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I found this question in the revision kit (BPP learning media).
Normally, no losses are expected from a process. Any abnormal losses are sold for scrap. Which of the following calculates the net cost to the company of one unit of abnormal loss?
i) Total input cost / actual output units
ii) Total input cost / expected output units
iii) (Total input cost – total scrap value)/ expected output units
iv) (Total input cost / expected output units) – scrap valueThe answer that I chose was option (ii): Total input cost / expected output units, yet when I checked the answer, it says option (iv): (Total input cost / expected output units) – scrap value. My argument here is that subtracting the scrap value after dividing the total input cost by the expected output doesn’t make sense to me. I am confused why the answer is option (iv) and not option (ii). I humbly request for help. 🙂
Option (iv) is the correct answer.
Abnormal losses are valued the same as ‘good’ units. i.e. total cost / expected output.
To get the net cost of one unit abnormal loss, we then subtract any scrap proceeds.
This is explained in my free lectures. The lectures are a complete free course and cover everything needed to be able to pass the exam well.
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