Process Account - Abnormal Gain - Illustration

Page 10

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.

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
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

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
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 = NCNO
  • 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

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 = NCNO
    = 25,549255 units
    = 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 error

    NC + VAGU = VAO
    25,549 + 1,503 = 27,052
    No adjustment needed.

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 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
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
Page 12 »