A process takes in 10,000 kg of material costing $46,000, and conversion costs are $20,600. Normal loss is 4% of input and can be sold as scrap for $1.50 per kg. Actual output was 9,450 kg, and all losses are sold as scrap. What is the net cost of the abnormal loss charged to the statement of profit or loss?

Correct answer: A) $806.25

Explanation

Expected output = 9,600 kg, so abnormal loss = 9,600 - 9,450 = 150 kg. Cost per kg = (66,600 - 600) / 9,600 = $6.875, so the abnormal loss is valued in the process account at 150 x 6.875 = $1,031.25. The scrap proceeds of 150 x 1.50 = $225 are set against this, so the net charge to profit or loss is 1,031.25 - 225 = $806.25.