Illustration - Problem

The product of a company passes through three different processes I, II and III. It is ascertained from past experience that loss in each process is incurred as under:

Process I : 2%. Process II: 5% process III : 10%

The percentage of loss in each case is computed on the basis of number of units entering the process concerned. The loss of each process has a scrap value. The loss of processes I and II is sold at 1 per unit and that of process III at 4 per unit.

The company gives you the following information for the month of October, 20_5:

2,000 units of crude material were introduced in process I at a cost of 8 per unit. Besides this the following were other expenses:

Process I Process II Process III
Materials consumed
Direct labour
Works expenses
8,000
12,000
2,000
3,000
8,000
1,000
2,000
6,000
3,000

Output
Stock
Oct 1
Oct 31
Stock Valuation
On Oct 1, per unit
Units
1,950

200
150

19
Units
1,925

300
400

27
Units
1,590

500

36.5

Stock on 31st October, 20_5 are to be valued at cost as shown by month's production accounts.

Prepare the Process Accounts.

Illustration - Solution - Process I

Process I a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Crude Material
To Material
To Direct Labour
To Works Expense
2,000 16,000
8,000
12,000
2,000
By Normal Loss
By Abnormal Loss
By Process I Stock a/c
40
10
1,950
40
194
37,766
2,000 38,000   2,000 38,000
Process I Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process I a/c
200
1,950
3,800
37,766
By Process II a/c
By Balance c/d
2,000
150
38,661
2,905
2,150 41,566 2,150 41,566
To Balance b/d 150 2,905

Notes/Assumptions

• Process Stock a/c is used for handling process outputs.

Working Notes

Input
Particulars Crude Material Material Total
Quantity Rate Value Quantity Rate Value Quantity Value
Current Period input 2,000 8 16,000 8,000 2,000 24,000
Input Processed (IP) 2,000 24,000
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour
Works Expense
2,000 24,000

12,000
2,000
Total (IP | TC)
− Normal Loss (IP × 2%)
2,000
40
38,000
40

1.00
Normal (NO | NC | NCNO/U)
− Actual Output
1,960
1,950
37,960
37,766
19.3674
Abnormal Loss(+)/Gain(−) +10 +194
• Process losses are calculated based on number of units entering the process i.e. the inputs processed.
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (1,950 × 19.3674) and Abnormal Loss (10 × 19.3674) are valued at NCNO/U
Output Stocks
Particulars Quantity Cost Cost/Unit
Opening Stock
+ Current Period Output
200
1,950
3,800
37,766
19
19.3674
Total Stock
− Closing Stock
2,150
150
41,566
2,905
19.3330
19.3674
Transfer to Process II 2,000 38,661 19.3305
Closing Stock Valuation Rates
FIFO method
LIFO method
Average method

19.3674
19
19.3330
• Closing stocks are to be valued at cost as shown by current months production acccount i.e. at the current period rate of 19.3674.

Detailed Working

• Primary Material is the Crude Materail introduced into the process.
• Secondary Material results in increase in quantity of input.
• Normal Loss Units

 NLU = 2% of input processed = IP × 2% = 2,000 units × 2% = 40 units
• Normal Output Units

 NOU = IP − NLU = 2,000 units − 40 units = 1,960 units
• Actual Output Units

The Output that is actually obtained in the process.

AOU = 1,950 units (given)

• Abnormal Loss or Gain

Since NOU > AOU, there is abnormal loss

• Total Cost

 TC = 24,000 + 12,000 + 2,000 = 38,000
• Normal Loss Realisation Rate per unit

NLRR/U = 1/unit

• Normal Loss Realisation

 NLR = NLU × NLRR/U = 40 × 1/unit = 40
• Normal Cost

 NC = TC × NLR = 38,000 − 40 = 37,960
• Normal Cost of Normal Output per unit

 NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$ = $\frac{\mathrm{37,960}}{\mathrm{1,960}}$ = 19.3674/unit
• Value of Actual Output

 VAO = AO × NCNO/Unit = 1,950 units × 19.3674/unit = 37,766
• Value of Abnormal Loss

 VAL = ALU × NCNO/Unit = 10 units × 19.3674/unit = 194

No Process Stock a/c

Process I a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Crude Material
To Material
To Direct Labour
To Works Expense
200
2,000
3,800
16,000
8,000
12,000
2,000
By Normal Loss
By Abnormal Loss
By Process II a/c
By Balance c/d
40
10
2,000
150
40
194
38,661
2,905
2,200 41,800   2,200 41,800
To Balance b/d 150 2,905

Process Stock a/c used only for recording closing stock

Process I a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I Stock a/c
To Crude Material
To Material
To Direct Labour
To Works Expense
200
2,000
3,800
16,000
8,000
12,000
2,000
By Normal Loss
By Abnormal Loss
By Process II a/c
By Process I Stock a/c
40
10
2,000
150
40
194
38,661
2,905
2,200 41,800   2,200 41,800
Process I Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process I a/c
200
150
3,800
2,905
By Process I a/c
By Balance c/d
200
150
3,800
2,905
350 6,705 350 6,705
To Balance b/d 150 2,905

Illustration - Solution - Process II

Process II a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I Stock a/c
To Material
To Direct Labour
To Works Expense
To Abnormal Gain
1,950

73
37,766
3,000
8,000
1,000
1,958
By Normal Loss
By Process II Stock a/c
98
1,925
98
51,626
2,023 51,724   2,023 51,724
Process II Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process II a/c
300
1,925
8,100
51,626
By Process III a/c
By Balance c/d
1,825
400
48,999
10,727
2,225 59,726 2,225 59,726
To Balance b/d 400 10,727

Notes/Assumptions

• Process Stock a/c is used for handling process outputs. Thus the input receved from Process I is from Process I Stock a/c and output of Process II is transferred to Process II Stock a/c

Working Notes

Input
Particulars Crude Material Material Total
Quantity Rate Value Quantity Rate Value Quantity Value
Current Period input 1,950 19.3674 37,766 3,000 1,950 40,766
Input Processed (IP) 1,950 40,766
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour
Works Expense
1,950 40,766

8,000
1,000
Total (IP | TC)
− Normal Loss (IP × 5%)
1,950
98
49,766
98

1.00
Normal (NO | NC | NCNO/U)
− Actual Output
1,852
1,925
49,668
51,626
26.8186
Abnormal Loss(+)/Gain(−) −73 −1,958
• Process losses are calculated based on number of units entering the process i.e. the inputs processed.
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (1,925 × 26.8186) and Abnormal Loss (73 × 26.8186) are valued at NCNO/U
Output Stocks
Particulars Quantity Cost Cost/Unit
Opening Stock
+ Current Period Output
300
1,925
8,100
51,626
27
26.8186
Total Stock
− Closing Stock
2,225
400
59,726
10,727
26.8432
26.8186
Transfer to Process IV 1,825 48,999 26.8488
Closing Stock Valuation Rates
FIFO method
LIFO method
Average method

26.8186
27
26.8432
• Closing stocks are to be valued at cost as shown by current months production acccount i.e. at the current period rate of 26.8186.

Detailed Working

• Primary Material is the output of Process I received as in Input.
• Secondary Material does not result in increase in quantity of input.
• Normal Loss Units

 NLU = 5% of input processed = IP × 5% = 1,950 units × 5% = 98 units
• Normal Output Units

 NOU = IP − NLU = 1,950 units − 98 units = 1,852 units
• Actual Output Units

The Output that is actually obtained in the process.

AOU = 1,925 units (given)

• Abnormal Loss or Gain

Since NOU < AOU, there is abnormal gain
• Abnormal Gain Units

 AGU = AOU − NOU = 1,925 units − 1,852 units = 73 units

• Total Cost

 TC = 40,766 + 7,000 + 1,000 = 49,766
• Normal Loss Realisation Rate per unit

NLRR/U = 1/unit

• Normal Loss Realisation

 NLR = NLU × NLRR/U = 98 × 1/unit = 98
• Normal Cost

 NC = TC × NLR = 49,766 − 98 = 49,668
• Normal Cost of Normal Output per unit

 NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$ = $\frac{\mathrm{49,668}}{\mathrm{1,852}}$ = 26.8186/unit
• Value of Actual Output

 VAO = AO × NCNO/Unit = 1,925 units × 26.8186/unit = 51,626
• Value of Abnormal Gain

 VAG = AGU × NCNO/Unit = 73 units × 26.8186/unit = 1,958

No Process Stock a/c

Process II a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process I a/c
To Material
To Direct Labour
To Works Expense
To Abnormal Gain
300
1,950

73
8,100
37,766
3,000
8,000
1,000
1,958
By Normal Loss
By Process III a/c
By Balance c/d
98
1,825
400
98
48,999
10,727
2,323 49,824   2,323 49,824
To Balance b/d 400 10,727

Assumed that Process I a/c also does not have a stock a/c and as such output of process I transferred to Process II is from Process I a/c itself.

Process Stock a/c used only for recording closing stock

Process II a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II Stock a/c
To Process I Stock a/c
To Material
To Direct Labour
To Works Expense
To Abnormal Gain
300
1,950

73
8,100
37,766
3,000
8,000
1,000
1,958
By Normal Loss
By Process III a/c
By Process II Stock a/c
98
1,825
400
98
48,999
10,727
2,323 49,824   2,323 49,824
Process II Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process II a/c
300
400
8,100
10,727
By Process II a/c
By Balance c/d
300
400
8,100
10,727
700 18,827 700 18,827
To Balance b/d 400 10,727

Assumed that Process I a/c has a stock a/c and as such output of process I transferred to Process II is from Process I Stock a/c.

Illustration - Solution - Process III

Process III a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II Stock a/c
To Material
To Direct Labour
To Works Expense
1,925

51,626
2,000
6,000
3,000
By Normal Loss
By Abnormal Loss
By Process III Stock a/c
193
142
1,590
772
5,071
56,783
1,925 62,626   1,925 62,626
Process III Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process III a/c
500
1,590
18,250
56,783
By Finished Stock a/c 2,090 75,033
2,090 75,033 2,090 75,033

Notes/Assumptions

• Process Stock a/c is used for handling process outputs.

Working Notes

Input
Particulars Crude Material Material Total
Quantity Rate Value Quantity Rate Value Quantity Value
Current Period input 1,925 26.8188 51,626 2,000 1,925 53,626
Input Processed (IP) 1,925 53,626
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour
Works Expense
1,925 53,626

6,000
3,000
Total (IP | TC)
− Normal Loss (IP × 10%)
1,925
193
62,626
772

4.00
Normal (NO | NC | NCNO/U)
− Actual Output
1,732
1,590
61,854
56,783
35.7125
Abnormal Loss(+)/Gain(−) +142 +5,071
• Process losses are calculated based on number of units entering the process i.e. the inputs processed.
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (1,590 × 35.7125) and Abnormal Loss (142 × 35.7125) are valued at NCNO/U
Output Stocks
Particulars Quantity Cost Cost/Unit
Opening Stock
+ Current Period Output
500
1,590
18,250
56,783
36.5
35.7125
Total Stock
− Closing Stock
2,090
75,033
35.9010
Transfer to Finished Stock 2,090 75,033 35.9010

Detailed Working

• Primary Material is the output of Process II received as input.
• Secondary Material results in increase in quantity of input.
• Normal Loss Units

 NLU = 10% of input processed = IP × 10% = 1,925 units × 2% = 193 units
• Normal Output Units

 NOU = IP − NLU = 1,925 units − 193 units = 1,732 units
• Actual Output Units

The Output that is actually obtained in the process.

AOU = 1,590 units (given)

• Abnormal Loss or Gain

Since NOU > AOU, there is abnormal loss

• Total Cost

 TC = 53,626 + 6,000 + 3,000 = 62,626
• Normal Loss Realisation Rate per unit

NLRR/U = 4/unit

• Normal Loss Realisation

 NLR = NLU × NLRR/U = 193 × 5/unit = 772
• Normal Cost

 NC = TC × NLR = 62,626 − 772 = 61,854
• Normal Cost of Normal Output per unit

 NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$ = $\frac{\mathrm{61,854}}{\mathrm{1,732}}$ = 35.7125/unit
• Value of Actual Output

 VAO = AO × NCNO/Unit = 1,590 units × 35.7125/unit = 56,783
• Value of Abnormal Loss

 VAL = ALU × NCNO/Unit = 142 units × 35.7125/unit = 5,071

No Process Stock a/c

Process III a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d
To Process II Stock a/c
To Material
To Direct Labour
To Works Expense
500
1,925
18,250
51,626
2,000
6,000
3,000
By Normal Loss
By Abnormal Loss
By Finished Stock a/c
193
142
2,090
772
5,071
75,033
2,425 80,876   2,425 80,876

Process Stock a/c used only for recording closing stock

Process III a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process III Stock a/c
To Process II Stock a/c
To Material
To Direct Labour
To Works Expense
500
1,925
18,250
51,626
2,000
6,000
3,000
By Normal Loss
By Abnormal Loss
By Finished Stock a/c
193
142
2,090
772
5,071
75,033
2,425 80,876   2,425 80,876
Process III Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Balance b/d 500 18,250 By Process III a/c 500 18,250
500 18,250 500 18,250
Author : The Edifier