Process Account - Input, Output, Cost of Production
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 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 first process, prepare the process account and other relevant accounts.
Process Accounts
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
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Primary Material To Material To Direct Labour/Labor To Production Overheads | 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.
Apportionment of Production Overhead
Rate of Absorption of Production Overhead
= |
| ||
= |
| ||
= | 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%
Thus, Production Overheads chargeable to
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)
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Primary Material To Material To Direct Labour/Labor To Production Overheads | 500 | 2,000 1,600 3,500 2,450 |
Output has to be valued.
Output and its valuation
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
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 |
Particulars | Quantity | Cost | Cost/Unit |
---|---|---|---|
Input Processed (IP) + Other Costs Direct Labour/Labor Production Overheads | 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 = - 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
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Primary Material To Material To Direct Labour/Labor To Production Overheads | 500 | 2,000 1,600 3,500 2,450 | By Process II a/c | 500 | 9,550 |
500 | 9,550 | 500 | 9,550 |
Once all the quantities and amounts are posted, the totals of the debit and credit sides of the ledger account should agree both in quantity and value terms.
The output of Process I is transferred to Process II for being used as input of primary material in that process.