CAT / FIA FMA Syllabus C. Cost Accounting Techniques - Normal and abnormal losses - Notes ^{6 / 17}

It is normal that the total of the input units may differ from the total of the output units.
This usually happens when there are losses or gains in the process.
Normal loss is the loss that is expected in a process and is often expressed as a percentage of the materials input to the process.
Total cost of inputs
Average cost per unit = --------------------------
Units input – Normal loss units
If normal loss does not have a scrap value, it is valued in the process account as $Nil.
If normal loss is sold as scrap, the revenue is used to reduce the input costs of the process.
Total cost of inputs – Scrap value of normal loss units
Average cost per unit = -------------------------------------------------------
Units input – Normal loss units

Input materials 3,000kg
Total Cost $52,800

Normal loss 10% of input

What is the cost per unit?

Solution

Cost per unit = Total cost / (Units input – Normal loss units)

Cost per unit = 52,800 / (3,000 - 10% x 3,000) = $19.56

If the loss or the gain in a process is different to what we are expecting, then we have an abnormal loss or an abnormal gain in the process.

If losses are greater than expected, the extra loss is abnormal loss.

If losses are less than expected, the difference is known as abnormal gain.

Abnormal loss and gain units are valued at the same cost as units of good output, they are valued at the full cost per unit.

In Process A:

Normal Loss 10%
Input 1,000kg
Output 800kg

What is the abnormal loss in kg?

Solution

1,000 - (10% x 1,000) = 900kg is expected output

900kg - 800kg = 100kg is the abnormal loss

In Process B:

Normal Loss 10%
Input 2,000kg
Output 1,950kg

What is the abnormal gain in kg?

Solution

2,000kg - (10% - 2,000) = 1,800 is the expected output

1,950kg - 1,800kg = 150kg is the abnormal gain