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Good Day Mr. John
Had a question on Process costing Please.
The output from Process 1 (920 units with a value of $110,400) forms the input to Process 2.
Normal loss in Process 2 is 10% of good output (from Process 2) and has no scrap value. Output from Process 2 is 900 units. additional material cost 20,600 & 35000 of conversion cost.Here the normal loss equals the 10% of good output, my question here is that how can we know, how to calculate the estimated unit cost, as we should deduct the scrap value and also a unit from the denominator in advance while finding estimate unit price, but here it says the normal loss is 10% of good output, How we know that in advance when estimating we can never know what will be the actual output
The answer shown as below:
Cost/unit = Input costs – scrap value of normal loss
Expected output=$110,400 + $20,600 + $35,000/
920?(900 × 10%) = $166,000/830 = 200
Thank you.You are assuming that the costing needs to be done at the start of the period, but this does not have to be the case and it is usually done at the end of the period (for example, we will not know all of the total costs until the end of the period).
Here, at the end of the period, we find that the actual output is 900 and therefore we will have expected there to have been a loss of 90 units. Therefore the the expected output should have been 920 – 90 = 830 units.
Having said this, I would be interested to know where you found this question, because it is a little bit of someone just playing games!!
Thank you, John, for your answer, it sounds a bit strange to me how the costing is done after the end of actual, if so why even need to expect the normal loss, maybe my thought only reached on budgeting & maybe I have a wrong understanding about the whole concept and chapter’s, Anyways thank you, to answer you this question is from BPP 2022 workbook from the chapter process costing. Thank you again.
If the business is calculating what the actual cost per unit was then they would have to wait until the end of the period in order to know what the actual costs were during the period. However it would still be sensible to use the expected % of normal loss even though in some periods they will lose more and in some periods they will lose less.
I would not worry too much about this particular question because as I wrote before the writer of the question was trying to be a bit too clever 🙂
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