Cost and revenues question

dark_knight

Hi guys, finding this one the toughest of level 3 so far and hope you could explain something regarding abnormal gains and scrap sales. When you have worked out the abnormal gain, debited to the process account and credited the abnormal gains with the same value as the finished goods. Why do you then debit the abnormal gains and credit the normal loss accounts with the scrap value you would get for it? Surely this means that the bank/creditors entry opposite to this will not be correct


___________abnormal_gain___________
Nor loss 200@0.3=60|236 process account
|
|

__________normal loss___________
Process acct 300 | 240 bank/creditors
| 60 abnormal gain
|
|

Apologies if it's as clear as mud I'm trying to type it out on my iPad

Thanks

janwal

You need to show on your abnormal gain account the amount for the Income Statement (P&L), is hard to show without full question.

sdv

dark_knight wrote: »

Hi guys, finding this one the toughest of level 3 so far and hope you could explain something regarding abnormal gains and scrap sales. When you have worked out the abnormal gain, debited to the process account and credited the abnormal gains with the same value as the finished goods. Why do you then debit the abnormal gains and credit the normal loss accounts with the scrap value you would get for it? Surely this means that the bank/creditors entry opposite to this will not be correct


___________abnormal_gain___________
Nor loss 200@0.3=60|236 process account
|
|

__________normal loss___________
Process acct 300 | 240 bank/creditors
| 60 abnormal gain
|
|

Apologies if it's as clear as mud I'm trying to type it out on my iPad

Thanks

You have to understand that any Abnormal Gain come from reduction of Normal Loss.

When calculating the production costs, any sale of normal loss scrap, helps to reduce the normal production costs. Therefore we will Debit the Normal loss account with £300 (1000kg @0.30) and credit the production account with £ 300.

If there is no Abnormal gain the we would be able to sell the normal loss of 1000kg and debit bank with £300 and credit normal loss account with £300 and clear the normal loss account to zero.

However, we now have 200kg abnormal gain and therefore can only sell 800kg @0.30 for £240 leaving a debit balance of £60 in the normal loss account (200kg @0.30).

The 200kg abnormal gain is calculated at £236. Thus credit Abnormal loss account with £236 and debit production account with £236. In reality we do not have an abnormal gain of £236 but only of £176 (236-60), because we were expecting to sell that 200 abnormal gain as a normal loss for £60

Therefore to clear the normal loss account debit Abnormal Gain account with £60 and credit Normal loss account with £60. This will now reflect the true picture- £300 received for sale of normal loss (clearing the account to a zero balance) and the real abnormal gain is £176 on the credit side.

I Hope this helps clear your understanding of abnormal gain

SandyHood

dark_knight
You have had a very good answer from sdv

I read your question and got concerned. I have now re-read the guidance notes https://services.aat.org.uk/servlet/file/CRS_guidance_20111312_DR.doc?ITEM_ENT_ID=177736&download=1and hope these quotes will help:

An understanding is required of appropriate organisational costing systems – job, batch, unit, process and service costing. ....................
Students should know and understand the reasons behind, and the implications of, classifying the costs of inventory at different stages. This includes understanding the recording of different stages of processed inventory in the accounting records, and that equivalent unit calculations (see below) are made in this context. .............


Process costing will be examined to the following extent:

• Students should be able to explain and prepare calculations for the following process costing terms: normal loss; abnormal loss; abnormal gain.

• There will be no more than two processes.

• Process accounts will be required, covering the terms in the previous paragraph, where there is no closing work in progress. This will include scrap sales revenue.

• Unit cost calculations for equivalent units where there is closing or opening work in progress, but not both and not including process losses.

• Neither by-products nor joint products will be examined.

My interpretation of this includes:

1. I do not expect to see the exam testing transactions between the normal loss account and either abnormal losses or abnormal gains
2. I do not expect to see the exam testing transactions in relation to the sale of scrap either for cash or on credit.
3. I do not expect to see the exam testing the calculation of accounting entries and their entries into the P&L (SoCI) beyond a single figure MCQ which would be taken from a process account.

My own classes, and in particular the Wednesday evening class (which has thread here) did two class questions where I included the other accounts. This was to see the context of process accounts within the broader accounting bookkeeping system. But they did not need this knowledge at the level of your question when they took the exam.

SandyHood

The process costing question will (almost certainly) be task 2.3
Look at the two sample exams - two different approaches both testing the same knowledge
I would use a sheet of paper for workings in exam 2 so I can do the T-accounts

This link will help with equivalent units (it is a common layout - but not the one I use in class)
http://www.aat-interactive.org.uk/elearning/learning_zone/AAT750013_E0903/lib/templates/master.htm

This link will help with normal losses and abnormal gains/losses (a fine T-account approach)
http://www.aat-interactive.org.uk/elearning/learning_zone/AAT750018_E0902/lib/templates/master.htm

On the green light:
https://www.aatgreenlight.org.uk/Tests/test.aspx
All the questions are good
Q3 looks at a abnormal gain balance (but in a company where normal losses have no scrap value)

dark_knight

Thanks for the replies, I read your post the other day sdv and went back to my books....originally I didnt understand that abnormal gains reduce normal losses. I thought that when all normal losses were sold along with the abnormal gain then (in the above example) 1200kg was sold, hence why I was getting confused with the bank being incorrect, but as it is reduced to 800kg then it works out correctly.

Many thanks for your help on that

Richard

dark_knight

Thanks Sandy, looks like I was getting confused about something that isn't going to be in the exam anyway, lol. It's always good to know though