Question

Q)What is normal spoilage and how is it dealt with in process costing

Q)Explain the importance of opportunity costs for decision making.

Answer 1

1.

Normal spoilage:

Normal spoilage is the amount of cost that is unavoidable in nature. Normal spoilage is the cost that the company considers as ordinary course of business and treats it as a part of production process. As it is non-avoidable thus, it is treated as product cost. It is predicted in advance and the provision is made for the same to avoid any instant high costs losses.

It can occur through many ways like, evaporation, spilling, defective material produced, breakage etc.

If such normal loss does not have any value and can be sold in scrap, it is credited to process account by the amount of sale as whatever will be received is an income to the company from the scrap. It is also referred to as standard loss. As it is a loss to the company and is treated as product cost. It is allocated to the respective product and increase the cost of production which is to be recovered from the customers.

If such normal loss have any value, such value is deducted from the total cost of the process.