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
Abnormal loss
Excess loss over the Dr. Abnormal
expected level
loss
Assigned cost
Cr. Process
account
Abnormal gain
Gain resulted when
the actual loss is less
than the normal or
expected loss
No entry
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 Dr. Scrap
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
– 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
Normal
Loss
Loss for
most jobs
In
overhead
rate
Loss identified
with a
specific job
Charge to
specific job
Abnormal
Loss
Period cost
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.