Question

Oriental Industries Ltd. manufactures a variety of materials and equipment for the aerospace industry. A team of R&D engineers in the firm’s plant has developed a new material that will be useful for a variety of purposes in orbiting satellites and spacecraft. Trade named Ceramal, the material combines some of the best properties of both ceramics and laminated plastics. Ceramal is already being used for a variety of housings in satellites produced in three different countries. Ceramal sheets are produced in an operation called rolling, in which the various materials are rolled together to form a multilayer laminate. Orbital Industries sells many of these Ceramal sheets just after the rolling operation to aerospace firms worldwide. However, Orbital also processes many of the Ceramal sheets further in the plant. After rolling, the sheets are sent to the moulding operation, where they are formed into various shapes used to house a variety of instruments. After moulding, the sheets are sent to the punching operation, where holes are punched in the moulded sheets to accommodate protruding instruments, electrical conduits, and so forth. Some of the moulded and punched sheets are then sold. The remaining units are sent to the dipping operation, in which the moulded sheets are dipped in a special chemical mixture to give them a reflective surface. Oriental Industries Ltd uses process costing system. For the month of January, 2020, the following production data is provided to you for Department -2:

Quantitative data:
• Transferred in during the month from Department -1 ………………    50,000 units
• Transferred- out during the month to finished goods store ………… 30,000
• Work in process at the end of the month ……………………………            12,000
           {60% completed as per conversion cost}

Numerical data:
Cost received from department: 1 ……………………………………            Rs. 1,400,000
Direct labor cost incurred in department: 2 ……………………….…                    1000,000
Factory overhead cost incurred in department: 2 ……………………                      800,000

Additional information:
• All losses are normal
• Direct materials are input in Department- I only.
• Work in process opening inventory is NIL.

Required:
a. As a cost Accountant of Oriental Industries Ltd, how would you differentiate in normal and abnormal loss?
b. Prepare cost of production Report for Department -2 for the month of January, 2020

Answer 1

ANSWER a.

In Process costing, the 2 types of losses named Normal and Abnormal are mainly classified in the basis of "Degree/Probability of Occurence" and "Controllaility"

Normal loss is the one which has high chances of occurance and is Expected, Anticipated even before starting the production process

Abnormal loss is the one which may occur due to unforeseen reasons and same could have been controlled had proper measures were in place.

Examples/Reasons include :

NORMAL LOSS	ABNORMAL LOSS
Weight loss	Quality issues
Evaporation	Faulty machine/tool
Shrinkage	Breakdown
Rusting	Carelessness
	Improper Supervision
	Unskilled labour

Note: Abnormaly lost units are taken into account while calculating Equivalent units of production

ANSWER b.

Department 2

Cost of Production Report

January 2020

Particulars	Per unit
Input cost from Department 1	28	WN-1
Direct Labour cost	20	WN-2
Factory Overhead cost	16	WN-2
Total Cost per Unit	64	(28+20+16)
Equivalent Completed Units	42,000	WN-3
Cost of Production for the period	26,88,000	(64 * 42,000)

Working-1
Department 1 cost allocation
Units output from Dept1	50,000
Total Cost received from Dept1	14,00,000
Cost per unit of output of Dept1	28	(14,00,000/5,00,000)

Working-2
Costs allocation in Department 2
Direct Labour cost	10,00,000
Total units to be processed	50,000
Cost per completed unit	20.00	(10,00,000 / 50,000)
Factory Overhead cost	8,00,000
Total units to be processed	50,000
Cost per completed unit	16.00	(8,00,000 / 50,000)

Working-3
Units Summary Equivalent completed Units
Input units from Dept1	50,000
Completed units and trf to Finished goods	30,000
Balance units at WIP stage	20,000	(50,000-30,000)
Stage completed with regards conversion cost	60%
Equivalent units (As already given in question)	12,000	(20,000 * 60%)

This is better explained as follows:
Particulars	Units	Stage	Eqv units
Fully completed	30,000	100%	30,000	(30,000*100%)
WIP units	20,000	60%	12,000	(20,000*60%)
Total Equivalent Units			42,000

Note1

WIP Opening units are 'Nil' as given in question, else those would also have been considered for above calculation

Note2
The Unallocated cost, meaning cost incurred and not allocated pertains to the Closing Equivalent units: WIP units     20,000 Stage UNCOMPLETED 40% (100-60%) Closing Equivalent units        8,000 (20,000*40%) Cost per unit as cal above             64 Unallocated cost 5,12,000 (64 * 8000) which is equal to (Total cost incurred - Cot of production ) 5,12,000 (14 + 10 + 8) - (26.88) Notes are only for explaination and better understanding.