Treatment of Special Items in a Cost Sheet

Understand Treatment of Special Items in Cost Sheet

Key rules to remember

Normal scrap or waste

Sale value of normal scrap is credited once: either to the cost of the related material (prime cost) or to factory overheads/factory cost

If scrap is of a specific job, credit that job. Otherwise credit the general overhead or factory cost. Follow the wording of the question and never deduct the same scrap at both stages.

Abnormal loss

Abnormal loss = [(Total cost − Scrap value of normal loss) ÷ Normal output] × Abnormal units; less scrap realised on the abnormal units

Never included in the cost sheet. Net amount is transferred to the Costing Profit and Loss Account.

Abnormal gain

Value of gain units = [(Total cost − Scrap value of normal loss) ÷ Normal output] × Abnormal gain units. Net gain = Value of gain units − Scrap value of those gain units

Gain units are valued at the normal cost per unit, with normal output as the divisor. Because those units did not become scrap, the scrap income expected on them is not received. So the scrap value of the gain units is set against their value in the scrap (normal loss) account. The balance is the net gain, and it is transferred to the Costing Profit and Loss Account, not to the cost sheet.

Gross factory cost

Prime cost + Factory overheads

This is the total before the WIP adjustment. Do not call it works cost.

Factory cost

Gross factory cost + Opening WIP − Closing WIP (less normal scrap realisation only if the question says to credit it to factory cost)

Factory cost and works cost are the same figure. WIP is adjusted only once, at this stage. If normal scrap was already credited to material cost, do not deduct it again here.

Cost of production

Factory cost + Administration overhead

Administration overhead is added after the WIP adjustment. Divide by units produced to get cost per unit.

Cost of goods sold

Cost of production + Opening finished goods − Closing finished goods

Value the closing finished goods at cost of production per unit, not at selling price.

Royalty

Royalty on production → direct expense (prime cost); royalty on sales → selling and distribution overhead

Minimum rent or dead rent is treated as an overhead.

Bad debts

Normal bad debts related to sales → selling and distribution overhead; extraordinary bad debts and bad debts of a financial nature → excluded

Check the wording. Only normal bad debts that arise from sales are a cost. Do not exclude all bad debts.

Excluded items

Interest on capital, interest and finance charges, income-tax, dividend, donations, discount allowed, goodwill written off, losses on sale of assets, transfer to reserves

These are not part of the cost sheet. Abnormal losses are also kept out. Extraordinary or financial bad debts are excluded too. Notional rent or interest is included only when the question asks for it in cost accounts.

How to solve Treatment of Special Items in Cost Sheet questions

1. 1Read the data and list every item. Mark each as direct material, direct labour, direct expense, factory overhead, office overhead, selling or distribution overhead, or to exclude.
2. 2Identify items to exclude: financial charges, appropriations, abnormal losses, sale of assets and similar. Strike them off first.
3. 3Treat losses: find normal loss and abnormal loss. Note the sale value of normal scrap and decide where the question wants it credited (material cost or factory cost). Cost the abnormal loss separately and keep it out of the sheet.
4. 4Compute prime cost: opening materials + purchases + carriage − closing materials, then add direct labour and direct expenses such as royalty on production. Deduct normal scrap here only if the question says to credit it to material cost.
5. 5Add factory overheads to prime cost to get gross factory cost. Add opening WIP and deduct closing WIP. If the question says to credit normal scrap realisation to factory cost, deduct it here, and not in prime cost. The result is factory cost (works cost).
6. 6Add administration overhead to factory cost to get cost of production. Then adjust finished goods stock to get cost of goods sold.
7. 7Add selling and distribution overhead to get cost of sales. Add profit to get sales if asked.
8. 8Write short notes for each excluded item so the examiner sees you recognised it.

Quickest way: Tag-and-sweep method

Common mistakes in Treatment of Special Items in Cost Sheet

• Including abnormal loss in the cost sheet.

  Students treat it like any other production loss.

  Fix: Remove it and charge it to the Costing Profit and Loss Account. Value it at [(Total cost − Scrap value of normal loss) ÷ Normal output] per unit, less scrap realised. Spread normal loss only over good units.

• Adding scrap sale value to sales instead of deducting it from cost.

  Scrap seems like income.

  Fix: Treat normal scrap realisation as a reduction of material or factory cost unless the question says otherwise.

• Including interest on loans, dividend or income-tax in overheads.

  They appear in the same list as expenses.

  Fix: Treat them as financial or appropriation items and exclude them.

• Adjusting WIP and finished goods at the wrong stage.

  Students are unsure of the order of the format.

  Fix: Adjust WIP after adding factory overheads to prime cost (gross factory cost), to get factory cost. Add administration overhead to reach cost of production. Adjust finished goods after that to get cost of goods sold.

• Valuing closing finished stock at selling price.

  The question gives both cost and sales data.

  Fix: Value finished stock at cost of production per unit unless told otherwise.

• Putting all royalty under overheads.

  Students remember royalty as an expense only.

  Fix: Royalty on production is a direct expense. Royalty on sales goes to selling overhead.

Worked examples