Normal loss with no scrap value:
During the process certain losses are ineharent and cannot be eliminated. For example, liquid may be evaporate. These losses occur under efficient operation and are unavoidable. They are referred to as normal or uncontrollable losses. Because they are an inherent part of the production process normal losses are absorbed by the good production. Where normal losses apply the cost per unit of output is calculated by dividing the costs incurred for a period by the expected output from the actual input for that period. For example,
Actual input is 10,000 liters at a cost of Rs. 120,000 and normal loss is 1/6th of the input. Therefore the actual output is 10,000 liters so that the per unit cost is Rs. 12 (120,000/10,000 liters). Actual output is expected output so there is neither an abnormal loss or gain.
Abnormal loss with no scrap value:
The losses that cannot be avoided, there are some losses that are not expected to occur under efficient operations, for example the mixing of ingredient, the use of inferior materials etc. These losses are not an inherent part of the production process, and are referred to as abnormal or controllable losses. Because they are not an inherent part of the production process and arise from inefficiencies they are not included in the process costs. Instead, they are removed from the appropriate process account and reported separately as an abnormal loss. The abnormal loss is treated as a period cost and written off in the profit statement at the end of the accounting period. This ensure that abnormal losses are not incorporated in any inventory valuations.
For example, expected output is 10,000liters but the actual output was 9,000 liters, resulting in an abnormal loss is 1,000 liters. That is to calculate the cost per liter of the expected output which is,
input cost (Rs. 120,000) / expected output (10,000 liters)
this will give Rs. 12 per liter
Be remember the unit cost is the same for an output of 10,000 or 9,000 liters since we want to calculate the cost per unit of normal output. The input cost is distributed is as follows,
Rs.
completed production cost transferred to next department 9,000 liters at Rs. 12 108,000
abnormal loss 1,000 liters at Rs. 12 12,000
Total 120,000
The abnormal loss is valued at the cost per unit of normal production. Abnormal loss can only be controlled in future by establishing the cause of the abnormal loss and taking appropriate remedial action to ensure that it does not reoccur.
Accounting entry of abnormal loss in process account:
Particular Liters Unit cost Amount Particular Liters Unit cost Amount
Rs. Rs. Rs. Rs
Input cost 2,000 10 120,000 Normal loss 2,000 - -
Outputs to
finished goods 9,000 12 108,000
Abnormal loss 1,000 12 12,000
Total 120,000 120,000
Normal Loss With Scrap Value:
In this case the normal lost unit has scrap value e.g Rs.5 per liter. The sales value of the spoiled units should be offset against the cost of the appropriate process where the loss occurred. Therefore the sale value of the normal loss is credited to the process account and a corresponding debit entry will be made in the cash or accounts receivable account. The calculation of the cost per unit of output is,
Input cost less scrap value of normal loss / Expected output
Rs.120,000 - (2000*5) / 10,000 liters
= Rs. 11
Compared with the above cases cost per unit has declined from Rs. 12 per liter to Rs. 11 per liter to represent the effect that the normal spoilage has a scrap value which has been offset against the process account.
The entry in process account like this
Process Account
Particular Liters Unit Cost Total Particular Liters Unit Cost Total
Rs. Rs. Rs. Rs.
Input Cost 12,000 10 120,000 Normal loss 2,000 - 10,000
Output 10,000 11 110,000
Total 120,000 12000
Remember that the scrap value of the normal loss is credited against the normal loss entry in the process account.
Abnormal Loss With Scrap Value:
Consider the above where the abnormal loss unit is 1,000 and now the scrap value of that lost unit is Rs. 5 per liter The sale value of the additional 1,000 liters lost represent revenue of an abnormal nature and should not be used to reduce process unit cost. This revenue is offset against the cost of the abnormal loss.
The accounting entry is like this,
Process Account
Particular Liters Unit Cost Total Particular Liters Unit Cost Total
Rs Rs. Rs. Rs.
Input cost 12,000 10 120,000 Normal loss 2,000 - 10,000 Output 9,000 11 99,000
Abnormal loss 1,000 11 11,000
Total 120,000 120,000
During the process certain losses are ineharent and cannot be eliminated. For example, liquid may be evaporate. These losses occur under efficient operation and are unavoidable. They are referred to as normal or uncontrollable losses. Because they are an inherent part of the production process normal losses are absorbed by the good production. Where normal losses apply the cost per unit of output is calculated by dividing the costs incurred for a period by the expected output from the actual input for that period. For example,
Actual input is 10,000 liters at a cost of Rs. 120,000 and normal loss is 1/6th of the input. Therefore the actual output is 10,000 liters so that the per unit cost is Rs. 12 (120,000/10,000 liters). Actual output is expected output so there is neither an abnormal loss or gain.
Abnormal loss with no scrap value:
The losses that cannot be avoided, there are some losses that are not expected to occur under efficient operations, for example the mixing of ingredient, the use of inferior materials etc. These losses are not an inherent part of the production process, and are referred to as abnormal or controllable losses. Because they are not an inherent part of the production process and arise from inefficiencies they are not included in the process costs. Instead, they are removed from the appropriate process account and reported separately as an abnormal loss. The abnormal loss is treated as a period cost and written off in the profit statement at the end of the accounting period. This ensure that abnormal losses are not incorporated in any inventory valuations.
For example, expected output is 10,000liters but the actual output was 9,000 liters, resulting in an abnormal loss is 1,000 liters. That is to calculate the cost per liter of the expected output which is,
input cost (Rs. 120,000) / expected output (10,000 liters)
this will give Rs. 12 per liter
Be remember the unit cost is the same for an output of 10,000 or 9,000 liters since we want to calculate the cost per unit of normal output. The input cost is distributed is as follows,
Rs.
completed production cost transferred to next department 9,000 liters at Rs. 12 108,000
abnormal loss 1,000 liters at Rs. 12 12,000
Total 120,000
The abnormal loss is valued at the cost per unit of normal production. Abnormal loss can only be controlled in future by establishing the cause of the abnormal loss and taking appropriate remedial action to ensure that it does not reoccur.
Accounting entry of abnormal loss in process account:
Particular Liters Unit cost Amount Particular Liters Unit cost Amount
Rs. Rs. Rs. Rs
Input cost 2,000 10 120,000 Normal loss 2,000 - -
Outputs to
finished goods 9,000 12 108,000
Abnormal loss 1,000 12 12,000
Total 120,000 120,000
Normal Loss With Scrap Value:
In this case the normal lost unit has scrap value e.g Rs.5 per liter. The sales value of the spoiled units should be offset against the cost of the appropriate process where the loss occurred. Therefore the sale value of the normal loss is credited to the process account and a corresponding debit entry will be made in the cash or accounts receivable account. The calculation of the cost per unit of output is,
Input cost less scrap value of normal loss / Expected output
Rs.120,000 - (2000*5) / 10,000 liters
= Rs. 11
Compared with the above cases cost per unit has declined from Rs. 12 per liter to Rs. 11 per liter to represent the effect that the normal spoilage has a scrap value which has been offset against the process account.
The entry in process account like this
Process Account
Particular Liters Unit Cost Total Particular Liters Unit Cost Total
Rs. Rs. Rs. Rs.
Input Cost 12,000 10 120,000 Normal loss 2,000 - 10,000
Output 10,000 11 110,000
Total 120,000 12000
Remember that the scrap value of the normal loss is credited against the normal loss entry in the process account.
Abnormal Loss With Scrap Value:
Consider the above where the abnormal loss unit is 1,000 and now the scrap value of that lost unit is Rs. 5 per liter The sale value of the additional 1,000 liters lost represent revenue of an abnormal nature and should not be used to reduce process unit cost. This revenue is offset against the cost of the abnormal loss.
The accounting entry is like this,
Process Account
Particular Liters Unit Cost Total Particular Liters Unit Cost Total
Rs Rs. Rs. Rs.
Input cost 12,000 10 120,000 Normal loss 2,000 - 10,000 Output 9,000 11 99,000
Abnormal loss 1,000 11 11,000
Total 120,000 120,000
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