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Hi Mr. John,
In this question, I don’t know how they calculated the cost for finished goods ($2550). Can you please explain how they arrived at the figure. Thanks.
20,000 litres of liquid were put into a process at the beginning of the month at a cost of $4,400.
The output of finished product was 17,000 litres. The normal level of waste in this process is
20% and the waste which is identified at the end of the process can be sold at $0.50 per litre.
What is the abnormal gain or loss and what is the cost per unit?A Abnormal gain $1,000, cost per unit $0.15
B Abnormal loss $1,000, cost per unit $0.15
C Abnormal loss $1,000, cost per unit $0.28
D Abnormal gain $1,000, cost per unit $0.28If they input 20,000 litres then they would expect to lose 20% which is 4,000 litres. This is the expected or normal loss. They actually only lost 3,000 litres and so there is an abnormal gain of 1,000 litres.
The cost per litre is calculated using the expected output. They spent $4,400 and expect to lose 4,000 litres and therefore expect to receive sale proceeds of 4,000 x $0.50 = $2,000. So a net cost of $2,400. They expect to produce 16,000 litres and therefore a cost per litre of $2,400 / 16,000 = $0.15 per litre.
Therefore the cost of the finished goods (which is not asked for in the question) is 17,000 litres x $0.15 = $2,550.
The abnormal gain is 1,000 litres (and not $1,000).
I do explain all of this in my free lectures on Process Costing. The lectures are a complete free course and cover everything needed to be able to pass Paper MA well.
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