Management Accounting · Cost accounting methods

Process Costing: Normal Loss, Abnormal Loss and Abnormal Gain

Updated 11 October 2026 · Fact-checked

Process costing spreads the cost of a process over the units it produces. Normal loss is expected and its cost stays in good units. Abnormal loss and abnormal gain are differences from normal loss, valued at the same cost per unit as good output. Find the cost per unit, then value each item.

Understand Process Costing: Losses and Gains

Process costing is used when output is continuous and units are identical, such as chemicals, food or paint. You collect costs for each process, then divide them over the units produced.

Some input is lost in most processes through evaporation, waste or spoilage. Normal loss is the loss you expect under normal operating conditions. It is not treated as a separate cost. Its cost is absorbed by the good units. If the lost units can be sold as scrap, the scrap value is credited to the process account, which reduces the cost of good output.

Abnormal loss happens when actual loss is higher than normal loss. Abnormal gain happens when actual loss is lower than normal loss. Both are treated as the difference between actual and expected output. They are valued at the same cost per unit as good units, because the cost per unit is calculated on expected output, not actual output.

Abnormal loss is not a cost of normal production, so it is taken out of the process account and written off to an abnormal loss account. Any scrap value of abnormal loss units is credited to that account. The net balance goes to the statement of profit or loss. Abnormal gain works the other way round. It is a credit in the process account and a debit in the abnormal gain account, and the scrap income you did not receive on those units is deducted from the gain.

The key idea: normal loss is a cost of doing business and is absorbed. Abnormal items are exceptions, kept separate so management can see and control them.

Key formulas to remember

Normal loss units: Normal loss = normal loss % × units input; Apply the percentage to input, unless the question says it applies to something else. Check the wording.
Expected output: Expected output = input units − normal loss units; This is the denominator for cost per unit.
Cost per unit: Cost per unit = (total process costs − scrap value of normal loss) ÷ expected output units; Only the scrap value of normal loss is deducted here. Do not deduct abnormal loss scrap.
Abnormal loss or gain units: Abnormal loss = expected output − actual output (if positive). Abnormal gain = actual output − expected output (if positive); Compare actual good output with expected output.
Valuing abnormal items: Value = abnormal units × cost per unit; Abnormal loss account: debit at this value, credit scrap proceeds. Abnormal gain account: credit at this value, debit scrap lost.
Normal loss value: Normal loss value = normal loss units × scrap value per unit; Debit scrap account or cash, credit process account. If there is no scrap value, the value is nil.

How to solve Process Costing: Losses and Gains questions

Use this order for any question on process losses. A units-first approach keeps the numbers tidy.

1Write the input units and the actual output units. Add any opening work-in-progress only if the question gives it. At this level, most questions have none.
2Calculate normal loss units from the stated percentage of input.
3Calculate expected output: input less normal loss.
4Compare actual output with expected output. A shortfall is abnormal loss. An excess is abnormal gain.
5Calculate cost per unit: (total costs − normal loss scrap value) ÷ expected output.
6Value good output at cost per unit. Value abnormal loss or gain at the same cost per unit.
7Write the process account with units and values. Debits are costs and any abnormal gain. Credits are normal loss scrap, abnormal loss, and output. The account must balance.
8Calculate the abnormal loss or gain account if asked. Include scrap proceeds on the abnormal units.

Quickest way: Units, then one rate, then multiply

When to use it: Use this in the objective test when you need only a cost per unit or the value of an abnormal item.

Compute expected output = input × (1 − normal loss %).
Compute net cost = total cost − (normal loss units × scrap price).
Divide net cost by expected output to get the rate.
Multiply the rate by actual good output, or by the abnormal units, whichever the question asks.
Check: good output value + abnormal loss value + normal loss scrap should equal total costs, with abnormal gain adjusting the other way.

Common mistakes in Process Costing: Losses and Gains

Dividing costs by input units instead of expected output units.
Input is the first number in the question and it looks like the obvious divisor.
Fix: Always subtract normal loss first. The divisor is expected output.
Deducting scrap value of abnormal loss when finding cost per unit.
Students deduct all scrap income because it is all scrap.
Fix: Only the scrap value of normal loss reduces the costs in the rate. Abnormal loss scrap goes to the abnormal loss account.
Valuing normal loss at cost per unit rather than at scrap value.
Students value every unit leaving the process at the same rate.
Fix: Normal loss is credited at scrap value per unit, or nil if it has no scrap value.
Putting abnormal gain on the wrong side of the account.
It sounds like a good thing, so students treat it like an extra cost.
Fix: Abnormal gain is extra units in the process account, so it is a debit there. The abnormal gain account is credited.
Applying the normal loss percentage to output.
Students skip reading the base. Some questions state the loss as a percentage of input.
Fix: Use input unless the question says otherwise. Check by confirming expected output makes sense.
Not separating abnormal items and leaving them in good output cost.
Students find actual output cost by dividing total cost by actual units.
Fix: Keep the rate based on expected output, then value abnormal loss or gain separately.

Worked examples

Example 1

A process has 1,000 litres of input costing $9,000 in total. Normal loss is 10% of input and loss units can be sold for $2 per litre. Actual output is 850 litres. Calculate the cost per litre and the value of the abnormal loss.

Show the solution

Normal loss = 10% × 1,000 = 100 litres.
Expected output = 1,000 − 100 = 900 litres.
Scrap value of normal loss = 100 × $2 = $200.
Net cost = $9,000 − $200 = $8,800.
Cost per litre = $8,800 ÷ 900 = $9.7778 (approx.).
Abnormal loss = 900 − 850 = 50 litres.
Value of abnormal loss = 50 × $9.7778 = $488.89 (approx.).
Scrap on abnormal loss = 50 × $2 = $100, so the net abnormal loss written off = $388.89 (approx.).
Check: good output 850 × $9.7778 = $8,311.11. Add $488.89 and $200 gives $9,000.

Answer: Cost per litre is about $9.78. Abnormal loss is 50 litres valued at about $488.89, or about $388.89 after its $100 scrap proceeds.

Example 2

A process has input of 2,000 kg costing $17,100 in total. Normal loss is 5% of input with no scrap value. Actual output is 1,950 kg. Calculate the cost per kg, the abnormal gain and its value.

Show the solution

Normal loss = 5% × 2,000 = 100 kg.
Expected output = 2,000 − 100 = 1,900 kg.
Normal loss scrap value = nil, so net cost is $17,100.
Cost per kg = $17,100 ÷ 1,900 = $9.
Actual output 1,950 kg exceeds expected output 1,900 kg, so abnormal gain = 50 kg.
Value of abnormal gain = 50 × $9 = $450.
Check: good output 1,950 × $9 = $17,550. This equals total cost $17,100 plus abnormal gain $450.

Answer: Cost per kg is $9. There is an abnormal gain of 50 kg valued at $450.

Exam tips

Do the units line first. Most wrong answers start from a wrong expected output.
Read the base of the loss percentage: input, or something else. Then read whether the lost units have scrap value.
In multiple-response questions on accounting entries, check which side each abnormal item sits on before you select.
In number-entry questions, keep full decimals in your working until the end, then round as instructed. The system may be strict about rounding.
Use the check that good output, abnormal loss and normal loss scrap value add up to total costs, adjusting for any abnormal gain.

Practice questions from Cost accounting methods

Process Costing: Losses and Gains in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Process Costing: Losses and Gains: frequently asked questions

What is the difference between normal loss and abnormal loss?

Normal loss is the loss you expect from the process, and its cost is absorbed by good units. Abnormal loss is any loss above that expected level. It is valued separately and written off.

How do I account for abnormal gain in process costing?

Abnormal gain is output above expected output. Debit it in the process account at cost per unit and credit the abnormal gain account. Debit the abnormal gain account with the scrap income lost on those units.

Is scrap value deducted from process costs?

Yes, the scrap value of normal loss is credited to the process account. This lowers the net cost spread over expected output. Scrap from abnormal loss is not deducted in the rate.

Why is cost per unit based on expected output?

Normal loss is part of the process, so its cost must be carried by the good units. Using expected output keeps the rate the same whether actual loss was high or low.