Process Accounts : Normal/Abnormal

Loss/Gain : Problems and Solutions

 
Elements/Components of Cost
 

For the purpose of cost accounting, the process industry is divided into separate departments
with each department representing a specific process. The Direct Material and Direct
Labour/Labor Costs are collected for each department separately and the overheads which
are collected over all the departments/processes are apportioned over the various
departments/processes on some rational basis.

The following are the main elements/components of costs involved in the

manufacturing process where process costing method is adopted.

1. Direct Materials
There are two types of materials that we come across in process costing.
No
.
o Primary Material
Materials which are introduced in the initial process and passed on to the next
process as a part of output after completion of processing.

o Secondary Material
Materials which are introduced in the first or subsequent processes in
addition to the main material introduced in the initial process. This gets mixed
up with the main material and is passed on to the subsequent processes as a
part of the output.

2. Direct Labour/Labor
The direct labour/labor cost is generally incurred in every process. Identification of
direct labour cost is also relatively easy in process costing industry
 3. Direct Expenses
Expenses in addition to Direct Material and Labor which can be directly attributable to
a particular process. These are costs relevant to specific processes.

4. Production Overheads
The overhead expenses are generally expended over all the processes involved in
production. These are to be apportioned over the various processes in an amicable
manner.
 
Methodology of Recording/Accounting Costs
 

Financial Accounting Methodology is adopted for recording costs involved.

 Process Accounts
A nominal account for each process is used to record all the costs relevant to a
process.

Each process account is

 Debited with
 The Primary Direct Material Cost
 Secondary Direct Material Cost
 Direct Labor Cost
 Direct Expenses and
 Production Overheads allocated and/or apportioned to the process.

 Credited with
The value of output transferred to the subsequent process or finished stocks.

 Process Stock Accounts

 Stocks relevant to a process are maintained in a separate stock account.

Stock accounts for input may be maintained where all the input
acquired/received for a process during a period is not used up.

Stock accounts for output may be maintained where all the output
produced/completed in a process during a period is not disposed off either by
transfer to the next process or by sale.

 Where the output relevant to a process is sold apart from being transferred to the
next process, it generates revenue. These revenues relevant to a process, are
generally recorded using the process account or the stock account.

A product is finally obtained after it passes through three distinct processes. The
following information is available from the cost records.

Process I Process II Process III Total

Rs. Rs. Rs. Rs.
Materials 2,600 2,000 1,025 5,625
Direct Wages 2,250 3,680 1,400 7,330
Production Overheads 7,330
500 units @ Rs. 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 Normal loss Value of

(Units) as a scrap
percentage (per unit)
of input
Process I 450 10% Rs. 2
Process II 340 20% Rs. 4
Process III 270 25% Rs. 5
Prepare the process accounts and the other relevant accounts.
Process Accounts  
  

A separate ledger account is used for each process.

Since the processes are named in the problem itself, we will use the same names for the
process accounts.

Thus the three process accounts would be

 Process I a/c
 Process II a/c
 Process III a/c

 
Direct Material and Labor/Labour Costs
 

There is a primary material input into the process to the extent of 500 units costing Rs. 4 per
unit

 Primary Material Cost chargeable to Process I = Rs. 2,000 (500 units × Rs. 4/unit).

There is a secondary Direct Material input into each process which is to be debited to
the relevant process accounts.

 Process I : Rs. 2,600

 Process II : Rs. 2,000
 Process III : Rs. 1,025

Direct Labor/Labour Costs incurred for each process are to be debited to the relevant
process accounts

 Process I : Rs. 2,250

 Process II : Rs. 3,680
 Process III : Rs. 1,400

All these costs are debited to the process account.

 
Apportionment of Production Overhead
 

Production overheads are absorbed as a % of direct wages.

Rate of Absorption of Production Overhead = Total Production Overheads × 100

Total Direct Wages

 Rs. 7,330
= × 100
Rs. 7,330

= 100%

⇒ Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the

Process × 100%

Thus, Production Overheads chargeable to: Process I = Rs. 2,250 × 100%

= Rs. 2,250

Process II = Rs. 3,680 × 100%

= Rs. 3,680

Process III = Rs. 1,400 × 100%

= Rs. 1,400

 
Process I a/c [Ignoring Losses]
 

If there are no losses either normal or abnormal, then the output would be equal to the
quantity input i.e. 500 units and its value is the total cost incurred in the process. This output
would be transferred to the next process i.e. the Process II account. In such a case, the process
account would be as follows:

Dr Process I a/c Cr

Particulars Quantity Amount Particulars Quantity Amount

(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 500 2,000 By Process II 500 9,100
To Material (Secondary) 2,600 a/c
To Direct Labour/Labor 2,250
To Production Overheads 2,250
  500 9,100   500 9,100
           
However, we see that the problem data indicates that there is a 10% normal loss in the
process which is to be accounted for.
Process I a/c » Working Notes  
  

Taking the losses into consideration we need to derive figures required for preparing the
process account.

 Gross Input [GI]

The Quantity of Material that is input into the process. This is the number of units of
material introduced into the process (or processed in the process if specifically
stated). {Here it is 500 units.}

The nature of the Secondary material introduced into the process may be such
that, it may or may not result in an increase in the number of units of material.
{Here it does not.}

 Normal Loss [NL]

The Quantity of Loss that is acceptable to the production process.

There may be a number of methods for calculating the loss. What we need to
consider is the quantity of loss that is accepted as normal.

{Here it would be 50 units (10% of input ⇒ 500 units × 10% = 50 units)

 Normal Output [NO]

The Output that should be obtained if the production is carried out under normal
circumstances.

[Normal Output = Gross Input − Normal Loss]

{Here it would be 450 units (500 units − 50 units)}

 Actual Output [AO]

The Output that is actually achieved in the production process.

Where no information relating to this is given, we assume it to be equal to

 Normal Output.

{Here it is given to be 450 units}

 Abnormal Loss [AL]

Where the Actual Output is less than the Normal Output we encounter abnormal loss.

["Abnormal Loss" = "Normal Output" − "Actual Output"]

{Here, Normal Output (450 units) = Actual Output (450 units),
  ⇒ There is no abnormal loss.}

 Abnormal Gain [AG]

Where the Actual Output is more than the Normal Output we encounter abnormal
gain.

["Abnormal Gain" = "Actual Output" − "Normal Output" ]

{Here, Normal Output (450 units) = Actual Output (450 units)
  ⇒ There is no abnormal gain.}

 Total Cost [TC]

The total cost that is incurred in relation to the process.

This is the total amount of debits made to the process account.

{Here it is Rs, 9,100 (= Rs. 2,000 + Rs. 2,600 + Rs. 2,250 + Rs. 2,250)}

 Normal Loss Realisation [NLR]

The amount that is realisable by the sale of normal loss units.

This will be the market value of the normal loss units or the estimated (normal)
amount realisable on the sale of normal loss..

[Normal Loss Realisation = Normal Loss In Units × Realisable Rate per unit]
{Here it is Rs, 100 (= 50 units × Rs. 2/unit)}

The normal loss may or may not have realisable value. For example if there is
 loss of weight in the production process which is accepted as normal, then the
normal loss has no realisable value as it has no physical form and is not
saleable/realisable. Even where the loss is physically present its market value
may be zero (like in the case of ash)

 Normal Cost [NC]

The cost that should have been incurred for the production process under standard
production conditions.

It is equal to the total cost reduced by the normal loss realisation.

[Normal Cost = Total Cost − Normal Loss Realisation]

{Here it is Rs, 9,000 (= Rs. 9,100 − Rs. 100)}

 Normal Cost of Normal Production

(Per Unit) [NCNP/Unit]
The Normal Cost per unit of Normal Output.

This is the most important value that we derive which would be useful in the
valuation of outputs and losses in processes.

Normal Cost NC
Normal Cost of Normal Production (Per Unit) = ⇒ NCNP/unit =
Normal Output NO

NC
Here it is » NCNP/unit =
NO

Rs. 9,000
=
450 units

= Rs. 20/unit of output.

 
Principle for Valuation of Output
 

Since we assumed that there were no losses we can easily say that the value of output is the
total cost incurred and therefore derive its value.

When there are losses and their realisations, valuing output in this manner is not
appropriate.

The principle for valuation to be followed whether it be in Financial Accounting or

Cost Accounting is:

Normal Loss is valued at market price and all others i.e.

"Actual Output", "Abnormal Loss", "Abnormal Gain" etc., are
valued at cost i.e. the "Normal Cost of Normal Production per
unit".

 Value of Actual Output

The normal value of the output actually achieved.

It is given by valuing actual output units at normal cost of normal production

per unit.

[Value of Actual Output = Actual Output Units × Normal Cost of Normal

Production per unit]
{Here it is Rs, 9,000 (= 450 units × Rs. 20/unit)}

This is the method to be adopted for valuing the actual output in all situations.
Since there is no abnormal gain or abnormal loss, the value of actual output is
equal to the normal cost.
 
Process I a/c
 

The data relating to costs incurred would be recorded as it is. Only the data relating to outputs
would have to be filled after making appropriate calculations and deriving the same.

The appropriate process account would be as follows:

Dr Process I a/c Cr

Amoun Quantity
Quantity Amount
Particulars t Particulars (in
(in Units) (in Rs)
(in Rs) Units)

To Material (Primary) 500 2,000 By Normal Loss a/c 50 100

 To Material (Secondary) 2,600 450 9,000
To Direct Labour/Labor 2,250 By Process II a/c
To Production Overheads 2,250

  500 9,100   500 9,100

           

As for now, Normal loss is credited to process a/c.

01. A Product passes through two distinct processes, A and B. From the following
information you are required to write the process accounts, abnormal loss/gain
accounts.

Units Issued---Process A 10,000 units at Rs. 10each.

Process A Process B
Rs. Rs.
Material added 40,000 30,000
Direct Labour 20,000 24,000
Overheads 13,500 22,610
Normal wastage (% of 5% 5%
input) Rs. 5 per Rs. 10 per
(Scrap value of normal unit unit
loss) 9,400 9,000
Output (units)
 
Solution » General Workings
 

Since no mention is made regarding the sale or insurance realisation of abnormal loss units, it
is assumed that they are not disposed off or realised as yet.
Solution » Process A  
 
Process A a/c

Particulars Quantity Amount Particulars Quantity Amount

(in (in Rs) (in (in Rs)
Units) Units)
To Primary Material 10,000 1,00,000 By Normal Loss 500 2,500
introduced 40,000 a/c 100 1,800
To Material Added 20,000 By Abnormal 9,400 1,69,200
To Direct Labour 13,500 Loss a/c
To Overheads By Process B a/c
  10,000 1,73,500   10,000 1,73,500
           

Working Notes

• Gross/Total Input [GI/TI]

GI/TI = Raw Material Introduced into the process
= 10,000 Units
» Value of input introduced [VII]
VII = GI × Cost per unit
= 10,000 Units × Rs. 10/Unit
= Rs. 1,00,000

• Normal Loss [NL]

NL = Input × % of Normal Loss to input
= Gross Input × 5%
= 10,000 Units × 5%
= 500 Units

• Normal Output [AO]

NO = GI − NL
= 10,000 Units − 500 Units
= 9,500 Units

• Actual Output [AO]

AO = 9,400 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO < NO, there is abnormal Loss.
• Abnormal Loss [AL]
AL = NO − AO
= 9,500 Units − 9,400 Units
= 100 Units

• Total Cost [TC]

TC = Rs. 1,00,000 + Rs. 40,000 + Rs. 20,000 + Rs. 13,500
= Rs. 1,73,500

• Normal Loss Realisation [NLR]

NLR = NL × Realisation rate per unit
= 500 units × Rs. 5/unit
= Rs. 2,500

• Normal Cost [NC]

NC = TC − NLR
= Rs. 1,73,500 − Rs. 2,500
= Rs. 1,71,000

• Normal Cost of Normal Output per

unit [NCNO/Unit]
NC
NCNO/unit =
NO
Rs. 1,71,000
=
9,500 Units
= Rs. 18/Unit

Valuation »
Normal loss is valued at market price and all others are valued at the "Normal Cost of
Normal Output per unit".

• Actual Output [VAO]

 VAO = AO × NCNO/unit
= 9,400 Units × Rs. 18/unit
= Rs. 1,69,200

• Abnormal Loss [VAL]

VAG = AL × NCNO/unit
= 100 Units × Rs. 18/Unit
= Rs. 1,800

• Normal Loss [VNL]

VNL = NLR
= Rs. 2,500
 
Solution » Process B
 
Dr Process B a/c Cr
Particulars Quantity
Quantity Amount Amount
Particulars (in
(in Units) (in Rs) (in Rs)
Units)
To Process A a/c 9,400 1,69,200 By Normal Loss a/c 470 4,700
To Materials Consumed 30,000 By Finished Stock a/c 9,000 2,43,000
To Direct Labour 24,000
To Manufacturing 22,610
Expenses 70 1,890
To Abnormal Gain
  9,470 2,47,700   9,470 2,47,700
           

Working Notes

• Gross/Total Input [GI/TI]

GI/TI = Output of the previous process received as Input
= 9,400 Units

• Normal Loss [NL]

NL = Input × % of Normal Loss to input
= Gross Input × 5%
 = 9,400 Units × 5%
= 470 Units

• Normal Output [NO]

NO = GI − NL
= 9,400 Units − 470 Units
= 8,930 Units

• Actual Output [AO]

AO = 9,000 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO > NO, there is abnormal Gain.

• Abnormal Gain [AG]

AG = AO − NO
= 9,000 Units − 8,930 Units
= 70 Units

• Total Cost [TC]

TC = Rs. 1,69,200 + Rs. 30,000 + Rs. 24,000 + Rs. 22,610
= Rs. 2,45,810

• Normal Loss Realisation [NLR]

NLR = NL × Realisation rate per unit
= 470 units × Rs. 10/unit
= Rs. 4,700

• Normal Cost [NC]

NC = TC − NLR
= Rs. 2,45,810 − Rs. 4,700
= Rs. 2,41,110

• Normal Cost of Normal Output per

 unit [NCNO/Unit]
NC
NCNO/unit =
NO
Rs. 2,41,110
=
8,930 Units
= Rs. 27/Unit

Valuation »
Normal loss is valued at market price and all others are valued at the "Normal Cost of
Normal Output per unit".

• Actual Output [VAO]

VAO = AO × NCNO/unit
= 9,000 Units × Rs. 27/unit
= Rs. 2,43,000

• Abnormal Gain [VAG]

VAG = AG × NCNO/unit
= 70 Units × Rs. 27/unit
= Rs. 1,890

• Normal Loss [VNL]

VNL = NLR
= Rs. 4,700
 
Solution » Normal Loss
 
 Dr Normal Loss a/c Cr
Quantity Quantity
Amount Amount
Particulars (in Particulars (in
(in Rs) (in Rs)
Units) Units)
To Process A a/c 500 1,800 By Abnormal Gain a/c 70 700
To Process B a/c 470 4,700 900 5,800
By balance c/d
  970 6,300   970 6,300
To Balance b/d 900 5,800      

 
Solution » Abnormal Loss
 
Dr Abnormal Loss a/c Cr

           
 
Quantity Amount Particular Quantity Amount
Particulars
(in Units) (in Rs) s (in Units) (in Rs)
To Process 100 1,800  By costing  100  1800  
A a/c     P&l a/c
Solution abnormal gain account
Dr Abnormal Gain a/c Cr

Particulars Quantity Particulars Quantity

Amount Amount
(in (in
(in Rs) (in Rs)
Units) Units)
To Normal Loss a/c 70 700 By Process B a/c 70 1,890
To Costing P & L – 1,190
a/c
  70 1,890   70 1,890