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 Labour/Labor
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 first process, prepare the process account and other relevant accounts.

Process Accounts

A separate ledger account is used for each process.

Since the processes are named in the problem itself, we will use the same names for the process accounts.

Thus the four process accounts would be

• Process I a/c
• Process II a/c
• Process III a/c
• Process IV a/c

Direct Material and Labor/Labour Costs

• There is a primary material input into the process to the extent of 500 units costing 4 per unit

Primary Material Cost chargeable to

 Process I, 500 units × 4/unit = 2,000
• There is a secondary Direct Material input into each process which is to be debited to the relevant process accounts.

Material Cost chargeable to

 Process I = 1,600 Process II = 2,600 Process III = 2,000 Process IV = 1,025
• Direct Labor/Labour Costs incurred for each process are to be debited to the relevant process accounts

Direct Labor/Labour Cost chargeable to

 Process I = 3,500 Process II = 2,250 Process III = 3,680 Process IV = 1,400

All these costs are debited to the relevant process account.

Process I 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 I a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Primary Material
To Material
To Direct Labour/Labor
500
2,000
1,600
3,500

The cost/expenditure in the name of Production overheads is not readily available from the given data and has to be obtained through calculations.

Production overheads are absorbed as a % of direct wages.

Rate of Absorption of Production Overhead

=
 Total Production Overheads Total Direct Labour/Labor Cost
× 100
=
 7,595 10,850
× 100
= 0.7 × 100
= 70% of Direct Labour/Labor Cost

⇒ Production overheads are 70% of Direct Labour/Labor Cost.

∴ Production overheads Chargeable to a process

= Direct Labour/Labor Cost of the Process × 70%

 Process I 3,500 × 70% = 2,450 Process II 2,250 × 70% = 1,575 Process III 3,680 × 70% = 2,576 Process IV 1,420 × 70% = 994 7,595

Process I a/c (after posting production overheads)

Process I a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Primary Material
To Material
To Direct Labour/Labor
500
2,000
1,600
3,500
2,450

Output has to be valued.

Output and its valuation

Both in quantitative terms as well as value terms, we can say that we input various resources like material, labour/labor and others into the process to obtain the output. Output can be physically identified and measured in quantitative terms. But the value is something to be assessed and derived.

In valuing the output, we can consider the output to be an asset that is being built and apply the principles for valuation of an asset in its valuation.

Principle for Valuation of an Asset

The value of an asset includes all the expenses incurred before bringing the asset into usable condition.

All the expenses incurred in relation to the process go into the value of the output of the process which is the asset being built.

Where there are no losses and stocks (opening or closing),

• Total value of the output = Total expenditure incurred in the process
• Output units = input units
• Cost/Unit of output = Total value of output/Output units

Process I 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 500 4 2,000 1,600 500 3,600
Input Processed (IP) 500 3,600
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour/Labor
500 3,600

3,500
2,450
Total (IP | TC) 500 9,550
Normal (NO | NC | NCNO/U)
− Actual Output
500
500
9,550
9,550
19.50
• Since there are no losses Normal Output is total output and normal cost is total cost
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (500 × 19.50) is valued at NCNO/U

Detailed Working

• Primary Material is input introduced into the process.
• The Secondary material introduced into the process may or may not result in an increase in the number of units of material. Here it does not
• Normal Output

Since there are no losses and stocks, the input processed is the normal and actual output.  NO = IP = 500 units
• Normal Cost

Since there are no losses and stocks, normal cost is the total cost that is incurred in relation to the process.  NC = 2,000 + 1,600 + 3,500 + 2,450 = 9,550

Can be known from the debits made to the process account.

• Normla Cost of Normal Output per unit

The Cost per unit at which the output from the process is obtained normally.

NCNO/Unit =  NC NO
=  9,550 500 units
= 19.50/unit

This is the most important value that we derive which would form the basis for other valuations.

• Value of Output

The value of the output obtained which is given by valuing output units at cost of output per unit.

 VO = AO × NCNO/U = 500 units × 19.50/unit = 9,550

Where there are no losses and stocks the value of output would be the normal cost incurred in the process.

 VO = NC = 9,550

Process I a/c

The process account along with the values obtained through calculations

Process I a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Primary Material
To Material
To Direct Labour/Labor