Problem 5: Cost of production report – normal and abnormal loss
This problem illustrates the treatment of both normal and abnormal losses when they occur at the end of production process.
Problem 5 (a)
The quantity and cost data belonging to Department Y of Albari Company for the month of July is presented below:
Quantity data:
- Units received from department X: 24,000
- Units transferred to finished goods store room: 18,000
- Units in ending inventory (70% converted): 4,000
- Expected normal loss: 5% of good output
- Abnormal loss: ?
Cost data:
- Cost of units received from preceding department: $168,000
- Cost incurred in Department Y:
– Materials: $36,000
– Labor and factory overhead: $91,200
In Department Y, conversion costs are incurred uniformly throughout the process and materials are added at the end of the process, following inspection.
Required: Prepare a cost of production report for Department Y of Albari Company.
Solution

Equivalent units:
Materials:
= 18,000 units
Labor and factory overhead:
= 18,000 + (4,000 × 70%) + *900 + 1,100**
= 22,800 units
*Normal loss: 18,000 × 5%
= 900
**Abnormal loss: Total units received from preceding department – (units transferred to finished goods + Ending inventory – Normal loss)
= 24,000 – (18,000 + 4,000 + 900)
= 1,100
Unit cost
Materials:
= $36,000/18,000 units
= $2.00 per equivalent unit
Labor and factory overhead:
= $91,200/22,800 units
= $4.00 per equivalent unit
Problem 5 (b)
The steward Chemicals Inc. uses a process costing system. During November, Department B received 28,000 units from Department A at a total cost of $280,000. The following costs were added by department B during the month:
- Materials: $24,000
- Conversion cost: $180,000
During November, Department B completed 16,000 units and transferred the same to finished goods store room. 10,000 units were still in process in department B at the end of the month. These units were estimated to be 60% complete with respect to conversion costs.
Materials are added after inspection and identification of loss which take place at the end of process. Normal spoilage is expected to be only 5% of good units. Any spoilage more than 5% is considered as abnormal and is charged to factory overhead.
Required: Prepare a cost of production report of Department B of Steward Chemicals Inc.
Solution

Equivalent units
Materials:
= 16,000 units
Conversion costs:
16,000 + (10,000 × 60%) + *800 + 1,200**
= 24,000 units
*Normal loss: 16,000 × 5%
= 800
**Abnormal loss: Total units received from preceding department – (units transferred to finished goods + Ending inventory – Normal loss)
= 28,000 – (16,000 + 10,000 + 800)
= 1,200
Unit cost
Materials:
= $24,000/16,000 units
= $1.50 per equivalent unit
Conversion costs:
= $180,000/24,000 units
= 7.50 per equivalent unit
In problem 5 (a) and (b):
- the normal loss occurred at the end of process has been charged to good units transferred to finished goods store room.
- the abnormal loss occurred at the end of process has been charged to factory overhead.
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