Question

QuesLIUI 12 MADStil Plc processes unique syrup as flavouring for coffee and desserts for sales in the retail market. The company operates a process costing system and adopts the weighted average method to value its inventories. The syrup is sold in small bottles for £12 each. The first stage in the production process is carried out in the Mixing Department which removes foreign objects from the raw materials and mixes them in the proper proportions in large containers. The company uses the weighted average method in its process costing system. A draft report for the Mixing Department for January 2018 appears as below: 30,000 Units to be accounted for: Work-in-process, 1 January (90% materials, 80% conversion cost added last month) Started into production Total units 200,000 230,000 Units accounted for as follows: Transferred to the next department Work-in-process, 31 January (75% materials, 60% conversion cost added this month) Total units 190,000 40,000 230,000 £98,000 Total cost Cost to be accounted for: Work-in-process, 1 January (materials £67,800; conversion £30,200) Cost added in January (materials £579,000; conversion £248,000) Total cost £827,000 £925,000 Cost accounted for as follows: Transferred to the next department Work-in-process, 31 January Total cost £805,600 £119,400 £925,000 The management has approached you, the newly appointed management accountant, to provide them with more useful information based on the draft report. Required: (a) Determine the costs of (i) completed units transferred to the next department, and the (ii) work-in-process units at the end of the period. Show all relevant workings. [25 marks] (b) The manager of the Mixing Department is proud of the fact that there were no losses reported in the processing. However, he is concerned about how such losses, if any, would be addressed in the management reports. Advise the manager by explaining the treatments for normal losses and abnormal losses in the costing system, and the rationale behind such treatments. [15 marks] [Total 40 marks]

Answer 1

Ans. (a)

Statement of Equivalent Production

Particulars		Material		Conversion
Opening Units (30,000)	100%	30,000	100%	30,000
Started and completed (160,000)	100%	160,000	100%	160,000
Started but incomplete (40,000)	75%	30,000	60%	24,000
Total		220,000		214,000

Therefore, Cost of material per unit = (£67,800+£579,000) / 220,000 = £2.94/unit

Cost of conversion per unit = (£30,200+£248,000) / 214,000 = £1.30/unit

Hence, Total cost of production of one unit is £4.24.

Valuation of Closing Stock

Particulars	Units	Material	Conversion	Total
(i) Transferred to next department	190,000	558,600	247,000	805,600
(ii) Work in process	40,000	88,200	31,200	119,400
Total	230,000	646,800	278,200	925,000

Therefore, (i) Cost of units trf to next department = £805,600 ; and (ii) Cost of Work in Process = £119,400

Ans (b). Treatment of normal losses: All the burden of normal losses will be borne by the remaining good units.

  Treatment of abnormal losses: The abnormal losses can be treated in following ways- (i) Transfer to Statement of Profit and Loss A/c in order to book the expenses which have occurred in the current year itself. (ii) Show it as cost of goods sold as this is a result of production of goods with the motive of selling them.