1. Accounting for losses and scrap in process account

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

3. 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

4. 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

5. 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

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

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

8. 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

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

10. 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

11. Joint-Cost Basics
Coal
Gas
Benzyl
Tar

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

13. Distinguish joint products
from byproducts.

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

15. Explain why joint costs should be
allocated to individual products.

16. 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

17. Allocate joint costs using
four different methods.

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

19. 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.

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

21. 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.

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

23. 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.

24. 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.

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

26. Account for byproducts using two different methods.

27. 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.