Question

briefly explain the following terms as used in process costing
1. Normal loss
2. Abnormal loss
3. Joint products

Answer 1

Loss of material in Process Costing :-

In certain manufacturing activities & process, some loss of material is inevitable & unavoidable during the processing due to inherent nature of material or processing. For proper treatment and effective estimation of costs such losses are taken in Cost accounting based on normal standard, estimations of losses. There may be normal or abnormal loss of material during processing of goods. Such loss of material may be waste having no scrap value or scrap value which can be sold at some reduced prices. Such losses are classified as follows:-

A) Normal Loss :- Normal loss means that loss which is inherent in the processing operations. An estimation of normal loss can be made well in advance. Normal loss is considered as part of cost of production & in case any scrap value is realized from sale of normal loss units, the process account is credited by the same amount.

Calculation of Normal loss = Input material * Percentage of normal loss

B) Abnormal Loss:- Any other loss arising due to any unforeseen, unexpected, uncontrollable or abnormal conditions or situations like, power failure, power fluctuations , natural calamities, accident, breakdown of machinery, substandard quality of material etc. We can also understand it as any loss over and above the normal loss. Amount of abnormal loss is transferred to Costing P & L A/c.

Calculation of Abnormal loss = Total loss - Normal loss or
Abnormal loss = Units of abnormal loss * Cost per unit.

C) Joint Product :- When two or more products of equal importance are simultaneously produced by following a common manufacturing process, such products are regarded as Joint products. All the products produced are of equal importance in terms of sales value & profits, so all the joint products are treated as main product. Until the spit off point is reached, the joint products are not distinguishable. A joint cost is incurred prior to the point at which separately identifiable products emerge from the same process.
The best example is Oil refining industry – with joint products like – Petrol, diesel, LPG, kerosene, paraffin.