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 Gain and Its Treatment
Valuation of Normal Process Loss
