# Illustration (Problem)

A product is finally obtained after it passes through four distinct processes. The following information is available from the cost records.

Process I Process II Process III Process IV Total
Materials
Direct Labor/Labour
1,600
3,500
2,600
2,250
2,000
3,680
1,025
1,420
7,225
10,850
7,595

500 units @ 4 per unit were introduced in process I. Production overheads are absorbed as a percentage of direct wages.

The actual output and normal loss of the respective processes are given below:

Output
(Units)
Normal loss
as a percentage
of input
Value of scrap
(per unit)
Process I
Process II
Process III
Process IV
500
450
340
270

10%
20%
25%

2
3
5

For the third process, prepare the process account and other relevant accounts.

# Process IV a/c posted with given data

The expenses and quantitative values as far as they can be obtained straight away from the given data are posted into the ledger.
Process IV a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process III a/c
To Material
To Direct Labor/Labour
340
22,535
1,025
1,420
994

Production Overheads chargeable to Process IV

 = Direct Labor/Labour cost of Process IV × Production overheads as a % of Direct Labor/Labour cost = 1,420 × 70% = 994

The quantity and values relating to output and other credits to the process account are to be derived through calculations.

# Process IV a/c - Working Notes to derive the required data

Input
Particulars Primary Secondary Total
Quantity Rate Value Quantity Rate Value Quantity Value
Current Period input 340 66.28 22,535 1,025 340 23,560
Input Processed (IP) 340 23,560
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour/Labor
340 23,560

1,420
994
Total (IP | TC)
− Normal Loss (IP × 10%)
340
85
25,974
425

5.00
Normal (NO | NC | NCNO/U)
− Actual Output
255
270
25,549
27,052
100.1922
Abnormal Loss(+)/Gain(−) −15 −1,503
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (270 × 100.1922), Abnormal Gain (15 × 100.1922) are all valued at NCNO/U

## Detailed Working

• Primary Material is output of Process III introduced into the process.
• The Secondary material introduced into the process does not result in an increase in the number of units of material.
• ## Normal Loss Units

 NLU = 25% of input = IP × 25% = 340 units × 25% = 85 units
• ## Normal Output Units

 NOU = IP − NLU = 340 units − 85 units = 255 units
• # Actual Output Units

The Output that is actually obtained in the process.

AOU = 270 units

• # Abnormal Loss or Gain

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

 AGU = AOU − NOU = 270 units − 255 units = 15 units

• ## Total Cost

 TC = 22,535 + 1,025 + 1,420 + 994 = 25,974
• ## Normal Loss Realisable Rate per unit

NLRR/U = 5/unit

• ## Normal Loss Realisation

 NLR = NLU × RR/U = 85 units × 5/unit = 425
• ## Normal Cost

 NC = TC − NLR = 25,974 − 425 = 25,549
• ## NCNO/Unit = Normal Cost of Normal Output per unit

 NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$ = = 100.1922/unit
• ## Value of Actual Output

 VAO = AOU × NCNO/U = 270 units × 100.1922/unit = 27,052
• ## Value of Abnormal Gain Units

 VAGU = AGU × NCNO/U = 15 units × 100.1922/unit = 1,503

## Note

NC + VAGU = VAO
25,549 + 1,503 = 27,052

# Ledger Accounts

The values obtained from the calculations are posted in the process account to complete it.
Process IV a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c
To Material
To Direct Wages
To Abnormal Gain a/c
340

15
22,535
1,025
1,420
994
1,503
By Normal Loss a/c
By Finished Goods a/c
85
270
425
27,052
355 27,477   355 27,477
Normal Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c
To Process III a/c
To Process IV a/c
50
90
85
100
270
425
By Abnormal Gain a/c

15
75

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 (?)
15
75
1,428
By Process IV a/c

15
1,503

15 1,503   15 1,503
Finished Goods a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process IV a/c 270
27,052

Profit and Loss a/c
Dr Cr
Particulars Amount Particulars Amount
By Abnormal Gain a/c

1,478

# Note

• Assumed that the same Normal loss a/c and Abnormal Gain a/c are used for all processes.

In problem solving we show the Normal Loss a/c, Abnormal Loss a/c and Abnormal Gain a/c towards the end i.e. after presenting all the Process account.

• Ascertain all the values used on the credit side of the process account through the Working Notes even in cases where you can derive them as balancing figures.
• ### Disposal of Finished Goods

Since no detail relating to the disposal of Finished goods is given, we assume that they remain in stock.
• ### Disposal of Normal Loss Stock

Since no detail relating to the disposal of Normal Loss Stock is given, we assume that they are unsold.

The value of normal loss stock represents an unrealised asset (though of a very small value).

• ### Closing Abnormal Gain a/c

Abnormal Gain a/c is closed by transferring its balance to the Profit and Loss a/c (integrated accounting) or Costing Profit and Loss a/c (Cost ledger accounting).
Author : The Edifier