by Process Costing is widely used in industries where production is continuous and the output is uniform. The Process Account is a fundamental part of this system, helping allocate costs for each stage or department of production. It facilitates cost control, pricing, and profitability analysis. A process account records all costs—material, labor, and overheads—incurred in each process, including losses and gains.
Process Losses:
In any process industry, some degree of loss is inevitable due to the nature of the operations. For instance, in chemical manufacturing or food processing, evaporation, shrinkage, spoilage, and leakage may occur. These losses can be classified as:
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Normal Process Loss
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Abnormal Process Loss
Losses are a natural and essential component to account for when calculating the cost per unit. Proper treatment ensures that the company does not undervalue or overvalue its products.
Normal Process Loss:
Normal process loss refers to the expected or unavoidable loss that occurs during the manufacturing process under normal operating conditions. These losses are inherent in production and cannot be eliminated even under efficient operating conditions.
Examples of Normal Process Loss:
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Evaporation in chemical manufacturing
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Breakage in glass production
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Spoilage in food processing
Accounting Treatment:
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Normal losses are not recorded as separate items in the accounts.
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The cost of normal loss is absorbed by the good units produced.
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If the normal loss has a scrap value, it is credited to the Process Account.
illustration:
Let’s say 1,000 units are introduced into Process A. The expected normal loss is 10% (100 units). If the cost of processing is ₹9,000, and the scrap value of loss is ₹1 per unit:
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Scrap Value = 100 units × ₹1 = ₹100
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Net Cost = ₹9,000 – ₹100 = ₹8,900
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Good Output = 900 units
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Cost per unit = ₹8,900 / 900 = ₹9.89
So, the cost of the normal loss is effectively borne by the remaining good units.
Abnormal Process Loss:
Abnormal process loss is the loss that occurs over and above the normal loss. It is not expected and may be due to machinery breakdown, human error, power failure, substandard materials, or poor supervision. It reflects inefficiency and is treated differently in accounts.
Accounting Treatment:
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The cost of abnormal loss is calculated at the same rate as good units.
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Abnormal loss is debited to the Abnormal Loss Account and credited in the Process Account.
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Any scrap value is deducted from the abnormal loss and the balance is transferred to the Costing Profit & Loss Account.
illustration:
If from 1,000 input units, only 850 good units are produced, while normal loss was expected at 10% (i.e., 100 units), then 50 units are considered abnormal loss.
If cost per unit is ₹10 and there’s no scrap value, the cost of abnormal loss = 50 units × ₹10 = ₹500
This ₹500 is debited to the Abnormal Loss Account.
Abnormal Gain:
Sometimes, actual loss is less than the expected normal loss. This difference is called abnormal gain. It usually indicates better efficiency, superior quality of materials, or improvement in the production process.
Example:
If 1,000 units are input into Process A and normal loss is expected to be 100 units, but only 80 units are lost, the 20 units saved is called abnormal gain.
Accounting Treatment:
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The cost of abnormal gain is calculated at the same cost per unit as good units.
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Abnormal Gain Account is debited, and Process Account is credited.
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Scrap value of expected normal loss for the saved units is credited to the Abnormal Gain Account.
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The net abnormal gain is transferred to the Costing Profit & Loss Account.
illustration:
Cost per unit = ₹10
Abnormal Gain = 20 units
Scrap value = ₹2 per unit
Abnormal Gain Value = 20 × ₹10 = ₹200
Scrap Saved = 20 × ₹2 = ₹40
Net Gain = ₹200 – ₹40 = ₹160 → credited to the Costing P&L Account
Inter-Process Profit:
In some industries, especially where production is carried out in several processes, goods are transferred from one process to another at a profit rather than at cost. This is done to evaluate the efficiency and profitability of each process.
Objective of Inter-Process Profit:
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To assess the performance of individual departments or processes.
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To simulate market pricing between departments.
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To ensure accountability at each process level.
How It Works:
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Process 1 produces goods at a cost of ₹100 per unit.
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It transfers them to Process 2 at ₹120 per unit (i.e., with a 20% profit).
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Process 2 treats ₹120 as the cost of input.
This method helps in internal evaluation, but it must be adjusted while preparing final accounts, especially for unsold closing stock, to eliminate unrealized profits.
Accounting Treatment:
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Profit is shown in the transfer from one process to another.
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Closing stock (if any) should be valued at cost only (not including the inter-process profit).
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The unrealized portion of profit is deducted in financial statements to reflect actual cost.
illustration:
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Cost in Process 1 = ₹100
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Transfer to Process 2 at 20% profit = ₹120
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Closing stock in Process 2 = 100 units
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Unrealized profit = 100 units × ₹20 = ₹2,000
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This profit is deducted from profit in final statements.
