Process Costing – Losses
1 Introduction
In many processes it is unlikely that the output units will equal the input units. For example, in the manufacture of beer it is very unlikely that the litres produced will equal the number of litres that were input, due to evaporation.
We need to deal with any losses in our costings.
2 Normal loss
Normal loss is the amount of loss that is expected from the process, based on past experience. It is also known as the expected loss.
In our costings, we spread the process costs over the number of units that we expect to produce.
During March the following costs were incurred in a process:
Materials (1,000 kg) | $12,000 |
Labour | $7,000 |
Overheads | $8,000 |
A normal loss of 10% was expected. The actual output was 900 kg.
Calculate the cost per kg, and prepare a Process Account.
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3 Normal loss with a scrap value
The word ‘loss’, when used in process costing, does not just mean units that are lost but also units that were damaged. Any damaged units may be saleable as scrap.
If there are any expected scrap proceeds from damaged units, then these scrap proceeds are subtracted from the total costs of the process before spreading over the units we expect to produce.
During April, the following costs were incurred in a process:
Materials (3,000 kg) | $30,000 |
Labour | $12,000 |
Overheads | $10,800 |
A normal loss of 10% was expected. The actual output was 2,700 kg.
Losses have a scrap value of $5 per unit.
Calculate the cost per kg and prepare a Process Account and a Loss Account.
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4 Abnormal losses
Even though we may expect a normal loss of (for example) 10% to occur each month, it is unlikely that we will actually lose exactly 10% each month. Some months we will probably lose more than 10%, and some months less than 10%.
Any excess loss in any month is known as an abnormal (or unexpected) loss.
We prepare costings as normal, taking into account any normal loss, and spreading the total cost over the units that we expect to produce.
Any abnormal losses are charged separately at the full cost per unit.
(Note: we always assume that any abnormal losses are sold for scrap at the same price as normal losses).
During May, the following costs were incurred in a process:
Materials (1,000 kg) | $9,000 |
Labour | $18,000 |
Overheads | $13,500 |
A normal loss of 10% of input was expected.
Actual output was 850 kg.
Losses are sold as scrap for $9 per kg.
Calculate the cost per kg and prepare a Process Account and a Loss Account.
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5 Abnormal Gains
In the same way that the actual output may be less than that expected, in some months it may be more than expected.
If this happens, then we say that we have an abnormal gain.
The treatment of abnormal gains is exactly the same as for abnormal losses.
During June the following costs were incurred in a process:
Materials (2,000 kg) | $18,000 |
Labour | $36,000 |
Overheads | $27,000 |
A normal loss of 10% of input was expected.
Actual output was 1,840 kg.
Losses are sold as scrap for $9 per kg.
Calculate the cost per kg, and prepare a Process Account and a Loss Account.
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Process Costing – Losses
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