Process Costing:Normal Loss & Its Treatment(Part4)

November 18th, 2007 Comments off
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Accounting For Losses
 In process costing, we can often found the output from a process is less than the input. Where the output from a process is less than the input, there is therefore a loss.
    Basically there are two types of losses in Process Costing:

  1. Normal loss
  2. Abnormal Loss
                                  Normal Loss
    ·     Normal loss is unavoidable losses arising due to the nature of the material or the process

  • The reasons for such loss in output can be due to the following:
  • Evaporation;
  • Breakage;
  • Scrap due to high quality needed;
  • Rejection on inspection;
  • Defective Units;
  • Loss inherent in large scale manufacturing;
  • Chemical change
  • Residue Material
  • Examples of normal losses are metal turnings, off-cuts, metal borings, edges, shreddage and ends.
  • The quantity of normal loss anticipated is determined from past experience and from the material specification.
  • The cost of normal loss is absorbed by the completed output.
  • The value of scrap of normal loss units is deducted from the direct material cost. Normal loss never receives a share of the process cost. 
Treatment of Normal Loss are as follows:

  1. Where the loss has NO scrap value:-
  • The quantity of loss is credited to the process account. The good output bears the cost of the expected/normal loss
  1. Where the loss has SCRAP value:-
  • Deduct the scrap value from the process cost;
  • Open a Normal Loss account and debit the quantity and value of the loss and credit the process account with the scrap value when it is sold
  1. Scrap that needs to be REWORKED in that process or in an earlier process:-
  • Credit the process account and debit stock account with the value of the raw material/input entering the process or with the market price of such scrap.
  1. Scrap value is small:-
  • Credit Scrap Sales account and regard the sale as a profit.
                   ILLUSTRATION ofNormal LossFor Company A which manufactured drink, the production manager usually experiences a 10% loss of direct materials in the production process. In  August ’07  the details/data are as follows:

Inputs: $
Direct materials(2,000 litre) 18,000
Direct labor 17,000
Overheads 12,000

Required:

(a)   compute the number of litre lost in the process;

(b)   compute the cost per litre of drink produced;

(c)   write up the process cost account

      

Solution:

(a)   The number of litres lost in the process:

       =Total direct materials x % loss=2,000 x 10%=200

(b) The cost per litre of drink is computed as follows:

       =Total Cost/Total output

=$47,000/1,800 litres

       =$26.11 per litre

Notes:

Total Cost=(Sum of direct costs plus overheads)

Total Output=2,000litre x (100-10%) =1,800 litres

© Process Cost Account as follows:

Dr   Cr
Litres $ Litres $
Direct materials 2,000 18,000 Normal loss 200
Labor 17,000 Output 1,800 47,000
Overheads 12,000
2,000 47,000 2,000 47,000

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Financial Accounting

 
 

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