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 Wages
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 III 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 III a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c
To Material
To Direct Wages
450
15,875
2,000
3,680
2,576

Production Overheads chargeable to Process III

 = Direct Wages of Process III × Production overheads as a % of Direct Wages = 3,680 × 70% = 2,576

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

Process III 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 450 35.28 15,875 2,000 450 17,875
Input Processed (IP) 450 17,875
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour/Labor
450 17,875

3,680
2,576
Total (IP | TC)
− Normal Loss (IP × 10%)
450
90
24,131
270

3.00
Normal (NO | NC | NCNO/U)
− Actual Output
360
340
23,861
22,535
66.2806
Abnormal Loss(+)/Gain(−) 20 1,326
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (340 × 66.2806), Abnormal Loss (20 × 66.2806) are all valued at NCNO/U

Detailed Working

• Primary Material is output of Process II 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 = 20% of input NLU = GIU × 20% = 450 units × 20% = 90 units
• Normal Output Units

 NOU = IP − NLU = 450 units − 90 units = 360 units
• Actual Output Units

The Output that is actually obtained in the process.

AOU = 340 units (given)

• Abnormal Loss or Gain

Since AOU < NOU, there is abnormal loss
• Abnormal Loss Units

 ALU = NOU − AOU = 360 units − 340 units = 20 units

• Total Cost

The total amount of debits made to the process account.

 TC = 15,875 + 2,000 + 3,680 + 2,576 = 24,131
• Normal Loss Realisable Rate Per unit

The rate at which the normal loss units can be sold.

NLRR/U = 3/unit

• Normal Loss Realisation

 NLR = NLU × NLRR/U = 90 units × 3/unit = 270
• Normal Cost

 NC = TC − NLR = 24,131 − 270 = 23,861
• Normal Cost of Normal Output per unit

 NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$ = = 66.2806/unit ( $\frac{23,861}{360}/\mathrm{unit}$ )
• Value of Actual Output

 VAO = AOU × NCNO/U = 340 units × 66.2806/unit = 22,535
• Value of Abnormal Loss Units

 VALU = ALU × NCNO/U = 20 units × 66.2806/unit = 1,326

Note

NC − VALU = VAO
23,861 − 1,326 = 22,535

Ledger Accounts

The values obtained from the calculations are posted in the process account to complete it.
Process III a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c
To Material
To Direct Wages
450
15,875
2,000
3,680
2,576
By Normal Loss a/c
By Abnormal Loss a/c
By Process IV a/c
90
20
340
270
1,326
22,535
450 23,861   450 23,861
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
50
90
100
270

Abnormal Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process III a/c
20 1,326

Note

• Assumed that the same Normal loss a/c and Abnormal Loss 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 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).

• Disposal of Abnormal Loss Stock

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

The value of abnormal loss stock represents an unrealised asset.

Author : The Edifier