QUESTION ONE You are an Assistant Accountant at Trade Kang Limited which uses pr
ID: 2328691 • Letter: Q
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QUESTION ONE You are an Assistant Accountant at Trade Kang Limited which uses process costing technique to account for its products and productions costs. Your supervisor Ms. Kasanda Chanda has asked you to do a write up on some concepts she intends to discuss at a meeting with Finance and non- Finance team. Specifically she wants you to (a) Explain briefly the term joint products' in the context of process costing (2marks) (a) Discuss whether, and if so how joint process costs should be shared among joint aroduts Asume that no further procesing is requred after the split-off point) (11 marks) (b) Explain briefly the concept of 'equivalent units in process costing (4marks) (o) Explain the accounting treatment of notmal and abnormal losses (3marks)Explanation / Answer
a) Joint products are multiple products generated at the same time by a single production process. These products incur undifferentiated joint costs until a split-off point, after which each product incurs separate processing and seperate cost. For example:- milk, cheese, cream, butter and other dairy products.
b) Methods to allocate joint cost if no further processing is required:-
i) Physical measurement method
Joint costs are allocated based on number of units or physical quantity such as weight, volume or length of each product relative to total production. This method can be represented in the following formula:
Cost allocated = Quantity of produt/Quantity of total production * Total joint cost
ii) Relative sales value method
This method allocates joint costs on the basis of estimated sales value of a given joint product relative to the sales value of total joint production. This is illustrated in the following formula:
Cost allocated = Sale value of product/Sale value of total production * Total joint cost
iii) Net realizable value (NRV) method
For products that need further processing, NRV method is more suitable because it takes into account, the additional costs needed to further process and sell the joint products. Under this method, joint cost is allocated to products using the following formula:
Cost allocated = NRV of product/NRV of total production * Total joint cost
c) Equivalent units of production is means the number of complated units that a company could have produced given its resources at one time. It is a term applied to the work-in-process inventory at the end of an accounting period. It is the number of completed units of an item that a company could theoretically have produced, given the amount of direct materials, direct labor, and manufacturing overhead costs incurred during that period for the items not yet completed. In short, if 100 units are in process but you have only expended 40% of the processing costs on them, then you are considered to have 40 equivalent units of production.
d) Normal losses are loss that we cannot stop. They are natural wastage. For example:- losses due to unavoidable, inherent and to natural causes like evaporation, leakage, drying, etc. Its accounting treatement is:-
abnormal losses are avoidable loss as it does not arise due to the nature of goods. They are generally caused by theft, accident, fire, pilferage, abnormal breakages, carelessness, etc. Its accounting treatement is:
We need to calculate the value of abnormal loss. Once we have calculated the same, the amount of abnormal loss is added to the remaining cost to cover the loss.
Cost allocated = Sale value of product/Sale value of total production * Total joint cost
iii) Net realizable value (NRV) method
For products that need further processing, NRV method is more suitable because it takes into account, the additional costs needed to further process and sell the joint products. Under this method, joint cost is allocated to products using the following formula:
Cost allocated = NRV of product/NRV of total production * Total joint cost
c) Equivalent units of production is means the number of complated units that a company could have produced given its resources at one time. It is a term applied to the work-in-process inventory at the end of an accounting period. It is the number of completed units of an item that a company could theoretically have produced, given the amount of direct materials, direct labor, and manufacturing overhead costs incurred during that period for the items not yet completed. In short, if 100 units are in process but you have only expended 40% of the processing costs on them, then you are considered to have 40 equivalent units of production.
d) Normal losses are loss that we cannot stop. They are natural wastage. For example:- losses due to unavoidable, inherent and to natural causes like evaporation, leakage, drying, etc. Its accounting treatement is:-
The cost price of the stock is increased to cover up the cost of normal goods.abnormal losses are avoidable loss as it does not arise due to the nature of goods. They are generally caused by theft, accident, fire, pilferage, abnormal breakages, carelessness, etc. Its accounting treatement is:
We need to calculate the value of abnormal loss. Once we have calculated the same, the amount of abnormal loss is added to the remaining cost to cover the loss.
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