CIMA - C1 Fundamentals of Management Accounting
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12: Process costing ⏐ Part D Costing and accounting systems
Step 3
Calculate total cost of output and losses
Period 3
$
Cost of output (850 × $32.30)
27,455
Normal loss
0
Abnormal loss (50 × $32.30)
1,615
29,070
Period 4
$
Cost of output (950 × $32.30)
30,685
Normal loss
0
Abnormal gain (50 × $32.30)
1,615
29,070
Step 4
Complete accounts
PROCESS ACCOUNT
Units
$
Units
$
Period 3
Cost of input
1,000
29,070
Normal loss
100
0
Finished goods a/c
850
27,455
(× $32.30)
Abnormal loss a/c
50
1,615
(× $32.30)
1,000
29,070
1,000
29,070
Period 4
Cost of input
1,000
29,070
Normal loss
100
0
Abnormal gain a/c
50
1,615
Finished goods a/c
950
30,685
(× $32.30)
(× $32.30)
1,050
30,685
1,050
30,685
ABNORMAL LOSS OR GAIN ACCOUNT
$
$
Period 3
Period 4
Abnormal loss in process a/c
1,615
Abnormal gain in process a/c
1,615
Abnormal loss in process a/c
1,615
Abnormal gain in process a/c
1,615
There is a zero balance on this account at the end of period 4.
Question
Cost of output
Charlton Co manufactures a product in a single process operation. Normal loss is 10% of input. Loss occurs at the end
of the process. Data for June are as follows.
Opening and closing inventories of work in progress Nil
Cost of input materials (3,300 units) $59,100
Direct labour and production overhead $30,000
Output to finished goods 2,750 units
The full cost of finished output in June was
A $74,250
B $81,000
C $82,500
D $89,100
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Answer
The correct answer is C.
Step 1
Determine output and losses
Units
Actual output
2,750
Normal loss (10% × 3,300)
330
Abnormal loss
220
3,300
Step 2
Calculate cost per unit of output and losses
Cost of input
Expected units of output
=
−
$89,100
3,300 330
= $30 per unit
Step 3
Calculate total cost of output and losses
$
Cost of output (2,750 × $30)
82,500
Normal loss
0
Abnormal loss (220 × $30)
6,600
89,100
If you were reduced to making a calculated guess, you could have eliminated option D. This is simply the total input cost,
with no attempt to apportion some of the cost to the abnormal loss.
Option A is incorrect because it results from allocating a full unit cost to the normal loss: remember that normal loss
does not carry any of the process cost.
Option B is incorrect because it results from calculating a 10% normal loss based on output of 2,750 units (275 units
normal loss), rather than on input of 3,300 units.
Question
Abnormal gain
Zed Co makes a product Emm which goes through several processes. The following information is available for the
month of June.
Kg
Opening WIP 5,200
Closing WIP 3,500
Input 58,300
Normal loss 400
Transferred to finished goods 59,900
What was the abnormal gain in June?
A 260 kg
B 300 kg
C 400 kg
D 560 kg
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12: Process costing ⏐ Part D Costing and accounting systems
Answer
B
Process account
Dr
Cr
Opening WIP
5,200
Output
59,900
Input
58,300
Normal loss
400
Abnormal gain
Closing WIP
3,500
63,800
63,800
The abnormal gain is the balancing figure. 63,800 – 5,200 – 58,300 = 300
4 Accounting for scrap
Scrap is 'discarded material having some value'. CIMA Official Terminology
4.1 Basic rules for accounting for scrap
(a) Revenue from scrap is treated, not as an addition to sales revenue, but as a reduction in costs.
The valuation of normal loss is either at scrap value or nil. It is conventional for the scrap value of normal loss to be
deducted from the cost of materials before a cost per equivalent unit is calculated.
(b) The scrap value of normal loss is therefore used to reduce the material costs of the process.
DEBIT Scrap account
CREDIT Process account
with the scrap value of the normal loss.
Abnormal losses and gains never affect the cost of good units of production. The scrap value of abnormal losses is not
credited to the process account, and the abnormal loss and gain units carry the same full cost as a good unit of
production.
(c) The scrap value of abnormal loss is used to reduce the cost of abnormal loss.
DEBIT Scrap account
CREDIT Abnormal loss account
with the scrap value of abnormal loss, which therefore reduces the write-off of cost to the income
statement.
(d) The scrap value of abnormal gain arises because the actual units sold as scrap will be less than the scrap
value of normal loss. Because there are fewer units of scrap than expected, there will be less revenue from
scrap as a direct consequence of the abnormal gain. The abnormal gain account should therefore be
debited with the scrap value.
FA
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FAST FORWARD
Key term
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DEBIT Abnormal gain account
CREDIT Scrap account
with the scrap value of abnormal gain.
(e) The scrap account is completed by recording the actual cash received from the sale of scrap.
DEBIT Cash received
CREDIT Scrap account
with the cash received from the sale of the actual scrap.
The same basic principle therefore applies that only normal losses should affect the cost of the good output. The scrap
value of normal loss only is credited to the process account. The scrap values of abnormal losses and gains are
analysed separately in the abnormal loss or gain account.
4.2 Example: scrap and abnormal loss or gain
A factory has two production processes. Normal loss in each process is 10% and scrapped units sell for $0.50 each
from process 1 and $3 each from process 2. Relevant information for costing purposes relating to period 5 is as follows.
Direct materials added:
Process 1 Process 2
units 2,000 1,250
cost $8,100 $1,900
Direct labour $4,000 $10,000
Production overhead 150% of direct labour cost 120% of direct labour cost
Output to process 2/finished goods 1,750 units 2,800 units
Actual production overhead $17,800
Required
Prepare the accounts for process 1, process 2, scrap, abnormal loss or gain.
Solution
Step 1
Determine output and losses
Process 1
Process 2
Units
Units
Output
1,750
2,800
Normal loss (10% of input)
200
300
Abnormal loss
50
-
Abnormal gain
-
(100
)
2,000
3,000
*
* 1,750 units from Process 1 + 1,250 units input to process.
Important!
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12: Process costing ⏐ Part D Costing and accounting systems
Step 2
Calculate cost per unit of output and losses
Process 1
Process 2
$
$
Cost of input
– material
8,100
1,900
– from Process 1
–
(1,750 × $10)
17,500
– labour
4,000
10,000
– overhead
(150% × $4,000)
6,000
(120% × $10,000)
12,000
18,100
41,400
Less: scrap value of
normal loss
(200 × $0.50)
(100
)
(300 × $3)
(900)
18,000
40,500
Expected output
90% of 2,000 1,800
90% of 3,000 2,700
Cost per unit
$18,000 ÷ 1,800 $10
$40,500 ÷ 2,700
$15
Step 3
Calculate total cost of output and losses
Process 1
Process 2
$
$
Output (1,750 × $10)
17,500
(2,800 × $15)
42,000
Normal loss (200 × $0.50)*
100
(300 × $3)*
900
Abnormal loss (50 × $10)
500
–
18,100
42,900
Abnormal gain
–
(100 × $15)
(1,500
)
18,100
41,400
* Remember that normal loss is valued at scrap value only.
Step 4
Complete accounts
PROCESS 1 ACCOUNT
Units $ Units $
Direct material 2,000 8,100 Scrap a/c (normal loss) 200 100
Direct labour 4,000 Process 2 a/c 1,750 17,500
Production
Abnormal loss a/c
50
500
overhead a/c
6,000
2,000
18,100
2,000
18,100
PROCESS 2 ACCOUNT
Units
$
Units
$
Direct materials
From process 1
1,750
17,500
Scrap a/c (normal loss)
300
900
Added materials
1,250
1,900
Finished goods a/c
2,800
42,000
Direct labour
10,000
Production o'hd
12,000
3,000
41,400
Abnormal gain
100
1,500
3,100
42,900
3,100
42,900
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ABNORMAL LOSS ACCOUNT
$ $
Process 1 (50 units) 500 Scrap a/c: sale of scrap of
extra loss (50 units) 25
Income statement
475
500
500
ABNORMAL GAIN ACCOUNT
$
$
Scrap a/c (loss of scrap revenue
Process 2 abnormal gain
1,500
due to abnormal gain,
(100 units)
100 units × $3)
300
Income statement
1,200
1,500
1,500
SCRAP ACCOUNT
$ $
Scrap value of normal loss Cash a/c - cash received
Process 1 (200 units) 100 Loss in process 1 (250 units) 125
Process 2 (300 units) 900 Loss in process 2 (200 units) 600
Abnormal loss a/c (process 1)
25
Abnormal gain a/c (process 2)
300
1,025
1,025
Question
Process accounts
Parks Co operates a processing operation involving two stages, the output of process 1 being passed to process 2. The
process costs for period 3 were as follows.
Process 1
Material 3,000 kg at $0.25 per kg
Labour $120
Process 2
Material 2,000 kg at $0.40 per kg
Labour $84
General overhead for period 3 amounted to $357 and is absorbed into process costs at a rate of 375% of direct labour
costs in process 1 and 496% of direct labour costs in process 2.
The normal output of process 1 is 80% of input and of process 2, 90% of input. Waste matter from process 1 is sold for
$0.20 per kg and that from process 2 for $0.30 per kg.
The output for period 3 was as follows.
Process 1 2,300 kgs
Process 2 4,000 kgs
There was no inventory of work in progress at either the beginning or the end of the period and it may be assumed that
all available waste matter had been sold at the prices indicated.
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12: Process costing ⏐ Part D Costing and accounting systems
Required
Show how the foregoing data would be recorded in process, scrap and abnormal loss/gain accounts by completing the
proformas below. (Hint. Not all boxes require entries.)
PROCESS 1 ACCOUNT
kg $ kg $
Material
Normal loss to scrap a/c
Labour
General overhead
Production transferred to
process 2
Abnormal gain account
Abnormal loss a/c
PROCESS 2 ACCOUNT
kg $ kg $
Transferred from process 1
Normal loss to scrap a/c
Material added
Production transferred to
Labour
finished inventory
General overhead
Abnormal loss
Abnormal gain
SCRAP ACCOUNT
kg $ kg $
Normal loss (process 1)
Abnormal gain (process 1)
Normal loss (process 2)
Abnormal gain (process 2)
Abnormal loss (process 1)
Cash
Abnormal loss (process 2)
ABNORMAL LOSS AND GAIN ACCOUNT
kg $ kg $
Process 1 (loss)
Scrap value of abnormal
Process 2 (loss)
loss
Scrap value of abnormal gain
Process 1 (gain)
Income statement
Process 2 (gain)
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Answer
Step 1
Determine output and losses
Process 1
Process 2
kgs
kgs
Output
2,300
4,000
Normal loss (20% of 3,000 kgs)
600
(10% of 4,300)
430
Abnormal loss
100
–
Abnormal gain
–
(130
)
3,000
4,300
*
* From process 1 (2,300 kgs) + 2,000 kgs added
Step 2
Determine cost per unit of output and losses
Process 1
Process 2
$
$
Material (3,000 × $0.25)
750
(2,000 × $0.40)
800
From process 1
×
(2,300 × $0.50)
1,150
Labour
120
84
Overhead (375% × $120)
450
(496% × $84)
417
Less: scrap value of normal loss
(600 × $0.20)
(120
)
(430 × $0.3)
(129)
1,200
2,322
Expected output
3,000 × 80%
2,400
4,300 × 90%
3,870
Cost per unit
$
$1,320 $120
3,000 600
−
−
⎛⎞
⎜⎟
⎝⎠
$0.50
$2,451 $129
4,300 430
−
−
⎛⎞
⎜⎟
⎝⎠
$0.60
Step 3
Determine total cost of output and losses
Process 1
Process 2
$
$
Output (2,300 × $0.50)
1,150
(4,000 × $0.60)
2,400
Normal loss (scrap)
(600 × $0.20)
120
(430 × $0.30)
129
Abnormal loss (100 × $0.50)
50
–
1,320
2,529
Abnormal gain
–
(130 × $0.60)
(78
)
1,320
2,451
Step 4
Complete accounts
PROCESS 1 ACCOUNT
kg
$
kg
$
Material
3,000
750
Normal loss to scrap a/c
Labour
120
(20%)
600
120
General overhead
450
Production transferred to
process 2
2,300
1,150
Abnormal loss a/c
100
50
3,000
1,320
3,000
1,320
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12: Process costing ⏐ Part D Costing and accounting systems
PROCESS 2 ACCOUNT
kg
$
kg
$
Transferred from
process 1
2,300
1,150
Normal loss to scrap a/c
Material added
2,000
800
(10%)
430
129
Labour
84
Production transferred to
General overhead
417
finished inventory
4,000
2,400
4,300
2,451
Abnormal gain
130
78
4,430
2,529
4,430
2,529
SCRAP ACCOUNT
kg
$
kg
$
Normal loss (process 1)
600
120
Abnormal gain (process 2)
130
39
Normal loss (process 2)
430
129
Cash
1,000
230
Abnormal loss
(process 1)
100
20
1,130
269
1,130
269
ABNORMAL LOSS AND GAIN ACCOUNT
kg
$
kg
$
Process 1 (loss) 100 50 Scrap value of
Scrap value of abnormal abnormal loss 100 20
gain 130 39 Process 2 (gain) 130 78
Income statement
9
230
98
230
98
(Note. In this answer, a single account has been prepared for abnormal loss/gain. It is also possible to separate this
single account into two separate accounts, one for abnormal gain and one for abnormal loss.)
5 Valuing closing work in progress
When units are partly completed at the end of a period (ie when there is closing work in progress) it is necessary to
calculate the equivalent units of production in order to determine the cost of a completed unit.
In the examples we have looked at so far we have assumed that opening and closing inventories of work in process have
been nil. We must now look at more realistic examples and consider how to allocate the costs incurred in a period
between completed output (ie finished units) and partly completed closing inventory.
Some examples will help to illustrate the problem, and the techniques used to share out (apportion) costs between
finished output and closing work in progress.
5.1 Example: valuation of closing inventory
Trotter Co is a manufacturer of processed goods. In March 20X3, in one process, there was no opening inventory, but
5,000 units of input were introduced to the process during the month, at the following cost.
$
Direct materials
16,560
Direct labour
7,360
Production overhead
5,520
29,440
FA
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Of the 5,000 units introduced, 4,000 were completely finished during the month and transferred to the next process.
Closing inventory of 1,000 units was only 60% complete with respect to materials and conversion costs.
Solution
(a) The problem in this example is to divide the costs of production ($29,440) between the finished output of 4,000
units and the closing inventory of 1,000 units. It is argued, with good reason, that a division of costs in
proportion to the number of units of each (4,000:1,000) would not be 'fair' because closing inventory has not
been completed, and has not yet 'received' its full amount of materials and conversion costs, but only 60% of the
full amount. The 1,000 units of closing inventory, being only 60% complete, are the equivalent of 600 fully
worked units.
(b) To apportion costs fairly and proportionately, units of production must be converted into the equivalent of
completed units, ie into equivalent units of production.
Equivalent units are 'notional whole units representing incomplete work. Used to apportion costs between work in
progress and completed output …' CIMA Official Terminology
Step 1
Determine output
For this step in our framework we need to prepare a statement of equivalent units.
STATEMENT OF EQUIVALENT UNITS
Total
Equivalent
units
Completion
units
Fully worked units
4,000
100%
4,000
Closing inventory
1,000
60%
600
5,000
4,600
Step 2
Calculate cost per unit of output, and WIP
For this step in our framework we need to prepare a statement of costs per equivalent unit because
equivalent units are the basis for apportioning costs.
STATEMENT OF COSTS PER EQUIVALENT UNIT
Total costs
Equivalent units
=
$29,440
4,600
Cost per equivalent unit $6.40
Step 3
Calculate total cost of output and WIP
For this step in our framework a statement of evaluation may now be prepared, to show how the costs
should be apportioned between finished output and closing inventory.
STATEMENT OF EVALUATION
Equivalent
Cost per equivalent
Item
units
unit
Valuation
$
Fully worked units
4,000
$6.40
25,600
Closing inventory
600
$6.40
3,840
4,600
29,440
Key term
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