Accounting for losses and scrap in process account

Accounting for losses in process costing In a production process, losses are inherent and unavoidable Nature of losses Normal loss Abnormal loss

Accounting for scrap Revenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue Damaged goods may be sold as scrap

Transactions Accounting treatment Accounting entries Normal loss Losses within expected level Not assigned cost No entry Abnormal loss Excess loss over the expected level Assigned cost Dr. Abnormal loss Cr. Process account Abnormal gain Gain resulted when the actual loss is less than the normal or expected loss Dr. Process account Cr. Abnormal gain

Transactions Accounting treatment Accounting entries Scrap value of normal loss Reducing material cost Dr. Scrap Cr. Process account Scrap value of abnormal loss Reduce cost of abnormal loss Cr. Abnormal loss Loss of scrap value due to abnormal gain The actual units sold as scrap will be less than the scrap value of normal loss Dr. Abnormal gain Cr. Scrap

Transactions Accounting treatment Accounting entries Actual cash received from the sale of scrap Reducing material cost Dr. Cash Cr. Scrap

Product and Material Losses Normal Loss – expected during production Abnormal Loss – exceeds that expected during production

Normal Loss Anticipated on all jobs Specific to a job Include cost when calculating predetermined overhead application rate Include cost less the estimated disposal value Specific to a job Applied to the specific job

Abnormal Spoilage Period cost – includes cost of abnormal loss less any disposal value

Product and Material Losses Normal Loss Abnormal Loss In overhead rate Loss for most jobs Period cost Loss identified with a specific job Charge to specific job Period cost

Joint-Cost Basics Coal Gas Benzyl Tar

Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point Separable costs

Distinguish joint products from byproducts.

Joint Products and Byproducts Main Products Joint Products Byproducts High Low Sales Value

Explain why joint costs should be allocated to individual products.

Why Allocate Joint Costs? To compute inventory cost and cost of goods sold For insurance settlement computations To determine cost reimbursement under contracts For rate regulation For litigation purposes

Allocate joint costs using four different methods.

Approaches to Allocating Joint Costs Two basic ways to allocate joint costs to products are: Approach 1: Market based Approach 2: Physical measure

1.PHYSICAL MEASUREMENT OR PHYSICAL UNIT METHOD. 2.AVERAGE UNIT COST METHOD. 3.MARKET PRICE METHOD. 4.SALE VALUE METHOD. 5.POINT VALUE OR SURVEY METHOD.

Approach 1: Market-based Data Sales value at splitoff method Estimated net realizable value (NRV) method Constant gross-margin percentage NRV method

Constant Gross-Margin Percentage NRV Method This method entails three steps: Step 1: Compute the overall gross-margin percentage. Step 2: Use the overall gross-margin percentage and deduct the gross margin from the final sales values to obtain the total costs that each product should bear.

Step 3: Deduct the expected separable costs from the total costs to obtain the joint-cost allocation.

Choosing a Method Why is the sales value at splitoff method widely used? It measures the value of the joint product immediately. It does not anticipate subsequent management decisions. It uses a meaningful basis. It is simple.

Choosing a Method The purpose of the joint-cost allocation is important in choosing the allocation method. The physical-measure method is a more appropriate method to use in rate regulation.

Avoiding Joint Cost Allocation Some companies refrain from allocating joint costs and instead carry their inventories at estimated net realizable value.

Account for byproducts using two different methods.

Accounting for Byproducts Method A: The production method recognizes byproducts at the time their production is completed. Method B: The sale method delays recognition of byproducts until the time of their sale.