Abnormal Gain - Valuation, Accounting Treatment

Abnormal Gain

To understand what abnormal gain is and at what rate it should be valued we will base our learning on the following data:

1,000 units are input into a process at a cost of 1,00,000. Loss at 10% of input is considered normal, which is realisable at 1/unit. The actual production is 920 units.

Inputs Processed
IP = 1,000 units
Normal Loss Units
NLU = 10 % of input
= IP × 10%
= 1,000 units × 10%
= 100 units
Normal Output Units
NOU = IP − NLU
= 1,000 units − 100 units
= 900 units

Particulars	Quantity	Value	Rate
Gross Input − Normal Loss	1,000 100	1,00,000 100	100.00 1.00
Normal Output	900	99,900	111.00

Note

Data in the rate column should always be obtained as the quotient of

\frac{Value}{Quantity}

Adjusting Abnormal Gain units and their value

Actual Output Units
AOU = 920 units [Given]
Abnormal Loss/Gain [AL/AG]
Since AOU > NOU, there is abnormal gain.
Abnormal Gain Units
AGU = AOU − NOU
= 920 units − 900 units
= 20 units

Actual Output Units ≠ Normal Output Units

The actual output is 920 units whereas the normal output is 900 units only.

To arrive at the figure of actual output we need to add these 20 units to the normal output.

Particulars	Quantity	Value	Rate
Gross Input − Normal Loss	1,000 100	1,00,000 100	100.00 1.00
Normal Output + Abnormal Gain	900 20	99,900 –	111.00 –
Actual Output	920	99,900	108.60

Value adjustment

If we assume that since no additional cost is incurred for the additional units obtained as abnormal gain, we need not add any further cost to the cost column, the cost per unit of output works out to 108.60.

Normal Cost is the cost that has to be incurred under normal circumstances. It should not be influenced by abnormal natured costs/losses. Similarly it should also not be influenced by abnormal natured incomes/gains.

What would the cost per unit be in the future?

The gain is termed abnormal because, there is no guarantee that the same gain would occur in the future. If we start the operations with a similar input of 1,000 units, we would be able to achieve an output of 900 units at a Normal Cost of 99,900 i.e. @ 111/unit.

The cost per unit has reduced from 111 to 108.60 on account of abnormal gain (in output units).

Adjustment

The output of the process should be valued at the normal cost of 111 per unit and not the abnormal cost of 108.60 (the figure we arrive at if we do not make any value adjustments). To ensure this we need to make appropriate adjustments to the cost incurred to arrive at the normal cost of the actual output. This is done by adding the value of abnormal gain units to the normal cost thereby making the cost of actual output equal to the normal cost of actual output.

Particulars	Quantity	Value	Rate
Gross Input − Normal Loss	1,000 100	1,00,000 100	100.00 1.00
Normal Output + Abnormal Gain	900 20	99,900 2,220	1110 111
Actual Output	920	1,02,120	111

Rate at which the abnormal Gain is valued

Actual output units = 920 units

Normal cost of actual output

=	Actual Output Units × Normal Cost of Normal Output perUnit
=	AOU × NCNO/U
=	920 units × 111/unit
=	1,02,120

Value attributable to the abnormal gain units

=	Normal Cost of Actual Output − Normal Cost of Normal Output
=	Normal Cost of 920 units − Normal Cost of 900 units
=	1,02,120 − 99,900
=	2,220

Rate at which the abnormal gain units have been valued

=	$\frac{Total value attributed to abnormal gain}{Abnormal Gain units}$
=	$\frac{2,200}{20 units}$
=	111/unit

The abnormal gain units and the actual output units are valued at the same rate.

Abnormal Gain is valued at cost i.e. at the normal cost of normal output per unit

Abnormal Gain - Accounting Treatment

Actual Output Units
= Net Output Units + Abnormal Gain Units
= Gross Input units − Net Loss Units + Abnormal Gain Units
= (Gross Input units + Abnormal Gain Units) − Net Loss Units
Abnormal gain in quantity terms should be added to the gross input units to obtain actual Output.

Normal Cost of actual output

=	Normal cost of normal output + value of Abnormal Gain Units
=	Total Cost − Net Loss Realisation + value of Abnormal Gain Units
=	(Total Cost + value of Abnormal Gain Units) − Net Loss Realisation

Value of abnormal gain units should be added to the total cost to obtain Normal cost of actual output.

Total cost and Gross input units are debited to the process account. Adding to a debit side item implies debiting the item. Therefore, Abnormal Gain both in terms of units and value is recorded by

Debiting the Process a/c and
Crediting the Abnormal Gain a/c

Journal
Particulars		Amount (Dr)	Amount (Cr)
Process A a/c To Abnormal Gain a/c	Dr	2,220	2,220
[For the value of abnormal gain]		2,220	2,220

Process A a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Input To Abnormal Gain a/c	1,000 20	1,00,000 2,220	By Normal Loss a/c By Process B a/c	100 920	100 1,02,120
	1,020	1,02,220		1,020	1,02,220

Abnormal Gain a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
			By Process A a/c	20	2,220

Closing the Abnormal Gain a/c

Gross input = 1,000 units
Normal Loss = 100 units
Actual Output = 920 units
Actual Loss (in units)
= Gross input units − Actual Output units
= 1,000 units − 920 units
= 80 units

Process A a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Input To Abnormal Gain a/c	1,000 20		By Normal Loss a/c By Process B a/c	100 920

Normal Loss Units

The 100 units of normal loss recorded is a notional figure arrived at based on the normal behavioral pattern of the production process. Only 80 of these are physically present.

The additional 20 units recorded are supported by the 20 notional units of abnormal gain entered on the debit side of the process account. Thus in the process account the totals of the unit columns agree.

Since, these units are recorded on a fictional basis, they would not be physically available for being sold/disposed at the time of disposing the normal loss units.

Abnormal Gain Units

The abnormal gain account has as a credit certain amount of profit in value terms.

Abnormal Gain a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
			By Process A a/c	20	2,220

The credit of 20 units in the abnormal gain account does not carry any meaning.

Adjustment/Rectification

The 20 notional units in the normal loss account and the abnormal gain account are eliminated by setting them off against each other. Loss equal to the net realisable value of the notional normal loss units being set off will be absorbed by the Abnormal gain account.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Gain a/c To Normal Loss a/c	Dr	20	20
[For the fictional value of normal loss units written off by transfer to the abnormal gain account (20 units @ 1/unit i.e. 20)]		20	20

Normal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process A a/c	100	100	By Abnormal Gain a/c By Balance c/d	20 80	20 80
	100	100		100	100
To Balance b/d	80	80

The balance in the Normal Loss account represents the actual loss units that are physically available.

Closing the Abnormal Gain account

The balance in the Abnormal Gain a/c after absorbing the set off loss of notional normal loss units represents the actual gain made. The gain being abnormal in nature is transferred to the Profit and Loss a/c, thereby closing the Abnormal Gain a/c.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Gain a/c To Profit & Loss a/c	Dr	2,200	2,200
[For the abnormal gain a/c closed by transfer of balance to the profit and loss account.]		2,200	2,200

The gain is transferred to Costing Profit and Loss a/c under cost ledger accounting and to profit and loss a/c under integrated accounting.

Abnormal Gain a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Normal Loss a/c To Profit and Loss a/c	20 –	20 2,200	By Process A a/c	20	2,220
	20	2,220		20	2,220

The two entries may be combined into a single compound entry as below.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Gain a/c To Normal Loss a/c To Profit & Loss a/c	Dr	2,220	20 2,200

Author : The Edifier

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=	Net Output Units + Abnormal Gain Units
=	Gross Input units − Net Loss Units + Abnormal Gain Units
=	(Gross Input units + Abnormal Gain Units) − Net Loss Units

=	Gross input units − Actual Output units
=	1,000 units − 920 units
=	80 units

Abnormal Gain - Valuation, Accounting Treatment

Abnormal Gain

Inputs Processed

Normal Loss Units

Normal Output Units

Note

Adjusting Abnormal Gain units and their value

Actual Output Units

Abnormal Loss/Gain [AL/AG]

Abnormal Gain Units

Actual Output Units ≠ Normal Output Units

Value adjustment

What would the cost per unit be in the future?

Adjustment

Rate at which the abnormal Gain is valued

Abnormal Gain - Accounting Treatment

Closing the Abnormal Gain a/c

Normal Loss Units

Abnormal Gain Units

Adjustment/Rectification

Closing the Abnormal Gain account