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1 Process costing is a costing method used where production follows a series of

Sequential processes. It is used in a variety of industries including:


Oil refining
Food processing
Paper making
Brewing
Features of process costing
The following are some of the features of Process costing:
1. The production is carried on continuously and passing two or more processes.
2. Only homogenous products are produced.
3. The production will be stopped if the plant and machinery is shut down for repairs.
4. The management has clearly defined process cost centres and the accumulation of cost
such as; cost material, cost of labor and overhead by the cost centre.
5. The finished product of one process becomes the raw material of the next process or
operations and so on until the final product is obtained.
6. Sometimes, goods are transferred from the process to the next process as transfer price
instead of cost price.

Normal loss
Normal loss is the expected amount of loss in a process. It is the level of loss or
waste that management would expect to occur under normal operating conditions.
Normal loss is not given a cost. The cost of producing these units is borne by the
good units.

Abnormal loss
Abnormal loss is the amount by which the actual loss exceeds the expected or
normal loss in a process. It can also be defined as the amount by which actual
production is less than normal production.
Abnormal loss is given a cost like good units.

Abnormal Gain
Abnormal gain is the amount by which actual output from a process exceeds the

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expected output. It is the amount by which actual loss is lower than expected loss.
Abnormal gain is given a value. The value of abnormal gain is calculated in the
same way we calculate the cost per unit of abnormal loss. It is calculated as the
cost of production divided by the expected units of output.

a)

Step 1

Determine output and losses


If actual output is 860 units and the actual loss is 140 units;

Units
Actual loss 140
Normal loss (10% of 1,000) 100
Abnormal loss 40

Step 2

Calculate cost per unit of output and losses


The cost per unit of output and the cost per unit of abnormal loss are based on expected output.

Costs incurred
Expected output

= $4,500
900 units

= $5 per unit

Step 3

Calculate total cost of output and losses


Normal loss is not assigned any cost.
$
Cost of output (860 x $5) 4,300
Normal loss 0
Abnormal loss (40 x $5) 200
4,500

Step 4

Complete accounts
Process account
Units cost Units cost
Cost incurred 1,000 4,500 Normal loss 100 0

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Output (finished
Goods a/c) 860 (x$5) 4,300
Abnormal loss 40 (x $5) 200

1,000 4,500 1,000 4,500

Abnormal loss account

Units cost Units cost


Process a/c 40 200 profit and loss a/c 40 200

b)

Calculation for output and losses

If actual output is 920 units and the actual loss is 80 units;

Units
Actual loss 80
Normal loss (10% of 1,000) 100
Abnormal gain 20

Calculate cost per unit of output and losses


The cost per unit of output and the cost per unit of abnormal gain are based on expected output.

Costs incurred
Expected output

$4,500

900 units

$5 per unit

Calculate total cost of output and losses

Normal loss is not assigned to any cost.


$
Cost of output (920 x $5) 4,600
Normal loss 0
Abnormal gain (20 x $5) (100)
4,500

Process account
Units $ Units $
Cost incurred 1,000 4,500 Normal loss 100 0

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Abnormal gain a/c 20 (x $5) 100 Output (finished
goods a/c) 920 (x$5) 4,600
1,020 4,600 1,020
4,600

Abnormal loss account

Units $ Units $
Process a/c 20 100 profit and loss a/c 20 100

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