Process costing account for a single product with abnormal loss: introduction; abnormal loss; abnormal output; actual loss; actual output; accounting treatment and examples

1.1 Introduction

Is it possible for you to handle a case of process costing account where there is only abnormal loss? How do we prepare process costing accounts for a case of single product where abnormal loss exists? As a learner, entrepreneur or tutor you think this is hard to understand or grasp with your mind! No, this task is easy. To understand this phenomenon, it if in order to first comprehend the meaning of terms that accompany this concept. They are as discussed below;

1.1.1 Abnormal Loss

Definition-1: Abnormal loss is the unexpected number of substandard units of output which is gotten at the end of the production process. In other words, it is excess of the expected substandard units (i.e., normal loss) produced at the end of the production process. So, it is the extra damaged units above the ones expected at the end of the production process.

NB: Abnormal loss occurs under abnormal conditions. Such as; It is a loss that can be controlled by the producer. So, if the actual loss is more than the expected/normal loss, then this difference is what represents abnormal loss. Such losses can be brought about by;

Machine breakdown.

Workers’ strike.

Industrial accident.

Defective raw materials.

1.1.2 Abnormal Output/Production

Definition-2: Abnormal output is the standard output which is realized at the end of the production process way below the expected or normal output under the condition of abnormal loss. For example, if the expected output was 1,800 (initial units (2,000)-minus normal loss of (200)) and if the actual output turns out to be 1,700, then the 1,700 units are referred to as abnormal output.

1.2 Facts about Abnormal Loss and Abnormal Output

The following are the facts that you should know and you need to know about abnormal loss and abnormal output.

1.2.1 Abnormal Loss

NB₁: Abnormal loss is NOT a computed value. Instead, it is an observable number of units at the end of the production process. In other words, you cannot predetermine it as we usually do in the case of normal loss. For example, if the normal or expected loss was computed in the beginning of the production process and found to be 100 units, and at the end of the process the actual loss was 140 units, then the abnormal loss is the 40 units (140-100).

You can use this formula to determine the abnormal loss;

Abnormal Loss=Actual Loss-Normal Loss (condition is the actual loss should be more than the normal loss).

NB₂: Abnormal Loss is realized or determined at the end of the production process.

NB₃: Abnormal Loss is the difference between the actual loss realized and normal loss.

1.2.2 Abnormal Output

NB₁: If there is normal or good output, there is also abnormal output under circumstances of abnormal loss occurrence.

NB₂: Abnormal output is the opposite of normal output. It is output which is way below the expected/normal output at the end of the production process as stated in the definition above.

NB₃: Abnormal output is NOT an estimation. It is actual physical units realized at the end of the production process.

NB₄: Abnormal output is NOT used in computation of cost per unit/average cost used when transferring the output from the current production process to the next one or to the finished goods account. It should be noted that we still use the normal/good output.

1.3 Facts about Actual Loss and actual Output

The following are the facts that you should know and you need to know about Actual Loss and actual Output in the case of abnormal loss occurrence.

1.3.1 Actual Loss

Under the circumstances of abnormal loss, the following are key point you need to note about actual loss;

NB₁: Actual loss is NOT a computed value, instead, it is an observable value. It is the number of sub-standard units actually realized at the end of the production process when abnormal loss has occurred. It is determined by physically counting the total number of sub-standard units produced at the end of that particular production process.

For example, if 10,000 units of the input material of raw materials were used in production and at the end of the process physical counting of actual units produced were 9,500 units. Then actual loss is 500 units.

NB₂: Actual Loss can only be;

More than Normal Loss: A case of Abnormal Loss.

And CANNOT be

Equal to Normal Loss: A case of NO Abnormal loss or Abnormal gain.
Less than Normal Loss: A case of Abnormal Gain.

1.3.2 Actual Output

Under the circumstances of abnormal loss, the following are key point you need to note about actual loss;

NB₁: Actual output is the physical output after actual loss has taken place at the end of the production process.

NB₂: Actual output is NOT as good as good output. This is the physical units actually realized at the end of the production process.

Accounting treatment of abnormal loss

2.1 Introduction

There are twofold ways of treating abnormal loss.

i). Case one, you maintain a corresponding Abnormal loss account in the books of account of the business which later is closed to profit and loss account

ii). Case two, involves off-setting of the scrap value of the abnormal loss units against the Scrap-Debtor Account to reduce the scrap income.

2.2 Maintenance of an Abnormal Account in the book of accounts of the organization

In this case, the following steps help in accounting for these transactions.

Step One: Eliminate the abnormal loss units (valued at good output price) from the current process account by;

DR Abnormal loss A/C

CR Process A/C

Step Two: At the end of the financial period, since the units representing the abnormal loss has not been sold or rather disposed, then;

DR Profit and loss account with the full amount.

CR Abnormal account the full amount to close that account.

2.2.1 Example 1

The following is the production report for “Make it Happen” manufacturers co. ltd.

2000 litres of direct materials @ $5 per Litre were introduced in process 1

Labor cost paid $3,000

Factory overhead $2,300

Expected loss was 10%. After the end of process 1, the actual output was 1,750 litres

Required

Prepare the relevant ledger accounts and record the above transactional activities

Solution

Workings

W-1: Determination of the normal loss

W-2: Determination of per unit cost of good production

NB: In this case one above, the abnormal loss has not been disposed or sold. That’s why at the end of the financial period, the whole amount on the debit side of abnormal loss account has been closed to profit and loss account.

2.3 Off-setting of the scrap value of the abnormal loss units against the Scrap-Debtor Account

In this approach, you off set the scrap value of the abnormal loss units against the Scrap-Debtor Account or cashbook to reduce the scrap income. In this case, the following steps are followed;

Step One: On sale of the goods representing abnormal loss (i.e., scrap)

Step two: On balancing the ledger account

If the balancing figure in the abnormal loss account is on the debit side, it is a case of gain on sale, hence

If the balancing figure in the abnormal loss account is on the credit side, it is a case of loss on sale, hence

2.3.1 Example 2

The following is the production report for Normal producers co. ltd.

2,000 Kilograms of direct materials @ $5 per kg were introduced in process 1

Labor cost paid was $3,000

Manufacturing overhead $2,300

Expected loss was 10%. After the end of process 1, the actual output was 1750 Kilograms.

Finally, the units representing normal loss were sold at $1.80 per Kg.