Process Costing - Valuing Normal Loss

System

Hi

We covered process costing at college last night - and I don't understand why, when we sell wastage only the normal (as in no additional abnormal) loss is valued at the sale price for inclusion in the process account.

As far as I understand it, the abnormal loss is valued at the output cost per unit, despite it being sold with the normal wastage at another price.

I have no problems with the accounting and the entries required in the process account, I just don't understand the reasoning!

Cheers
Martin

System

Re:Process Costing - Valuing Normal Loss

In a dept where an abnormal loss has been identified the abnormal loss is clearly identified and management know how much it has cost and can decide whether to investigate.

System

Re:Process Costing - Valuing Normal Loss

This is a link to another discussion on this topic

http://forums.aat.org.uk/forums/posts/list/15446.page

"Chicbakers" make tasty bread but can't scrape all the mix out of the mixing bowls to put into the bread tins that go into the oven.


In fact, we expect that 5% of the total mix is wasted, and at the end of each shift this uncooked leftover dough is sold for animal feed


The total cost of all the loaves produced is the real cost of all the ingredients less the scrap value of the normal loss So we use the value of the normal loss as a way of reducing the total cost of the bread produced

If the inputs were

10,000kgs flour etc costing £3,000

labour and overheads costing £2,275

Then we would expect to make 10,000 x 95% kgs of dough
and have a (normal) loss of 5% of 10,000 kgs

If the actual production was only 9,200 kgs that would mean we had an abnormal loss of 300 kgs. That loss should be valued at the same price as the dough produced in the process account.
The double entry would be in the abnormal loss account for that process.

When the losses are sold to the animal feed man, there will be 800kg (500kg of normal loss, 300kg of abnormal loss). If this is sold at £0.10 per kg then

debit cash £80

and

credit normal loss £80

.
At this point you need another entry

debit normal loss 300kg at £0.10 per kg (£30)

and credit abnormal loss the same amount

You should now find:-

Normal Loss account balances

and

Abnormal Loss account has a balance based on the value of the 300kgs at the same price as the dough less the £30

This balance will ultimately go to the costing P&L so the loss is shown there as only the difference, as you question suggests.

I've done a spreadsheet to show the double entries (email me if you'd like to see the completed set of these accounts)

I hope this helps
sandy.hood@chichester.ac.uk