This is a commonly used statement which traces the flow of units produced and costs incurred in the production process. The report is prepared for each process and it provides a reconciliation of the physical flow of units and the total costs for the period . Assuming no spoilage or losses, the following relationships will always hold:
1. Physical Units:
Beginning W.I.P + Units started during – Units to account for the period.
= Units completed and transferred + Ending work in progress – Units accounted for.
Cost of Beginning W.I.P. + Current costs incurred – Costs to account for = Costs of units completed and transferred
- Most manufacturing processes result in some portion of the raw materials used not being converted into a reliable half hence losses. These losses may take the form of waste, scrap, rework, and spoilt units.
- Waste: are materials lost in the process, which are irrecoverable or have no recoverable value.
- Scrap: Material held after a productive process, which are irrecoverable or have no recoverable value.
- Rework: These are finished goods that do not meet quality standards but which with some additional work can be sold.
- Loss: Refers to finished or partially finished units, which cannot be reworked or used for their intended purpose. They may be discarded or sold for minimal value. There are two types of spoilage;
- Normal Loss: is loss expected and unavoidable even under the most efficient systems of production. Normal spoilage cost is normally included in product cost.
- Abnormal Spoilage: This is loss that is avoidable with efficient operating conditions. The cost is regarded as controllable and can be eradicated if due diligence and supervision are exercised. The cost is normally treated as a loss and charged to profit and loss account.
- Accounting Treatment of Spoilage Costs
- Normal Spoilage Costs: These costs are assigned to the good output using two approaches:
- Omission Approach: Under this approach, the normally spoilt units are not included in the calculation of equivalent units. This means that the cost of the normally spoilt units will automatically be distributed to the good output. By excluding the normal spoilage in the computation to the good output, a lower figure will be derived. The weaknesses of this method are;
- The cost of normal spoilage is spread equally into the finished goods and the ending W.I.P regardless of whether the ending W.I.P. has passed the inspection stage or not.
b) It does not allow the manager to see the costs of spoilage because these costs are not computed.
- Recognition and Re-Assignment Approach In this approach, the normal spoilage is included in the equivalent units computation; further, the normally spoilt units will be assigned costs just like any other unit. The spoilage costs will then be reallocated to these good units that have passed the inspection point. The steps to follow under this method are:
- Compute equivalent units including normal spoilage.
- Assign costs to all units including normal spoilage.
- Reassign normal spoilage costs to good output.
- Abnormal Spoilage Costs
These costs do not add any production benefit to the company and are treated as accounting losses. The costs are written off directly as losses for the period in which they occur.
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