Process Losses and Gains:
It is usual that a certain amount of material introduced into the processes are lost, scrapped or wasted. There are many ways in which losses may arise e.g., evaporation, shrinkage, breakages, spoilage for various reasons.
The process loss can be categorized into:
(1) Normal process loss, and
(2) Abnormal process loss.
- Normal Loss:
The loss expected during the normal course of operations, for unavoidable reasons is called ‘normal loss’ and this is due to inherent result of the particular process and thus uncontrollable in the short-run. Management usually able to identify an average percentage of normal losses expected to arise from the production process.
For example, 100 kgs. introduced into the production process and on an average 95 kgs. comes out after the process, we can say that the normal process loss is 5%. The normal losses are absorbed by the completed production.
The cost of normal losses should be borne by the good production. If any value can be recouped from sale of scrap or wastage or spoilage etc., then this would be credited to the Process Account thus reducing the overall cost of the process.
- Abnormal Loss:
Abnormal losses are those losses above the level deemed to be the normal loss rate for the process. The abnormal loss is the amount by which the actual loss exceeds the normal loss and it is expected to arise under inefficient operating conditions.
The abnormal losses are not included in the process costs but 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 to the Profit and Loss Account at the end of the period.
Abnormal losses are credited out of the Process Account into an abnormal loss account at the full unit cost value. Abnormal losses will be costed on the same basis as good production and therefore, like good production, will carry a share of cost of normal losses.
If the loss is less than the normal expected loss, the difference is considered as abnormal gain. Abnormal gain is accounted similar to that abnormal loss.
Abnormal gains will be debited to the Process Account and credited to Abnormal Gain Account. The Abnormal Gain Account is debited with the figure of reduced normal loss in quantity and value. At the end of the accounting year the balance in the Abnormal Gain Account will be carried to Profit and Loss Account.
Value of Scrap:
The value of scrap, treated as normal loss, received from its sale is credited to the Process A/c. But the value of scrap received from its sale under abnormal conditions should be credited to Abnormal Loss A/c.