Process Accounts : Normal/Abnormal Loss, Abnormal Gain : Problems and Solutions

Problem 2

In a factory the product passes through two processes A and B. A loss of 5% is allowed in Process A and 2% in Process B, nothing being realized by disposal of wastage.

During April, 2005, 10,000 units of material costing 6 per unit were introduced in Process A. The other costs are :

	Process A	Process B
Materials Labour Overheads	— 10,000 6,000	6,140 6,000 4,600

The output was 9,300 units from Process A. 9,200 units were produced by Process B, which were transferred to the warehouse.

8,000 units of the finished product was sold @ 15 per unit. The selling and distribution expenses were 2 per unit.

Prepare (i) Process Accounts; and (ii) A statement of profit or loss of the firm for April 2005, assuming there were no opening stocks of any type.

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
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Primary Material introduced To Labour To Overheads	10,000	60,000 10,000 6,000	By Normal Loss a/c By Abnormal Loss a/c By Process B a/c	500 200 9,300	– 1,600 74,400
	10,000	76,000		10,000	76,000

Working Notes »

• Gross/Total Input [GI/TI]

GI/TI	=	Raw Material Introduced into the process
	=	10,000 Units

» Value of input introduced [VII]

VII	=	TI × Cost per unit
	=	10,000 Units × 6/Unit
	=	60,000

• 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]

9,300 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO < NO, there is abnormal Loss.

• Abnormal Loss [AL]

AL	=	NO − AO
	=	9,500 Units − 9,300 Units
	=	200 Units

• Total Cost [TC]

TC	=	60,000 + 10,000 + 6,000
	=	76,000

• Normal Loss Realisation [NLR]

NLR

NIL

• Normal Cost [NC]

NC	=	TC − NLR
	=	76,000 − 0
	=	76,000

• Normal Cost of Normal Output per unit [NCNO/Unit]

NCNO/unit

76,000

9,500 Units

8/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
	=	9,300 Units × 8
	=	74,400

• Abnormal Loss [VAL]

VAG	=	AL × NCNO/unit
	=	200 Units × 8/Unit
	=	1,600

• Normal Loss [VNL]

VNL	=	NLR
	=	NIL

Solution » Process B

Process B a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process A a/c To Materials To Labour To Over Heads To Abnormal Gain	9,300 86	74,400 6,140 6,000 4,600 860	By Normal Loss a/c By Finished Stock a/c	186 9,200	– 92,000
	9,386	92,000		9,386	92,000

Working Notes »

• Gross/Total Input [GI/TI]

GI/TI	=	Output of the previous process received as Input
	=	9,300 Units

• Normal Loss [NL]

NL	=	Input × % of Normal Loss to input
	=	Gross Input × 2%
	=	9,300 Units × 2%
	=	186 Units

• Normal Output [NO]

NO	=	GI − NL
	=	9,300 Units − 186 Units
	=	9,114 Units

• Actual Output [AO]

9,200 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO > NO, there is abnormal Gain.

• Abnormal Gain [AG]

AG	=	AO − NO
	=	9,200 Units − 9,114 Units
	=	86 Units

• Total Cost [TC]

TC	=	74,400 + 6,140 + 6,000 + 4,600
	=	91,140

• Normal Loss Realisation [NLR]

NLR

NIL

• Normal Cost [NC]

NC	=	TC − NLR
	=	91,140 − 0
	=	91,140

• Normal Cost of Normal Output per unit [NCNO/Unit]

NCNO/unit

91,140

9,114 Units

10/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
	=	9,200 Units × 10/unit
	=	92,000

• Abnormal Gain [VAG]

VAG	=	AG × NCNO/unit
	=	86 Units × 10/unit
	=	860

• Normal Loss [VNL]

VNL	=	NLR
	=	NIL

Statement of Profit

Statement of Profit
Particulars	Amount (in )
Sales [8,ooo units @ 15 each] Less: Cost of production [8000 Units x 10/unit] Gross Profit Less: Operating Expenses Selling and distribution expenses [8,000 Units x 2/Unit]	1,20,000 80,000 40,000 16,000
Net Profit/Loss	+ 24,000

There is a net profit of 24,000.

Author : The Edifier