Process Account - Abnormal Gain - Illustration
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 Production Overheads | 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.
- Output of process III introduced as primary material in process IV - 340 units valued at 22,535
- Rate of absorption of production overheads 70% of direct Labor/Labour cost (Calculations in Process I Working notes).
Process IV a/c posted with given data
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Process III a/c To Material To Direct Labor/Labour To Production Overheads | 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
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 |
Particulars | Quantity | Cost | Cost/Unit |
---|---|---|---|
Input Processed (IP) + Other Costs Direct Labour/Labor Production Overheads | 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 = - 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 gainAbnormal Gain Units
AGU = AOU − NOU = 270 units − 255 units = 15 units
Valuations
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 = = = 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
Adjusting approximation errorNC + VAGU = VAO
25,549 + 1,503 = 27,052
No adjustment needed.
Ledger Accounts
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Process II a/c To Material To Direct Wages To Production Overheads 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 |
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 |
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 |
Dr Cr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Process IV a/c | 270 | 27,052 |
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).