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Accounting for losses and scrap in process account

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

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Accounting for losses and scrap in process account

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  1. Accounting for losses and scrap in process account

  2. Accounting for losses in process costing • Nature of losses In a production process, losses are inherent and unavoidable • 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. Product and Material Losses • Normal Loss – expected during production • Abnormal Loss – exceeds that expected during production

  5. 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

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

  7. 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

  8. Joint-Cost Basics Coal Gas Benzyl Tar

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

  10. Distinguish joint products from byproducts.

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

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

  13. 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

  14. Allocate joint costs using four different methods.

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

  16. 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.

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

  18. Constant Gross-MarginPercentage 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.

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

  20. 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.

  21. 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.

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

  23. Account for byproductsusing two different methods.

  24. 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.

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