accounting for losses and scrap in process account
TRANSCRIPT
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
Dr. Scrap
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– Include cost when calculating predetermined
overhead application rate– Include cost less the estimated disposal value
• Specific to a job– Applied to the specific job– Include cost less the estimated disposal value
Abnormal Spoilage
• Period cost – includes cost of abnormal loss less any disposal value
Product and Material Losses
AbnormalLoss
In overheadrate
Period cost
Charge tospecific job Period cost
NormalLoss
Loss for most jobs
Loss identifiedwith a
specific job
Joint-Cost BasicsJoint-Cost Basics
Coal
Gas TarBenzyl
Joint-Cost Basics
Joint costsJoint 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?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 AllocatingJoint 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 DataApproach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
Constant Gross-MarginPercentage NRV MethodConstant 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 thefinal sales values to obtain the totalcosts that each product should bear.
• Step 3:
• Deduct the expected separable costs from the
• total costs to obtain the joint-cost allocation.
Choosing a MethodChoosing a Method
Why is the sales value at splitoff method widely used?
It measures the valueof the joint product
immediately.
It does not anticipatesubsequent management
decisions.
It uses ameaningful basis.
It is simple.
Choosing a MethodChoosing a Method
The purpose of the joint-cost allocation is
important in choosing the allocation method.
The physical-measure method is a moreappropriate method to use in rate regulation.
Avoiding Joint Cost AllocationAvoiding 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 ByproductsAccounting for Byproducts
• Method A:
• The production method recognizes byproducts
• at the time their production is completed.
Method B:The sale method delays recognition ofbyproducts until the time of their sale.