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Treatment of Normal and Abnormal Loss in Process Costing

http://www.krantikari.org/2016/09/cost-accounting-ebook.html
 When we start the production of goods through different processes, normal loss and abnormal loss will happen with this. Due to this our total cost of production will increase.
If we do not treat the normal and abnormal loss, our total cost of production will less than exact cost of production. Due to this, our sale price will not estimate correctly. So, for making good plan of selling and controlling our losses, we need to treat the normal loss and abnormal loss in process accounts.

 1. Treatment of Normal Loss in Process Accounts 

 Normal losses are those which we can not stop. These are natural wastage.

 For example, if you doing the business of timber on the basis of their weight. It is sure that after cutting of tree, weight of wood will decrease. So, this loss is normal loss. In process account’s credit side, we just show the normal loss’s units. Now, our total produced units will decrease. This will increase our cost of production per unit in any process. For example: If total cost of process A is Rs. 10,000. When we produce 100 units in A process, we have checked that due to natural reasons, we have just 90 units. Now, in A Process Account, we will show 100 units in debit side and 10 units of normal loss in credit side without writing its amount. Due to this our total cost of Rs. 10,000 will of 90 units. It means, cost per unit has increased from Rs. 100 per unit to Rs. 111 per unit.

 2. Treatment of Abnormal Loss in Process Accounts

 All those losses which happen due to abnormal reasons are called abnormal losses. Following are its main example.

 1. If you use bad quality raw material in the production, there is big risk of wastage in production. So, use of bad quality raw material is the reason of abnormal loss.

 2. Careless is also reason of abnormal loss. For example, due to the careless of worker, 5 units waste the products during production. So, loss of 5 units is the abnormal loss.

 3. All those losses which are not normal will be the abnormal loss. For treating the abnormal loss in the process account, we need to calculate the value of abnormal loss.

 a) When there is not any normal loss 

  Abnormal loss = Normal cost at normal production / normal output X units of abnormal loss

 b) When there is normal loss

 Abnormal loss = {Normal cost at normal production / (Total output – normal loss units)} X Units of abnormal loss. Example : In process A 100 units of raw materials were introduced at a cost of Rs. 1000. The other expenditure incurred by the process was Rs. 602 of the units introduced 10% are normally lost in the course of manufacture and they possess a scrap value of Rs. 3 each. The output of process A was only 75 units. Prepare process A account.

                                               Process A Account

Debit Side Units  Amount in Rs.  Credit Side Units  Amount in Rs.
Raw material 100 1000 Normal Loss 10 -
Other Expenses - 602 Sale of Scrap of normal wastage 10 units X Rs. 3 each -  30
*Abnormal Loss 15 262
Process B ( Output ) - balancing figure 75 1310
100 1602 100 1602

* Calculation of Abnormal loss in units and in value

Total input========== 100 units
Less normal loss in units== 10 units
--------------------------------------
Normal Output ======== 90 units
actual output of A process = 75 units
--------------------------------------
Abnormal loss in units ==== 15 units
==========================
 Value of Abnormal Loss
= Cost of Total Output - scrap sale of normal loss/ Normal Output X Units of Abnormal loss
= 1602 - 30 / 90 X 15 = Rs. 262

Related : Process Costing 

COMMENTS

: 5
  1. i need the email for accounting education

    ReplyDelete
    Replies
    1. email of accounting education is vinod@svtuition.org and svtuition@gmail.com

      Delete
  2. Extra Cost of Sales
    Opening Stock 221,983,990 91,256,642
    Purchases Raw Materials 589,183,341 394,996,679
    Port agent Bo-Charges 7,792,319 10,740,650
    Electricity Bill 11,864,603 8,691,857
    Wages, Overtime & bonus 7,996,409 10,600,455
    Spairs & Maintenance 841,764 1,650,675
    839,662,426 517,936,958
    Less: Closing Stock 360,188,433 221,983,990
    479,473,993 295,952,968
    how to adjust here normal loss and abnormal loss to show the value of production cost . please help to solve
    e-mail:ipcb.bd@gmail.com

    ReplyDelete
  3. Materials issued : 1000units@₹150/unit
    Wages :₹30000
    Over heads :₹10000
    Normal loss : 5% of input
    Actual out put : 900units
    How to prepare process account

    ReplyDelete
  4. Abnormal loss is spread on good unit of production.is this statement true or false? Give reason.

    ReplyDelete
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Accounting Education: Treatment of Normal and Abnormal Loss in Process Costing
Treatment of Normal and Abnormal Loss in Process Costing
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Accounting Education
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