Process Costing: Normal Loss, Abnormal Loss, Equivalent Production and Process Accounts Questions

Question 1

Define process costing.

Accepted Answer

Process costing is a method of costing in which costs are collected for each process/department for a period and then average cost per unit is computed.

Question 2

What is normal loss?

Accepted Answer

Normal loss is the expected and unavoidable loss under normal efficient operating conditions in a process.

Question 3

What is abnormal loss?

Accepted Answer

Abnormal loss is the loss over and above normal loss, arising due to abnormal/unexpected reasons.

Question 4

Define equivalent production.

Accepted Answer

Equivalent production is the measure of work done expressed in terms of equivalent completed units (e.g., 100 units 50% complete = 50 equivalent units).

Question 5

What is conversion cost?

Accepted Answer

Conversion cost means labour cost plus overhead cost incurred to convert materials into finished output.

Question 6

State one industry where process costing is used.

Accepted Answer

Process costing is used in cement manufacturing (continuous, homogeneous output).

Question 7

State the main features of process costing (any three).

Accepted Answer

Main features of process costing (any three):

1) Continuous and homogeneous production: output is standardised/identical and production flows continuously from one process to another.
2) Process-wise cost collection: costs are accumulated for each process/department for a period (month/quarter) rather than job-wise.
3) Average unit cost: cost per unit is obtained by dividing total process cost (after scrap credit) by units produced.

Other features include inter-process transfers and frequent existence of WIP and normal loss.

Question 8

Explain the treatment of normal loss in process costing.

Accepted Answer

Treatment of normal loss in process costing:

- Normal loss is expected and unavoidable, so normal loss units are not assigned any cost separately.
- The cost of normal loss is borne by good units (effective output).
- If normal loss has scrap value, the scrap value is credited to the process account, thereby reducing process cost.
- Effective output = Input units − Normal loss units.

Hence, normal loss increases the cost per good unit unless there is scrap recovery.

Question 9

Differentiate between normal loss and abnormal loss.

Accepted Answer

Normal loss vs abnormal loss:

| Basis | Normal loss | Abnormal loss |
|---|---|---|
| Nature | expected/unavoidable | unexpected/avoidable (over and above normal) |
| Cause | inherent process wastage | fire, theft, abnormal breakdown, negligence |
| Cost treatment | cost absorbed by good units; scrap value credited | valued at process cost and transferred to Abnormal Loss A/c then Costing P&L |

Thus, normal loss is part of standard cost, while abnormal loss is treated separately.

Question 10

Explain equivalent production and why it is required.

Accepted Answer

Equivalent production (EUP) converts incomplete units into an equivalent number of completed units based on the percentage of completion.

Example: 200 units at 50% completion = 100 equivalent completed units.

Why required:
1) In process industries, closing WIP is common and is partially complete for materials and/or conversion.
2) EUP helps compute a fair cost per unit by spreading cost over completed output and the work contained in WIP.
3) Without EUP, unit costs would be distorted and valuation of WIP and transfer-out would be incorrect.

Hence, EUP is essential for correct valuation and cost control in process costing.

Question 11

What is abnormal gain? Explain its treatment briefly.

Accepted Answer

Abnormal gain arises when actual loss is less than normal loss (i.e., the process performs better than expected).

Treatment (brief):
- Abnormal gain units are valued at the same cost per unit as good output.
- It is credited to Abnormal Gain Account (process account shows it on credit side).
- The scrap value corresponding to the normal loss that did not occur is usually adjusted, and the net gain is transferred to Costing Profit & Loss account.

Thus, abnormal gain is treated separately like abnormal loss but in reverse.

Question 12

Prepare a brief format of a process account and explain what is shown in it.

Accepted Answer

A process account summarises input, costs, output and losses for a process. A brief format is:

| Debit (Units/₹) | Credit (Units/₹) |
|---|---|
| Input units and cost | Normal loss (at scrap value) |
| Direct materials | Abnormal loss/gain (if any) |
| Direct labour | Output transferred to next process/FG |
| Overheads | Closing WIP (if any) |

It shows how costs are accumulated in the process, how scrap/loss is treated, and the value of output transferred and WIP.

Question 13

Explain equivalent production (EUP) with a worked example showing materials and conversion separately.

Accepted Answer

Equivalent production (EUP) means expressing incomplete production (WIP) in terms of equivalent completed units. Because materials and conversion may be added at different stages, EUP is often computed separately for (i) materials and (ii) conversion (labour + overhead).

Worked example (weighted average style):
Units introduced = 1,000
Units completed & transferred = 800
Closing WIP = 100 units
Normal loss = 100 units (so total accounted: 800 + 100 + 100 = 1,000)
Completion of closing WIP: Materials 100% (materials added at start), Conversion 50%

Step 1: Compute EUP for materials
- Completed units: 800 × 100% = 800
- Closing WIP: 100 × 100% = 100
Total materials EUP = **900**

Step 2: Compute EUP for conversion
- Completed units: 800 × 100% = 800
- Closing WIP: 100 × 50% = 50
Total conversion EUP = **850**

Step 3 (how it is used):
- Cost per equivalent unit is computed separately for materials and conversion by dividing total respective costs by respective EUP.
- Then costs are assigned to (i) units transferred out and (ii) closing WIP in proportion to their equivalent units.

Conclusion: EUP ensures fair valuation of WIP and correct unit cost when production is incomplete.

Question 14

Explain the treatment of normal loss, abnormal loss and abnormal gain in process costing (exam-style).

Accepted Answer

Treatment in process costing (exam-style):

A) Normal loss
- Meaning: expected/unavoidable loss under efficient conditions (e.g., evaporation, shrinkage).
- Cost treatment: normal loss units are not given any cost; the cost is absorbed by good output.
- Scrap value: if normal loss has scrap value, the process account is credited with scrap value (reducing process cost).
- Effective output = Input − Normal loss.

B) Abnormal loss
- Meaning: loss over and above normal loss due to abnormal reasons (fire, theft, major breakdown, negligence).
- Valuation: abnormal loss units are valued at the same cost per unit as good units (after considering scrap credit of normal loss).
- Accounting: Abnormal Loss Account is debited; process account is credited. Any scrap value realised is credited to Abnormal Loss Account. The net loss is transferred to Costing Profit & Loss A/c.

C) Abnormal gain
- Meaning: actual loss is less than normal loss (better-than-normal performance).
- Valuation: abnormal gain is valued at process cost per unit like good output.
- Accounting: process account is credited with abnormal gain; Abnormal Gain Account is credited. The notional scrap value corresponding to the normal loss not occurring is adjusted, and net gain is transferred to Costing Profit & Loss A/c.

Thus, normal loss is part of regular costing, while abnormal loss/gain is treated separately to avoid distorting product cost and to highlight efficiency/inefficiency.

Question 15

Compute normal loss and show how scrap value affects cost per unit: Input 1,000 units; normal loss 10%; scrap value ₹2/unit; total process cost ₹16,000. Find effective output and cost per good unit.

Accepted Answer

Given:
Input = 1,000 units
Normal loss = 10% of input
Scrap value = ₹2 per normal loss unit
Total process cost (before scrap credit) = ₹16,000

Step 1: Compute normal loss units and effective output
Normal loss units = 10% of 1,000 = **100 units**
Effective output (good units) = 1,000 − 100 = **900 units**

Step 2: Compute scrap value credit
Scrap value of normal loss = 100 × ₹2 = **₹200**

Step 3: Compute net cost to be borne by good units
Net process cost = Total process cost − scrap value credit
= 16,000 − 200 = **₹15,800**

Step 4: Cost per good unit
Cost per good unit = Net process cost / Effective output
= 15,800 / 900
= **₹17.56 per unit (approx.)**

Conclusion: Scrap value reduces the process cost and therefore reduces the cost per good unit.

Process Costing: Normal Loss, Abnormal Loss, Equivalent Production and Process Accounts

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