These costs do not add any production benefit to the company and are treated as accounting losses. They are controllable losses which are not expected to occur under efficient operating conditions e.g. improper mixing of ingredients, omission of some important chemical in the manufacture of a product, e.t.c.. Abnormal losses are considered to result from production inefficiencies that should be eliminated and are not an inherent part of the production process. The cost of abnormal spoilage not included in the process cost nor included in inventory valuation but reported separately as abnormal is written off directly as losses for the period in which it occur.
Abnormal losses, just as normal losses, may or may not have a scrap value. Abnormal loss with or without scrap value is treated in a similar way in the process account. The sales revenue received from sale of abnormal loss units is offset against the cost of abnormal loss in the abnormal loss account to arrive at the net abnormal loss that shall be charged to the profit and loss account in the period in which it arises.
>>> Illustration
Maybud Ltd operates Process X which creates two Product A. There is no work in progress. The following information relates to Process X for last month:
(i) 80,000 litres of raw materials with a total cost of Shs158,800 were input into the process and conversion costs were Shs133,000.
(ii) A normal process loss of 5% of the input was expected. An actual loss of 5,500 litres was identified at the end of the process.
Required:
(a) Prepare the Process X account for last month showing the amount of abnormal loss.
(b) Assuming that losses have a realizable value of Shs.1 per unit, calculate the loss to be charged to the Profit and loss account in the period. Show the process account as it would appear.
Solution
(a)
Step 2: Calculation of Cost per unit
(b)
Abnormal loss to be charged to the Profit and loss account shall be net of the revenue received. However, the cost per unit transferred shall change because the normal loss at this point has a value which shall be offset against the total costs in computing the unit cost.
>>> Illustration
Mombasa Limited manufactures a product through two departments. The following is the data in respect of department 2 for the month of January:
Additional Information
(a) Normal spoilage is 10% of all good units that pass inspection
(b) Inspection occurs when production is 80% complete.
(c) Conversion costs are incurred evenly through-out the process.
(d) Additional materials* are added after units pass the inspection point
Required
Prepare a process cost report using
Weighted Average (Omission Method)
Apply both the recognition and re-assignment and the omission approach in dealing with the
spoilage.
