(79)---TREATMENTS FOR LOSSES IN PROCESS COSTING

Normal and abnormal losses.

Certain losses are inherent in the production process and cannot b eliminated.
These losses occur under efficient operating conditions and are referred to as Normal or uncontrollable losses.

In addition to losses which cannot be avoided, there are some losses which are not expected to occur under efficient operating conditions, for example the improper mixing of ingredients, the use of inferior materials and the incorrect cutting of cloths. These losses are not an inherent part of the production process and are referred to as abnormal or controllable losses.

• Normal loss is the loss expected during a process. It is not given a cost.
• Abnormal losses is the extra loss resulting when actual loss is greater than normal or expected loss ,and it is given a costs.
• Abnormal l gain is the gain resulting when actual loss in less than the normal or expected loss ,and it is given a ‘negative cost’

Since an abnormal loss is not given a cost, the cost producing these units is borne by the good units of output.
Abnormal loss and gain units are valued at the same rate as “good” units. Abnormal events do not therefore affect the cost of good production. Their costs are analyzed separately in an abnormal loss or abnormal gain account.

Scrap value of loss.

Loss may have a scrap value. For scrap value the following basic rules are applied in accounting for this value in the process accounts.

• Revenue from scrap is treated, not as an addition to sales revenue, but as a reduction in costs.
• The scrap value of normal loss is therefore used to reduce the material costs of the process.
  DEBIT Scrap account
  CREDIT Process loss account
• The scrap value of abnormal loss is used to reduce the costs of abnormal loss
  DEBIT Scrap account
  CREDIT Abnormal loss account
  With the scrap value of abnormal loss, this therefore reduces the write off of cost to the profit and loss account.
• The scrap value of abnormal gain rises because the actual units sold as scrap will be less than the scrap value of normal loss. Because there are fewer units of scrap than expected, there will be less revenue from scrap as a direct consequence of the abnormal gain. The abnormal gain account should therefore be debited with the scrap value.
• The scrap account is completed by recording the actual cash received from the sale of scrap.
  DEBIT Cash received
  CREDIT Scrap account
  With the cash received from the sale of the actual scrap.