Exercise 13: Cost of production report – normal loss at the end of process

Learning objective:
This exercise illustrates the treatment of normal loss when it occurs at the end of the production process.

Sky Corporation uses a process costing system in its two production departments – Department X and Department Y. During October, Department Y received 5,000 units from Department X at a cost of $100,000. The materials and conversion costs incurred in Department Y during the month of October were as follows:

• Materials: $16,000
• Conversion costs: $72,000

In Department Y, materials are added at the end of the process after quality control inspection.

During October, department Y completed and transferred 4,000 units to the finished goods storeroom. The 600 units were in process at the end of the month (2/3 complete as to conversion cost). The loss of units that occurred in Department Y was considered normal.

Required: Prepare a cost of production report of Department Y.

Solution

The entire cost of lost units identified at the end of the process is charged to good units completed during the period.

Notice that the entire cost of units lost at the end of the process has been charged to good output only. The same has not been charged to units in process at the end of the month. The per unit cost of $35 used to compute the total cost of lost units has been arrived at as follows:

Cost from preceding department + Conversion cost
= $20 + $15
= $35

The cost of materials has not been included, as it is added to good units only after quality control inspection.

Equivalent units

Materials:
= 4,000 units

Conversion costs:
= 4,000 + (600 × 2/3) + 400
= 4,800 units

Unit cost:

Materials:
= $16,000/4,000 units
= $4.00

Conversion cost:
= $72,000/4,800 units
= $15.00