Treatment of Process Losses and Gains in Cost Accounts
by In process costing, Process Loss refers to the reduction in quantity or value of output during the manufacturing process. Loss may occur due to evaporation, shrinkage, wastage, defective production or other unavoidable reasons. Losses are classified as normal loss and abnormal loss. Normal loss is expected under normal operating conditions, while abnormal loss occurs beyond the expected level. Process gain, or abnormal gain, arises when the actual loss is less than the expected normal loss. Process losses and gains are separately identified and accounted for to determine the accurate cost of production and evaluate the efficiency of each process.
Classification of Process Losses and Gains:
1. Normal Loss
Normal loss is the loss that is expected to occur under normal operating conditions during a production process. It may arise due to evaporation, shrinkage, leakage, wastage or unavoidable defects. The quantity of normal loss is generally determined in advance based on past experience or technical standards. Normal loss does not represent inefficiency because it is considered unavoidable. Usually, normal loss has some scrap value, which is credited to the Process Account. The cost of normal loss is absorbed by the good units produced. Therefore, the cost per unit of output increases due to normal loss.
2. Abnormal Loss
Abnormal loss is the loss that occurs in excess of the expected normal loss. It may arise because of accidents, careless handling, defective materials, machinery failure or inefficient production. Since abnormal loss is avoidable, it is treated separately from normal process costs. The value of abnormal loss is generally transferred to the Abnormal Loss Account and subsequently to the Profit and Loss Account. Abnormal loss is valued at the same cost per unit as good production. Its separate treatment helps management identify inefficiencies and take corrective measures to control unnecessary losses.
3. Abnormal Gain
Abnormal gain arises when the actual process loss is less than the normal loss expected from the process. For example, if normal loss is expected to be 10% but actual loss is only 7%, the difference represents abnormal gain. It indicates that the actual production efficiency is better than the expected level. Abnormal gain is separately recorded in the Abnormal Gain Account. The value of abnormal gain is generally calculated at the same cost per unit applicable to the process output. The resulting gain is ultimately transferred to the Profit and Loss Account.
4. Process Gain
Process gain generally refers to an increase in quantity during a process, particularly where additional output results from changes in the nature or volume of materials. It may occur in processes involving chemical reactions, mixing or expansion. Process gain is different from abnormal gain, which specifically arises when actual loss is lower than normal loss. The gain is recorded separately in the Process Account to ensure accurate measurement of output and cost. Proper identification of process gain helps determine the actual production efficiency and ensures that the cost of output is calculated correctly.
Normal Process Loss and Its Treatment:
Normal process loss is the loss that is expected to occur during a production process under normal operating conditions. It may arise due to evaporation, shrinkage, leakage, wastage, drying or unavoidable defects. Since such loss is unavoidable, it is considered a normal part of production and its cost is absorbed by the good units produced.
Treatment of Normal Process Loss
- Normal Loss without Scrap Value
If normal loss has no realisable value, no separate accounting entry is generally required. The cost of normal loss is absorbed by the good units produced.
- Normal Loss with Scrap Value
If the normal loss has scrap value, the amount realised from its sale is credited to the Process Account. This reduces the total cost to be borne by the good units.
- Effect on Cost Per Unit
The cost of production is divided only among the expected good output after deducting normal loss. Therefore, the cost per good unit increases because the total process cost is recovered from fewer units.
Journal Entries
| Particulars | Journal Entry |
|---|---|
| When normal loss has no scrap value | No separate entry |
| When normal loss is sold for scrap | Cash/Bank A/c Dr. To Process A/c |
| When normal loss is transferred to scrap account | Scrap A/c Dr. To Process A/c |
Example
Suppose 1,000 units are introduced into a process and normal loss is 10%. The expected normal loss is 100 units and good output is 900 units. If the total process cost is ₹18,000 and normal loss has no scrap value:
Cost per good unit = ₹18,000 ÷ 900 = ₹20 per unit
Thus, the cost of normal loss is absorbed by the 900 good units produced.
Abnormal Process Loss and Its Treatment:
Abnormal process loss is the loss that occurs in excess of the normal process loss expected under normal operating conditions. It may arise due to accidents, machine breakdown, careless handling, defective materials, inefficient labour or other unusual circumstances. Since abnormal loss is avoidable, it is not treated as a normal production cost. It is separately identified and transferred to the Abnormal Loss Account.
Calculation
Abnormal Loss = Actual Loss − Normal Loss
For example, if 1,000 units are introduced, normal loss is 10% and actual loss is 150 units:
Normal Loss = 100 units
Actual Loss = 150 units
Abnormal Loss = 150 − 100 = 50 units
Treatment of Abnormal Process Loss
-
Separate Identification
Abnormal loss is separately identified from normal loss because it represents an unexpected loss.
- Valuation
Abnormal loss is valued at the cost per unit of good production, after considering the scrap value of normal loss.
-
Transfer to Abnormal Loss Account
The value of abnormal loss is transferred from the Process Account to the Abnormal Loss Account.
-
Transfer to Profit and Loss Account
After considering any scrap value, the net abnormal loss is transferred to the Profit and Loss Account.
Journal Entries
| Particulars | Journal Entry |
|---|---|
| Transfer abnormal loss to Abnormal Loss Account | Abnormal Loss A/c Dr. To Process A/c |
| Sale of abnormal loss as scrap | Cash/Bank A/c Dr. To Abnormal Loss A/c |
| Transfer remaining abnormal loss to Profit and Loss Account | Profit and Loss A/c Dr. To Abnormal Loss A/c |
Example
Suppose 1,000 units are introduced into a process. Normal loss is 10%, but actual loss is 150 units. Therefore:
Normal Loss = 100 units
Abnormal Loss = 150 − 100 = 50 units
If the process cost is ₹18,000 and normal loss has no scrap value:
Cost per unit = ₹18,000 ÷ 900 = ₹20
Therefore:
Value of Abnormal Loss = 50 × ₹20 = ₹1,000
The ₹1,000 abnormal loss is transferred to the Profit and Loss Account after considering any scrap value.
Abnormal Process Gain and Its Treatment:
Abnormal process gain arises when the actual loss in a production process is less than the normal loss expected under normal operating conditions. It indicates that the actual output is higher than the expected output. Abnormal gain may occur due to better quality of materials, improved production methods, efficient labour or reduced wastage. It is separately identified because it represents an unexpected gain.
Calculation
Abnormal Gain = Normal Loss − Actual Loss
For example, if 1,000 units are introduced into a process and normal loss is 10%, the expected loss is 100 units. If actual loss is only 70 units:
Abnormal Gain = 100 − 70 = 30 units
Treatment of Abnormal Process Gain
-
Separate Identification
Abnormal gain is separately identified because actual production is higher than the expected production.
- Valuation
Abnormal gain is valued at the same cost per unit applicable to the process output, after considering the scrap value of normal loss.
-
Transfer to Abnormal Gain Account
The value of abnormal gain is transferred from the Process Account to the Abnormal Gain Account.
-
Transfer to Profit and Loss Account
After considering the scrap value of normal loss, the resulting abnormal gain is transferred to the Profit and Loss Account.
Journal Entries
| Particulars | Journal Entry |
|---|---|
| Transfer abnormal gain to Abnormal Gain Account | Process A/c Dr. To Abnormal Gain A/c |
| Transfer scrap value adjustment | Abnormal Gain A/c Dr. To Process A/c |
| Transfer net abnormal gain to Profit and Loss Account | Abnormal Gain A/c Dr. To Profit and Loss A/c |
Example
Suppose 1,000 units are introduced into a process. Normal loss is 10%, but actual loss is only 70 units.
Normal Loss = 100 units
Actual Loss = 70 units
Abnormal Gain = 100 − 70 = 30 units
If process cost is ₹18,000 and normal loss has no scrap value:
Expected output = 900 units
Cost per unit = ₹18,000 ÷ 900 = ₹20
Therefore:
Value of Abnormal Gain = 30 × ₹20 = ₹600
The ₹600 abnormal gain is transferred to the Profit and Loss Account after making the necessary scrap value adjustment.
Valuation of Normal Process Loss:
Normal process loss is valued based on its scrap or realisable value, if any. Since normal loss is expected during production, its cost is generally absorbed by the good units produced. If the normal loss has a scrap value, the amount realised from its sale is credited to the Process Account, reducing the cost to be recovered from good output.
Formula
Cost per Unit of Good Output = (Total Process Cost − Scrap Value of Normal Loss) ÷ Expected Good Output
Where:
Expected Good Output = Input − Normal Process Loss
Example
Suppose 1,000 units are introduced into a process. Normal loss is 10% and its scrap value is ₹2 per unit. Total process cost is ₹18,000.
Normal Loss = 1,000 × 10% = 100 units
Expected Good Output = 1,000 − 100 = 900 units
Scrap Value = 100 × ₹2 = ₹200
Cost of Good Output = ₹18,000 − ₹200 = ₹17,800
Cost per Good Unit = ₹17,800 ÷ 900 = ₹19.78 approximately
Thus, the scrap value of normal loss reduces the total process cost, while the remaining cost is absorbed by the good units produced.