Process Account - Normal/Abnormal Loss - Illustration

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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.

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
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

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
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 = NCNO
  • 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

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 = NCNO
    = 23,861360 units
    = 66.2806/unit ( 23,861360/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 error

    NC − VALU = VAO
    23,861 − 1,326 = 22,535
    No adjustment needed.

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
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
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
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