8.2 Losses in process costing

　　Normal loss is the amount of loss expected from the operation of a process. This expectation is based on past experience, and this loss is considered to be unavoidable.

　　Abnormal loss is then extra loss resulting when actual loss is greater than normal or expected loss, and it is given a cost.

　　Abnormal gain is the gain resulting when actual loss is less than the normal or expected loss, and its is given a “negative cost”。

　　Example 1

　　Input to a process is 1000 units at a cost of $4500

　　Normal loss is 10%

　　There is no opening or closing stocks

　　(1)output = 860 units

　　(2)output = 920 units

　　Solution:

　　(1)output = 860 units

　　Step 1: determine output and losses

　　units

　　Actual Loss 1000 units-860 units　 140

　　Normal Loss 1000 units x 10%　　 100

　　Abnormal loss　　　　　　　　　 40

　　Step 2: calculate cost per unit of output and losses

　　Cost incurred 　　　=　　 $4,500 　　= $5 per unit

　　Expected output　　　 1000 units x 90%

　　The cost per unit of output and the cost per units of abnormal loss are based on expected output.

　　Step 3: calculate total cost of output and losses

　　Calculate total cost of output and losses; normal loss is not assigned any cost.

　　Simply, total cost of output = total cost of input

　　$

　　Cost of output 860 units x $5　　　　 4,300

　　Normal loss　　　　　　　　　　　　 0

　　Abnormal loss 40 units x $5　　　　　 200

　　Total cost　　　　　　　　　　　　 4500

　　Step 4: complete accounts

　　Process account

　　Unit

　　$

　　Unit

　　$

　　Cost incurred

　　1000

　　4500

　　Normal loss

　　100

　　0

　　Output(finished goods a/c)

　　860 x $5

　　4300

　　Abnormal loss

　　40 x $5

　　200

　　1000

　　4500

　　Abnormal loss account

　　Unit

　　$

　　Unit

　　$

　　Process account

　　40

　　200

　　Profit/loss account

　　40

　　200

　　40

　　200

　　40

　　200