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

Problem 7

A product passes through three process viz., Process I. Process II. and Process III. The normal wastage of each process is:

Process I: 5%; Process II: 6%; and Process III: 10%.

The percentage of normal wastage in each case is computed on the basis of the number of units entering the process concerned. The wastage of Process I is sold @ 25 paise per unit, that of Process II is sold @ 50 paise per unit and that of Process III is sold @ 1 per unit, The other expenses are:

Process I Process II Process III
Material Consumed
Direct Labour
Manufacturing expenses
1,500
7,500
1,575
2,250
12,000
1,425
750
9,750
3,015

15,000 units were input into the first process at a cost of 7725.

The output of each process has been as follows:

Process
Process
Process
I
II
III


14,250
13,650
12,012

Prepare process cost accounts and abnormal wastage and abnormal effective accounts.

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.

The normal loss arising from the processes is sold (The wastage of Process I is sold) and that is the rate at which they have been valued. As such there wou

Solution » Process I

Process I a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Primary Material introduced
To Material Consumed
To Direct Labour
To Manufacturing Expenses
15,000 7,725
1,500
7,500
1,575
By Normal Loss a/c
By Process II a/c
750
14,250
188
18,112
  15,000 18,300   15,000 18,300
           

Working Notes »

• Gross/Total Input [GI/TI]

GI/TI = Raw Material Introduced into the process
= 15,000 Units

» Value of input introduced [VII]

VII = 7,725 [Given]

• Normal Loss [NL]

NL = Input × % of Normal Loss to input
= Gross Input × 5%
= 15,000 Units × 5%
= 750 Units

• Normal Output [AO]

NO = GI − NL
= 15,000 Units − 750 Units
= 14,250 Units

• Actual Output [AO]

AO = 14,250 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO = NO, there is neither abnormal loss nor abnormal gain.

• Total Cost [TC]

TC = 7,725 + 1,500 + 7,500 + 1,575
= 18,300

• Normal Loss Realisation [NLR]

NLR = NL × Realisation rate per unit
= 750 units × 0.25/unit
= 187.50 188 [Amount rounded off to the nearest rupee]

• Normal Cost [NC]

NC = TC − NLR
= 18,300 − 188
= 18,112

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

NCNO/unit =
NC
NO
=
18,112
14,250 Units
=
9,056
7,125
/Unit (Or) 1.271/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
=
14,250 Units ×
9,056
7,125
/Unit
= 18,112

• Normal Loss [VNL]

VNL = NLR
= 188

Solution » Process II

Process II a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I a/c
To Materials Consumed
To DirectLabour
To Manufacturing Expenses
To Abnormal Gain
14,250



255
18,112
2,250
12,000
1,425
635
By Normal Loss a/c
By Process III a/c
855
13,650
428
33,994
  14,505 34,422   14,505 34,422
           

Working Notes »

• Gross/Total Input [GI/TI]

GI/TI = Output of the previous process received as Input
= 14,250 Units

• Normal Loss [NL]

NL = Input × % of Normal Loss to input
= Gross Input × 6%
= 14,250 Units × 6%
= 855 Units

• Normal Output [NO]

NO = GI − NL
= 14,250 Units − 855 Units
= 13,395 Units

• Actual Output [AO]

AO = 13,650 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO > NO, there is abnormal Gain.

• Abnormal Gain [AG]

AG = AO − NO
= 13,650 Units − 13,395 Units
= 255 Units

• Total Cost [TC]

TC = 18,112 + 2,250 + +12,000 + 1,425
= 33,787

• Normal Loss Realisation [NLR]

NLR = NL × Realisation rate per unit
= 855 units × 0.50/unit
= 427.50 428 [Rounded off to the nearest rupee]

• Normal Cost [NC]

NC = TC − NLR
= 33,787 − 428
= 33,359

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

NCNO/unit =
NC
NO
=
33,359
13,395 Units
=
33,359
13,395
/Unit (Or) 2.49/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
=
13,650 Units ×
33,359
13,395
/Unit
= 33,994

• Abnormal Gain [VAG]

VAG = AG × NCNO/unit
=
255 Units ×
33,359
13,395
/Unit
= 635

• Normal Loss [VNL]

VNL = NLR
= 428

Solution » Process III

Process III a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c
To Material Consumed
To Direct Labour
To Manufacturing Expenses
13,650 33,994
750
9,750
3,015
By Normal Loss a/c
By Abnormal Loss a/c
By Finished Stock a/c
1,365
273
12,012
1,365
1,025
45,119
  13,650 47,509   13,650 47,509
           

Working Notes »

• Gross/Total Input [GI/TI]

GI/TI = Output of the previous process received as Input
= 13,650 Units

• Normal Loss [NL]

NL = Input × % of Normal Loss to input
= Gross Input × 10%
= 13,650 Units × 10%
= 1,365 Units

• Normal Output [NO]

NO = GI − NL
= 13,650 Units − 1,365 Units
= 12,285 Units

• Actual Output [AO]

AO = 12,012 Units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO < NO, there is abnormal Loss.

• Abnormal Loss [AL]

AL = NO − AO
= 12,285 Units − 12,012 Units
= 273 Units

• Total Cost [TC]

TC = 33,994 + 750 + 9,750 + 3,015
= 47,509

• Normal Loss Realisation [NLR]

NLR = NL × Realisation rate per unit
= 1,365 units × 1/unit
= 1,365

• Normal Cost [NC]

NC = TC − NLR
= 47,509 − 1,365
= 46,144

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

NCNO/unit =
NC
NO
=
46,144
12,285 Units
=
46,144
12,285
/Unit (Or) 3.756/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
=
12,012 Units ×
46,144
12,285
/Unit
= 45,119

• Abnormal Loss [VAL]

VAL = AL × NCNO/unit
=
273 Units ×
46,144
12,285
/Unit
= 1,025

• Normal Loss [VNL]

VNL = NLR
= 1,365

Solution » Normal Loss

Normal Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I a/c
To Process II a/c
To Process III a/c
750
855
1,365
188
428
1,365
By Abnormal Gain a/c
By Cash/Bank/Drs a/c
255
2,715
128
1,853
  2,970 1,981   2,970 1,981
           

Solution » Abnormal Loss

Abnormal Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process III a/c 273 1,025      
           

Solution » Abnormal Gain

Abnormal Gain a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Normal Loss a/c (II)
To Costing P & L a/c
255
128
507
By Process II a/c 255 635
  275 635   275 635
           

Solution » Other Accounts

Finished Stock a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process III a/c 12,012
45,120
     
           
Costing Profit and Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
 

By Abnormal Gain a/c 507