# 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 Labour/Labor
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 second process, prepare the process account and other relevant accounts.

• Output of process I introduced as primary material in process II - 500 units valued at 9,550
• Rate of absorption of production overheads 70% of direct wages (Calculations in Process I Working notes).

# Process II 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 II a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I a/c
To Material
To Direct Labour/Labor
500
9,550
2,600
2,250
1,575

Production Overheads chargeable to Process II

 = Direct Labour/Labor of Process II × Production overheads as a % of Direct Labour/Labor cost = 2,250 × 70% = 1,575

The quantity and values relating to output and other credits to the process account are to be derived through calculations.

# Process II 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 500 19.50 9,550 2,600 500 12,150
Input Processed (IP) 500 12,150
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour/Labor
500 12,150

2,250
1,575
Total (IP | TC)
− Normal Loss (IP × 20%)
500
50
15,975
100

2.00
Normal (NO | NC | NCNO/U)
− Actual Output
450
450
15,875
15,875
35.2778
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (450 × 35.2778) is valued at NCNO/U

## Detailed Working

• Primary Material is output of Process I 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

The Quantity of Loss to be considered as normal has to be ascertained based on the problem data.  NLU = 10% of input = IP × 10% = 500 units × 10% = 50 units
• ## Normal Output Units

The quantity of output that should be obtained if the production is carried out under normal circumstances with all losses as normal.  NOU = IP − NLU = 500 units − 50 units = 450 units
• # Actual Output Units

The Output that is actually obtained in the process.

Where there are no other factors affecting production and resulting in other losses or gains, we assume it to be equal to Normal Output.

 AOU = NOU = 450 units
• ## Total Cost

The total cost that is incurred in relation to the process.  TC = 9,550 + 2,600 + 2,250 + 1,575 = 15,975

Known from the debits made to the process account.

• ## Normal Loss Realisable Rate Per unit

The rate at which the normal loss units can be sold.

NLRR/U = 2/unit

• ## Normal Loss Realisation

The total value of normal loss units valued at their realisable rate per unit.  NLR = NLU × NLRR/U = 50 units × 2/unit = 100
• # Normal Cost

The cost that should have been incurred for the normal output under standard operational conditions. It is given by the total cost set off with any value realisation from normal loss.  NC = TC − NLR = 15,975 − 100 = 15,875
• ## Normal Cost of Normal Output per unit

The Cost per unit at which the output from the process would be obtained under normal circumstances.
NCNO/U =  NC NO
=
= 35.2778/unit ( $\frac{635}{18}/\mathrm{unit}$ )

If not too complex, use the fractional value in calculations to minimise the need to approximate values. Otherwise, the more the digits after the decimal we consider the lesser the need for approximation.

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

• ## Value of Actual Output

The normal value of the output actually achieved obtained by valuing actual output units at normal cost of normal production per unit.  VAO = AOU × NCNO/U = 450 units × 35.2778/unit (or) 450 units × $\frac{635}{18}/\mathrm{unit}$ = 15,875

In the absence of abnormal losses or gains, the value of actual output would be equal to the normal cost.

 VAO = NC = 15,875
This relation may be used for adjusting approximation error.

Since here VAO = NC, no adjustment is needed.

## Principle for valuation of output

Normal Loss is valued at market price (net realisable value) and all others are valued at cost

Actual Output, Abnormal Loss, Abnormal Gain etc., are all valued at the Normal Cost of Normal output per unit as we will learn later on.

# Ledger Accounts

The values obtained from the calculations are posted in the process account to complete it.
Process II a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process I a/c
To Material
To Direct Wages
500
9,550
2,600
2,250
1,575
By Normal Loss a/c
By Process III a/c
50
450
100
15,875
500 15,975   500 15,975

Once all the quantities and amounts are posted, the totals of the debit and credit sides of the ledger account should agree both in quantity and value terms.

Normal Loss a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process II a/c 50
100

# Illustration (Problem2)

From the following information relating to an intermediary process, prepare the process account and any other related accounts.

Output of 800 units valued at 84,000 from Process B, the previous process has been input into the process. Additionally expenses on material 42,000, labour 23,000 and overhead 54,000 have been incurred.

The nature of the process is such that there would be a loss of 2% of input normally. Such loss is capable of being disposed off @ 840 per unit normally. On account of a defect in the current batch, an additional expenditure of 4/unit had to be incurred to make the normal loss units saleable. 10 units have been sold @850/unit.

# Process C 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 C a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process B a/c
To Material
To Labour/Labor
800
84,000
42,000
23,000
54,000

The quantity and values relating to output and other credits to the process account are to be derived through calculations.

# Process C 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 800 105 84,000 42,000 800 1,26,000
Input Processed (IP) 800 1,26,000
Processing
Particulars Quantity Cost Cost/Unit
Input Processed (IP)
+ Other Costs
Direct Labour/Labor
800 1,26,000

23,000
54,000
Total (IP | TC)
− Normal Loss (IP × 2%)
800
16
2,03,000
13,440

840.00
Normal (NO | NC | NCNO/U)
− Actual Output
784
784
1,89,560
1,89,560
241.7857
• Normal Cost of Normal Output per unit  NCNO/U = $\frac{\mathrm{NC}}{\mathrm{NO}}$
• Actual output (784 × 241.7857) is valued at NCNO/U

## Detailed Working

• Primary Material is output of Process B 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

The Quantity of Loss to be considered as normal has to be ascertained based on the problem data.  NLU = 2% of input = IP × 2% = 800 units × 2% = 16 units
• ## Normal Output Units

The quantity of output that should be obtained if the production is carried out under normal circumstances with all losses as normal.  NOU = IP − NLU = 800 units − 16 units = 784 units
• # Actual Output Units

The Output that is actually obtained in the process.

Where there are no other factors affecting production and resulting in other losses or gains, we assume it to be equal to Normal Output.

 AOU = NOU = 784 units
• ## Total Cost

The total cost that is incurred in relation to the process.  TC = 84,000 + 42,000 + 23,000 + 54,000 = 2,03,000

Known from the debits made to the process account.

• ## Normal Loss Realisable Rate Per unit

The rate at which the normal loss units can be sold.

NLRR/U = 840/unit

• ## Normal Loss Realisation

The total value of normal loss units valued at their realisable rate per unit.  NLR = NLU × NLRR/U = 16 units × 840/unit = 13,440
• # Normal Cost

The cost that should have been incurred for the normal output under standard operational conditions. It is given by the total cost set off with any value realisation from normal loss.  NC = TC − NLR = 2,03,000 − 13,440 = 1,89,560
• ## Normal Cost of Normal Output per unit

The Cost per unit at which the output from the process would be obtained under normal circumstances.
NCNO/U =  NC NO
=
= 241.7857/unit

The more the digits after the decimal we consider the lesser the need for approximation.

• ## Value of Actual Output

 VAO = AOU × NCNO/U = 784 units × 241.7857/unit = 1,89,560

In the absence of abnormal losses or gains, the value of actual output would be equal to the normal cost.

 VAO = NC = 1,89,560
This relation may be used for adjusting approximation error.

Since here VAO = NC, no adjustment is needed.

# Working Notes (Normal Loss)

Normal Loss
Quantity Amount Rate
Current period
+ Expenses
16 13,440
64
840
4
Value
Units Left (?)
16
6
13,504
5,064
844
844
Sold
Sales Value
10 8,440
8,500
844
850
Profit(−)/Loss(+) −60

## Detailed Working

Units left in stock

 = Normal Loss units − Units sold = 16 units − 10 units = 6 units

Total value of units sold

 = Units sold × Value/unit = 10 units × 844/unit = 8,440

Total value of units left in stock

 = Units in stock × Value/unit = 6 units × 844/unit = 5,064

Sale value

 = Units sold × Selling Price/unit = 10 units × 850/unit = 8,500

Profit on sale

 = Sale Value − cost value = 8,500 − 8,440 = 60

# Ledger Accounts

Process C a/c
DrCr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process B a/c
To Material
To Labour/Labor
800
84,000
42,000
23,000
54,000
By Normal Loss a/c
By Output
16
784
13,440
1,89,560
800 2,03,000   800 2,03,000
Normal Loss a/c
Dr Cr
Particulars Quantity
(in Units)
Amount Particulars Quantity
(in Units)
Amount
To Process C a/c
To Cash
To Profit and Loss a/c
16 13,440
64
60
By Cash
By Balance c/d
10
6
8,500
5,064
16 13,564   16 13,564

## Assumption

The organisation maintains an Integrated Accounting system. Thus regular accounts like Cash a/c and Profit and Loss a/c are used in recording transactions.

## Note

The same normal loss account may be used for all the processes. If the organisation intends to maintain information relating to the normal loss arising on each process distinctly, it will create a distinct Normal Loss account for each process, in which case the account head would also include additional words to differentiate one account from the other, say like Process C Normal Loss a/c.
Author : The Edifier