In manufacturing processes, entire input is not getting converted into output. A certain part of input is lost while processing which is inevitable. Wastages of material, evaporation of material, changes in moisture content are unavoidable in some process. But sometimes losses occur due to negligence of labour, poor quality raw material, poor technology etc. These are normally called as avoidable losses. Basically process losses are classified into two categories (a) Normal Loss (b) Abnormal Loss

NORMAL LOSS

You are viewing: Which Industries Use Process Costing

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials and production process under normal conditions. It is normally estimated on the basis of past experience of the industry. It may be in the form of normal wastage, normal scrap, normal spoilage, and normal defectiveness.

Calculation: Normal Loss = Input x Expected % of Normal loss

Valuation: Units of Normal Loss x Scrap value per unit.

Read more : Which Brands Are Cheaper In Thailand

Treatment: The cost of normal process loss is absorbed by good units produced under the process. The amount realised by the sale of normal process loss units should be credited to the process account.

Sometimes we may have to incur cost to pick up scrap in such case it is our cost and we will still write it on the credit side and put the amount in brackets.

ABNORMAL LOSS

Any loss caused by unexpected abnormal conditions such as plant breakdown, substandard material, carelessness of workers, accident, unplanned operations etc. such losses are over and above normal losses and cannot be estimated in advance. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are more than expected losses.

Calculation: Expected Output (Input – Normal loss) – Actual Output

Valuation: Normal Cost x Units in abnormal loss

Read more : Which Two Rivers Form The Border Between Minnesota And Wisconsin

Treatment: The cost of abnormal loss is not treated as part of cost of production and therefore not absorbed by good units produced and hence charged to Costing Profit & Loss Account.

ABNORMAL GAIN

Abnormal Gain arises when actual output is more than the expected output or when actual losses are less than the expected normal losses.

Calculation: Actual output – Expected Output (Input – Normal loss)

Valuation: Normal Cost x Units in abnormal gain

Treatment: The cost of abnormal loss is not treated as recovery of cost of production and therefore cost of good units is not reduced by the cost of abnormal gains and hence credited to Costing Profit & Loss Account.

Source: https://t-tees.com
Category: WHICH