# Process Costing: Losses (part b) Abnormal Losses

1. says

Hello,
could you help me please, to understand one question from course book.
The question says “ABC manufactures a single product. Normal loss (scrap) in the process is 10% of output and scrapped units can be sold off for 4\$/unit.
Process costs of direct materials, labour, production overheads totalled 184 800 \$.
Input to the process in the month was 13 200 units

What was the cost/unit produced?

The questions seems very easy, but i don’t get, why do we calculated output as ” 13 200 * 10/110 = 12000 -> finished units” ?

• says

If the loss is 10% of output, then for every 100 units output the loss will have been 10 units and therefore the input will have been 110 units.

So……if the input was 13,200 unit then the output must have been 100/100 x 12000 units.

(and the loss is 10% x 12,000 units = 1200 units, which checks OK. 13,200 input – 12000 input does equal a loss of 1200 which is 10% of the output of 12000!)

2. says

Hi. I understand everything except the (non-exam related) Income statement reference in the T-Account. Is it correct to say that the 1750 would be a debit entry in the Income statement and seen as an ?expense?. Would you please be so kind as to draw up what an income statement with the above figures (in your lecture clip) would look like? I’ve had to do Income statements before – never with losses. I have no idea how that would go? If it wouldn’t be asking too much, please.

• says

It would be wasting your time to produce an income statement (and impossible anyway since this would only be an extract).

The abnormal loss would appear as an expense in the income statement.
However this is completely irrelevant for the exam.
This exam is about management accounting – not financial accounting!

• says

Same here after all this time.. i understand the process costing got confused with abnormal and normal..

• says

The lecture explains what is meant by equivalent units. For example, 100 units which have had 20% work done on them is equivalent to have done the full work on 20 units (20% of 100)

• says

I have a question..
In min 12:50 , how come the abnormal loss / unexpected loss only 50kg? whereas the value given is 850kg? explanation please thanks..

• says

In the question it says that the actual output is 850kg (not that the loss is 850).

The input is 1000kg and so the total loss is 1000 – 850 = 150 kg.
The normal loss is 100kg (10% x 1000) and so the extra 50kg is the abnormal loss.

• says

I see.. thankss im gonna get my test on this march.. need ur guide sir john.. appreciate it..

3. says

I have one question that whether the final amount of loss is dependent on the extent to which the company would bear the normal loss.

• says

@merryjxm, I am not sure that I understand your question.
The normal loss is the average/expected loss, and this is decided by the company.
The total loss is a matter of fact – some months they will lose more than expected and some months less. The difference is the abnormal loss or an abnormal gain.

4. says

Very good explanation .I enjoy and the lecturer makes the course interesting

• says

@desie86, Abnormal losses are valued at full cost per unit (i.e. at the same amount as finished units).

5. says

Hi,
Process costing is a costing technique where all you are trying to do is get cost per unit for similar items manufactured in processes (i.e. expected cost per unit).Abnormal losses are not expected hence they are excluded from the computation of cost per unit. The rule here is: to get cost per unit you only consider normal (expected) losses.

450 is not credited to the process account, it is rather credited to loss account.The accounting entry for cash from scrap is CR:Loss a/c, DR:Cash/Receivables.

Anyway, don’t let the a/c entries bug you. Learn the rule.
(1) Abnormal loss is not considered to get cost p.u
(2) Abnormal loss is the difference between expected output and actual output
(3) Abnormal loss is valued @ cost p.u
(4) Net loss is normal loss valued @ scrap value + abnormal loss valued @ cost p.u – total cash from scrap sales
(5) The credit entries in the process T- accounts are
(i) Actual output unit @ cost p.u.
(ii) normal loss unit @ scrap value
(iii) abnormal loss @ cost p.u

This is what I understood from the lectures and notes.
Thanks open tuition for the wonderful lectures and notes.

6. says

very nice explanation, thank you very much Open Tuition, however I have one question, in the process a/c on the credit side, shouldn’t we credit the \$450 for abnormal loss (scrap value) as well, it is an income that the company will eventually gain, right? so the cost per unit should be less? I was expecting \$ 43.47 per unit instead of \$ 44. I would be very grateful if someone would help me on this.

7. says

why we calculate abnormal loss with full cost of 44, there is loss of material.. as normal loss why we dont treat abnormal one.

• says

@bilalqureshi, due to it not being expected, so that balance would be right as normal loss is a projection on what the company might lose.