Accounting · Process Costing
'PetroChem India' operates a multi-stage crude oil cracking unit. In the distillation stage, some volume loss due to evaporation is unavoidable (Normal Loss). In the purification stage, a major machine breakdown caused an unexpected and significant loss of output (Abnormal Loss). Which of the following correctly classifies the two types of losses, and what is the accounting effect of the Normal Loss on the unit cost of the good output?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Classification: Joint Product (Distillation), By-Product (Purification). Accounting Effect of Normal Loss: Results in a credit to the Work-in-Progress (WIP) account.
- 2Classification: Normal Loss (Distillation), Abnormal Loss (Purification). Accounting Effect of Normal Loss: The total cost of the process is spread over the remaining good units, increasing the cost per unit of the good outp ut.✓
- 3Classification: Abnormal Loss (Distillation), Normal Loss (Purification). Accounting Effect of Normal Loss: Charged directly to the Costing Profit and Loss Account.
- 4Classification: Normal Loss (Distillation), Abnormal Gain (Purification). Accounting Effect of Normal Loss: Decreases the total cost of production.
Correct answer
Classification: Normal Loss (Distillation), Abnormal Loss (Purification). Accounting Effect of Normal Loss: The total cost of the process is spread over the remaining good units, increasing the cost per unit of the good outp ut.
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