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How to Answer Cost Accounting Questions – College Edition (Part One)

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College has been a rough patch for and most people; you are thrown into an environment and you must figure out a way out successfully. Today, this article is dedicated to college students pursuing an Associates Degree in Business Studies and is studying Cost Accounting.

Cost Accounting is offered as a part of an Undergraduate program (associate degree) for students to explore and understand in detail the concept of Budgeting and Pricing, Managerial Accounting Systems, profit planning, etc. Cost Accounting is a very effective and helpful course for persons who intend on owning a business in the future; the knowledge helps you to understand how your company is spending money, how much it makes, and how to analyze earning versus spending capacity for effective cost controls.

Most popular costs in business are explained thoroughly in this class, these include direct and indirect costs, Variable and fixed costs as well as operating costs.

Cost Accounting should not be confused with Financial Accounting; these have two different audiences which means the process of conducting both will be different. Financial Accounting is mainly for the major players in the business including shareholders, creditors, and regulators who do not have access to inside information, on the other hand, cost accounting is for the in house players or the people that have access to company information.

We will be answering three questions worth a total of twenty marks.

The questions are as follows:

  1. Describe three possible reasons for a normal loss in a process.
  2. Describe three possible reasons for an abnormal loss in a process
  3. Explain the reason for the difference in valuation between normal loss and abnormal loss.

RESPONSE FOR QUESTION ONE

Normal Loss is the loss anticipated before production. It can also be referred to as a standard loss. A provision for such a loss is made before the start of production. Three examples of normal loss are: Evaporation, shrinkage, and rusting.

Evaporation occurs when liquid turns into gas and happens whether liquids are hot or cold and even to a lesser extent, room temperature. Evaporation, therefore, can be a real loss faced by companies. For instance, a company that deals in cooking gases (which is Liquefied Petroleum Gas LPG) will suffer loss of some of their supply while it is in storage or being transported.

Shrinkage is used to describe the loss of inventory. For example, if the inventory records of a company report that 4986 units of Product XYZ are on hand, but a physical count indicates that there are only 4917 units on hand, there is an inventory shrinkage of 69 units. The inventory’s shrinkage might be due to employee theft or/and deterioration. In the manufacturing world, shrinkage can also refer to the loss of raw materials, such as metal or food ingredients, during the production process. This shrinkage is also known as spoilage or waste. For example, a manufacturer of baked food items will experience shrinkage throughout its processes due to ingredients adhering to the beaters and bowls.

Rusting is the red or orange coating that forms on the surface of iron when exposed to air or moisture. The process is a type of corrosion that occurs easily under natural conditions. Rusting poses a threat to anything that has elements of iron. 

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[…] THIS IS A CONTINUATION FROM PART ONE FOUND HERE […]