+- Accountancy Forum (https://www.accountancy.com.pk/forum)
+-- Forum: The Profession (https://www.accountancy.com.pk/forum/forumdisplay.php?fid=4)
+--- Forum: Students (https://www.accountancy.com.pk/forum/forumdisplay.php?fid=13)
+--- Thread: Standard Costing- Wastage (/showthread.php?tid=4107)
Standard Costing- Wastage - Heimu - 01-18-2007
I'm looking for principles rather than answers to guide me along.
here are the point of uncertainty that i hope someone could clarify.
Because the shelves are made of a natural material that has imperfections, one shelf is normally rejected for each five that are accepted (the rejected shelves are totally scrapped).
Therefore
1) Would this rejected shelf be considered into standard quantity or cost ( my assumption is yes and it's standard quantity)
2) Would the standard cost per component would then be multiplied by 6 and divided by 5 to offset the rejected 1
3) The wastage if taken into consideration, would be taken into the product input rather than product cost isnt it. If standard for 1 is 1m at $10 per meter. the standards would then be 1.2m at $10 not 1m at $12 to take into account the wastage isnt it?
note reread it again and it seems that i might not be making sense.
What i am asking is that is the rejected shelf input into the standard cost since it is a recurring thing it's probably a standard cost component as well. And if it is inside, under which part would the wastage fall into? adding extra to the material length or the standard cost per meter? Or are wastage to be treated as an entry on it's own.
- Abdur.Rehman - 01-20-2007
Standards are set for material by taking into consideration two things i.e. expected level of efficiency in material use and expected increase in the price of material...
As per ur example, if the loss is normal and unavoidable and management is aware of it, then the standard use of material should be adjusted for this normal loss.
- kamranACA - 08-22-2007
Dear,
I was just checking out these ol queries in night and I think the question raised by the guy has not been answered.
His question is about whether the wastage cost should be reflected in input material's quntity or in input material's value for settling down the standard cost per unit of final output. I hereunder quote his quries and replies thereto, if it wud be of any benefit to him at this later stage
Because the shelves are made of a natural material that has imperfections, one shelf is normally rejected for each five that are accepted (the rejected shelves are totally scrapped).
question
1) Would this rejected shelf be considered into standard quantity or cost ( my assumption is yes and it's standard quantity)
answer
As explained by AbdurRehman, this appears to be a normal loss being the common and expected feature of the manufacturing process for shelves. Therefore, it has to be taken into account while calculating standard cost.
Further,
This has to be taken into standard quantity. This will ultimately increase the cost of such modified /increased quantity. Both these things re inter-related and cannot be seggregated. Every thing in accounting or costing finally has to be converted into some measure of money; either u take it into quantity or value. However, for clear understanding, it has to be taken in gross input quantity.
Question
2) Would the standard cost per component would then be multiplied by 6 and divided by 5 to offset the rejected 1
Answer
Of course yes!!
Question
3) The wastage if taken into consideration, would be taken into the product input rather than product cost isnt it. If standard for 1 is 1m at $10 per meter. the standards would then be 1.2m at $10 not 1m at $12 to take into account the wastage isnt it?
Answer
Here concentraion i needed!!! Yes, input quntity has to be grossed up for the provision of nomal wastage. I you will base ur question on determination of raw input, then yes, quantity has to be adjusted. It means for every 1 output unit, there would be needed 1.2 meters cloth at $10 per meter. The resuting input cost would be 1.2 x 10 = $12 (instead of $ 10).
However, if u would b wrking back the cost of final product/output towards the ingredients of such total per unit standard cost then you can work it back from value to units. It means if the final output is 5 shelves then this must has the total cost of (5+1)*10$ = 60$. Then the effective final cot of one output (and not the input unit) would be $ 12 for each of the 1 output unit. Here u ca again convert it into quantity after allocating the normal loss (5 + 20% of 5) = 6. Loss = (6-5) = 1. Now 1 is 20% f final 5 units. It means every inal unit needs 20 percent extra input material thats is 0.2 meter for each unit to be produced increasing the required input quantity to 1.20 from 1 meter per unit.
Your conclusion for standard costing purpose is correct. Of course quantity has to be adjusted becoz practically the rate of one meter gross input cloth ($10 per meter) remain un-affected in the market with the level of wastage occuring during the production in gross input quantity (20% of final expected output).
Best regards,
Kamran