Process Account - Normal/Abnormal Loss - 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 Wages 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 II introduced as primary material in process III - 450 units valued at 15,875
- Rate of absorption of production overheads 70% of direct wages (Calculations in Process I Working notes).
Process III a/c posted with given data
DrCr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Process II a/c To Material To Direct Wages To Production Overheads | 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
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 |
Particulars | Quantity | Cost | Cost/Unit |
---|---|---|---|
Input Processed (IP) + Other Costs Direct Labour/Labor Production Overheads | 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 = - 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 lossAbnormal Loss Units
ALU = NOU − AOU = 360 units − 340 units = 20 units
Valuations
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 = = = 66.2806/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
Adjusting approximation errorNC − VALU = VAO
23,861 − 1,326 = 22,535
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 | 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 |
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 |
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.