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Hi John,
Could you help with this one:
A company expects a normal loss of 10% of input in a process. Information for period 8 is as follows:
Material input 400 litres costing $8 a litre
Conversion costs $4,800
Output 330 litres
Losses are identified when the process is 60% complete.
There is no opening or closing work in progress.
What is the value of the completed output?
Answer: $7,484
The question is from a Kaplan consolidation online test. I can’t get my head around the workings they have presented and wondered if you could help explain it better than they have.
I think that either you have not typed out all of the information in the question or that there is a typing mistake in either the printed question or answer.
On the information as you have typed it, the total value of the completed output is simply (400 x $8) + 4,800 = $8,000.
As you sure that there is no mention of the losses having any scrap value?
Hi John,
They definitely don’t mention scrap value in the question. This is their workings:
Normal loss = 10% × 400 = 40 litres
Actual loss = 400 – 330 = 70 litres
Abnormal loss = 70 – 40 = 30 litres
EUs
Material Conversion
Output 330 330
Normal loss 0 0
Abnormal loss 30 18
_____ _____
360 348Cost per EU
Material = (400 × 8)/360 = $8.89
Conversion = 4,800/348 = $13.79
Valuation of output
330 × ($8.89 + $13.79) = $7,484
I’ve got the exam booked for tomorrow and getting all the other questions correct so I should probably just ignore this one and move on, but a bit annoying that I can’t get my head around it.
The Kaplan answer is correct.
As far as the materials cost is concerned, then we arrive at the cost per unit by dividing the total cost by the expected output of 360 units. (330 actual output plus 30 abnormal loss), and so as per the answer the cost per unit is $8.89. (This is the materials unit cost that would be used for the valuation of the materials content of the output and of the abnormal loss.)
We would do the same for the conversion costs if the losses had all had the full conversion cost per unit. However they have not had the full conversion cost per unit because the loss was discovered when the units were 60% finished (and so none of the conversion cost total was spend on finishing the remaining 40% of the work).
So the 330 units that were output will all have had the full conversion cost per unit, but the 30 abnormal loss will only have had 60% of the work done, and so we spread the cost over 330 actual output plus (60% x 30) abnormal loss.This is a particularly nasty question and so I would just ignore it.
Best of luck with your exam tomorrow 🙂
Thanks John, that makes sense now. Hopefully the exam will have some easier questions. Thanks for your help.
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