Preparation of Process Accounts, Normal Loss Account, Abnormal Loss Account, Abnormal Gain Account

Process Costing is a method of cost accounting used when products undergo several stages or processes during production. It is particularly common in industries where products are manufactured in continuous processes, such as chemicals, textiles, and food production. In this method, costs are accumulated for each stage or process, and these costs are then assigned to the products as they move through each stage.

In process costing, it is important to account for Normal Loss, Abnormal Loss, and Abnormal Gain during production. These are captured in separate accounts to ensure accurate cost allocation and financial reporting.

Preparation of Process Accounts:

Process Accounts are used to accumulate the costs associated with each stage of production. Costs such as raw materials, labor, and overheads are debited to the process account, and the cost of completed products is transferred to the next process or to finished goods.

Components of Process Accounts:

• Opening Stock: If there are any work-in-progress items from the previous period.
• Materials: The cost of raw materials used in the production process.
• Labor: The direct labor costs associated with the process.
• Overheads: Indirect costs like power, depreciation, and other factory-related expenses.
• Normal Loss: The expected and predetermined loss due to the nature of the production process.
• Abnormal Loss: Any loss exceeding the expected normal loss.
• Abnormal Gain: The gain that occurs when actual loss is less than the expected normal loss.

Example of a Process Account:

Let’s assume the following details for Process 1:

• Input materials: 1,000 units costing $10 each.
• Labor: $2,000
• Overheads: $1,500
• Normal Loss: 10% of input (scrap value $2 per unit)
• Output: 850 units

The output of 850 units and the normal loss of 100 units are expected. However, the actual loss is 150 units, meaning there is an abnormal loss of 50 units.

• The cost per unit is calculated as:

Cost per unit = [13,500 − Scrap Value of normal loss]/[ units output + abnormal loss] = 13,500−200 / 850+50=13,300 / 900 = 14.78

• The cost of abnormal loss:

Abnormal Loss Cost = 50 × 14.78 = 739

Preparation of Normal Loss Account:

Normal Loss is the anticipated and standard loss that occurs in a production process due to the nature of materials or processes used. It is expected and considered a part of production, and its cost is absorbed by the good units produced.

Key Points:

• The cost of normal loss is spread across the remaining units.
• The scrap value (if any) from normal loss is credited to the process account.

Example of a Normal Loss Account:

In this account, the scrap value is credited, indicating that the company receives some revenue from the sale of scrap.

Preparation of Abnormal Loss Account:

Abnormal Loss occurs when the actual loss during the process exceeds the expected normal loss. This excess loss is considered abnormal and must be recorded separately. The cost of abnormal loss is not absorbed by the good units and is treated as an exceptional item in cost accounting.

Key Points:

• Abnormal loss is valued at the full production cost, excluding any scrap value of normal loss.
• It is transferred to the Profit & Loss account or further adjusted in the costing records.

Example of an Abnormal Loss Account:

The value of the abnormal loss ($739) is debited from the process account and transferred to the Profit & Loss account for recording the loss.

Preparation of Abnormal Gain Account:

Abnormal Gain arises when the actual loss is less than the expected normal loss. In this case, the business has gained more output than anticipated. The abnormal gain is credited to the process account, as it increases the value of the output produced.

Key Points:

• Abnormal gain is valued at the cost per unit.
• The difference between actual loss and expected loss is transferred as a gain.

Example of an Abnormal Gain Account:

Let’s say in another scenario, the normal loss is expected to be 10%, but the actual loss turns out to be only 8%. Hence, the business gains 2% more units than expected.

Abnormal Gain is credited, increasing the overall output value, and any gain is recorded in the Profit & Loss account.