normal and abnormal wastage in cost accounting

Explain normal wastage, abnormal wastage and abnormal gain. Discuss their treatment in process accounts.

Explanation and Treatment in Process Accounts

1. Normal Wastage:

Meaning of Normal Wastage

Normal wastage refers to that loss which can’t be avoided during the production process; it can be also expected by considering the nature of work operations. It is considered a standard part of the manufacturing process and cannot be eliminated, even under efficient working conditions. normal and abnormal wastage in cost accounting

Examples:

• Evaporation of liquids during heating
• Trimming of materials
• Spillage or dust during handling

Key Points:

• It is anticipated and built into the production cost.
• The cost of normal wastage is absorbed by the good units.
• It’s scrap value if it has which can be sold on little value, that is deducted from the process cost. normal and abnormal wastage in cost accounting

Thus in short words:
Normal wastage refers to unavoidable loss of material which is bound to occur during the manufacturing process operations.(e.g., evaporation, shrinkage, etc.). normal and abnormal wastage in cost accounting

Treatment of Normal Wastage in Process Accounts

1. Included in Cost of Good Units:
   Normal wastage is spread over the remaining good units produced during the operations of work. It is not treated separately.
2. Scrap Value (if any):
   If the normal wastage has a realizable scrap value, it is credited to the process account, reducing the overall cost. normal and abnormal wastage in cost accounting

Accounting Entry in Process Account:

If scrap has value:

Dr. Process A Account

Cr. By Normal Wastage (at scrap value)

• If scrap has no value: No separate entry; the total process cost is simply divided among the good units.

Example: Suppose 7,000 units are input, and 200 units are expected to be lost as normal wastage. If the total cost is ₹14,000 and the scrap value of the wastage is ₹1 per unit (₹100 total):

• Net cost = ₹14,000 – ₹200 = ₹12,200
• This ₹12,200 is distributed over 6800 good units = ₹1.79 per unit.

2. Abnormal Wastage:

Meaning of Abnormal Wastage

Abnormal wastage (also called abnormal loss) refers to the unexpected and avoidable loss of materials or units during production. This type of loss occurs beyond the normal or standard limit and is usually due to factors like:

• Machine breakdowns
• Human errors or negligence
• Accidents or poor-quality materials
• Inefficiencies in the process

Key Features:

• Not a part of standard production
• Avoidable with better control or efficiency
• Not involved in the cost of good units.
• Treated separately and transferred to a Costing Profit & Loss Account.

In other words Meaning
Abnormal wastage is the unexpected or avoidable loss of material due to inefficiency, accidents, or errors.

Treatment of Abnormal Wastage in Process Accounts

Abnormal wastage (or abnormal loss) is treated separately from normal wastage because it is unexpected and avoidable. Here’s how it’s handled

1. Calculate the Cost of Abnormal Wastage:

• Abnormal wastage units are valued at the same cost per unit as good units produced during the operations.

2. Transfer to Abnormal Loss Account:

• The cost of abnormal wastage is debited to the Abnormal Loss Account during the treatment of cost for business costs.
• If the abnormal wastage has a scrap value, it is credited to the Abnormal Loss Account. normal and abnormal wastage in cost accounting

3. Transfer Net Loss to Costing Profit & Loss Account:

• The net loss (after deducting any scrap value) is transferred to the Costing Profit & Loss Account.

Journal Entries:

For recording abnormal loss:

Abnormal Loss A/c Dr.

To Process Account

If there is scrap value:

Scrap/Bank A/c Dr.

To Abnormal Loss A/c

Transfer net loss to P&L:

Costing Profit & Loss A/c Dr.

To Abnormal Loss A/c

3. Abnormal Gain:

Meaning of Abnormal Gain

Abnormal gain refers to the unexpected or higher-than-expected output during the production process. It occurs when the actual loss of materials or units is less than the expected (normal) loss, resulting in more good units than anticipated. normal and abnormal wastage in cost accounting

Key Points:

• It is a positive outcome and occurs when the loss is lower than normal.
• The gain is unanticipated, and typically arises due to greater efficiency or improved process conditions.
• Abnormal gain is treated as extra production and is recorded separately.

Examples:

• Producing more units than the expected yield due to improved production techniques.
• Higher-quality materials or better handling leading to less wastage than expected.normal and abnormal wastage in cost accounting

In other words:-
When loss occurs less than the normal loss during the manufacturing process is called Abnormal gain. It can occur by the efficiency of management.

Treatment of Abnormal Gain in Process Accounts

Abnormal gain occurs when the loss occurs less than the normal loss. And in resulting of which good units produced more than expectations:

1. Value of Abnormal Gain:

• The extra units (gained) are valued at the same cost per unit as the good units produced. normal and abnormal wastage in cost accounting

2. Credit to Process Account:

• The abnormal gain is credited to the process account to reduce the overall cost of production.

3. Transfer to Abnormal Gain Account:

• The cost of abnormal gain is debited to the Abnormal Gain Account during the treatment of cost.

4. Transfer to Costing Profit & Loss Account:

• The net gain (after deducting any scrap value) is transferred to the Costing Profit & Loss Account as a profit.

Journal Entries:

For recording abnormal gain:

Process Account Dr.

To Abnormal Gain A/c

Transfer to P&L:

Abnormal Gain A/c Dr.

To Costing Profit & Loss A/c

Conclusion of Normal Wastage, Abnormal Wastage, and Abnormal Gain

Normal wastage, abnormal wastage, and abnormal gain are important concepts in process costing that help in analyzing and controlling production efficiency:

• Normal wastage is an unavoidable part of production and is absorbed by the cost of good units. It reflects the expected inefficiencies built into the process.normal and abnormal wastage in cost accounting
• Abnormal wastage is unexpected and avoidable. It indicates inefficiency or error and is treated as a separate loss, charged to the Costing Profit & Loss Account.
• Abnormal gain arises when actual loss is less than the normal loss, indicating improved efficiency. It is treated as a separate gain and credited to the Costing Profit & Loss Account. normal and abnormal wastage in cost accounting

In conclusion, understanding and properly accounting for these elements helps in accurate cost determination, better control over production processes, and informed decision-making by management. You can check the syllabus of cost Accounting on the official website of gndu.

Essential questions of Cost Accounting

1. What are the reasons for reconciliation for cost Accounting and financial accounting.
2. What is the importance of Functional budget in the manufacturing business.

normal and abnormal wastage in cost accounting