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When we start the production of goods through different processes, normal loss and abnormal loss will happen with this. Due to this our total cost of production will increase.
If we do not treat the normal and abnormal loss, our total cost of production will less than exact cost of production. Due to this, our sale price will not estimate correctly. So, for making good plan of selling and controlling our losses, we need to treat the normal loss and abnormal loss in process accounts.
1. Treatment of Normal Loss in Process Accounts
Normal losses are those which we can not stop. These are natural wastage.
For example, if you doing the business of timber on the basis of their weight. It is sure that after cutting of tree, weight of wood will decrease. So, this loss is normal loss. In process account’s credit side, we just show the normal loss’s units. Now, our total produced units will decrease. This will decrease our cost of production in any process. For example: If total cost of process A is Rs.,. When we produce units in A process, we have checked that due to natural reasons, we have just units. Now, in A Process Account, we will show units in debit side and units of normal loss in credit side without writing its amount. Due to this our total cost of Rs., will of units. It means, cost per unit has increased from Rs. per unit to Rs. per unit.
2. Treatment of Abnormal Loss in Process Accounts
All those losses which happen due to abnormal reasons are called abnormal losses. Following are its main example.
1. If you use bad quality raw material in the production, there is big risk of wastage in production. So, use of bad quality raw material is the reason of abnormal loss.
2. Careless is also reason of abnormal loss. For example, due to the careless of worker,5 units waste the products during production. So, loss of5 units is the abnormal loss.
3. All those losses which are not normal will be the abnormal loss. For treating the abnormal loss in the process account, we need to calculate the value of abnormal loss.
Normal loss - the loss whose occurence is inevitableAbnormal loss - loss whose occurrence can be avoided
