Product Costing 2015

CHAPTER I

BASIC COST CONCEPTS AND MANAGEMENT

Cost is the amount of resource given up in exchange for some goods or services. The
resources given up are money or money’s equivalent expressed in monetary units. The
Chartered Institute of Management Accountants, London defines cost as “the amount of
expenditure (actual or notional) incurred on or attributable to a specified thing or
activity”.

For a consumer, cost means price. For management cost means 'expenditure incurred' for
producing a particular product or rendering a particular service. The process of
ascertaining the cost is known as costing. It consists of principles and rules governing the
procedure of finding out the costs of goods/services. It aims at ascertaining the total cost
and also per unit cost. For instance, in transport companies the total cost for the period is
ascertained and used to find out the cost per passenger/mile i.e. the cost of carrying one
passenger for one mile. It provides for analysis of expenditure in such a way that the
management gets complete idea about even the smallest item of cost.

Purposes for computing product costs

The three different purposes for computing product costs are as follows:

(i) Preparation of financial statements: Here focus is on inventor able costs.

(ii) Product pricing: It is an important purpose for which product costs are used. For this
purpose, the cost of the areas along with the value chain should be included to make the
product available to the customer.

(iii) Contracting with government agencies: For this purpose government agencies may
not allow the contractors to recover research and development and marketing costs under
cost plus contracts.

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Classification of costs

Classification is the process of grouping costs according to their common characteristics

or features. There are various methods of classifying costs on the basis of requirements.
The following are the important bases on which costs are classified:

(a) On the basis of Nature (or) Elements.

(b) On the basis of Function.
(c) On the basis of Variability.
(d) On the basis of Normality.
(e) On the basis of Controllability and Decision Making.
(1) On the basis of Nature or Elements: One of the important classification cost is on
the basis of nature or elements. Based on elements, it is classified into Material Cost,
Labour Cost and Other Expenses. They can be further subdivided into Direct and
Indirect Material Cost, Direct and Indirect Labor Cost and Direct and Indirect Other
Expenses.

(a) Material: The substance from which the product is made is known as material. It
can be direct as well as indirect.

Direct material: It refers to those materials which become a major part of the finished
product and can be easily traceable to the units. Direct materials include:

i. Material passing from one process to another

ii. All materials specifically purchased for a particular job/process.
iii. All material acquired and latter requisitioned from stores.
iv. Components purchased or produced.
v. Primary packing materials
Indirect material: All material which is used for purposes ancillary to production and
which can be conveniently assigned to specific physical units is termed as indirect
materials. Examples: oil, grease, consumable stores, printing and stationary material
etc.

(b) Labor: Labor cost can be classified into direct labour and indirect labour.

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Direct labor: It is defined as the wages paid to workers who are engaged in the
production process whose time can be conveniently and economically traceable to
units of products. For example: wages paid to compositors in a printing press, to
workers in the foundry in cast iron works etc.

Indirect labor: Labor employed for the purpose of carrying tasks incidental to goods
or services provided, is indirect labour. It cannot be practically traced to specific units
of output. Examples: wages of store-keepers, foreman, time-keepers, supervisors,
inspectors etc.

(c) Expenses: Expenses may be direct or indirect.

Direct expenses: These expenses are incurred on a specific cost unit and identifiable
with the cost unit. Examples are cost of special layout, design or drawings, hiring of a
particular tool or equipment for a job, fees paid to consultants in connection with a
job etc.

Indirect expenses: These are expenses which cannot be directly, conveniently and
wholly allocated to cost centre or cost units. Examples are rent, rates and taxes,
insurance, power, lighting and heating, depreciation etc.

(2) On the basis of Function: The classification of costs on the basis of the various
function of a concern is known as function-wise classification. Here there are four
important functional divisions in the business organization, viz.: (a) Production
Cost (b) Administration Cost (c) Selling and Distribution Cost (d) Research and
Development Costs, and (e) Pre-production Cost

(a) Manufacturing/production Costs: It is the cost of operating the manufacturing

division of an undertaking. It includes the cost of direct materials, direct labor,
direct expenses, packing (primary) cost and all overhead expenses relating to
production.

(b) Administration Costs: They are indirect and cover all expenditure incurred in
formulating the policy, directing the organization and controlling the operation of

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a concern, which is not related to research, development, production,

distribution or selling functions.

(c) Selling and Distribution Cost: Selling cost is the cost of seeking to create and
stimulate demand e.g. advertisements, market research etc. Distribution cost is
the expenditure incurred which begins with making the package produced
available for dispatch and ends with making the reconditioned packages available
for re-use e.g. warehousing, cartage etc. It includes expenditure incurred in
transporting articles to central or local storage. Expenditure incurred in moving
articles to and from prospective customers as in the case of goods on sale or
return basis is also distribution cost.

(d) Research and Development Costs: They include the cost of discovering new ideas,
process, and products by experiment and implementing such results on a
commercial basis.

(e) Pre-production Cost: When a new factory is started or when a new product is
introduced, certain expenses are incurred. There are trial runs. Such costs are
termed as pre-production costs and treated as deferred revenue expenditure.
They are charged to the cost of future production.

(3) On the basis of Variability: On the basis of variability with the volume of
production Cost is classified into Fixed Cost, Variable Cost and Semi Variable Cost

i. Fixed Cost: The Chartered Institute of Management Accountants, London,

defines fixed cost as “the cost which is incurred for a period, and which, within
certain output and turnover limits, tends to be unaffected by fluctuations in the
levels of activity (output or turnover)”.

These costs are incurred so that physical and human facilities necessary for
business operations can be provided. These costs arise due to contractual
obligations and management decisions. They arise with the passage of time and
not with production and are expressed in terms of time. Examples are rent,
property-taxes, insurance, supervisors’ salaries etc.

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It is wrong to say that fixed costs never change. These costs may vary depending
on the circumstances. The term fixed refer to non-variability related to the relevant
range. Fixed cost can be classified into the following categories for the purpose of
analysis:

ii. Variable Cost: Variable costs are those costs that vary directly and
proportionately with the output e.g. direct materials, direct labor. It should be kept
in mind that the variable cost per unit is constant but the total cost changes
corresponding to the levels of output. It is always expressed in terms of units, not
in terms of time.

Management decisions can influence the cost behavior patterns. The concept of
variability is relative. If the conditions upon which variability was determined
changes, the variability will have to be determined again. Semi-fixed (Semi-
Variable) costs: Such costs contain fixed and variable elements. Because of the
variable element, they fluctuate with volume and because of the fixed element;
they do not change in direct proportion to output. Semi-variable costs change in
the same direction as that of the output but not in the same proportion.
Depreciation is an example; for two shifts working the total depreciation may be
only 50%more than that for single shift working. They may change with
comparatively small changes in output but not in the same proportion.

iii. Semi-fixed (Semi-Variable) costs: Such costs contain fixed and variable
elements. Because of the variable element, they fluctuate with volume and because
of the fixed element; they do not change in direct proportion to output. Semi-
variable costs change in the same direction as that of the output but not in the
same proportion. Depreciation is an example; for two shifts working the total
depreciation may be only 50% more than that for single shift working. They may
change with comparatively small changes in output but not in the same
proportion.

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(4) On the basis of Normality: Costs are classified into normal costs and abnormal costs
on the basis of normality features. Normal costs are those incurred normally within
the target output or fixed plan.

(5) On the basis of Controllability and Decision Making: Based on the managerial
decision making and controllability the classifications are as follows:

(a) Controllable Costs: Controllable Costs are the costs which can be influenced by
the action of a specified number of an undertaking. Controllable Costs incurred in
a particular responsibility center can be influenced by the action of the executive
heading that responsibility center. For example, direct materials and indirect
materials.

(b) Uncontrollable Costs: Uncontrollable Costs are those costs which cannot be
influenced by the action of a specified number of an undertaking. In fact, no cost
is controllable; it is only in relation to a particular individual that may specify a
particular cost to either controllable or non-controllable. For example, rent and
rates.

(c) Sunk Cost: These are historical costs which were incurred in the past and are not
relevant to the particular decision making problem being considered. While
considering the replacement of a plant, the depreciated book-value of the old asset
is irrelevant as the amount is a sunk cost which is to be written-off at the time of
replacement. Unlike incremental costs, sunk costs are not affected by increase or
decrease of volume. Example of sunk cost includes dedicated fixed assets,
development cost already incurred.

(d) Opportunity Cost: Opportunity costs mean the costs off or going or giving up an
opportunity. It is the notional value of going without the next best use of time,
effort and money. These indicate the income or potential benefits sacrificed
because a certain course of action has been taken. An example of opportunity costs
is the market value forgone or sacrificed when an old machine is being used.

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(e) Replacement Cost: Such expenses may be incurred due to factors like change in
method of production, an addition or alteration in the factory building, change in
flow of production etc. All such expenses are treated as production overheads;
when amount of such expenses is large, it may be spread over a period of time.

(f) Conversion Cost: Conversion Costs are those costs incurred while converting
materials into semi-finished or finished goods. It is the aggregate of direct wages,
direct expenses and overhead costs of converting raw materials into finished
products.

(g) Differential Cost: Differential cost has been defined as “the difference in total cost
between alternatives, calculated to assist decision making”. Differential cost is the
increase or decrease in total costs resulting out of:

(a) Producing and distributing a few more or few less of products;

(b) A change in the method of production/distribution;

(c) An addition or deletion of a product or a territory; and

(d) The selection of an additional sales channel.

Incremental cost measures the addition in unit cost for an addition in output. This cost
need not be the same at all levels of production. It is usually expressed as a cost per unit
whereas the differential cost is measured in total. The former applies to increase in
production and is restricted to the cost only, whereas the differential cost has a
comprehensive meaning and application in the sense that it denotes either increase or
decrease.

Differential cost is useful in planning and decision making and helps to choose the best
alternative. It helps management to know the additional profit that would be earned if
idle capacity is used or when additional investments are made.

(h) Joint Costs: The processing of a single raw material results in two or more
different products simultaneously. The joint products are not identifiable as
different types of product until certain stage of production known as the split-off

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point is reached. Joint costs are the costs incurred up to the point of separation.
One product may be of major importance and others of minor importance which
are called by-products.

“Joint costs relate to two or more products produced from a common production
process or element-material, labor or overhead or any combination thereof or so
locked together that one cannot be produced without producing the other”.

(i) Common Costs: Common costs are those costs which are incurred for more than
one product, job, territory or any other specific costing object. They are not easily
related with individual products and hence are generally apportioned.

Statement of Cost

i. Prime cost = direct material cost + direct labor cost + direct other expenses

ii. Manufacturing cost = prime cost + factory overheads (work overheads)

iii. Production cost (or total cost) = manufacturing cost + establishment cost

iv. Selling price (or marketing price) = production cost + profit

v. Factory overheads = indirect material cost + indirect labor cost + indirect other
expenses (All at factory level)

vi. Establishment cost = office administration + distribution and advertisement

cost

vii. Unit cost = total cost / production volume (units)

viii. Unit sales price = sales price / production volume (units)

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Sample example 1:

A business house is engaged in manufacturing various sizes of drill press. A particular

hand drill is sold for 2,000birr. The various yearly expenses are approximately given
below – such hand drills are manufactured 5,000 a year.

Material cost – 50,000birr

Labor cost – 25,000birr
Cost of motor for each drill – 1,000birr
The factory overhead – 40% of prime cost
The office expenses including other costs – 10% of factory cost
Calculate the profit on each hand drill.

Solution:

Prime cost = direct material cost + direct labor cost + direct other expenses
= 50,000 + 25,000 + 1000*5000 = 5,075,000birr
Factory overheads = 40% prime cost
= 40%b (5,075,000) = 2,030,000birr
Manufacturing cost = prime cost + factory overheads (work overheads)
= 5,075,000 + 2,030,000 = 7,105,000birr
Establishment cost = 10% of factory cost
= 10% (7,105,000) = 710,500birr
Production cost (or total cost) = manufacturing cost + establishment cost
= 7,105,000 + 710,000 = 7,815,000birr
Unit cost = total cost / production volume (units)
= 7,815,000/5000 = 1,563birr
Profit on each product = Unit sales price - unit cost
= 2,000 – 1,563 = 437birr
Computation of costs
Marginal costs (MC) – The cost of producing an extra unit of output.
MC = Change in TC / Change in Q
Total Cost (TC) – Composed of total Fixed Cost and Total variable Cost.

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TC = FC + VC
Average Fixed Cost (AFC) – Decreases continuously as output increases. The Greater
Output the Smaller the AFC, due to fixed cost that is spread to more output levels.
AFC = FC/Q
Average Variable Cost (AVC) – Refers to the variable costs per unit of output produced
by the firms.
AVC = VC/Q
Average Cost (AC) – Obtained by Dividing TC by Level of Output, it also obtained by
adding the sum of AFC and AVC.
AC = TC/Q or AC = AFC + AVC
Sample example 2:

Quantity TC MC AFC AVC AC

FC VC
(Q) (FC+VC) (^TC/^Q) (FC/Q) (VC/Q) (TC/Q)
0 50 0 50
1 50 25 75 25 50 25 75

2 50 45 95 20 25 22.5 47.5

3 50 75 125 30 16.67 25 41.67

4 50 120 170 45 12.5 30 42.5

5 50 175 225 60 10 35 45

6 50 250 300 75 8.33 41.67 50

7 50 340 390 90 7.14 48.57 55.71

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Chapter II
JOB, BATCH AND PROCESS COSTING
The general fundamental principles of ascertaining costs are the same in every system of
cost accounting, but the methods of analysis and presenting the costs vary from industry to
industry. Different methods are used because business enterprises vary in their nature and
in the type of products or services they produce or render.
Methods of Costing are broadly classified into
(1) Specific Order Costing and
(2) Operation Costing
The term Specific Order Costing refers to the basic costing method which is applicable
where the work consists of separate contracts, jobs or batches. The specific order costing
is further classified into job costing, batch costing and contract costing. Job Costing is a
form of specific order costing which applies where industries which manufacture products
or render services against specific orders.
In contract (or terminal) costing each contract is treated as a cost unit and costs are
ascertained separately for each contract. It is suitable for business concerned with building
or engineering projects or structural or construction contracts.
Operation costing is a mix of job costing and process costing, and is used in either of the
following situations:
 A product initially uses different raw materials, and is then finished using a common
process that is the same for a group of products; or
 A product initially has identical processing for a group of products, and is then
finished using more product-specific procedures.
I. JOB COSTING
Job Costing is a form of specific order costing which applies where industries which
manufacture products or render services against specific orders such as civil contracts,
construction works (such as house building), automobile repair shop, printing press,
machine tool manufacturing, engine and machine construction, ship building and furniture
making etc.
The term job costing may be defined as costing in which costs are collected and
accumulated according to jobs, contracts, products or work orders. It refers to a system of
costing in which costs are ascertained in terms of specific jobs or orders which are not
comparable with each other. Each job is treated as a separate entity for the purpose of

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costing. The material and labor costs are complied through the respective abstracts and
overheads are charged on predetermined basis to arrive at the total cost.
Features of Job Order Costing
Some of the important features of this method of costing are given below:
1. Works or productions are undertaken against the order of customers.
2. Production is not as a continuous process because each job is accepted by work
order basis not for stock or future sales.
3. Each job is treated as a separate entity for the purpose of costing.
4. There is no uniformity in the flow of production because of different production
process.
5. Costs are collected and accumulated after the completion of each job or products in
order to find out profit or loss on each job.
6. The jobs differ from each other requiring separate work in progress maintained for
each job.
II. BATCH COSTING
This is another form of job costing which is adopted in case of manufacturing of a large
number of components of machines or of other articles. Since a large number of them are
manufactured together and pass through the same process of manufacture, it is convenient
to collect their cost of manufacture together.
Separate job cost sheets are maintained for each batch of products. Each batch is allotted a
number.
Material requisitions are prepared batch wise, the direct labor is engaged batch wise and
the overheads are also recovered batch wise. Cost of each component in the batch is then
determined by dividing the total cost by the number of articles manufactured.
Batch costing is used in number drug industries, readymade garment industries, electronic
components manufacture, TV sets, radio etc.
Features of Batch Costing
- Batch costing is applied in industries where identical products are produced.
- A batch is a cost unit which consists of a separate, readily identifiable group of
product units which maintains its separate identity throughout the production
process.
- The output of batch consists of a number of units and it is not economical to
ascertain cost of every unit of output independently

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- The procedure is very similar to job costing:

a. Each batch is treated a job and costs are calculated for total batch.
b. On completion of production cost per unit is found as
Cost per unit = Total Batch Cost
Total Units in Batch
III. PROCESS COSTING
Process costing is a form of operations costing which is used where standardized
homogeneous goods are produced.
Process costing is a method of costing under which all costs are accumulated for each stage
of production or process, and the cost per unit of product is ascertained at each stage of
production by dividing the cost of each process by the normal output of that process.
Process Costing is a method of costing employed where each similar units of production
involved in different series of process from conversion of raw materials into finished
output. Thus, unit cost is determined on the basis of accumulated costs of each operation or
at each stage of manufacturing a product. Process costing is an accounting methodology
that traces and accumulates direct costs, and allocates indirect costs of a manufacturing
process.
This costing method is applied in industries like chemicals, paper, lumber, electronics,
cement industries, food processing industries, textiles, steel, rubber, sugar, shoes, petrol
etc. Process costing is also used in the assembly type of industries. In process costing, it is
assumed that the average cost presents the cost per unit. Cost of production during a
particular period is divided by the number of units produced during that period to arrive at
the cost per unit.
Character tics of Process Costing
1. Continuous or mass production where products which passes through distinct
process or operations.
2. Each process is deemed as a separate operations or production centers.
3. Products produced are completely homogenous and standardized. The process is
standardized.
4. Output and cost of one process are transferred to the next process till the finished
product completed.
5. Cost of raw materials, labor and overheads are collected for each process.
6. The cost of a finished unit is determined by accumulated of all costs incurred in all
the process divided by the number of units produced.

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7. The cost of normal and abnormal losses usually incurred at different stages of
production is added to finished goods.
8. The interconnected processes make the final output of by-product or joint products
possible.
Applications of Process Costing
Process costing is being used by following Industries as under:
1. Identical Products Industries
Process costing is most often used when manufacturers release identical products. If mass
produced televisions have the same parts, manufacturers can assign consistent prices to the
products based on how much the products cost to manufacture overall.
2. Industries with Multiple Departments
Businesses that have multiple departments usually use process costing so that management
can assess the costs accumulated by each department. For example, one department can
take the raw resources and refine them before turning them into finished parts, another
department can assemble the parts and a third department can test the finished product to
assess both quality and safety. Materials might need to be shipped from one department to
another, which may incur additional costs. When the costs of production go up
unexpectedly, process costing can allow management to quickly pinpoint the department
responsible for the increased costs and identify the source of the increased cost.
3. Industries with Interchangeable Parts
Process costing comes into play when a factory manufactures identical parts. For example,
a computer manufacturing plant will create numerous components that are interchangeable
among computers of the same model. Process costing allows manufacturers to sell
individual parts separately to computer repair shops or individual buyers, since the
manufacturers know the cost of the separate parts.
4. Industries with Varying Product Features
Products that have multiple extraneous features can benefit from process costing.
Manufacturers can release two versions of the product, with one version costing less but
having fewer features and another product costing more but having more features. For
example, a manufacturer might release two coffee pots, one with a timer and one without.
Process costing lets the manufacturer know how much the timer costs to add to the coffee
pot, which enables the manufacturer to gauge how much it must raise the price on the
coffee pot with the timer.
5. Innovative Industries
Process costs are important in industries that have high innovation. For example,
manufacturers cannot determine an appropriate price for a new type of product without
knowing how much the product will cost to manufacture overall. In addition, businesses

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cannot determine if a product will be profitable until they know the overall cost so they can
estimate the maximum price that customers will pay for the product.
Difference between Job Costing and Process Costing

S Basis of Job Costing Process Costing

N distinction
1 Specific Production is against specific Production is a continuous
order order from the customers process based on future
demand.
2 Nature A variety of products are Homogenous products are
produced according to produced in large scale.
specifications.

3 Transfer Output and costs are not involved Output and costs are transferred
in any transactions from one job from one process to another
to another. process.
4 Control Cost control is more difficult Effective cost control is
because each job is different from possible because production is
other. standardized.
5 Cost Cost ascertainment and Costs are collected and
calculations determination of unit cost can be accumulated at the end
possible only when job is of the completed.
accounting period.
6 Work in There is no question of work in Work in progress is always
progress progress at the beginning or end there because production is
(WIP) of the period. continuous.
7 Suitability Suitable to industries where Suitable, where goods are made
production is intermittent and for stock and productions is
customer orders can be identified continuous.
in the value of production.

Process Costing Procedures

For each process an individual process account is prepared.
Each process of production is treated as a distinct cost center.
1. Items on the Debit side of Process a/c.
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Each process account is debited with –

a) Cost of materials used in that process.
b) Cost of labor incurred in that process.
c) Direct expenses incurred in that process.
d) Overheads charged to that process on some predetermined.
e) Cost of ratification of normal defectives.
f) Cost of abnormal gain (if any arises in that process)
2. Items on the Credit side
Each process account is credited with
a) Scrap value of Normal Loss (if any) occurs in that process.
b) Cost of Abnormal Loss (if any occurs in that process)
3. Cost of Process
The cost of the output of the process (Total Cost less Sales value of scrap) is transferred to
the next process. The cost of each process is thus made up to cost brought forward from the
previous process and net cost of material, labor and overhead added in that process after
reducing the sales value of scrap. The net cost of the finished process is transferred to the
finished goods account. The net cost is divided by the number of units produced to
determine the average cost per unit in that process.
Specimen of Process Account when there are normal loss and abnormal losses

Dr. Abnormal I a/c. Cr

Particulars Unit Rs. Particulars Units Rs.
s
To basic material xx xx By normal loss xx xx
To direct material xx By abnormal loss xx xx
To direct wages xx By process II a/c xx xx
To direct wages xx (output transferred to next
process)
To direct expenses xx By process I stock a/c xx xx
To production overheads xx

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To cost of rectification of xx
normal defects
To abnormal gains xx
xx xx xx xx

4. Process Losses
Processes losses may be defined as the loss of material occur at different stages of
manufacturing process. In manufacturing processes, entire input is not getting converted
into output. A certain part of input is lost while processing which is inevitable. Certain
production techniques are of such a nature that some loss is inherent to the production.
Wastages of material, evaporation of material are un- avoidable in some process. But
sometimes the Losses are also occurring due to negligence of Laborer, poor quality raw
material, poor technology etc. These are normally called as avoidable losses. The following
are the types of process losses during the course of processing operations:
a. Normal Process Loss
b. Abnormal Process Loss
c. Abnormal Process Gain
d. Spoilage
e. Defectives

a. Normal Process Loss

Normal loss is an unavoidable loss which occurs due to the inherent nature of the materials
and production process under normal conditions. It is normally estimated on the basis of
past experience of the industry. It may be in the form of normal wastage, normal scrap,
normal spoilage, and normal defectiveness. If the normal loss units can be sold as a scrap
then the sale value is credited with process account. If some rectification is required before
the sale of the normal loss, then the cost of rectification is debited in the process account.
The cost per unit of a process is calculated after adjusting the normal loss. In case of
Normal Loss the cost per unit is calculated by the under given formulae.
Cost of good unit = total cost – sales value of scrap
Input – normal loss units
The cost of normal process loss in practice is absorbed by good units produced under the
process. This is known as Normal Process Loss or Normal Wastage. The amount realized
by the sale of normal process loss units should be credited to process account. Example:

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evaporation, scrap, stamping process

b. Abnormal Process Loss
Any loss caused by unexpected abnormal conditions that may be caused by breakdown of
machinery, false production planning, lack of effective supervision/carelessness,
substandard materials, accident etc. such losses are in excess of pre-determined normal
losses. This loss is basically avoidable. Thus abnormal losses arrive when actual losses are
more than expected losses.
Abnormal losses are calculated as per under given formulae:
Value of abnormal loss = [total cost – scrap value of normal loss] * units in abnormal loss
Input units – normal loss in units
The cost of an abnormal process loss unit is equal to the cost of good unit. The total cost of
abnormal process loss is credited to process account from which it arises. Cost of abnormal
process loss is not treated as cost of the product. In fact, the total cost of abnormal process
loss is debited to Costing Profit and Loss Account.
Dr. Abnormal loss a/c. Cr
Particulars Units Rs. Particulars Units Rs.
To process A/c. xx xx By bank xx xx
By costing P&L a/c xx xx
xx xx xx xx
c. Abnormal Process Gain
The margin allowed for normal loss is an estimate (i.e. on the basis of expectation in
process industries in normal conditions) and slight differences are bound to occur between
the actual output of a process and that anticipates. This difference may be positive or
negative. If it is negative it is called ad abnormal Loss and if it is positive it is Abnormal
gain i.e. if the actual loss is less than the normal loss then it is called as abnormal gain. The
value of the abnormal gain calculated in the similar manner of abnormal loss.
The formula used for abnormal gain is:
Abnormal gain = Total Cost incurred – Scrap Value of Normal Loss x Abnormal Gain
Unites
Input units – Normal Loss Units
The sales values of abnormal gain units are transferred to Normal Loss Account since it arrive out of the
savings of Normal Loss. The difference is transferred to Costing P & L A/c. as a Real Gain.
Dr. Abnormal Gain A/c. Cr
Particulars Units Rs. Particulars Units Rs.
To Normal Loss a/c. xx xx By Process a/c. xx xx
To Costing P & L a/c. Xx xx

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Xx xx xx xx
d. Spoilage: Normal Spoilage costs are included in costs either by charging the loss due to
spoilage to the production order or by charging it to production overhead so that it is spread
over all the products. Any value realized from the sale of spoilage is credited to production
order or production overhead account as the case may be. The cost of abnormal spoilage is
charged to Costing Profit and Loss Account. When spoiled work is the result of rigid
specification, the cost of spoiled work is absorbed by good production while the cost of
disposal is charged to production overhead.
e. Defectives: Defectives that are considered inherent in the process and are identified as
normal can be recovered by using the following method.
Charged to goods products
Charged to general overheads
Charged to departmental overheads
If defectives are abnormal, they are to be debited to Costing Profit and Loss Account.

Handout for BSC Tesfaye Page 19