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Aldeby is a manufacturing factory. There are three processes A, B and C which the product has to pass through in order to complete the production. However, when the units transfer from process B to process C, by-products also are emerged. Then by-products transfer to process D to further processing. According to Drury (2004:208), ‘by-products are products that have a minor sales value and that emerge incidentally from the production of the major product’. In the following paragraph, I am going to work out the accounts for process A, B,C and D, along with explanation and analysis, also work out the account for abnormal loss and gain. Then I am going to analyse the transfer and by-product price in term of manager. Last but not least, I will give my suggestions to manager about how to improve product profit in term of manufacturing process.
Firstly, I am going to work out process account A. There are several cost numbers which I have to know in order to complete process account A. According to Drury (2004:156-161), the cost number are input cost, output cost to next process, normal loss and abnormal loss or gain. In this case study, we have to firstly work out the number of production overheads, direct materials and estimated value in order to do further work. After completing the calculation, then we have got enough information to calculate input cost, output cost to next process and abnormal loss or gain. Now, let’s calculate production overheads for this week. We have to know overhead absorption rate in order to calculate for each process overhead cost allocation. For calculating overhead absorption rate you need to know two things which are total amount of overhead and overhead absorption base. The overhead absorption rate = total amount of overhead/ overhead absorption base. In this case, the overhead base should be direct labour. We can assume worker get x pounds per hour. And we know direct workers’ wage so direct labour hour=direct workers’ wage/ x. So that the direct labour hour for process A, B, C and D are 4000/x, 6000/x, 2000/x and 200/x. The overhead absorption rate is 30500/12200/x=2.5x. So the production overhead cost for process A, B, C and D are 4000/x*2.5x=10,000; 6000/x*2.5x=15,000; 2000/x*2.5x=5,000 and 200/x*2.5x=500. In this case study, input cost=direct material cost+ materials added in process +direct wages+ direct expenses+production overhead. So input cost for process A=12,000+5,000+4,000+800+10,000=31,800. We have to work out estimated value in order to know other cost number such as output cost to process B, abnormal loss or gain. Before I am going to calculate the estimated value for process A, I want to define the definition of normal and abnormal loss. According to Drury( 2004:156), normal loss is that ‘certain losses are inherent in the production process and cannot be eliminated, while abnormal losses are avoidable’. In the other word, abnormal loss or gain is the difference between expected output and actual output. Also every normal loss unit has a value which we call scrap-value.
we have to bear in mind. the calculation of the cost per unit of output = Input cost less scrap value of normal loss/ Expected output.760 * 5.5 £ 450 31. the scrap value of normal loss=300 * 1.760 process Abnormal gain account A £ Normal loss account Profit and loss statement 90 240 330 Income due from normal loss £ Process account 450 abnormal gain account Cash from spoiled units (240* 1.800 – 300)/ 5700 = 5. Also we can see. Moreover. In process A. Output cost to process B= actual output at process A * estimated value = 5.5 = 31.3 5.5.760 – 5.700 but the actual output units for process A is 5.130 Normal loss Unit 300 Unit cost ---5.680.680 32. input cost and abnormal gain are in debit side in process account. normal loss=6. there are three accounts occurred.700. which are process account A. the scrap value of normal loss = normal loss * scrap value.000 – 300 =5.760. abnormal gain account A and income due from normal losses.5= 450 and expected output = 6. While normal loss=input units * normal loss%. while normal loss and output to next process are valued in the other side. expected output = input unit normal loss.000 Abnormal gain 60 Unit cost 5. the expected output units are 5.5 = 360) 450 450 £ 90 360 330 process account £ 330 .700 = 60 occurred. For process A. Process account A Unit Input cost 6. So the estimated value per unit = (31.5 £ 31. So there is abnormal gain 5.130 Output to next 5.000 * 5%=300.800 330 32.According to Drury (2004:158).
760 * 10% = 576. As we see. The following tables are the process account B and abnormal loss account B to be displayed. Now let’s work out the necessary cost numbers in order to complete process account C.200. Normal loss for process B = 5. the expected output units are 5.760 576 = 5.360 – 1. Then we can calculate input cost for process B.680 + 15. which are 31.000 = 63.020.845 and the estimated value for process C = ( 74.Now.080 .460.680 + 9.316. As we know from process B.000 + 2. Also we can easily calculate other cost numbers which we have to display in the process account. So input cost for process C = 61. let’s move to process B.152 and expected output = 5. process C is more complicated because a by-product also emerge in this process.008 Now. But we can still use the same method to calculate process C as process A and B. .100 Abnormal loss 63.000 + 6.000 + 2.152 61. So the estimated value for process B = (63.360 Abnormal loss account B £ Process account 1.360 Normal loss Unit 576 Unit cost ---12 12 £ 1. expected output = 5.845 and the actual output units are 4. As we can see.260 + 5.184.460 – 1.008 Cash sale for units scrapped 84 £ 168 840 1.008 63. which is 31. There is just a small difference when we calculate estimated value for process C.184 and the actual output units are 5. the output cost to process C is 61.184 = 12.760 Unit cost 11 £ 63. then divided by expect output. the scrap value of normal loss = 255 * 4 = 1. the expected output units are 4.845 = 14. the scrap value of normal loss = 576 * 2 = 1. output cost of by-product transferred to process D = 510 * 8 = 4.008 Balance transferred to profit statement 1. let’s move to process C. The following tables are displayed for process account C and abnormal loss account C. Process account B Unit Input cost 5.360 Output to process C 5. normal loss = 5.370 so there is abnormal loss 475 units occurred.000+ 1. Compare to process A and B.000 = 74.200 1.100 – 255 = 4. we should use the input cost minus normal loss also minus by-products value.080) / 4.360.100 * 5% = 255.680.200 + 4. Process B is similar process A so that we can use the same method to calculate process B.100 so there is abnormal loss of 84 units occurred.152) / 5.020 – 4. We already know the direct material cost from the previous account.
316 £ 1. Normal loss = 510 * 10% = 51. As we know from the previous process.800 4.900 6.460 475 510 14.800 £ 1.800 Cash sale for units scrapped Balance transferred to profit statement 6.080 74.Process account C Units Input cost 5.900 4. B and C. the output cost from process C to D is 4. the expected output units are 459 and the actual output units are 450 so there is abnormal loss of 9 units occurred.151. As we can see.020 62.460 Normal loss Output to finished goods inventory Abnormal loss By.6 £ 74.370 Unit cost ---14. the expect output = 510 – 51 = 459 and the estimated value of by-product = ( 5. the scrap value of normal loss = 51 * 2 = 102.800 Now.080 + 220 + 200 + 151 + 500 = 5.560 Abnormal loss account C £ Process account 6. So we are able to calculate other cost factors in order to finish the final process. We can use the same method to calculate process D as A and B. The process account and abnormal account D are displayed in the following tables. let’s move to the last process D.151 – 102) / 459 = 11.100 Unit cost 14. .products 74.460 Unit 255 4.080. Process D is quite easier compare to the process A.316 8 6. Input cost = 4.
My suggestion for managers about by-product transfer price is that there are no good or bad to put the transfer price up or down. We can see from the case study. along with abnormal gain for process A and abnormal loss for process B. the company will lose money because there is abnormal loss of 9 units difference occurred.151 Normal loss Output to finished to finished goods inventory Abnormal loss 5. So I advise manager to set the by-product selling price more than 11. C and D.22 . . The transfer price of by-product is £8 from process C to process D. Now.151 – 102) / 450 = 11.1 5. the joint product per unit price will go up when the transfer price is going down. In fact. On the other hand. if we sell by-product just at 11 pounds. there is a significant effect on the joint product. B . C and D. let’s assume that we put transfer price to £9 per unit. So we calculate the price of by-product which the company is going to sell we should use the actual output units instead of expected output units. companies should depend on the specific situation to decide the transfer price of by-product.950 Abnormal loss account D £ Process account 99 Cash sale for units scrapped Balanced transferred to profit statement 99 £ 18 81 99 I have analysed and explained the process account A .22 pounds in order to make profit.151 Unit 51 450 Unit cost ----11 £ 102 4. The joint product per unit price will go down due to the input cost is constant. In the following paragraph.151 9 11 99 5. The estimated value of by-product from the previous paragraph we can know is 11 pounds. I am going to further discuss the pricing of by-product and its transfer price in term of management from process C to process D.Process account D Unit Input cost 510 Unit cost £ 10. The price of by-product = (input cost – normal loss) / actual output = (5.
. Thirdly. From my analysis. ‘management accounting information plays a vital role in these basic management activities such as planning. So companies may use the leftover material to produce other products or sell them at better price. According to Seal. more flexible to motivate employees more effective. ‘scrap value is the leftover part of raw materials’. directing. According to Drury (2004: 210).Conclusion: To sum up. motivating and controlling’. there are three areas which management should improve in the process in order to maximise profit. I have compute the process of A. Secondly. I believe these three suggestions are very useful for manager to enhance profitability of the processes. companies should also try to reduce normal loss. along with analysis and explanation.C and D. I know normal loss is unavoidable but it can minimize due to efficient or new equipments. high skills worker or advanced technology. companies can increase scrap value. the companies should reduce abnormal loss because abnormal loss is avoidable and controllable. B . Garrison and Noreen( 2009:4). Also I have analysed and advised mangers about the pricing of by-product and its transfer price from process C to process D. Firstly. Managers may make the jobs more interesting.
2004: Management and Cost Accounting ( 6th edition). Seal. C. W. . New York: McGraw-Hill Education (UK) Limited. Garrison. W... Singapore: Seng Lee Press. Drury. and Noreen. 2. 2009: Management Accounting ( 3rd edition).Reference: 1. E. H. .. R.
Management Accounting Autumn Assignment 2010/11 NBS----2F1Y Student No. 4550749 .
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