Methods of Costing

By "Method of Costing" we mean the procedure adopted to ascertain costs. The Method adopted would be
dependent on the circumstances in which accounting is required to be made which is dependent on the
product being manufactured and the nature of the industry making the product.
Depending on the nature of the business i.e. the type of the product made and the procedure adopted to
make it, all the different costing methods are classified as

1. Specific Order Costing

This is a costing method applicable to those industries where the activity being accomplished consists of a
task which is specifically identifiable at each stage of production.
This includes

1.

Job Costing

2.

Batch Costing

3.

Contract Costing

2. Operation Costing
This is a costing method applicable to those industries where the activity consists of continuous or
repetitive operations or processes and the products are identical and cannot be segregated.
This includes

1.

Unit Costing

2.

Process Costing

3. Operating Costing
This is also called Service Costing and is applicable to organisations which produce services but not
tangible goods.

4. Composite or Multiple Costing

This actually is not a method but a combination of two or more methods mentioned above.

Techniques of Costing
Techniques of costing imply tools that are to be used to apply a method of costing.
In accounting for costs using a particular method of costing as mentioned above, any one or more of the
techniques of costing are used by the organisation
The various techniques of costing are
1.

Absorption Costing

2.

Marginal Costing

3.

Standard Costing

4.

Differential Costing

5.

Uniform Costing

Features/Characteristics of Process Costing

Process Costing Method is applicable where the output results from a sequence of continuous or repetitive
operations or processes and products are identical and cannot be segregated.
Process Costing enables the ascertainment of cost of the product at each process or stage of manufacture.
The following features may be identified with process costing:
1.

The output consists of products which are homogenous.

2.

Production is carried on in different stages (each of which is called a process) having a continuous flow.

3.

Production takes place continuously except in cases where the plant and machinery are shut down for
maintenance etc. Output is uniform and all units are identical during each process. It would not be
possible to trace the identity of any particular lot of output to any lot of input.

4.

The input will pass through two or more processes before it takes the shape of the output. The output of
each process becomes the input for the next process until the final product is obtained, with the last
process giving the final product.

5.

The output of a process (except the last) may also be saleable in which case the process may generate
some profit.

6.

The input of a process (except the first) may be capable of being acquired from the outside sources.

7.

The output of a process is transferred to the next process generally at cost to the process. It may also be
transferred at market price to enable checking efficiency of operations in comparison to the market
conditions.

8.

Normal and abnormal losses may arise in the processes

There are a number of industries in which process costing can be applied.

Elements/Components of Cost
For the purpose of cost accounting, the process industry is divided into separate departments with each
department representing a specific process. The Direct Material and Direct Labour/Labor Costs are collected
for each department separately and the overheads which are collected over all the departments/processes
are apportioned over the various departments/processes on some rational basis.
The following are the main elements/components of costs involved in the manufacturing process where
process costing method is adopted.

1. Direct Materials
There are two types of materials that we come across in process costing.

o Primary Material
Materials which are introduced in the initial process and passed on to the next process as a part
of output after completion of processing.

o Secondary Material
Materials which are introduced in the first or subsequent processes in addition to the main
material introduced in the initial process. This gets mixed up with the main material and is
passed on to the subsequent processes as a part of the output.

2. Direct Labour/Labor
The direct labour/labor cost is generally incurred in every process. Identification of direct labour cost is
also relatively easy in process costing industry

3. Direct Expenses
Expenses in addition to Direct Material and Labor which can be directly attributable to a particular process.
These are costs relevant to specific processes.

4. Production Overheads
The overhead expenses are generally expended over all the processes involved in production. These are to
be apportioned over the various processes in an amicable manner.

Methodology of Recording/Accounting Costs

Financial Accounting Methodology is adopted for recording costs involved.

Process Accounts
A nominal account for each process is used to record all the costs relevant to a process.
Each process account is

Debited with

The Primary Direct Material Cost

Secondary Direct Material Cost

Direct Labor Cost

Direct Expenses and

Production Overheads allocated and/or apportioned to the process.

Credited with
The value of output transferred to the subsequent process or finished stocks.

Numbers, Alphabets or any word or phrase representing the process are used as suffixes/prefixes in the
names ("Process I a/c", "Process A a/c", "Refining Process A a/c",... etc.,.) to distinctly identify the
processes accounts.

Process Stock Accounts

Stocks relevant to a process are maintained in a separate stock account.
Stock accounts for input may be maintained where all the input acquired/received for a process during a
period is not used up.

Stock accounts for output may be maintained where all the output produced/completed in a process
during a period is not disposed off either by transfer to the next process or by sale.

Where the output relevant to a process is sold apart from being transferred to the next process, it
generates revenue. These revenues relevant to a process, are generally recorded using the process
account or the stock account.

Process Account Format

Dr

Process I a/c
Particulars

Quantity
(in Units)

To Direct Material
To Other Material
To Direct Labour/Labor
To Production Overheads

10,000

Amount
(in Rs)

Cr
Quantity
(in Units)

Particulars

4,00,000
50,000
1,20,000
54,000

By Process II a/c

10,000

6,24,000

Amount
(in Rs)
6,24,000

6,24,000

This is the simplest form of the process account that we see.

There is more to process costing than preparing this simple ledger account.

A Problem
To have a better understanding of the various terms that we come across in process costing let us consider
an example.
A product is finally obtained after it passes through three distinct processes. The following information is
available from the cost records.

Materials
Direct Wages
Production Overheads

Process I
Rs.

Process II
Rs.

Process III
Rs.

Total
Rs.

2,600
2,250

2,000
3,680

1,025
1,400

5,625
7,330
7,330

500 units @ Rs. 4 per unit were introduced in process I. Production overheads are absorbed as a percentage
of direct wages.
The actual output and normal loss of the respective processes are given below:

Output
(Units)

Normal loss
as a percentage
of input

Value of scrap
(per unit)

Process I
Process II
Process III

450
340
270

10%
20%
25%

Rs. 2
Rs. 4
Rs. 5

Prepare the process accounts and the other relevant accounts.

Process Accounts
A separate ledger account is used for each process.
Since the processes are named in the problem itself, we will use the same names for the process accounts.
Thus the three process accounts would be

Process I a/c

Process II a/c

Process III a/c

Direct Material and Labor/Labour Costs

There is a primary material input into the process to the extent of 500 units costing Rs. 4 per unit

Primary Material Cost chargeable to Process I = Rs. 2,000 (500 units Rs. 4/unit).

There is a secondary Direct Material input into each process which is to be debited to the relevant process
accounts.

Process I : Rs. 2,600

Process II : Rs. 2,000

Process III : Rs. 1,025

Direct Labor/Labour Costs incurred for each process are to be debited to the relevant process accounts

Process I : Rs. 2,250

Process II : Rs. 3,680

Process III : Rs. 1,400

All these costs are debited to the process account.

Apportionment of Production Overhead

Production overheads are absorbed as a % of direct wages.

Rate of Absorption of Production Overhead

Total Production Overheads

Total Direct Wages

Rs. 7,330

100

100

Rs. 7,330

= 100%

Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the Process 100%
Thus,
Production Overheads chargeable to:

Process I
Process II
Process III

Rs. 2,250 100%

Rs. 2,250

Rs. 3,680 100%

Rs. 3,680

Rs. 1,400 100%

Rs. 1,400

Process I a/c [Ignoring Losses]

If there are no losses either normal or abnormal, then the output would be equal to the quantity input i.e.
500 units and its value is the total cost incurred in the process. This output would be transferred to the next
process i.e. the Process II account. In such a case, the process account would be as follows:

Dr

Process I a/c
Particulars

Quantity
(in Units)

To Material (Primary)
To Material (Secondary)
To Direct Labour/Labor
To Production Overheads

Amount
(in Rs)

500

2,000
2,600
2,250
2,250

500

9,100

Cr
Particulars

By Process II a/c

Quantity
(in Units)

Amount
(in Rs)

500

9,100

500

9,100

However, we see that the problem data indicates that there is a 10% normal loss in the process which is to
be accounted for.

Process I a/c Working Notes

Taking the losses into consideration we need to derive figures required for preparing the process account.

Gross Input [GI]

The Quantity of Material that is input into the process. This is the number of units of material introduced
into the process (or processed in the process if specifically stated). {Here it is 500 units.}
The nature of the Secondary material introduced into the process may be such that, it may or may not
result in an increase in the number of units of material. {Here it does not.}

Normal Loss [NL]

The Quantity of Loss that is acceptable to the production process.

There may be a number of methods for calculating the loss. What we need to consider is the quantity of
loss that is accepted as normal.
{Here it would be 50 units (10% of input 500 units 10% = 50 units)

Normal Output [NO]

The Output that should be obtained if the production is carried out under normal circumstances.
[Normal
Output
=
Gross
{Here it would be 450 units (500 units 50 units)}

Input

Normal

Loss]

Actual Output [AO]

The Output that is actually achieved in the production process.
Where no information relating to this is given, we assume it to be equal to Normal Output.
{Here it is given to be 450 units}

Abnormal Loss [AL]

Where the Actual Output is less than the Normal Output we encounter abnormal loss.
["Abnormal
Loss"
=
{Here,
Normal
Output
There is no abnormal loss.}

"Normal
(450
units)

Output"

=
Actual

"Actual
Output
(450

Output"]
units),

Abnormal Gain [AG]

Where the Actual Output is more than the Normal Output we encounter abnormal gain.
["Abnormal
Gain"
=
{Here,
Normal
Output
There is no abnormal gain.}

"Actual
Output"
(450
units)
=

Actual

Total Cost [TC]

The total cost that is incurred in relation to the process.
This is the total amount of debits made to the process account.
{Here it is Rs, 9,100 (= Rs. 2,000 + Rs. 2,600 + Rs. 2,250 + Rs. 2,250)}

Normal Loss Realisation [NLR]

"Normal
Output

Output"
]
(450
units)

The amount that is realisable by the sale of normal loss units.

This will be the market value of the normal loss units or the estimated (normal) amount realisable on the
sale of normal loss..
[Normal
Loss
Realisation
=
Normal
{Here it is Rs, 100 (= 50 units Rs. 2/unit)}

Loss

In

Units

Realisable

Rate

per

unit]

The normal loss may or may not have realisable value. For example if there is loss of weight in the
production process which is accepted as normal, then the normal loss has no realisable value as it has no
physical form and is not saleable/realisable. Even where the loss is physically present its market value
may be zero (like in the case of ash)

Normal Cost [NC]

The cost that should have been incurred for the production process under standard production conditions.
It is equal to the total cost reduced by the normal loss realisation.
[Normal
Cost
=
Total
Cost
{Here it is Rs, 9,000 (= Rs. 9,100 Rs. 100)}

Normal

Loss

Realisation]

Normal Cost of Normal Production (Per Unit) [NCNP/Unit]

The Normal Cost per unit of Normal Output.
This is the most important value that we derive which would be useful in the valuation of outputs and
losses in processes.

Normal Cost of Normal Production (Per Unit)

Here it is NCNP/unit

Normal Cost
Normal Output

NC

NO
Rs. 9,000

=
=

NCNP/unit

450 units
Rs. 20/unit of output.

Principle for Valuation of Output

Since we assumed that there were no losses we can easily say that the value of output is the total cost
incurred and therefore derive its value.
When there are losses and their realisations, valuing output in this manner is not appropriate.
The principle for valuation to be followed whether it be in Financial Accounting or Cost Accounting is:

Normal Loss is valued at market price and all others i.e. "Actual

NC
NO

Output", "Abnormal Loss", "Abnormal Gain" etc., are valued at cost

i.e. the "Normal Cost of Normal Production per unit".

Value of Actual Output

The normal value of the output actually achieved.
It is given by valuing actual output units at normal cost of normal production per unit.
[Value of Actual Output = Actual Output Units Normal Cost of Normal Production per unit]
{Here it is Rs, 9,000 (= 450 units Rs. 20/unit)}
This is the method to be adopted for valuing the actual output in all situations.
Since there is no abnormal gain or abnormal loss, the value of actual output is equal to the normal cost.

Process I a/c
The data relating to costs incurred would be recorded as it is. Only the data relating to outputs would have
to be filled after making appropriate calculations and deriving the same.
The appropriate process account would be as follows:

Dr

Process I a/c
Particulars

To Material (Primary)
To Material (Secondary)
To Direct Labour/Labor
To Production Overheads

Quantity
(in Units)

Amount
(in Rs)

500

2,000
2,600
2,250
2,250

500

9,100

Cr
Particulars

By Normal Loss a/c

By Process II a/c

Quantity
(in Units)

Amount
(in Rs)

50
450

100
9,000

500

9,100

As for now, just learn that Normal loss is credited to process a/c.
We will learn about valuation and accounting treatment of normal and abnormal loss in the two pages to
follow. Please carry on.

Losses Classification
Losses are classified based on their nature into two:

Normal Loss
The loss of input/output where the occurrence is inevitable i.e. which occur on account of normal reasons
are normal losses. The magnitude of the loss is dependent on the production process in consideration.

Normal losses may be expressed in absolute terms (like say 50 units) or in proportionate terms (like say
1/10th) or in percentage terms (like say 2%).
Whether the calculation of loss should be based on the input or output is dependent on the method used
to express the loss and to some extent on the process in consideration.
In problem solving, where no specific mention is made, the loss is calculated (where it is given as a
proportion or percentage) based on gross input.

Abnormal Loss
The loss of input/output whose occurrence can be avoided i.e. which occur on account of abnormal
reasons are abnormal losses. This can also be interpreted as the magnitude of actual loss that is incurred
in excess of the normal loss.
It is given by the relation "Abnormal Loss Units" = "Normal Output Units" "Actual Output Units"

Physical Form of Loss

Based on their physical appearance/form, losses can be classified into two as

1. Loss without a physical presence

These are losses which result in the reduction in the quantity of material used with the quantity lost not
being available in a physical form.
One best example for this sort of loss is reduction in weight on account of evaporation. Where the material
used is a liquid and it is heated during processing, some of it might get evaporated during processing.

2. Loss with physical presence

These are losses which are available in a physical form, either in the same form as the material input or
some other form to which they get transformed on processing.

Normal Loss Value Illustration

Consider the following example:

1000 units of material have been input into a production process at a total cost
(material, labour/labor, overheads) of Rs. 1,00,000 i.e. @ Rs. 100 per unit. 100
units of material has been lost in the production process. These 100 loss units would
fetch a price of Rs. 1 per unit if sold in the market.

Assuming the loss to be normal

Say, the production process is such that this loss of 100 units can be considered normal (the same
proportion of loss would be have to be incurred every time the production is taken up)

In such a situation, the cost incurred for getting an output of 900 units (1000 - 100) can be interpreted in the
following ways:
1.

The cost incurred for 900 units is Rs. 90,000 (900 100)

2.

The cost incurred for 900 units is Rs. 1,00,000 being the total cost incurred.
This would result in the unit output cost working out to Rs. 111.11 (1,00,000 900)

3.

The cost incurred for 900 units is Rs. 99,900 (1,00,000 100) being the total cost incurred reduced by
the amount realised on selling the loss units.
This would result in the unit output cost working out to Rs. 111 (99,900 900)

Where the loss is normal, the last idea would be the most appropriate one for deciding the cost per unit of
output.
This can be explained by answering the question, how much would we be required to spend if we are to consider a
similar transaction immediately. If we need another lot of 900 units of this product, how many units have we to
introduce into the production process? 1,000 units for sure, since 100 units will be lost in production process for
sure (since the loss is being termed normal).
Therefore the amount to be spent would be equal to the total cost relevant to 1,000 units i.e. Rs. 1,00,000.
The loss units are capable of being sold for Rs. 1/unit, every time such loss occurs. Thereby, the cost incurred can
be set off (always) by using this realisation. Rs. 100 for 100 units.
Thus, the net cost to be incurred for getting an output of 900 units is Rs. 99,900 (Rs. 1,00,000 Rs.100)

Quantity
(Units)

Gross Input

Value
(Rs.)

Rate
(Rs./Unit)

1,000

1,00,000

100.00

Less: Normal Loss

100

100

1.00

Net Output

900

99,900

111.00

Note
The data in the rate column should always be obtained as the quotient of Value Quantity.

Normal Loss Valuation Interpretation

The following conclusions can be derived from the above illustration:

1. Value of Normal Loss

We were able to derive the Net cost incurred i.e. Rs. 99,900 or Rs. 111.00 per unit by deducting Rs. 100
from the total cost and 100 units from the gross input units.

This implies that we have valued the 100 normal loss units at Rs. 1 per unit, the rate at which it can be
sold (also called the net realisable value or net marketable rate).

Principle for valuation of normal loss

Normal Loss is valued at its market price or Net Relisable Value
This is true for valuation of "Normal Loss" in all cases.

2. Cost of Normal Loss Units

The actual cost of the units lost as normal loss is something we never consider under normal
circumstances.
Let us consider it for the purpose of learning a related idea.
The cost at which all the input units were bought is Rs. 100/unit. All the units that were lost as normal
loss would also have been bought at Rs. 100/unit. Therefore, the total cost of normal loss units would be
Rs. 10,000 (100 units Rs. 100/unit).

3. Value loss on account of Normal Loss

The loss on account of the units lost also should not be considered under normal circumstances.
Let us consider it for the purpose of learning a related idea.
The
total
cost
of
the
100
normal
loss
units
is
Rs.
The value of the 100 normal loss units (valued at net realisable value) is
Thus the net loss on account of units lost in normal loss is Rs. 9,900 (Rs. 10,000 Rs. 100).

10,000.
Rs. 100.

4. What happens to the value loss?

The value lost on account of input lost on account of normal reasons is absorbed by the normal (actual)
output.
That is the reason the rate of valuation of normal (actual) output has increased from Rs. 100/unit to Rs.
111/unit.
The increase by Rs. 11/unit is on account of the value loss of normal loss units i.e. Rs. 9,900 being
absorbed by the normal output units i.e. 900 units. (Rs. 9,900 900 units = Rs. 11/unit)

Note
In most cases, the value attributed to normal loss units is a notional value based on the estimated price
the normal loss units would fetch.
The actual sale of normal loss units may fetch a realisation that may be different from the value attributed
to it. At that stage the difference in the estimated value and actual value would result in a loss or profit

which is treated as abnormal loss or gain and is thus transferred to Costing P/L a/c in Cost Accounting
records and to Profit & Loss a/c in Financial Accounting records.
This loss or gain is different from the loss explained above.

Abnormal Loss Value Illustration

Consider the following example:

1000 units of material have been input into a production process at a total cost
(material, labour/labor, overheads) of Rs. 1,00,000 i.e. @ Rs. 100 per unit. 100
units of material has been lost in the production process. These 100 loss units would
fetch a price of Rs. 1 per unit if sold in the market.

Considering the loss as abnormal

Say the production process is such that this loss of 100 units can be considered abnormal (the loss would
not occur every time the 1,000 units of this kind are introduced into the manufacturing process).
In such a situation, the cost incurred for getting an output of 900 units (1000 - 100) can be interpreted in the
following ways:
1.

The cost incurred for 900 units is Rs. 90,000 (900 100)

2.

The cost incurred for 900 units is Rs. 1,00,000 being the total cost incurred.
This would result in the unit output cost working out to Rs. 111.11 (1,00,000 900)

3.

The cost incurred for 900 units is Rs. 99,900 (1,00,000 100) being the total cost incurred reduced by
the amount realised on selling the loss units.
This would result in the unit output cost working out to Rs. 111 (99,900 900)

Where the loss is abnormal, the first idea would be the most appropriate one for deciding the cost per unit of
output.
This can be explained by answering the question, how much would we be required to spend if we are to produce an
output of 900 units again. Since the loss is abnormal in nature, we need not assume its occurrence every time.
Thus we would introduce only 900 units the next time we need the 900 units of output.
Therefore the amount to be spent for getting an output of 900 units would be equal to the total cost relevant to
900 units i.e. Rs. 90,000.

Quantity
(Units)

Gross Input

Value
(Rs.)

Rate
(Rs./Unit)

1,000

1,00,000

100.00

Less: Abnormal Loss

100

10,000

100

Net Output

900

90,000

100

Note
The data in the rate column should always be obtained as the quotient of Value Quantity.

Abnormal Loss Valuation Interpretation

The following conclusions can be derived from the above:

1. Value of Abnormal Loss

We were able to derive the Net cost incurred i.e. Rs. 90,000 or Rs. 100.00 per unit by deducting Rs.
10,000 from the cost and 100 units from the gross input units.
This implies that we have valued the 100 abnormal loss units at Rs. 100/unit, their cost and not at the
marketable rate.
The marketable rate of abnormal loss units would be dependent on the physical condition of the units
lost/destroyed and their marketability in that state. This is a factor that would be useful in assessing the
net loss on account of abnormal loss.

Principle for Valuation of Abnormal Loss

Abnormal Loss is valued at cost or its full value
i.e at the "Normal Cost of Normal Output Per Unit"
This is true for valuation of "Abnormal Loss" in all cases.

2. Cost of Abnormal Loss Units

The cost of input per unit was Rs. 100 per unit. The cost incurred on all the units that were lost as
abnormal loss would be Rs. 10,000 (= 100 units Rs. 100/unit).
This forms the value of abnormal loss units

3. Realisations from Abnormal Loss Units

The abnormal loss units are dealt with separately, treating them as special kind of units.
Sale of damaged stock, insurance realisation, sale by reparing the damaged stock, sale by converting the
damaged stock to some other form are the various routes available for recovering the value of abnormal
loss units.
Assume the realisations through all the routes amounted to Rs. 2,500.

4. Value Loss on account of Abnormal Loss

The
cost
of
the
abnormal
loss
The
value
realised
The net loss would be Rs. 7,500 (Rs. 10,000 Rs. 2,500).

units
is

is
Rs.

Rs.

10,000.
2,500.

5. What happens to the Net Loss?

The net loss on account of units lost in abnormal loss should not be absorbed by the good stock. That is
the reason the value of abnormal loss units is eliminated and dealt with separately.
The loss being abnormal in nature is transferred to (absorbed by) the Costing Profit and Loss a/c in
Costing records and Profit and Loss a/c in Financial Accounting records.
The value of net stock would be Rs. 100 per unit and is not influenced by the loss on account of abnormal
reasons.

Normal Loss Related Quantities & Values

Quantity
(Units)

Gross Input

Value
(Rs.)

Rate
(Rs./Unit)

1,000

1,00,000

100

Less: Normal Loss

100

100

Net Output

900

99,900

111

The normal loss in quantity terms should be deducted from the gross input to obtain the Normal (net)
Output
[Normal Output = Gross Input Normal Loss Units]
The net realisable value of normal loss should be deducted from the total cost to obtain the Normal (net)
Cost.
[Normal Cost = Total Cost Normal Loss Realisation].

Caution
The rate column is always to be obtained as a quotient using the relation Value Quantity.

Normal Loss Accounting Treatment

Total Cost is debited to the Process a/c. Value of normal loss is deducted from the total cost to obtain the
normal cost.

Deducting from the debit side item is the same as Crediting the Item.
Therefore, "Normal Loss" both in terms of units and value is recorded by

Crediting the "Process " a/c and

Debiting the "Normal Loss a/c"

The units are also shown along with it in the relevant column.

Journal in the books of M/s __ for the period from ____ to _____
Date

V/R
No.

30/06/2006

Particulars

L/F

Normal Loss a/c

To Process I a/c
[For the value of normal loss.]

Dr

Dr

Debit Amount Credit Amount

(in Rs)
(in Rs)
100
100

Process I a/c
Particulars

To Input

Quantity
(in Units)

Amount
(in Rs)

1,000

1,00,000

1,000

1,00,000

Dr

Cr
Particulars

Quantity
(in Units)

By Normal Loss a/c

By Process II a/c

Amount
(in Rs)

100
900

100
99,900

1,000

1,00,000

Normal Loss a/c

Particulars

To Process I a/c

Quantity
(in Units)
100

Amount
(in Rs)

Particulars

Cr
Quantity
(in Units)

Amount
(in Rs)

100

Disposal/Sale of Normal Loss Stock

In recording the value of normal loss we can assume that we are creating an asset by the name "Normal
Loss".
The value of this asset is equal to the realisable value of normal loss. This value is an estimated (notional)
value.
The actual amount realised by sale of normal loss stock may be equal to, more than or less than its notional
value.
Thus, on disposal of normal loss stock there may be (a) Gain (b) Loss and (c) Neither Gain nor Loss

Profit on Disposal/Sale of Normal Loss Stock

There would be a gain on the sale/disposal of normal loss stock, when the actual amount realised/realisable
on its sale is more than its notional value.
Assume that of the 100 Normal Loss units, 80 units are sold for Rs. 120 (80 units Rs. 1.50/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date
xx/xx/20xx

30/06/2006

V/R
No.

Particulars

L/F

Cash/Bank/Drs a/c
To Normal Loss a/c
[For the sale of 80 units of normal loss stock
@ Rs. 1.50/unit i.e. at a value of Rs. 120.]

Dr

Normal Loss a/c

To Costing Profit & Loss a/c
[For the profit on sale of normal loss stock.]

Dr

Dr

Debit Amount Credit Amount

(in Rs)
(in Rs)

120

40

120

40

Normal Loss a/c

Particulars

Quantity
(in Units)

To Process I a/c
To Costing P&L a/c

100

100
40

100

140

20

20

To bal b/d

Dr

Amount
(in Rs)

Particulars
By Cash/Bank/Drs a/c
By bal c/d

Cr
Quantity
(in Units)

Amount
(in Rs)

80
20

120
20

100

140

Costing Profit & Loss a/c

Particulars

Amount
(in Rs)

Amount
(in Rs)

Particulars

By Normal Loss a/c

Cr
Amount
(in Rs)

Amount
(in Rs)

40

Note
1.

Profit or loss is assessed by taking only the value of 80 units into consideration.
Profit = Rs. 40 (80 units Rs. 1.50/unit) (80 units Rs. 1/unit)

2.

Since only 80 units are sold, the value of the other 20 units would be retained in the Normal Loss a/c, till
they are disposed.

3.

At the end of the accounting period, these would be shown in the balance sheet as assets or by making
any other appropriate adjustments to stock values.

Alternative [Less Preferable]

The above two journal entries can be combined into a single simple compound/combined journal entry as

Journal in the books of M/s __ for the period from ____ to _____
Date

V/R
No.

xx/xx/20xx

Particulars

L/F

Cash/Bank a/c
To Normal Loss a/c
To Costing Profit & Loss a/c
[For the sale of 80 units of normal loss stock
@ Rs. 1.50/unit i.e. at a value of Rs. 120 and
the profit thereon Rs. 40.]

Dr

Dr

Debit Amount
(in Rs)

Credit Amount
(in Rs)

120
80
40

Normal Loss a/c

Particulars

To Process I a/c

To bal b/d

Quantity
(in Units)

Amount
(in Rs)

Particulars

100

100

100

100

20

20

Cr
Quantity
(in Units)

By Cash/Bank/Drs a/c
By bal c/d

Amount
(in Rs)

80
20

80
20

100

100

The disadvantage being the absence of the information relating to profit in the normal loss account.

Dr

Costing Profit & Loss a/c

Particulars

Amount
(in Rs)

Amount
(in Rs)

Particulars

Cr
Amount
(in Rs)

By Cash/Bank/Drs a/c

Amount
(in Rs)

40

Loss on Disposal/Sale of Normal Loss Stock

There would be a loss on the disposal/sale of normal loss stock, when the actual amount realised/realisable
on its sale is less than its value.

Assume that the 100 Normal Loss units are sold for Rs. 90 (100 units Rs. 0.90/unit)

Journal in the books of M/s __ for the period from ____ to _____
Date

V/R
No.

30/06/2006

Particulars

L/F

Cash/Bank a/c
Costing Profit & Loss a/c
To Normal Loss a/c
[For the sale of 100 units of normal loss stock
@ Rs. 0.90/unit i.e. at a value of Rs. 90 and
the loss thereon i.e. Rs. 10.]

Dr

Dr

Debit Amount Credit Amount

(in Rs)
(in Rs)
90
10
100

Normal Loss a/c

Particulars

To Process I a/c

Quantity
(in Units)

Amount
(in Rs)

Particulars

100

100

100

100

Dr

Cr
Quantity
(in Units)

By Cash/Drs a/c
By Costing P&L a/c

Amount
(in Rs)

100

90
10

100

100

Costing Profit & Loss a/c

Particulars

To Normal Loss a/c

Amount
(in Rs)

Amount
(in Rs)

Particulars

Cr
Amount
(in Rs)

Amount
(in Rs)

10

Note
1.

Profit or loss is assessed by taking the value of all the 100 units into consideration since all of them are
disposed off.
Loss = Rs. 10 (100 units Rs. 0.90/unit) (100 units Rs. 1/unit)

2.

Since all the units are sold, there would be no value left in the normal loss account.

3.

At the end of the accounting period, there would be no asset (named Normal Loss) to be shown in the
balance sheet.

Alternative
The above journal entry can be broken down into two entries as

Journal in the books of M/s __ for the period from ____ to _____
Date
30/06/2006

30/06/2006

V/R
No.

Particulars

L/F

Cash/Bank/Dr a/c
To Normal Loss a/c
[For the sale of 100 units of normal loss stock
@ Rs. 0.90/unit i.e. at a value of Rs. 90.]

Dr

Costing Profit & Loss a/c

To Normal Loss a/c
[For the loss on sale of normal loss stock i.e.
Rs. 10.]

Dr

Debit Amount Credit Amount

(in Rs)
(in Rs)

90

10

90

10

The Ledger postings would be the same, whether you record a single journal entry or two entries.
There is no inconvenience in adopting this method except for the fact that it needs you to record an additional
journal entry.