?
Please help. Thank you!
Source: Becker (2015), Process Accounting, Q44.2
The abnormal gain units are indeed valued at 5.226. However the costings are based on the expectation of receiving scrap proceeds of $0.5.
Therefore although we gain extra units we are not receiving the scrap for those units that we expected to make. Therefore the actual gain resulting is the difference between the value of 5.226 and the ‘lost’ 0.5.I do explain this in my free lectures on process costing. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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