Process Account :: Normal Loss » Illustration

... From Page 5
A Problem (illustration)  
 
A product is finally obtained after it passes through three distinct processes. The following information is available from the cost records.
Process I
Rs.
Process II
Rs.
Process III
Rs.
Total
Rs.
Materials
Direct Wages
Production Overheads
5,200
4,000
3,960
6,000
5,924
8,000
15,084
18,000
18,000

1,000 units @ Rs. 6 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
950
840
750
5%
10%
15%
Rs. 4
Rs. 8
Rs. 10
Prepare the process accounts and the other relevant accounts.

Working Notes (Direct » Materials, Labour/Labor)  
 
There is a primary direct material introduced in the first process whose value is to be debited to the process account.

Primary Direct Materials = 1,000 units @ Rs. 6/unit
= Rs. 6,000

The secondary direct material Rs. 5,200 is also to be debited to the process account.

The direct wages Rs. 4,000 are also to be debited to the process account.

Working Notes (Apportionment of Production Overhead)  
 

Since production overhead is incurred over all the processes together, it is to be apportioned among the process on some rational basis.

It is given that Production overheads are absorbed as a % of direct wages. Therefore,
Rate of Absorption of Production Overhead =
Total Production Overheads
Total Direct Wages
× 100
=
Rs. 18,000
Rs. 18,000
× 100
= 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. 4,000 × 100%
= Rs. 4,000
Process II = Rs. 6,000 × 100%
= Rs. 6,000

Process III = Rs. 8,000 × 100%
= Rs. 8,000

Ledger Accounts  
 

DrProcess I a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Material (Primary)
To Material (Secondary)
To Direct Labour/Labor
To Production Overheads
1,000
6,000
5,200
4,000
4,000
By Normal Loss a/c
By Process II a/c
  [Output Transferred]
50
950
200
19,000
  1,000 19,200   1,000 19,200
           

The values on the credit side of the account should be derived as given below in the working notes and should not be ascertained as balancing figures.

DrNormal Loss a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process I a/c
50 200




           
           
Note: The Normal Loss, Abnormal Loss and Abnormal Gain accounts are not prepared for each process account separately. They are prepared only once after preparing all the process accounts. We give them here each time to enable understanding.

Working Notes  
 

• Gross Input [GI]

GI = 1,000 units [Given]

• Normal Loss [NL]

NL = 5 % of input
=1,000 units × 5%
=50 units

• Normal Output [NO]

NO = GI − NL
=1,000 units − 50 units
=950 units

• Actual Output [AO]

AO = 950 units [Given]

• Abnormal Loss/Gain [AL/AG]

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

• Total Cost [TC]

TC = Rs. 6,000 + Rs. 5,200 + Rs. 4,000 + Rs. 4,000
=Rs. 19,200

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
=50 units × Rs. 4/unit
=Rs. 200

• Normal Cost [NC]

NC = TC − NLR
=Rs. 19,200 − Rs. 200
=Rs. 19,000

• Normal Cost Normal Output per unit [NCNO/U]

NCNO/Unit =
NC
NO
=
Rs. 19,000
950 units
=Rs. 20/unit

• Value of Actual Output [VAO]

VAO = AO × NCNO/Unit
=950 units × Rs. 20/unit
=Rs. 19,000

Normal loss is valued at market price and all others are valued at the "Normal Cost of Normal Output per unit". The value of output transferred to the next process should always be ascertained using this method and not as a balancing figure.

Author Credit : The Edifier ... Continued Page 7

♣ Copyright Krishbhavara. All rights reserved ♣ Site optimized for Internet Explorer 5.5 and above