Question

In: Accounting

4. How do you differentiate ‘Normal Process Losses’ from ‘Abnormal process Losses’. (6 marks)

4. How do you differentiate ‘Normal Process Losses’ from ‘Abnormal process Losses’.

Solutions

Expert Solution

The loss that occurs in conversion of input raw material to finished goods is known as process loss. The difference between input quantity and output quantity is process loss

Process loss can be normal process loss or abnormal process loss

Normal process loss:

Loss expected or anticipated in advance prior to production is a normal process loss. This is standard loss. Some examples are like evaporation, rusting, weight loss due to nature of material. These types of losses may occur due to nature of raw material or type of production process or nature of finished goods.

Abnormal process loss:

The loss over and above the normal process loss is abnormal process loss. This is usually due to bad handling, reworks, bad working conditions, machine breakdown, machine repairs, etc. This is unexpected loss and will increase cost of production

Value of Abnormal units is calculated by = (Normal cost of Normal output/ Normal production) X Abnormal Quantity lost

Normal Process Loss

Abnormal Process Loss

Control over loss

Usually Uncontrollable

Can be Controlled through improved techniques

Treatment of Cost

Cost is absorbed by goods units

Cost is calculated separately and charged to Costing P and L Account

Type

Usually anticipated in advance

It is unanticipated loss

Loss

Usually Loss % is predetermined at beginning of the process

Loss % can be accessed only during production


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