ACCA Applied Knowledge · Management Accounting · Cost accounting methods
In a process costing system, normal loss arises in a process and has a scrap value of $2 per kg. How should the scrap value of normal loss be treated in the process account?
The scrap value of normal loss is credited to the process account, with the debit going to a scrap account. This reduces the total cost to be spread over good units, because normal loss is an expected part of the process cost.
- ACredited to the process account as a reduction in process costsCorrect
- BDebited to the process account as an additional cost
- CCredited to the profit or loss account as other income
- DIgnored in the process account and recorded only when the scrap is sold
Explanation
Normal loss is an expected cost of the process. Its scrap value is debited to a scrap (or cash) account and credited to the process account, which reduces the cost to be shared over good output. Treating it as other income would overstate unit costs, and ignoring it would do the same.
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