In process costing, process loss refers to the expected wastage during production, whereas abnormal losses are unexpected and avoidable losses. Conversely, abnormal gains occur when actual output exceeds the expected output.
Process Loss: Process loss arises due to the inherent wastage, scrap, or spoilage that occurs at various stages of the manufacturing cycle. Such losses can result from evaporation, chemical reactions, or other factors inherent in the production process.
Accounting for Process Loss: Normal losses are incorporated into process cost calculations, and their cost is typically deducted from the total cost of production. For instance, if 25 kilograms of raw materials, costing Rs. 1250, are used to manufacture biscuits weighing 25 grams each, one would expect to produce 1000 units (25,000 grams / 25 grams per biscuit). However, due to natural wastage, only 900 units are produced. Consequently, the cost per unit increases from Rs. 1.25 to Rs. 1.40.
Abnormal Loss: An abnormal loss refers to any loss beyond the expected or normal wastage that is inherent in the production process. Unlike normal losses, which are absorbed into production costs, abnormal losses are accounted for separately as an unexpected financial setback.
In accounting, abnormal losses are recorded separately in the income statement and are often written off. The scrap value of an abnormal loss is credited to the process account to reflect the financial impact accurately. If the actual loss is more than the predetermined loss (abnormal loss), difference is considered as abnormal loss which is debited to profit & loss account.
Transactions in abnormal loss:
Separate from Normal Loss from the total loss. Total loss minus normal loss is abnormal loss. Abnormal losses are treated separately from normal losses to avoid distorting cost calculations and product pricing.
Calculate the Cost:
Determine the cost of the units lost due to the abnormal event, considering the cost of raw materials, labor, and overheads incurred up to that point.
Debit to Abnormal Loss Account:
Debit the abnormal loss account with the cost of the lost units.
Credit the Process Account:
Credit the process account (or relevant production cost account) with the cost of the lost units.
Transfer to Profit and Loss Account:
The abnormal loss account is then transferred to the profit and loss account as a period cost.
For example, a manufacturing process expects a 3% wastage rate, but due to a machine malfunction, 10% of the products are defective, resulting in an 7 % abnormal loss.
Calculation:
Calculate the cost of the 7% abnormal loss units.
Debit the Abnormal Loss Account with the cost of the abnormal loss.
Credit the Process Account with the cost of the abnormal loss.
Transfer the Abnormal Loss Account to the Profit and Loss Account.
Abnormal loss in a consignment account:
Abnormal loss in a consignment account is a loss that occurs during the transportation of goods from a manufacturer to an agent for sale. These losses can be accidental or caused by carelessness. Abnormal loss is another significant part of consignment accounting. All losses incurred due to the carelessness or any other drawbacks during delivery come under abnormal cost. It can also be considered a human-made mistake.
Accounting in abnormal loss in a consignment account:
In consignment accounting, abnormal loss, resulting from unforeseen events or carelessness, is treated as a separate expense, not included in the cost of production, and is debited to the Abnormal Loss Account and credited to the Consignment Account, ultimately transferred to the Profit and Loss Account to arrive at the correct profit or loss.
Abnormal Gain:
An abnormal gain occurs when actual production exceeds the expected or normal output, leading to a higher-than-anticipated profit. This may result from:
- Improved production efficiency
- Higher-quality raw materials
- Reduced wastage compared to expectations
Abnormal gains are recorded separately to differentiate them from standard operational outcomes. This distinction allows for a better analysis of the factors contributing to these unexpected improvements.
Example: If a factory produces 1050 units of biscuits when only 1000 units were expected, it results in an abnormal gain of 50 units. This suggests a lower-than-expected scrap rate, leading to higher output and increased profitability.
Accounting for Abnormal Gains:
In accounting for abnormal gains, the units and amount are debited to the relevant process account and credited to the abnormal gain account, which is then transferred to the income statement..
By distinguishing between process loss, abnormal loss, and abnormal gains, businesses can make more informed financial decisions and optimize their production efficiency.
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