Abnormal Gain With No Scrap Value:
In process the actual loss may be less than the expected loss then this will be a abnormal gain. For example the expected output is 10,000 liters for an input of 12,000 liters but the actual output is 11,000 liters resulting in an abnormal gain of 1,000 liters.We are assuming for this case that the normal loss does not have a scrap value. Our objective is to find the cost per unit of expected output. The calculation of the cost per unit of normal output is the same as we see in normal case. Like this,
input cost (Rs. 120,000) / expected output (10,000 liters)
= Rs. 12 per liter
The value of the gain is calculated in the same way as the abnormal loss and removed from the process account by debiting the account and crediting the abnormal gain account. The entry in the process account 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 - -
Abnormal Output 11,000 12 132,000
gain 1,000 12 12,000
Total 132,000 132,000
As we see in the above process account that 11,000 liters are passed to the next process at the cost per unit of normal output. The gain is credited to the abnormal gain account and transferred to the credit of the profit and loss statement at the end of the period. This shows that the inventory valuation is not understated by gain of an abnormal nature.
Abnormal Gain With Scrap Values:
In this case the with scrap value the cost per unit calculation is the same procedure as in normal loss with scrap value like this,
Input cost less scrap value of normal loss / expected output
Rs. 120,000 - (2000 * Rs. 5) / 10,000 liters
Rs. 11 per liter
The net cost incurred in this process is Rs. 115,000 (Rs. 120,000 input cost less 1,000 liters spoilt with a sale value of Rs. 5 per liter) The distribution of cost in this case is like this,
Transferred to finished goods inventory. Rs.
(11,000 liters at Rs. 11 per liter) 121,000
Less abnormal gain (1,000 liters at Rs. 11 per liter) 11,000
lost sale of spoiled units (1,000 liter at Rs. 5 per liter) 5,000
Result 6000
Conclusion 115,000
Be remember the cost per unit is based upon normal production cost per unit and is not affected by the fact that an abnormal gain occurred or that sale of the spoiled units with a sale value of Rs. 5,000 did not materialize. Our purpose is to produce a cost per unit based on normal operating efficiency.
The treatment in process account 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
Abnormal Output 11,000 11 121,000
gain 1,000 11 11,000
Total 131,000 131,000
Abnormal Gain Account
Particular Amount Particular Amount
Rs. Rs,
Normal loss account 5,000 Process account 11,000
Profit & loss
account (balance) 6,000
Total 11,000 11,000
Income Due From Normal losses
Particular Amount Particular Amount
Rs. Rs.
Process account 10,000 Abnormal gain account 5,000
Cash from spoiled units
(1,000 liters at Rs.5) 5,000
Total 10,000 10,000
As we see that the abnormal gain has been removed from the process account and that it is valued at the cost per unit of normal production. However, as 1,000 liters were gained, there was a loss of sales revenue of Rs. 5,000, and this lost revenue is offset against the abnormal gain. The net gain is therefore Rs. 6,000, and this is the amount that should be credited to the profit statement.
The process account is credited with the expected sales revenue from the normal loss (2,000 liters at Rs. 5), since the objective is to record in the process account normal net costs of production. Because the normal loss of 2,000 liters does not occur , the company will not obtain the sale value of Rs. 10,000 from the expected lost output. This problem is resolved by making a corresponding debit entry a normal loss account, which represents the amount due from the sale proceeds from the expected normal loss. The amount due (Rs.10,000) is then reduced by Rs.5,000 to reflect the fact that only 1,000 liters were lost. This is achieved by crediting the normal loss account (income due) and debiting the abnormal gain account with Rs.5,000, so that the balance of the normal loss account shows the actual amount of cash received for the income due from the spoiled units (i.e. Rs.5,000, which consists of 1,000 liters at Rs.5 per liter).
In process the actual loss may be less than the expected loss then this will be a abnormal gain. For example the expected output is 10,000 liters for an input of 12,000 liters but the actual output is 11,000 liters resulting in an abnormal gain of 1,000 liters.We are assuming for this case that the normal loss does not have a scrap value. Our objective is to find the cost per unit of expected output. The calculation of the cost per unit of normal output is the same as we see in normal case. Like this,
input cost (Rs. 120,000) / expected output (10,000 liters)
= Rs. 12 per liter
The value of the gain is calculated in the same way as the abnormal loss and removed from the process account by debiting the account and crediting the abnormal gain account. The entry in the process account 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 - -
Abnormal Output 11,000 12 132,000
gain 1,000 12 12,000
Total 132,000 132,000
As we see in the above process account that 11,000 liters are passed to the next process at the cost per unit of normal output. The gain is credited to the abnormal gain account and transferred to the credit of the profit and loss statement at the end of the period. This shows that the inventory valuation is not understated by gain of an abnormal nature.
Abnormal Gain With Scrap Values:
In this case the with scrap value the cost per unit calculation is the same procedure as in normal loss with scrap value like this,
Input cost less scrap value of normal loss / expected output
Rs. 120,000 - (2000 * Rs. 5) / 10,000 liters
Rs. 11 per liter
The net cost incurred in this process is Rs. 115,000 (Rs. 120,000 input cost less 1,000 liters spoilt with a sale value of Rs. 5 per liter) The distribution of cost in this case is like this,
Transferred to finished goods inventory. Rs.
(11,000 liters at Rs. 11 per liter) 121,000
Less abnormal gain (1,000 liters at Rs. 11 per liter) 11,000
lost sale of spoiled units (1,000 liter at Rs. 5 per liter) 5,000
Result 6000
Conclusion 115,000
Be remember the cost per unit is based upon normal production cost per unit and is not affected by the fact that an abnormal gain occurred or that sale of the spoiled units with a sale value of Rs. 5,000 did not materialize. Our purpose is to produce a cost per unit based on normal operating efficiency.
The treatment in process account 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
Abnormal Output 11,000 11 121,000
gain 1,000 11 11,000
Total 131,000 131,000
Abnormal Gain Account
Particular Amount Particular Amount
Rs. Rs,
Normal loss account 5,000 Process account 11,000
Profit & loss
account (balance) 6,000
Total 11,000 11,000
Income Due From Normal losses
Particular Amount Particular Amount
Rs. Rs.
Process account 10,000 Abnormal gain account 5,000
Cash from spoiled units
(1,000 liters at Rs.5) 5,000
Total 10,000 10,000
As we see that the abnormal gain has been removed from the process account and that it is valued at the cost per unit of normal production. However, as 1,000 liters were gained, there was a loss of sales revenue of Rs. 5,000, and this lost revenue is offset against the abnormal gain. The net gain is therefore Rs. 6,000, and this is the amount that should be credited to the profit statement.
The process account is credited with the expected sales revenue from the normal loss (2,000 liters at Rs. 5), since the objective is to record in the process account normal net costs of production. Because the normal loss of 2,000 liters does not occur , the company will not obtain the sale value of Rs. 10,000 from the expected lost output. This problem is resolved by making a corresponding debit entry a normal loss account, which represents the amount due from the sale proceeds from the expected normal loss. The amount due (Rs.10,000) is then reduced by Rs.5,000 to reflect the fact that only 1,000 liters were lost. This is achieved by crediting the normal loss account (income due) and debiting the abnormal gain account with Rs.5,000, so that the balance of the normal loss account shows the actual amount of cash received for the income due from the spoiled units (i.e. Rs.5,000, which consists of 1,000 liters at Rs.5 per liter).
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