Question # 1 When a process costing system is used, explain how the normal and abnormal spoilages information influenceson: a) product costing and inventory valuation b) decision making and...

When a process costing system is used, explain how the normal and abnormal spoilages
information influences on:
 product costing and inventory valuation
 decision making and performance management
Process costing is a method of costing in which we accumulate costs at each steps and
then apportion it to the units produced at each step. Process costing deals with the following
type of situations in the below mentioned manner:-
 Accounting for normal and abnormal loss.
 Accounting for abnormal gain.
Abnormal loss is defined as loss caused by unexpected abnormal conditions. Unlike
normal loss abnormal loss is avoidable. In other worked abnormal losses can be defined as the
amount of loss in excess of expected loss. Expected loss is the amount of loss which is
unavoidable and is bound to happen. Normal loss is determined on the basis of past experience
and industry norms.
Abnormal loss is an unusual situation and it should not affect the cost of production,
therefore abnormal loss is directly credited to the process so that the normal cost of production
does not get affected. Abnormal loss is then transferred to abnormal loss account from where we
add the amount incurred on it to sell it less the amount realized from the sale of scrap of
abnormal loss units.
 Abnormal loss = Actual loss > Normal loss.
Abnormal loss does not impact the value of ending inventory. Abnormal loss is caused
due to the following factors machine breakdown, Plant break down, Power grid failure etc.
Abnormal loss can be avoided if proper measures are adopted on timely basis such as timely
maintenance, replacing the machine plant at the end of their theoretical life.
Abnormal gain can be defined as the situation where actual loss is less than the expected
loss. Abnormal loss is opposite to abnormal gain, abnormal gain is debited to the process
account. The real gain that occurred due the abnormal gain is transferred to the costing profit
and loss account which is computed by reducing the amount of sale...