Methods of Costing

Methods of Costing

By "Method of Costing" we mean the procedure adopted to ascertain costs. The Method adopted would be dependent on the circumstances in which accounting is required to be made which is dependent on the product being manufactured and the nature of the industry making the product.

Depending on the nature of the business i.e. the type of the product made and the procedure adopted to make it, all the different costing methods are classified as

1. Specific Order CostingThis is a costing method applicable to those industries where the activity being accomplished consists of a task which is specifically identifiable at each stage of production.

This includes 1. Job Costing2. Batch Costing3. Contract Costing

2. Operation CostingThis is a costing method applicable to those industries where the activity consists of continuous or repetitive operations or processes and the products are identical and cannot be segregated.

This includes 1. Unit Costing2. Process Costing

3. Operating CostingThis is also called Service Costing and is applicable to organisations which produce services but not tangible goods.

4. Composite or Multiple CostingThis actually is not a method but a combination of two or more methods mentioned above.

Techniques of Costing

Techniques of costing imply tools that are to be used to apply a method of costing.

In accounting for costs using a particular method of costing as mentioned above, any one or more of the techniques of costing are used by the organisation

The various techniques of costing are

1. Absorption Costing2. Marginal Costing3. Standard Costing4. Differential Costing

5. Uniform CostingProcess Costing » Method and Techniques

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Process Costing is a technique of costing and it may be adopted using any of the techniques of costing.

The technique adopted would decide the procedure adopted in relation to various accounting aspects. For example, for the purpose of valuation of stocks

Fixed costs will be considered along with Variable costs, if "Absorption Costing" is adopted as the technique.

Only variable costs will be considered, if "marginal costing" is adopted as the technique.

Example of an area where Process Costing is appliedA common example of an industry where process costing may be applied is "Sugar Manufacturing Industry".

The processes in this industry are

Cane ShreddingThe cane is broken/cut into small pieces to enable easier movement through the milling machine.

MillingThe shredded cane is passed through rollers which crush them to extract cane juice. [Similar to the cane juice extracted by the vendors who sell you sugar cane juice.]

Heating and Adding limeThe extracted juice is then heated to make it a concentrate and lime is added to the heated juice.

Clarification

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Muddy substance is removed from the concentrate through this process

EvaporationWater is removed from the juice by evaporation.

Crystallisation and SeparationSugar crystals are grown from the dry juice concentrate in this process.

SpinningMolasses are separated from sugar using Centrifugals in this process.

DryingSugar is obtained by drying the wet raw sugar obtained in the spinning process.

Features/Characteristics of Process Costing

Process Costing Method is applicable where the output results from a sequence of continuous or repetitive operations or processes and products are identical and cannot be segregated.

Process Costing enables the ascertainment of cost of the product at each process or stage of manufacture.

The following features may be identified with process costing:

1. The output consists of products which are homogenous. 2. Production is carried on in different stages (each of which is called a process) having a continuous

flow. 3. Production takes place continuously except in cases where the plant and machinery are shut down for

maintenance etc. Output is uniform and all units are identical during each process. It would not be possible to trace the identity of any particular lot of output to any lot of input.

4. The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.

5. The output of a process (except the last) may also be saleable in which case the process may generate some profit.

6. The input of a process (except the first) may be capable of being acquired from the outside sources. 7. The output of a process is transferred to the next process generally at cost to the process. It may also

be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.

8. Normal and abnormal losses may arise in the processes

There are a number of industries in which process costing can be applied

A Problem

To have a better understanding of the various terms that we come across in process costing let us consider an example.

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

Process IRs.

Process IIRs.

Process IIIRs.

Total Rs.

Materials Direct Wages Production Overheads

2,600 2,250

2,000 3,680

1,025 1,400

5,625 7,330 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(Units)

Normal lossas a percentage

of input

Value of scrap (per unit)

Process I Process II Process III

450 340 270

10% 20% 25%

Rs. 2 Rs. 4 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

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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 OverheadsTotal Direct Wages

× 100

= Rs. 7,330Rs. 7,330

× 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. 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

ParticularsQuantity(in Units)

Amount(in Rs)


Amount(in Rs)

To Material (Primary) To Material (Secondary) To Direct Labour/Labor To Production Overheads

500 2,0002,6002,2502,250

By Process II a/c 500 9,100

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 of Normal Production (Per Unit) = Normal CostNormal Output

⇒ NCNP/unit = NCNO

Here it is » NCNP/unit = NCNO

= Rs. 9,000450 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 OutputThe 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


Amount(in Rs)


Amount(in Rs)


500 2,0002,6002,2502,250

By Normal Loss a/c

By Process II a/c

50450

1009,000

500 9,100 500 9,100

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

We will learn about valuation and accounting treatment of normal and abnormal loss in the two pages to follow. Please carry on.

Losses » Classification

Losses are classified based on their nature into two:

Normal LossThe loss of input/output where the occurrence is inevitable i.e. which occur on account of normal reasons are normal losses. The magnitude of the loss is dependent on the production process in

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consideration.

Normal losses may be expressed in absolute terms (like say 50 units) or in proportionate terms (like say 1/10th) or in percentage terms (like say 2%).

Whether the calculation of loss should be based on the input or output is dependent on the method used to express the loss and to some extent on the process in consideration.

In problem solving, where no specific mention is made, the loss is calculated (where it is given as a proportion or percentage) based on gross input.

Abnormal LossThe loss of input/output whose occurrence can be avoided i.e. which occur on account of abnormal reasons are abnormal losses. This can also be interpreted as the magnitude of actual loss that is incurred in excess of the normal loss.

It is given by the relation "Abnormal Loss Units" = "Normal Output Units" − "Actual Output Units"

Physical Form of Loss

Based on their physical appearance/form, losses can be classified into two as

1. Loss without a physical presenceThese are losses which result in the reduction in the quantity of material used with the quantity lost not being available in a physical form.

One best example for this sort of loss is reduction in weight on account of evaporation. Where the material used is a liquid and it is heated during processing, some of it might get evaporated during processing.

2. Loss with physical presenceThese are losses which are available in a physical form, either in the same form as the material input or some other form to which they get transformed on processing.

Normal Loss Value » Illustration

Consider the following example:

1000 units of material have been input into a production process at a total cost (material, labour/labor, overheads) of Rs. 1,00,000 i.e. @ Rs. 100 per unit. 100 units of material has been lost in the production process. These 100 loss units would fetch a price of Rs. 1 per unit if sold in the market.

Assuming the loss to be normalSay, the production process is such that this loss of 100 units can be considered normal (the same proportion of loss would be have to be incurred every time the production is taken up)

In such a situation, the cost incurred for getting an output of 900 units (1000 - 100) can be interpreted in the


following ways:

1. The cost incurred for 900 units is Rs. 90,000 (900 × 100) 2. The cost incurred for 900 units is Rs. 1,00,000 being the total cost incurred.

This would result in the unit output cost working out to Rs. 111.11 (1,00,000 ÷ 900)

3. The cost incurred for 900 units is Rs. 99,900 (1,00,000 − 100) being the total cost incurred reduced by the amount realised on selling the loss units.

This would result in the unit output cost working out to Rs. 111 (99,900 ÷ 900)

Where the loss is normal, the last idea would be the most appropriate one for deciding the cost per unit of output.

This can be explained by answering the question, how much would we be required to spend if we are to consider a similar transaction immediately. If we need another lot of 900 units of this product, how many units have we to introduce into the production process? 1,000 units for sure, since 100 units will be lost in production process for sure (since the loss is being termed normal).

Therefore the amount to be spent would be equal to the total cost relevant to 1,000 units i.e. Rs. 1,00,000.

The loss units are capable of being sold for Rs. 1/unit, every time such loss occurs. Thereby, the cost incurred can be set off (always) by using this realisation. Rs. 100 for 100 units.

Thus, the net cost to be incurred for getting an output of 900 units is Rs. 99,900 (Rs. 1,00,000 − Rs.100)

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100.00

Less: Normal Loss 100 100 1.00

Net Output 900 99,900 111.00

NoteThe data in the rate column should always be obtained as the quotient of Value ÷ Quantity.

Normal Loss Valuation » Interpretation

The following conclusions can be derived from the above illustration:

1. Value of Normal LossWe were able to derive the Net cost incurred i.e. Rs. 99,900 or Rs. 111.00 per unit by deducting Rs. 100 from the total cost and 100 units from the gross input units.

This implies that we have valued the 100 normal loss units at Rs. 1 per unit, the rate at which it can be sold (also called the net realisable value or net marketable rate).

Principle for valuation of normal loss


Normal Loss is valued at its market price or Net Relisable Value

This is true for valuation of "Normal Loss" in all cases.

2. Cost of Normal Loss UnitsThe actual cost of the units lost as normal loss is something we never consider under normal circumstances.

Let us consider it for the purpose of learning a related idea.

The cost at which all the input units were bought is Rs. 100/unit. All the units that were lost as normal loss would also have been bought at Rs. 100/unit. Therefore, the total cost of normal loss units would be Rs. 10,000 (100 units × Rs. 100/unit).

3. Value loss on account of Normal LossThe loss on account of the units lost also should not be considered under normal circumstances.

Let us consider it for the purpose of learning a related idea.

The total cost of the 100 normal loss units is Rs. 10,000. The value of the 100 normal loss units (valued at net realisable value) is Rs. 100. Thus the net loss on account of units lost in normal loss is Rs. 9,900 (Rs. 10,000 − Rs. 100).

4. What happens to the value loss?The value lost on account of input lost on account of normal reasons is absorbed by the normal (actual) output.

That is the reason the rate of valuation of normal (actual) output has increased from Rs. 100/unit to Rs. 111/unit.

The increase by Rs. 11/unit is on account of the value loss of normal loss units i.e. Rs. 9,900 being absorbed by the normal output units i.e. 900 units. (Rs. 9,900 ÷ 900 units = Rs. 11/unit)

Note

In most cases, the value attributed to normal loss units is a notional value based on the estimated price the normal loss units would fetch.

The actual sale of normal loss units may fetch a realisation that may be different from the value attributed to it. At that stage the difference in the estimated value and actual value would result in a loss or profit which is treated as abnormal loss or gain and is thus transferred to Costing P/L a/c in Cost Accounting records and to Profit & Loss a/c in Financial Accounting records.

This loss or gain is different from the loss explained above.

Abnormal Loss Value » Illustration



1000 units of material have been input into a production process at a total cost (material, labour/labor, overheads) of Rs. 1,00,000 i.e. @ Rs. 100 per unit. 100 units of material has been lost in the production process. These 100 loss units would fetch a price of Rs. 1 per unit if sold in the market.

Considering the loss as abnormalSay the production process is such that this loss of 100 units can be considered abnormal (the loss would not occur every time the 1,000 units of this kind are introduced into the manufacturing process).

In such a situation, the cost incurred for getting an output of 900 units (1000 - 100) can be interpreted in the following ways:

1. The cost incurred for 900 units is Rs. 90,000 (900 × 100) 2. The cost incurred for 900 units is Rs. 1,00,000 being the total cost incurred.

This would result in the unit output cost working out to Rs. 111.11 (1,00,000 ÷ 900)

3. The cost incurred for 900 units is Rs. 99,900 (1,00,000 − 100) being the total cost incurred reduced by the amount realised on selling the loss units.

This would result in the unit output cost working out to Rs. 111 (99,900 ÷ 900)

Where the loss is abnormal, the first idea would be the most appropriate one for deciding the cost per unit of output.

This can be explained by answering the question, how much would we be required to spend if we are to produce an output of 900 units again. Since the loss is abnormal in nature, we need not assume its occurrence every time. Thus we would introduce only 900 units the next time we need the 900 units of output.

Therefore the amount to be spent for getting an output of 900 units would be equal to the total cost relevant to 900 units i.e. Rs. 90,000.

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100.00

Less: Abnormal Loss 100 10,000 100

Net Output 900 90,000 100


Abnormal Loss Valuation » Interpretation

The following conclusions can be derived from the above:

1. Value of Abnormal LossWe were able to derive the Net cost incurred i.e. Rs. 90,000 or Rs. 100.00 per unit by deducting Rs. 10,000 from the cost and 100 units from the gross input units.

This implies that we have valued the 100 abnormal loss units at Rs. 100/unit, their cost and not at the

marketable rate.

The marketable rate of abnormal loss units would be dependent on the physical condition of the units lost/destroyed and their marketability in that state. This is a factor that would be useful in assessing the net loss on account of abnormal loss.

Principle for Valuation of Abnormal Loss

Abnormal Loss is valued at cost or its full value i.e at the "Normal Cost of Normal Output Per Unit"

This is true for valuation of "Abnormal Loss" in all cases.

2. Cost of Abnormal Loss UnitsThe cost of input per unit was Rs. 100 per unit. The cost incurred on all the units that were lost as abnormal loss would be Rs. 10,000 (= 100 units × Rs. 100/unit).

This forms the value of abnormal loss units

3. Realisations from Abnormal Loss UnitsThe abnormal loss units are dealt with separately, treating them as special kind of units.

Sale of damaged stock, insurance realisation, sale by reparing the damaged stock, sale by converting the damaged stock to some other form are the various routes available for recovering the value of abnormal loss units.

Assume the realisations through all the routes amounted to Rs. 2,500.

4. Value Loss on account of Abnormal LossThe cost of the abnormal loss units is Rs. 10,000. The value realised is Rs. 2,500. The net loss would be Rs. 7,500 (Rs. 10,000 − Rs. 2,500).

5. What happens to the Net Loss?The net loss on account of units lost in abnormal loss should not be absorbed by the good stock. That is the reason the value of abnormal loss units is eliminated and dealt with separately.

The loss being abnormal in nature is transferred to (absorbed by) the Costing Profit and Loss a/c in Costing records and Profit and Loss a/c in Financial Accounting records.

The value of net stock would be Rs. 100 per unit and is not influenced by the loss on account of abnormal reasons


Normal Loss » Related Quantities & Values

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100

Less: Normal Loss 100 100 1

Net Output 900 99,900 111

The normal loss in quantity terms should be deducted from the gross input to obtain the Normal (net) Output [Normal Output = Gross Input − Normal Loss Units]

The net realisable value of normal loss should be deducted from the total cost to obtain the Normal (net) Cost. [Normal Cost = Total Cost − Normal Loss Realisation].

CautionThe rate column is always to be obtained as a quotient using the relation Value ÷ Quantity.

Normal Loss » Accounting Treatment

Total Cost is debited to the Process a/c. Value of normal loss is deducted from the total cost to obtain the normal cost.

Deducting from the debit side item is the same as Crediting the Item.

Therefore, "Normal Loss" both in terms of units and value is recorded by

Crediting the "Process " a/c and Debiting the "Normal Loss a/c"

The units are also shown along with it in the relevant column.

Journal in the books of M/s __ for the period from ____ to _____

Date V/R No. Particulars L/FDebit Amount

(in Rs)Credit Amount

(in Rs)30/06/2006 – Normal Loss a/c

To Process I a/c [For the value of normal loss.]

Dr – 100100

Dr Process I a/c Cr


Amount(in Rs)


Amount(in Rs)

To Input 1,000 1,00,000 By Normal Loss a/c

By Process II a/c

100900

10099,900

1,000 1,00,000 1,000 1,00,000

Dr Normal Loss a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 100

Disposal/Sale of Normal Loss Stock

In recording the value of normal loss we can assume that we are creating an asset by the name "Normal Loss".

The value of this asset is equal to the realisable value of normal loss. This value is an estimated (notional) value.

The actual amount realised by sale of normal loss stock may be equal to, more than or less than its notional value.

Thus, on disposal of normal loss stock there may be (a) Gain (b) Loss and (c) Neither Gain nor Loss

Profit on Disposal/Sale of Normal Loss Stock

There would be a gain on the sale/disposal of normal loss stock, when the actual amount realised/realisable on its sale is more than its notional value.

Assume that of the 100 Normal Loss units, 80 units are sold for Rs. 120 (80 units × Rs. 1.50/unit)


DateV/R No.

Particulars L/FDebit

Amount(in Rs)

Credit Amount(in Rs)

xx/xx/20xx – Cash/Bank/Drs a/c To Normal Loss a/c [For the sale of 80 units of normal loss stock @ Rs. 1.50/unit i.e. at a value of Rs. 120.]

Dr ––

120120

30/06/2006 – Normal Loss a/c To Costing Profit & Loss a/c [For the profit on sale of normal loss stock.]

Dr ––

4040



Amount(in Rs)


Amount(in Rs)

To Process I a/c To Costing P&L a/c

100–

10040

By Cash/Bank/Drs a/c

By bal c/d

8020

12020

100 140 100 140

To bal b/d 20 20 Dr Costing Profit & Loss a/c Cr

ParticularsAmount(in Rs)

Amount(in Rs)


Amount(in Rs)

By Normal Loss a/c 40

Note1. Profit or loss is assessed by taking only the value of 80 units into consideration.

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Profit = Rs. 40 (80 units × Rs. 1.50/unit) − (80 units × Rs. 1/unit)

2. Since only 80 units are sold, the value of the other 20 units would be retained in the Normal Loss a/c, till they are disposed.

3. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.

Alternative [Less Preferable]The above two journal entries can be combined into a single simple compound/combined journal entry as Journal in the books of M/s __ for the period from ____ to _____

DateV/R No.


Amount(in Rs)


xx/xx/20xx – Cash/Bank a/c To Normal Loss a/c To Costing Profit & Loss a/c [For the sale of 80 units of normal loss stock @ Rs. 1.50/unit i.e. at a value of Rs. 120 and the profit thereon Rs. 40.]

Dr –––

1208040



Amount(in Rs)


Amount(in Rs)

To Process I a/c 100–

100 By Cash/Bank/Drs a/c

By bal c/d

8020

8020

100 100 100 100

To bal b/d 20 20

The disadvantage being the absence of the information relating to profit in the normal loss account.

Dr Costing Profit & Loss a/c Cr


Amount(in Rs)


Amount(in Rs)

By Cash/Bank/Drs a/c 40

Loss on Disposal/Sale of Normal Loss Stock

There would be a loss on the disposal/sale of normal loss stock, when the actual amount realised/realisable on its sale is less than its value.

Assume that the 100 Normal Loss units are sold for Rs. 90 (100 units × Rs. 0.90/unit)


DateV/R No.


Amount(in Rs)


30/06/2006 – Cash/Bank a/c Costing Profit & Loss a/c To Normal Loss a/c [For the sale of 100 units of normal loss stock @ Rs. 0.90/unit i.e. at a value of Rs. 90 and the loss thereon i.e. Rs. 10.]

Dr –––

9010

100



Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 100 By Cash/Drs a/c By Costing P&L a/c

100–

9010

100 100 100 100



Amount(in Rs)


Amount(in Rs)

To Normal Loss a/c 10

Note1. Profit or loss is assessed by taking the value of all the 100 units into consideration since all of them

are disposed off.

Loss = Rs. 10 (100 units × Rs. 0.90/unit) − (100 units × Rs. 1/unit)

2. Since all the units are sold, there would be no value left in the normal loss account. 3. At the end of the accounting period, there would be no asset (named Normal Loss) to be shown in the

balance sheet.

AlternativeThe above journal entry can be broken down into two entries as Journal in the books of M/s __ for the period from ____ to _____

DateV/R No.


Amount(in Rs)


30/06/2006 – Cash/Bank/Dr a/c To Normal Loss a/c [For the sale of 100 units of normal loss stock @ Rs. 0.90/unit i.e. at a value of Rs. 90.]

Dr ––

9090

30/06/2006 – Costing Profit & Loss a/c To Normal Loss a/c [For the loss on sale of normal loss stock i.e. Rs. 10.]

Dr ––

1010

The Ledger postings would be the same, whether you record a single journal entry or two entries.

There is no inconvenience in adopting this method except for the fact that it needs you to record an additional journal entry.

Disposal/Sale of Normal Loss Stock without Gain/Loss

There would be no loss or gain on the disposal/sale of normal loss stock, when the actual amount realised/realisable on its sale is equal to its value.

Assume that the 40 Normal Loss units are sold for Rs. 40 (40 units × Rs. 1/unit)


DateV/R No.


Amount(in Rs)


30/06/2006 – Cash/Bank a/c To Normal Loss a/c [For the sale of 40 units of normal loss stock @ Rs. 1.00/unit i.e. at a value of Rs. 40.]

Dr – 4040



Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 100 By Cash/Drs a/c

By bal c/d

4060

4060

100 100 100 100

To bal b/d 60 60

40 units sold at Rs. 1.00 each i.e. for Rs. 40 (= 40 units × Rs. 1.00/unit)

Influence of Losses on Costs

In arriving at the cost of manufacturing a product or service, only normal costs are to be considered as being part of cost. The costs should not be influenced by abnormal natured losses and costs.

Therefore the value of losses should be eliminated from the total costs.

Since all costs are debited to the process account, eliminating a value implies either deducting from the debit side or crediting the process account with the value.

Dr Process I a/c Cr


Amount(in Rs)


Amount(in Rs)

To Input [Includes Normal Loss: 100 units; Cost : 10,000]

1,000 1,00,000By Normal Loss a/c

By Bal c/d [Includes Normal Loss:

0 units Cost : 9,900]

100

900

100

99,900

1,000 1,00,000 1,000 1,00,000

To bal b/d 900 99.900

With regard to normal loss, it is accepted that the value other than its realisable value (i.e. the difference between the actual cost of normal loss stock and its realisable value) should be borne by good production.

This means that the unrealisable value of normal loss stock (Rs. 9,900) is accepted as normal cost. Therefore we eliminate only the realisable value (Rs. 100) of the normal loss stock from the process account.

In the above case, Rs. 100 being the value of normal loss is eliminated from the process account and the rest of the cost of normal loss stock i.e. Rs. 9,900 is absorbed by the process account.

A Problem (illustration)


Process IRs.

Process IIRs.

Process IIIRs.

Total Rs.


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.


Output(Units)


of input



950 840 750

5% 10% 15%

Rs. 4 Rs. 8 Rs. 10


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,


× 100

= Rs. 18,000Rs. 18,000

× 100

= 100%

Production overheads are 100% of Direct Wages. ⇒

http://www.futureaccountant.com/process-costing/study-notes/process-account-normal-loss-illustration.php



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

Dr Process I a/c Cr


Amount(in Rs)


Amount(in Rs)


1,000 6,0005,2004,0004,000

By Normal Loss a/c By Process II a/c [Output Transferred]

50950

20019,000

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.



Amount(in Rs)


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 = NCNO

= Rs. 19,000950 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.

Abnormal Loss » Related Quantities & Values

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100

Less: Abnormal Loss 100 10,000 100

Net Output 900 90,000 100

The abnormal loss in quantity terms should be deducted from the gross input to obtain the Normal (net) Output [Normal Output = Gross Input − Abnormal Loss Units]

The cost of abnormal loss units should be deducted from the total cost to obtain the Normal (net) Cost. [Normal Cost = Total Cost − Cost of Abnormal Loss Units].

CautionThe rate column is always to be obtained as a quotient using the relation Value ÷ Quantity.

Abnormal Loss » Accounting Treatment

Total cost is debited to the Process a/c. Cost of abnormal loss is deducted from the total cost to obtain the normal cost.

Deducting from the debit side item is the same as Crediting the Item.

Therefore, "Abnormal Loss" both in terms of units and value is recorded by

Crediting the "Process " a/c and Debiting the "Abnormal Loss a/c"

The units are also shown along with it in the relevant column.




(in Rs)30/06/2006 – Abnormal Loss a/c

To Process A a/c [For the value of abnormal loss.]

Dr – 10,00010,000

Dr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

To Input 1,000 1,00,000 By Abnormal Loss a/c

By Process B a/c

100900

10,00090,000

1,000 1,00,000 1,000 1,00,000

Dr Abnormal Loss a/c Cr

http://www.futureaccountant.com/process-costing/study-notes/abnormal-loss-accounting-treatment.php


Amount(in Rs)


Amount(in Rs)

To Process A a/c 100 10,000

Expenditure incurred on Abnormal Loss Stock » Increase in Value

In general, the abnormal loss stock is valued at cost.

Where repairs are carried on or where the abnormal loss stock is further processed to convert it into some other form, the expenditure incurred is to be treated as the capital value of the asset identified as "Abnormal Loss" and is to be debited to that account.

Thus, the additional expenditure incurred is debited to the "Abnormal Loss a/c".


DateV/R No.


Amount(in Rs)


xx/xx/xxxx – Abnormal Loss a/c To Cash/Bank a/c [For the expenditure incurred on abnormal loss stock to make it saleable.]

Dr – 2,3002,300



Amount(in Rs)


Amount(in Rs)

To Process A a/c To Cash/Bank a/c

100–

10,0002,300

Recovery of Abnormal Loss » Insurance, Disposal/Sale

In recording the value of normal loss we can assume that we are creating an asset by the name "Abnormal Loss".

The value of this asset is equal to its cost. This value is the actual value incurred in acquiring the stock lost on account of abnormal reasons.

The value may be enhanced on account of the expenditure incurred on it.

The most common routes available for recovering the value of abnormal loss stock are

Sale of the abnormal loss stock (if they are in a saleable condition) Insurance realisation (if the stock lost had been insured) Sale by repairing the abnormal loss stock (if possible and feasible) Sale by converting the abnormal loss stock to some other form (if possible and feasible)

The total amount realised through all these means may be equal to, more than or less than the value of the abnormal loss stock.

Thus, on disposal of abnormal loss stock there may be (a) Gain (b) Loss and (c) Neither Gain nor Loss




Sale of Salvaged Stock

Salvaged = Save from ruin or destruction = Collect discarded or refused material

The salvaged stock (abnormal loss stock) may be sold as it is or by improving its value by incurring additional expenditure on it.

Generally, the price at which the abnormal loss stock is sold is far less than the price at which the good stock is sold. There may be exceptional cases where it may not be so.

Assuming 50 units are sold for Rs. 2,000 (50 units × Rs. 40/unit)


DateV/R No.


Amount(in Rs)


30/06/2006 – Cash/Bank a/c To Abnormal Loss a/c [For the sale of 50 units of abnormal loss stock @ Rs. 40/unit i.e. at a value of Rs. 2,000.]

Dr – 2,0002,000



Amount(in Rs)


Amount(in Rs)

To Process A a/c 100–

10,000 By Cash/Bank a/c 50 2,000

Insurance Realisation

This is the amount that the insurance company would be paying (or accepting to pay) to make good the loss incurred on the abnormal loss stock. Journal in the books of M/s __ for the period from ____ to _____

DateV/R No.


Amount(in Rs)


30/06/2006 – Cash/Bank/Insurance Co. a/c To Abnormal Loss a/c [For the amount of insurance realisation received or receivable on the abnormal loss stock.]

Dr – 1,5001,500



Amount(in Rs)


Amount(in Rs)

To Process A a/c 100 10,000 By Bank/Ins. Co a/c –

1,500

Insurance Company indemnifies the lossThe amount paid (accepted to be paid) by the insurance company would be dependent on a number of factors


like the insurance agreement, the quantum of stock insured, the magnitude of loss, etc. Since the contract of insurance is a contract of indemnity (not a contract of guarantee), we cannot assume the insurance company to be paying an amount greater than the actual net loss incurred. Indemnity = A sum of money paid in compensation for loss or injury

= Protection against future loss

Can't there be insurance realisation on Normal Loss StockThe insurance company can make profits only if the loss does not occur in all cases. This is not possible if the insurance company insures normal loss. Normal Loss by its nature itself occurs every time the transaction takes place. Thus, when we talk of insurance of loss, we mean abnormal loss and not normal loss.

Profit on Disposal/Sale of Abnormal Loss Stock

There would be a profit on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is more than its value.

The profit being abnormal in nature is transferred to the "Costing Profit and Loss a/c"

Assuming 40 units whose value is Rs. 4,000, are disposed at a total Realisation of Rs. 4,800


DateV/R No.


Amount(in Rs)


30/06/2006 – Abnormal Loss a/c To Costing P & L a/c [For the surplus on disposal of the abnormal loss stock (sale and insurance realisation).]

Dr – 800800



Amount(in Rs)


Amount(in Rs)

To Process A a/c To Costing P&L a/c

100–

10,000800

By Cash/Bank/Dr. a/c

By Bank/Ins Co. a/c By bal c/d

40–

60

2,3002,5006,000

100 10,800 100 10,800

To bal b/d 60 6,000 Dr Costing Profit & Loss a/c Cr


Amount(in Rs)


Amount(in Rs)

By Abnormal Loss a/c 800

Note1. Profit or loss is assessed by taking only the value of 40 units into consideration.


Profit = Rs. 800 (Rs. 4,800 − Rs. 4,000).

2. Since only 40 units are disposed, the value of the other 60 units would be retained in the Abnormal Loss a/c, till they are disposed.


Loss on Disposal/Sale of Abnormal Loss Stock

There would be a loss on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is less than its value.

The loss being abnormal in nature is transferred to the "Costing Profit and Loss a/c"

Assuming 100 units whose value is Rs. 10,000, are disposed at a total Realisation of Rs. 6,000.


DateV/R No.


Amount(in Rs)


30/06/2006 – Costing Profit & Loss a/c To Abnormal Loss a/c [For the loss on disposal of the abnormal loss stock.]

Dr – 4,0004,000



Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 10,000 By Cash/Drs a/c By Costing P&L a/c

100–

6,0004,000

100 10,000 100 10,000



Amount(in Rs)


Amount(in Rs)

To Abnormal Loss a/c 4,000

Note1. Profit or loss is assessed by taking the value of all the 100 units into consideration since all of them

are disposed off.

Loss = Rs. 4,000 (Rs. 10,000 − Rs. 6,000).

2. Since all the units are disposed, there would be no value left in the abnormal loss account.

3. At the end of the accounting period, there would be no asset (named Abnormal Loss) to be shown in the balance sheet.

Disposal/Sale of Abnormal Loss Stock without Gain/Loss

There would be no gain or loss on the sale/disposal of abnormal loss stock when the actual amount realised (realisable) through sale proceeds and insurance together is equal to its value.

Assuming 75 units whose value is Rs. 7,500, are disposed at a total Realisation of Rs. 7,500.



Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 10,000 By Cash/Drs a/c By Bank/Ins Co. a/c

By bal c/d

75–

25

2,5005,0002,500

100 10,000 100 10,000

To bal b/d 25 2,500

Note1. Since only 75 units are disposed off, the value of the other 25 units would be retained in the

Abnormal Loss a/c, till they are disposed.


Influence of Losses on Costs

In arriving at the cost of manufacturing a product or service, only normal costs are to be considered as being part of cost. The costs should not be influenced by abnormal natured losses and costs.

Therefore the value of losses should be eliminated from the total costs.

Since all costs are debited to the process account, eliminating a value implies either deducting from the debit side or crediting the process account with the value.

Dr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

To Input [Includes Ab. Loss: 100 units; Cost : 10,000]

1,000 1,00,000By Abnormal Loss a/c

By Bal c/d [Includes Ab. Loss: 0 units Cost : 0]

100

900

10,000

90,000

With regard to abnormal loss, it is to be understood that no part of its value (cost) should be borne by good production.

Therefore we eliminate the total cost/value (Rs. 10,000) of the abnormal loss stock from the process account.



Process IRs.

Process IIRs.

Process IIIRs.

Total Rs.


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.


Output(Units)


of input



950 840 750

5% 10% 15%

Rs. 4 Rs. 8 Rs. 10



The primary direct material here is the output of Process I which is received as an input. Primary Direct Materials = Value of output received from Process I

= Rs. 19,000 (950 units @ Rs. 20 per unit)



Working Notes (Production Overhead)




× 100

= Rs. 18,000Rs. 18,000

× 100

= 100%




Process II = Rs. 6,000 × 100%= Rs. 6,000

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

NoteCalculations for apportionment of production overheads are done only once. They are given here just for reference

Ledger Accounts

Dr Process II a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process I a/c (Primary)

To Material (Secondary) To Direct Labour/Labor To Production Overheads

950 19,0003,9606,0006,000

By Normal Loss a/c By Abnormal Loss a/c

By Process III a/c [Output Transferred]

9515

840

760600

33,600

950 34,960 950 34,960



Amount(in Rs)


Amount(in Rs)

To Process I a/c To Process II a/c

5095

200760



Amount(in Rs)


Amount(in Rs)

To Process II a/c 15 600

Note Ascertain all the values used on the credit side of the process account through the Working Notes.

It would not be good practice to ascertained them as balancing figures.

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. They are given here each time to enable understanding.

Working Notes

• Gross Input [GI]GI = 950 units

All these are units received from the previous (Process I).

AssumptionThe additional material added would not result in an increase in the units input. [In the absence of any information relating to quantities]


= 950 units × 10%= 95 units


= 950 units − 95 units= 855 units


• Abnormal Loss/Gain [AL/AG]Since AO < NO, there is abnormal loss.

• Abnormal Loss [AL]AL = NO − AO



= Rs. 34,960


= 95 units × Rs. 8/unit= Rs. 760


= Rs. 34,960 − Rs. 760= Rs. 34,200


NCNO/Unit = NCNO

= Rs. 34,200855 units

= Rs. 40/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

= 840 units × Rs. 40/unit= Rs. 33,600

• Abnormal Loss [VAL]VAL = AL × NCNO/Unit

= 15 units × Rs. 40/unit= Rs. 600

• Normal Loss [VNL]VNL = Normal Loss Realisation [NLR]

= Rs. 760

Ascertain all the values used on the credit side of the process account through the Working Notes. It would not be good practice to ascertained them as balancing figures.

Gain

To understand what abnormal gain is and at what rate it should be valued:


1,000 units are input into a process at a cost of Rs. 1,00,000. Loss at 10% of input is considered normal, which is realisable at Rs. 1/unit. The actual production is 920 units.

• Gross Input [GI]GI = 1,000 units


= 1,000 units × 10%= 100 units


= 1,000 units − 100 units= 900 units

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100.00


Net/Normal Output 900 99,900 111.00


Dealing with Abnormal Gain units


• Abnormal Loss/Gain [AL/AG]Since AO > NO, there is abnormal gain.

• Abnormal Gain [AG]AG = AO − NO


Actual Output ≠ Normal OutputThe actual output is 920 units whereas the normal output is 900 units only.

http://www.futureaccountant.com/process-costing/study-notes/abnormal-gain-valuation-accounting-treatment.php

To arrive at the figure of actual output we need to add these 20 units to the normal output.

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100.00



Add: Abnormal Gain 20 – –

Actual Output 920 99,900 108.60

Since no additional cost is incurred in obtaining this output, we do not add any further cost to the cost column.

The cost per unit of output works out to Rs. 108.60.

Had there been no abnormal gain, the output would have been 900 units and the cost per unit would have been Rs. 111

Abnormal Gain Value Adjustment

To conclude whether it is appropriate not to record any value in the amount column, we should base our thought on the concept of Normal Cost.

Normal Cost is the cost that we would incur under normal circumstances. It should not be influenced by abnormal natured costs/losses. At the same time it should not also be influenced by abnormal natured incomes/gains.

What would the cost per unit be in the future?The gain is termed abnormal because, there is no guarantee that the same gain would occur in the future.

If we start the operations with a similar input of 1,000 units:

We would be able to achieve an output of 900 units

At what Cost?

At a Normal Cost of Rs. 99,900 i.e. @ Rs. 111/unit.

The cost per unit has reduced from Rs. 111 to Rs. 108.60 on account of abnormal gain (in output units).

The cost of output to be taken into the accounting records should be normal cost which would be Rs. 111 per unit and not Rs. 108.60 (the figure we arrive at if we do not make any value adjustments).

Rs. 108.60/unit is abnormal cost and the normal cost is Rs. 111/unit. Thus the output of the process which should be valued at the normal cost of Rs. 111 per unit.

Since abnormal gain should not influence costs, we need to make appropriate adjustments to the cost incurred to arrive at the normal cost. This is done by adding the "value of abnormal gain units" to the normal cost to obtain the total cost of actual output.

Quantity(Units)

Value(Rs.)

Rate(Rs./Unit)

Gross Input 1,000 1,00,000 100.00



Add: Abnormal Gain 20 2,220 111.00

Actual Output 920 1,02,120 111.00

Rate at which the abnormal Gain is valued

Calculations relevant to the adjustments to be made in relation to the abnormal gain

• Total Value of 920 units (valued @ Rs. 111 per unit) = 920 units × Rs. 11/unit= Rs. 1,02,120

• Value to be attributed to the abnormal gain units = Total Value of 920 units − Normal Cost of 900 units = Rs. 1,02,120 − Rs. 99,900 = Rs. 2,220

• Rate at the abnormal gain units are valued = Total Value AttributedAbnormal Gain units

= Rs. 2,22020 units

= Rs. 111/unit

We can conclude that the abnormal gain units and the actual output units are thus valued at the same rate.

Abnormal Gain is valued at cost i.e. at the normal cost of normal output per unit

This is true for valuation of "Abnormal Gain" in all cases.

Abnormal Gain » Accounting Treatment

Abnormal gain in quantity terms should be added to the gross input to obtain the actual output.

The value of abnormal gain should be added to the total cost to obtain the normal cost of actual output.

Total cost and Gross input units are debited to the process account.

Adding to a debit side item implies debiting the item.

Therefore, "Abnormal Gain" both in terms of units and value is recorded by

Debiting the "Process " a/c and Crediting the "Abnormal Gain a/c"




(in Rs)30/06/2006 – Process I a/c

To Abnormal Gain a/c [For the value of abnormal gain.]

Dr – 2,2202,220

Dr Process I a/c Cr


Amount(in Rs)


Amount(in Rs)

To Input To Abnormal Gain a/c

1,00020

1,00,0002,220

By Normal Loss a/c

By Process II a/c

100920

1001,02,120

1,020 1,02,220 1,020 1,02,220

Dr Abnormal Gain a/c Cr


Amount(in Rs)


Amount(in Rs)

By Process I a/c 20 2,220

Closing the Abnormal Gain a/c

There is a physical input of 1,000 units and an actual (physical) output of 920 units in the production process.

Based on this the physical loss in terms of units would be 80 units (1,000 units input - 920 units output).

• Normal Loss UnitsThe 100 units of normal loss recorded is a notional figure arrived at based on the normal behavioral pattern of the production process. Only 80 of these are physically present.

The excess (20) units recorded are supported by the 20 (notional) units of abnormal gain entered on the debit side of the process account.

Since, these units are recorded on a fictional basis, they would not be physically available for being sold/disposed at the time of disposing the normal loss units.

• Abnormal Gain UnitsThe abnormal gain account represents a certain element of profit in value terms.

The credit of 20 units in the abnormal gain account does not carry any meaning.

• Adjustment/RectificationTo adjust/rectify this condition, the 20 notional units in the normal loss account are set off to the abnormal gain account.

These units are valued at the same rate at which normal loss units have been earlier valued (net realisable rate).


Date V/R No. Particulars L/FDebit

Amount(in Rs)


30/06/2006 – Abnormal Gain a/c To Normal Loss a/c

Dr – 2020

http://www.futureaccountant.com/process-costing/study-notes/abnormal-gain-valuation-accounting-treatment.php

[For the fictional value of normal loss units written off by transfer to the abnormal gain account (20 units @ Rs. 1/unit i.e. Rs. 20) .]

DrNormal Loss a/c

Cr


Amount(in Rs)


Amount(in Rs)

To Process I a/c 100 100 By Abnormal Gain a/c

By Balance c/d

2080

2080

100 100 100 100

To Balance b/d 80 80

The balance in the Normal Loss account represents the actual loss units that are physically available.

• Closing the Abnormal Gain accountThe balance in the "Abnormal Gain a/c" represents the actual gain made. The gain being abnormal in nature is transferred to the Costing Profit and Loss a/c, thereby closing the "Abnormal Gain a/c". Journal in the books of M/s __ for the period from ____ to _____

Date V/R No. Particulars L/FDebit

Amount(in Rs)


30/06/2006 – Abnormal Gain a/c To Costing Profit & Loss a/c [For the abnormal gain a/c closed by transferring the balance gain to the costing profit and loss account.]

Dr – 2,2002,200

DrAbnormal Gain a/c

Cr


Amount(in Rs)


Amount(in Rs)

To Normal Loss a/c

To Costing P&L a/c

20–

202,200

By Process I a/c 20 2,220

20 2,220 20 2,220



Process IRs.

Process IIRs.

Process IIIRs.

Total Rs.


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

http://www.futureaccountant.com/process-costing/study-notes/process-account-abnormal-gain-illustration.php

of direct wages.


Output(Units)


of input



950 840 750

5% 10% 15%

Rs. 4 Rs. 8 Rs. 10



The primary direct material here is the output of Process I which is received as an input. Primary Direct Materials = Value of output received from Process I

= Rs. 33,600 (840 units @ Rs. 40 per unit)



Working Notes (Production Overhead)




× 100

= Rs. 18,000Rs. 18,000

× 100

= 100%




Process II = Rs. 6,000 × 100%= Rs. 6,000

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

NoteCalculations for apportionment of production overheads are done only once. They are given here just for reference Ledger Accounts


Dr Process III a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process II a/c (Pr) To Material (Secondary) To Direct Labour/Labor To Production Overheads

To Abnormal Gain a/c

840

36

33,6005,9248,0008,000

2,736<br< td=""> </br<>

By Normal Loss a/c

By Finished Stock a/c

[Output Transferred]

126

750

1,260

57,000

876 58,260 876 58,260



Amount(in Rs)


Amount(in Rs)

To Process I a/c To Process II a/c To Process III a/c

5095

126

200760

1,260

By Ab Gain a/c

By bal c/d

36

235

360

1,860

271 2,220 271 2,220

To Bal b/d 235 1,860 Dr Abnormal Loss a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process II a/c 15 600

Dr Abnormal Gain a/c Cr


Amount(in Rs)


Amount(in Rs)

To Normal Loss a/c

To Costing P&L a/c

36–

3602,376

By Process III a/c 36 2,736

36 2,736 36 2,736

Note Ascertain all the values used on the credit side of the process account through the Working Notes.

It would not be good practice to ascertained them as balancing figures. 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.

Disposal of Normal Loss Stock

Since no detail realting to the disposal of Normal Loss Stock is given, we assume that they are unsold.



The value of normal loss stock represents an unrealised asset (though of a very small value).

Disposal of Abnormal Loss Stock

Since no detail realting to the disposal, sale, insurance realisatoin of Abnormal Loss Stock is given, we assume that they are not yet disposed.

The value of abnormal loss stock represents an unrealised asset.

Working Notes

• Gross Input [GI]GI = 840 units

All these are units received from the previous process (Process II).

AssumptionThe additional material added would not result in an increase in the units input. [In the absence of any information relating to quantities]


= 840 units × 15%= 126 units




• Abnormal Loss/Gain [AL/AG]Since AO > NO, there is abnormal gain.

• Abnormal Gain [AG]AG = AO − NO





= Rs. 55,524


= 126 units × Rs. 10/unit= Rs. 1,260


= Rs. 55,524 − Rs. 1,260= Rs. 54,264


NCNO/Unit = NCNO

= Rs. 54,264714 units

= Rs. 76/unit



= 750 units × Rs. 76/unit= Rs. 57,000

• Abnormal Gain [VAG]VAG = AG × NCNO/Unit

= 36 units × Rs. 76/unit= Rs. 2,736

• Normal Loss Value of Abnormal Gain units

[VAG(NL)]VAG(NL) = Abnormal Gain units × Realisable value of Normal Loss/unit

= 36 units × Rs. 10/unit= Rs. 360

• Normal Loss [VNL]VNL = Normal Loss Realisation [NLR]

= Rs. 760


Process Inventories

In accounting, Inventories is a collective term used to represent raw materials, work in progress and finished goods.

Even in process cost accounting, inventories are classified as

Raw MaterialsWhere the raw material charged to the process remains unused at the end of the period i.e. at the time the process account is being balanced, it forms part of closing inventory for that process.

The raw material used in a process may be

The material that has been received into the process from a previous process (Or)

The material that was directly introduced into that process.

Finished StockBy Finished Stock in relation to a process, we mean the output (completed production) of that process.

The output of a process is transfered to the subsequent process account or to the Final Product account (if the process in consideration is the last process).

Where the transfer of output:

is being done immediately on completion of production, there would be no Finished Stock (Closing stock of finished goods) in relation to the process.

The transfer of output is recorded through the process account itself in such cases.

is not done immediately on completion of production, there is a possibility for the presence of Finished Stock in relation to that process. Where the finished stock is present, it forms a part

http://www.futureaccountant.com/process-costing/study-notes/closing-inventories-stocks-raw-material-finished-goods-work-in-progress-valuation.php

of the inventory for that process.

In such cases, the output, immediately on completion of production is transferred to a Process Stock account (created separately for each process). Any transfer of output would be done thereon from that account.

Where the closing finished stock is present, it can be identified within the process stock account

Work-In- ProgressWhere the processing of the input introduced into the process but not completed at the time the process account is being balanced, the partially completed production would form the work-in-progress.

This also forms part of the process inventory.

Valuation and Accounting for Inventories

The process inventories may consist of one or more of these i.e. raw materials, work-in-progress and finished goods.

In dealing with inventories, we would be handling two aspects.

1. ValuationValuation of inventory which is in the Raw Material Stage or the Finished Stock stage does not pose a problem as the values are figures that are derived from information available in relation to process accounts.

Valuation of work in progress is a complex task which requires you to learn new methodologies for valuation.

2. AccountingHow and where we account for Process Inventories is dependent on the type of inventory in consideration.

In general, Raw Material and Work In Progress Inventories are accounted for using the process account.

Finished stock inventory is accounted for through a separate stock account. To enable this, the output of a process is carried over to a process stock account and any transfer of the output thereon is done through the process stock account.

Valuation » Rates/Methods

The concept of the rates (methods) for valuation is relevant and applicable to all types of inventories, whether it be Raw Material or Work in Progress or Finished Goods.

The three methods most commonly used for valuing inventories are

FIFO [First in First Out] Method LIFO [Last in First Out] Method


Average Method

In genearal each method gives a distinct unit rate for valuing the closing inventory. In certain cases, the rates may work out to be the same under two or more methods.


There is an opening stock of 1,800 units @ Rs. 42/unit; The current period receipts are 18,000 units @ Rs. 40 per unit and the closing stock is 1,200 units whose value is to be ascertained by choosing an appropriate rate for valuation.

Particulars Quantity Amount Rate

Opening Stock Received during the current period

1,80018,000

75,6007,20,000

42.0040.00

Total Stock 19,800 7,95,600 40.18

Rate for Valuing Closing Stock:: FIFO method LIFO method Average method

40.0042.0040.18

Valuation » FIFO [First In First Out] Method

Under this method, it is assumed that the stock received in the current period is used, only after disposing off the previous period stocks.

Previous Period Stocks Opening Stocks ⇒(i.e. stocks in relation to the process at the end of the previous period).

Thus, the inventory at the end (i.e. the current period closing stock) would be from ([or] a portion of) the stock received into the process during the current period.

Thus it would be appropriate to value stock at the rate that is relevant to the stock received in the current period.



1,80018,000

75,6007,20,000

42.0040.00

Total Stock 19,800 7,95,600 40.18

Rate for Valuing Closing Stock:: FIFO method

40.00

If this method is employed, then the closing stock in the above case would/should be valued @ Rs. 40/unit.

• Closing Stock more than the stock received in the Current PeriodWhere the closing stock is in excess of the stock received during the current period, all the closing stock cannot be related to the stock received during the current period.

In such a case, the stock equivalent of the current period receipt may be valued at the current period price and


the rest at the rate relevant to the previous period stock (i.e. opening stock).

In problem solving, the total stock is sometimes valued at the current period rates, ignoring this aspect. It amounts to assuming that the total closing stock is relatable to the stocks received in the current period which should be stated clearly.

Valuation » LIFO [Last In First Out] Method

Under this method, it is assumed that the stock received during the current period will be disposed off first and only then the previous period stock is used.

Previous Period Stocks Opening Stocks ⇒(i.e. stocks in relation to the process at the end of the previous period).

Thus, the inventory at the end (i.e. the closing stock) would be from ([or] a portion of) the stock of the previous period (i.e. opening stock) only. Therefore it would be appropriate to value stock at the rate that is relevant to the previous period stock.



1,80018,000

75,6007,20,000

42.0040.00

Total Stock 19,800 7,95,600 40.18

Rate for Valuing Closing Stock:: LIFO method

42.00

If this method is employed the closing stock in the above case would/should be valued @ Rs. 42/unit.

• Where Closing Stock is more than the Opening Stock Where the closing stock is in excess of the previous period stock (opening stock) in relation to the process, all the closing stock cannot be related to the opening stock.

In such a case, the stock equivalent of opening stock may be valued at the previous period stock price and the rest at the rate relevant to the stock received in the current period.

In problem solving, the total stock is sometimes valued at the opening stock rate, ignoring this aspect. It amounts to assuming that the total closing stock is relatable to opening stock which should be stated clearly.

Valuation » Average Method

Under this method, it is assumed that all the stocks are pooled up and there is no specific demarcation as to whether previous period stocks are being used up or the stocks from the current period receipts are being used up.

Thus, the closing stock would be from ([or] a portion of) the stocks of either of the periods. In such cases, it would be appropriate to value stock at a rate that is the average of the previous period rates and the current period rates.


Opening Stock 1,800 75,600 42.00


Received during the current period 18,000 7,20,000 40.00

Total Stock 19,800 7,95,600 40.18

Rate for Valuing Closing Stock:: Average method

40.18

If this method is employed the closing stock in the above case would/should be valued @ Rs. 40.18/unit.

• Weighted Average PriceThis is the weighted average of the previous period (opening) and current period rates. It is given by the relation

Weighted Average Rate = Total Value (of the previous and current periods)Total Quantity

= Rs. 7,95,60019,800 units

= Rs. 40.18/unit

This rate can also be interpreted as the "weighted average" of rates taking the quantity of stocks as the weights.

Weighted Average Rate = (1,800 units × Rs. 42/unit) + (18,000 units × Rs. 40/unit)(1,800 units + 18,000 units)

= (Rs. 75,600 + Rs. 7,20,000)(19,800 units)

= Rs. 7,95,60019,800 units

= Rs. 40.18/unit

• Simple AverageThe simple average of stock rates is given by the average of just the prices.

Simple Average Price =(Rs. 42/unit + Rs. 40/unit)2

= Rs. 41/unit

This is not the rate that is intended by the term Average Rates.

Same Rate under all methods

Under the following conditions, we will notice that the rate for valuation would be the same whatever may be the method we assume.

• Where there is no Opening StockWhere there is no opening stock, the total stock at the end would be related to the stock received during the current period. The method of valuation would not be relevant and all the three methods would yield the same rate.





–18,000

–7,20,000

–40.00

Total Stock 18,000 7,20,000 40


404040

• Where the Previous and Current Period Rates are the SameWhere there is opening stock and the rates relating to the opening stock as well as the current period stock are the same, all the three methods would yield the same rate.



1,80018,000

75,6007,56000

42.0042.00

Total Stock 19,800 8,31,600 42


424242

Raw Material Types » Values

The raw material that we consider in a process account is basically of two types. The value of raw material that is remaining at the end (closing raw material stock) is decided based on its type.

Raw Materials

Directly introduced into a process

This is the raw material stock that is acquired from sources outside the process and introduced into the process.

If the closing stock of raw material is such stock, its value can be ascertained from the data relating to the cost of purchase that has been charged to the process as well as the value of this type of stock at the beginning.

Received from the previous process

This is the output of the previous process introduced into the process as raw material.

If the closing stock of raw material is such stock, its value can be ascertained from the data relating to the cost that is charged to the process while transferring the stock from the previous process as well as the value of this type of stock at the beginning.

Accounting Treatment

The value of raw materials at the end

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Credit » Process a/c

The value/cost of material used in a process is charged to the process by debiting the relevant "Process a/c".

Therefore, the value of the closing inventory is credited to the "Process a/c", to eliminate the charge relating to the material that has not been used up for the finished production from the process account.

Debit » No Separate Raw Material Stock a/c

Where no separate Raw Material Stock a/c is being maintained for the process raw material stocks, the value of closing stock of raw material is carried forward to the subsequent accounting periods using the same Process a/c.

In such case, the posting in the Process a/c would read "By Bal c/d (Raw Material Stock)". The value of raw materials at the end would be an asset to the organisation and where the asset is to be shown, it would appear with the label "Process a/c".

Separate Raw Material Stock a/c

Where a separate Raw Material Stock a/c is being maintained for the process raw material stocks, the value of closing stock of raw material is debited to that account.

In such case, the posting in the Process a/c would read "By Process__ Raw Material Stock a/c". The value of raw materials at the end would be an asset to the organisation and where the asset is to be shown, it would appear with the label "Process__ Raw Material Stock a/c".

Illustration (No Opening Stock)

Where there is no opening stock, valuing the closing stock would be easy, since the rate of valuation would be the same, whatever may be the method (FIFO, LIFO, Average) adopted for valuation.

Closing stock would valued at the rate at which the stock has been received into the process as input during the current period. Since there is no opening stock, all the closing stock units relate to the units introduced in the current period. The following details relate to an intermediary process (II):

Transfer from Process I : 2,500 units @ Rs. 20/unit; material introduced in the process : 500 units @ Rs. 30/unit. Direct Labour : Rs. 24,000 and Production Overheads : Rs. 12,000, Normal Loss : 10% of total input processed. Normal Loss units are capable of being disposed off @ Rs. 5/unit. Closing stock consisted of 400 units of the material received from Process I and 50 units of the material introduced in the process. The actual output transferred to Process III is 2,100 units.

Dr Process II a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process I a/c (Primary)


2,500500

50,00015,00024,00012,000

By Normal Loss a/c ** By Process III a/c * By Abnormal Loss a/c **

By Mat. Stock (Primary) * By Mat. Stock (Secondary) *

3002,100

150

40050

1,50084,0006,000

8,0001,500



3,000 1,01,000 3,000 1,01,000

* Values relating to these are derived through calculations. ** Quantities and Values relating to these are derived through calculations.

Working Notes » Hide/Show

Where there is Opening Stock in Process

The opening stock of a period is nothing but the closing stock of the previous period.

Valuation

There is no special valuation done in relation to opening stock, it is just a figure carried forward from the end of the previous period to the beginning of the current period.

In the absence of appropriate information we assume that the opening stock is also valued at the same rates as the current period stock.


Since the opening stock of raw material brought forward from a previous period, gets consumed during the current period, the value of opening stock is charged to the "Process a/c" at the beginning by debiting it to the "Process a/c".

Closing Stock ValuationWhen there is opening stock, valuation of closing stock of raw material would be dependent on the method (FIFO, LIFO, Average) adopted by the organisation for valuing closing stocks.

Illustration (With Opening Stock)

The following details relate to a terminal process (C): Opening Stock consisted of material Received from Process B : 500 units @ Rs. 42/unit and material introduced in the process : 100 units @ Rs. 24/unit. During the current period material received by transfer from Process B : 12,800 units @ Rs. 40/unit and material introduced in the process : 1,600 units @ Rs. 25/unit. Direct Labour cost : Rs. 86,480 and Production Overheads : Rs. 64,766. Normal Loss : 5% weight loss and 3% scrap (of total input processed). Normal Loss units are capable of being disposed off @ Rs. 12/unit. Closing stock consisted of 725 units of the material received from Process B and 75 units of the material introduced in the process. The actual output transferred to Finished Stock is 13,400 units.

Dr Process C a/c Cr


Amount(in Rs)


Amount(in Rs)

To Bal b/d (Pr. Mat) To Bal b/d (Sec. Mat) To Process I a/c (Pri) To Material (Sec) To Direct Labour/Labor To Production Overheads

To Abnormal Gain **

500100

12,8001,600

386

21,0002,400

5,12,00040,00086,48064,76620,485

By Nor. Loss (wt) a/c **

By Nor. Loss (scr) a/c **

By Finished Stock a/c *

By Mat. Stock (Pri) * By Mat. Stock (Sec) *

710426

13,400

72575

–5,112

7,11,144

29,0001,875

15,386 7,47,131 15,386 7,47,131

* Values relating to these are derived through calculations.



** Quantities and Values relating to these are derived through calculations.


Using a Separate Material Stock a/c

It is possible to use a separate Material Stock Account and charge only the value of the material consumed to the "Process a/c". For these separate material accounts are maintained for each type of material.

Considering the illustration above, the "Process C Material a/c" and the "Process a/c" would be as below.

Dr Primary Material (Process C) a/c Cr


Amount(in Rs)


Amount(in Rs)

To Bal b/d To Process I a/c

50012,800

21,0005,12,000 By Pr. Mat. Consumed a/c

By Mat. Stock (Primary) *

12,575725

5,04,00029,000

13,300 5,33,000 13,300 5,33,000

Dr Secondary Material (Process C) a/c Cr


Amount(in Rs)


Amount(in Rs)

To Bal b/d To Mat. Introduced

1001,600

2,40080,000 By Sec. Mat. Consumed a/c

By Mat. Stock (Secondary) * 1,625

7578,6503,750

2,500 82,400 2,500 82,400

Dr Process C a/c Cr


Amount(in Rs)


Amount(in Rs)

To Pr. Mat. Consumed To Sec. Mat. Consumed To Direct Labour/Labor To Production Overheads

To Abnormal Gain **

12,5751,625

386

5,04,00078,65086,48064,76621,616

By Nor.l Loss (weight) a/c **

By Nor. Loss (scrap) a/c ** By Finished Stock a/c *

710426

13,400

–5,112

7,50,400

14,536 7,55,512 14,536 7,55,512


We know the basic accounting norm, that the greater the information we need, greater the number of ledger accounts we need to maintain. Generally, the raw material stocks are handled through the "Process a/c" itself.

You are required to ascertain the output cost and the unit cost at the various stages of manufacture of the product. All other relevant values are to be found out as required.

It is known that, the operations in each process are complete on a daily basis i.e. that there would be no work-in-progress at the end of a day.

General Working Notes » Assumptions

• Raw Material StocksThe operations of each process are completed on a daily basis

There would be no work in progress at the end of any day. ⇒ Whatever remains at the end should be either raw materials or finished stock. ⇒

The information relating to stocks indicates that

The stocks are raw material stocks and There is no stock of finished goods (either opening or closing).

• Opening StockOpening stock of raw material is stock pertaining to (closing stock of) the previous period.

Since the rate for valuation of opening stock is not given, We assume that the opening stock is also valued at the current period rates.

The current period rates and the pervious period rates are the same. ⇒

• Closing StockRate for valuation of opening stock = Current Period Rates (rate applicable to goods received during the current period)

When the rates applicable to the opening stock and the current period stock is the same, the average rate would also the be same rate.

Whatever may be the method adopted for valuation i.e. FIFO (current period rate), LIFO (previous period rate) or AVERAGE, the rate of valuation of Closing stock would be the same,

Solution » Process A a/c

Dr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

To Materials Introduced #

To Manufacturing Wages

To Other Direct Expenses

To Factory Overheads

8,400 48,00024,00013,60015,200

By Normal Loss a/c *

By Process B a/c *

4008,000

–1,08,800

8,400 1,00,800 8,400 1,00,800


http://www.futureaccountant.com/process-costing/study-notes/closing-stock-in-process-at-raw-material-stage-illustration.php


• Actual Output [AO]AO = 8,000 units [Given]

• Normal Loss [NL]NL = 400 units [Given]

• Normal Output [NO]NO = AO

= 8,000 units

In the absence of information relating to inputs, we assume that the actual output itself is the normal output

• Gross/Total Input [GI/TI]NO = GI/TI − NL

GI/TI⇒ = NO + NL= 8,000 units + 400 units = 8,400 units



= Rs. 1,00,800


= 400 units × Rs. 0/unit= 0

Normal loss is valued at market price, which is given to be nil.


= Rs. 1,00,800 − Rs. 0

= Rs. 1,00,800

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

NCNO/Unit = NCNO

= Rs. 1,00,8008,000 units

= Rs. 12.60/unit



= 8,000 units × Rs. 12.60/unit= Rs. 1,00,800

Notes/Assumptions Material stocks are recorded through the "Process a/c" itself without using a separate account for

materials. # Quantities relating to these are derived through calculations.


Solution » Process B a/c

Dr Process B a/c Cr


Amount(in Rs)


Amount(in Rs)

To Opening Mat. Stock *

To Process A a/c To Manufacturing Wages



5808,000

7,3081,00,800

34,00016,12815,000

By Normal Loss a/c * By Process C a/c ** By Closing Mat. Stock *

2847,656

640

5681,64,604

8,064

8,580 1,73,236 8,580 1,73,236


• Opening Stock of Raw Material [OS(RM)]OS(RM) = 580 units [given]

• Inputs Introduced [II]II = Pertaining to Stock received from Process A

= 8,000 units

• Gross/Total Input [GI/TI]GI/TI = OS + II

= 580 units + 8,000 units = 8,580 units

• Closing Stock of Raw Material [CS(RM)]CS(RM) = 640 units [Given]

• Input Processed [IP]IP = GI − CS(RM)

= 8,580 units − 640 units= 7,940 units


• Normal Output [NO]NO = IP − NL

= (7,940 units − 284 units)= 7,656 units

• Actual Output [AO]AO = NO

= 7,656 units

In the absence of information relating to outputs, we assume that the actual output is equal to normal output


• Value of Opening Stock [VOS]VOS = OS × Rate/unit

= 580 × Rs. 12.60/unit= Rs. 7,308

Material used in this process is Output of "Process A".

Thus, the cost of materials (current period) is nothing but the cost of output of "Process A" during the current period which is Rs. 12.60/unit.

• Current Period Costs [CPC]CPC = Rs. (1,00,800 + 34,000 + 16,128 + 15,000)

= Rs. 1,65,928

These are costs debited to the process account excluding the opening stocks values.

• Total Cost [TC]TC = VOS + CPC

= Rs. 7,308 + Rs. 1,65,928= Rs. 1,73,236

Total cost includes the value of opening stocks and the costs incurred in the current period.


= 284 units × Rs. 2/unit= Rs. 568

• Value of Closing Stock [VCS]VCS = Closing Stock in units × Rate/unit

= 640 units × Rs. 12.60/unit = Rs. 8,064

Rates for Valuation of Closing Stock


Opening Stock (?) 580 7,308 12.60

Received during the current period 8,000 1,00,800 12.60

Total Stock 8,580 1,08,108 12.60

Rate for Valuing Stocks:: FIFO method LIFO method Average method

12.6012.6012.60

• Normal Cost [NC]NC = (TC − VCS) − NLR

= (Rs. 1,73,236 − 8,064) − Rs. 568= Rs. 1,65,172 − Rs. 568= Rs. 1,64,604


NCNO/Unit = NCNO

= Rs. 1,64,6047,656 units

= Rs. 21.50/unit



= 7,656 units × Rs. 21.50/unit= Rs. 1,64,604

• Normal Loss [VNL]VNL = NLR

= Rs. 568



materials. * Values relating to these are derived through calculations.

** Both Quantities and Values relating to these are derived through calculations.

Solution » Process C a/c

Dr Process C a/c Cr


Amount(in Rs)


Amount(in Rs)

To Opening Mat. Stock *

To Process A a/c To Manufacturing Wages



7387,656

15,8671,64,604

18,00013,4529,500

By Normal Loss a/c * By Abnormal Loss a/c **

By Finished Stock a/c * By Closing Mat. Stock *

356204

7,000834

1,7805,712

1,96,00017,931

8,394 2,21,513 8,394 2,21,513


• Opening Stock of Raw Materials [OS(RM)]OS(RM) = 738 units

• Inputs Introduced [II]II = Pertaining to Stock received from Process B

= 7,656 units

• Gross/Total Input [GI/TI]GI/TI = OS + II

= 738 units + 7,656 units = 8,394 units

• Closing Stock of Raw Materials [CS(RM)]CS(RM) = 834 units [Given]

• Input Processed [IP]IP = GI − CS(RM)

= 8,394 units − 834 units


= 7,560 units


• Normal Output [NO]NO = IP − NL

= 7,560 units − 356 units= 7,204 units

• Actual Output [AO]AO = 7,000 units [Given]

• Abnormal Loss/Gain [AL/AG]Since AO < NO, there is abnormal loss.

• Abnormal Loss [AL]AL = NO − AO

= 7,204 units − 7,000 units= 204 units

• Value of Opening Stock [VOS]VOS = OS × Rate/unit

= 738 × Rs. 21.50/unit= Rs. 15,867

Material used in this process is Output of "Process B".

Thus, the cost of materials (current period) is nothing but the cost of output of "Process B" during the current period which is Rs. 21.50/unit.

• Current Period Costs [CPC]CPC = Rs. (1,64,604 + 18,000 + 13,452 + 9,500)

= Rs. 2,05,556

These are costs debited to the process account excluding the opening stocks values.

• Total Cost [TC]TC = VOS + CPC

= Rs. 15,867 + Rs. 2,05,556= Rs. 2,21,423

Total cost includes the value of opening stocks and the costs incurred in the current period.


= 356 units × Rs. 5/unit= Rs. 1,780

• Value of Closing Stock [VCS]VCS = Closing Stock in units × Rate/unit

= 834 units × Rs. 21.50/unit = Rs. 17,931

Rates for Valuation of Closing Stock



7387,656

15,8671,64,604

21.5021.50

Total Stock 8,394 1,80,471 21.50


21.5021.5021.50

• Normal Cost [NC]NC = (TC − VCS) − NLR

= (Rs. 2,21,423 − 17,931) − Rs. 1,780= Rs. 2,03,492 − Rs. 1,780= Rs. 2,01,712


NCNO/Unit = NCNO

= Rs. 2,01,712

7,204 units= Rs. 28/unit



= 7,000 units × Rs. 28/unit= Rs. 1,96,000

• Abnormal Loss [VAL]VAG = AL × NCNO/Unit

= 204 units × Rs. 28/unit= Rs. 5,712

• Normal Loss [VNL]VNL = NLR

= Rs. 1,780



materials. * Values relating to these are derived through calculations.

** Both Quantities and Values relating to these are derived through calculations.

Finished Goods » Valuation

Current Period Stock

The value of finished goods/stock in a process during a period is ascertained from the process account. It is valued at the Normal Cost of Normal Output per unit.

Opening Stock

The opening stock of a period is nothing but the closing stock of the previous period. There is no special valuation done in relation to opening stock, it is just a figure carried forward from the end of the previous period to the beginning of the current period.

http://www.futureaccountant.com/process-costing/study-notes/closing-stock-in-process-at-finished-stock-goods-stage.php

In the absence of appropriate information we assume that the opening stock is also valued at the same rates as the current period stock.

Closing Stock

When there is opening stock, valuation of closing stock of finished goods would be dependent on the method (FIFO, LIFO, Average) adopted by the organisation for valuing closing stocks.

In the absence of Opening Stock

Where there is no opening stock, valuing the closing stock would be easy, since the rate of valuation would be the same, whatever may be the method (FIFO, LIFO, Average) adopted for valuation.

Where nothing is mentioned regarding the method adopted, we assume FIFO method.


The value of opening stock of finished goods brought forward from the previous period is debited to the Process Stock a/c (as opening balance - using the opening entry).

Debit » Process Stock a/c (bal b/d) The value of production completed during the current period is transferred from the Process a/c to the

Process Stock a/c. Debit » Process Stock a/c Credit » Process a/c

The value of closing stock of finished goods is carried forward within the Process Stock a/c to the subsequent accounting period (as closing balance - using the closing entry).

Credit » Process Stock a/c (bal c/d) The balancing figure in the process stock account represents the value of output transferred to the

subsequent process or disposed off otherwise as indicated.

For the value of output transferred to the subsequent process

Debit » Subsequent Process a/c

Credit » Process Stock a/c

Illustration (with Opening Stock of Finished Goods)

The following details relate to an intermediary process (Y): Opening Finished Stock : 1,200 units valued at Rs. 40,800; Transfer from Process X : 24,200 units @ Rs. 18/unit; Material introduced : 800 units @ Rs. 30/unit. Direct Labour : Rs. 1,43,400; Production Overheads : Rs. 2,35,000, Normal Loss : 8% of total input processed. These units have a realisable value of Rs. 12/unit . The actual output from the process during the current period is 22,500 units. 1,500 units of completed production remained in stock at the end. The remainder of the goods have been transferred to "Process Z"

Dr Process Y a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process X a/c (Primary)

24,200800

4,35,60024,000

By Normal Loss a/c ** By Abnormal Loss a/c **

2,000500

10,00018,000


1,43,4002,35,000 By Process Y Stock a/c *

22,500 8,10,000

25,000 8,38,000 25,000 8,38,000

Working Notes » Hide/ShowDr Process Y Stock a/c Cr


Amount(in Rs)


Amount(in Rs)

To Bal b/d To Process Y a/c

1,20022,500

40,8008,10,000

By Process Z a/c **

By Bal c/d *

22,2001,500

7,96,80054,000

23,700 8,50,800 23,700 8,50,800



•

Opening Stock [OSU] = 1,200 units••

•

The total closing stock is assumed to be related to

stock produced during the current period, assuming FIFO

method for stock disposal and valuation. Thus the value o

f closing stock is made at the rate at which the current p

eriod goods/stock have been received from the process

account.

Rates for Stock Valuation

Quantity

1,20022,500

23,700

LIFO,

FIFO and Average methods are the three most commonly us

ed methods for valuing the stocks. Each method takes a d

istinct unit rate for valuing closing stock.

•••

The v

alue of output transferred to the next process in such a

case is the balance after deducting the value of closing

stock from the total value of goods (opening stock and

current period production received).

•

•

Recording Finished Stock within Process Account

t is theoretically possible to make adjustments for stocks of finished goods within the process account. However, in general, where there are stocks of finished goods in relation to a process, a separate stock account is maintained for each process and transfer of finished stocks to subsequent processes is done through this stock account.

In such a case, preparation of "Process a/c" would be the same as in other cases. The only difference would be the presence of an additional ledger account in relation to each process where there are opening and

closing finished goods inventories.

Where the stocks are handled using the Process a/c itself, that account would contain the consolidated details of the two separate accounts i.e. the Process a/c and the Process Stock a/c.

Reworking the illustration above, assuming that the stocks are handled through the "Process Y a/c" itself.

Dr Process Y a/c Cr


Amount(in Rs)


Amount(in Rs)

To bal b/d (Fin. Stock) To Process X a/c (Primary) To Material (Secondary) To Direct Labour/Labor To Production Overheads

1,20024,200

800

40,8004,35,600

24,0001,43,4002,35,000

By Normal Loss a/c ** By Abnormal Loss a/c **

By Process Z a/c * By Bal c/d (Fin. Stock)

2,000500

22,2001,500

10,00018,000

7,96,80054,000

26,200 8,78,800 26,200 8,78,800

Caution :: WorkaroundAbundant care should be taken in deciding upon the various figures in calculations if such a method is adopted. Till the figures for production are arrived at, the opening stock of finished goods should not be taken into consideration.

To avoid confusion prepare the account in two stages, which in effect would be making up the accounts as in the first case. The only difference being the two accounts would be made up within a single account.

Dr Process Y a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process X a/c (Primary) To Material (Secondary) To Direct Labour/Labor To Production Overheads

24,200800

4,35,60024,000

1,43,4002,35,000

By Normal Loss a/c ** By Abnormal Loss a/c ** By Completed Production c/d *

2,000500

22,500

10,00018,000

8,10,000

25,000 8,38,000 25,000 8,38,000

To Bal b/d (Fin. Stock) To Completed Production b/d

1,20022,500

40,8008,10,000

By Process Z a/c ** By Bal c/d (Fin. Stock) *

22,2001,500

7,96,80054,000

23,700 8,50,800 23,700 8,50,800


M/s Shanghai Chemicals, manufacture of a product which passes through three different processes I, II and III. The technical specifications of the manufacturing process allow for process losses (on the units processed) as under: Process I : 3%, Process II : 4% and Process IV : 5%.

Particulars I II III

Direct Materials Direct Wages Factory Overheads Scrap Value of Loss/unit

Rs. 1,24,0002,36,00084,000–

Rs. –34,00016,12815,000

Rs. –18,00013,4529,500

Output Opening Finished Stock Closing Finished Stock

Rate of Valuation (Opening Stock)

Units 8,000400––

2

Units –284580640

5

Units 7,000356738834

You are required to ascertain the output cost and the unit cost at the various stages of manufacture of the product. All other relevant values are to be found out as required.

It is known the operations in each process are complete on a daily basis i.e. that there would be no work-in-progress at the end of a day.

What is Work in Progress?

Work-in-Progress is a term used to indicate incomplete work.

Something which has been started but has not yet been completed.

This term is used both in case of an asset as well as a product being manufactured.

• AssetWhere there is an asset under construction, we consider it to be work-in-progress till the time the construction is completed.

• ProductWhere a product is being manufactured, we consider it to be work-in-progress till the production process is completed and the finished output is obtained.

Inventories are Assets

We come across inventories of three kinds (a) Raw Materials, (b) Work-in-Progress and (c) Finished Goods.

Whatever may be the stage of the inventory, it would be treated as an asset at the time of assessing the value of assets and liabilities of the organisation.

This can be understood from the fact that all these inventories are considered as a part of what we call Closing Stock. Since Closing Stock is treated as an asset, it is shown on the assets side of the balance sheet.

Balance Sheet of M/s as on ___

LiabilitiesAmount

(Rs.)Amount

(Rs.)Assets

Amount(Rs.)

Amount(Rs.)

Closing Stocks: Raw Materials Work-in-Progress Finished Goods

45,0001,25,0001,08,000

2,78,000

• Principle for Valuation of AssetsThe value of an asset includes all the expenses incurred before bringing the asset into usable condition.

• Capitalising ExpensesWhere an expenditure incurred is treated as a part of the value of an asset, we say that the expenditure has been capitalised. Some examples:

Installation expenses incurred for a new machine. Repair and renewal expenses incurred for bringing up a second hand machine purchased into use.

These may be treated as revenue natured expenses in the normal course of business. But since they are expended in relation to an asset and that too during the period prior to bringing the asset into usable condition, they are to be treated as part of the value of the asset.

Recording and Posting If such expenses are already recorded using accounting heads indicating expenses such as

"Installation Expenses", "Repair Charges" etc, they are to be capitalised by transferring the same to the asset account.

Hide/Show

If they are not already recorded, then they are directly debited to the asset account.

Hide/Show

Valuation of Inventories

Since inventories are assets, the principle for valuation of assets is used in valuing inventories also. All the expenses incurred on the inventories before they are brought into usable condition would form part of the value of the inventories.

• Usable ConditionThe inventory acquiring usable condition would form the basis for deciding what expenses are to be capitalised and what not.

These expenses that form the part of the value of inventory would be different for the three different types of inventory.

» Raw Materials Usable condition for raw materials would be the state where they are ready for being used in the production process. Thus, all the expenses incurred before bringing the raw material to the actual production environment would have to form part of the value of raw materials.

Ascertaining all the expenses that need to form part of the value of raw materials would be difficult and impractical. It would be possible to ascertain such expenses only till the raw materials are placed in the stores. Any expenses relating to storage and carriage from the stores to the production environment are thus

ignored for valuing raw materials.

In Process AccountingIn process cost accounting, by valuation of raw materials we mean valuation of the raw materials purchased or received during the current period. We rarely come across the problem of valuing raw materials as it would be given or known from the available data in almost all cases.

In case of the primary and secondary materials for the initial process as well as the secondary materials for the second and subsequent processes, the value would be dependent on the cost of purchase or acquisition which is given in almost all cases.

In case of the primary materials for the second and subsequent processes, the cost is ascertained as the cost of output of the process from which the input has been received.

» Finished Goods Usable condition for finished goods would be the state where they are ready for being sold or disposed off otherwise. Thus, all the expenses incurred before the completion of production would have to form part of the value of finished goods. This is what we call the normal cost of normal output.

In Process AccountingIn process cost accounting, by valuation of finished goods we mean valuation of the finished goods manufactured during the current period.

This value is obtained from the process cost data shown in the Process account. The "Normal Cost of Normal Output" per unit is what decides the value of finished goods.

» Work in ProgressWork in Progress is incomplete production. It may be complete to any extent depending on the case in consideration.

Trying to ascertain the value of work in progress based on the same principle would not be possible as the state of Usable condition for work in progress does not carry any meaning.

Thus, we interpret the same principle in a different way. The value of an asset includes all the expenses in relation to an asset to make it usable.

The value of work in progress includes all the expenses incurred on it. These are the expenses which ultimately go into the value of the final product.

Thus, to ascertain the value of work-in-progress we need to know the expenditure incurred on the same till that time when it is being valued.

In Process AccountingIn process cost accounting, by valuation of work-in-progress we mean valuation of the work-in-progress at the end of the current period.

This value is not straight away obtainable from the process cost data shown in the Process account. We need to make additional efforts to find the value of work-in-progress in processes.

• Closing Stock ValuationOnce the value of current period inventory (raw materials and finished stock) is ascertained, it would be possible to ascertain the value of the respective closing stocks by choosing either the FIFO, LIFO or AVERAGE methods for valuation.

This is what we dealt with in the earlier notes. With regard to Work-in-Progress, we ascertain the value of closing work-in-progress itself through calculations.

Valuation of Work-in-Progress

By valuation of work-in-progress we mean valuation of closing work-in-progress.

The value of work-in-progress is equal to the total amount of expenditure incurred on the units in progress till the time of valuation. To be able to ascertain the value this way, the expenditure incurred on the units in process at the end should be ascertainable separately, which practically is not possible almost in all cases.

Assume that 10,000 units have been input into the production process and 2,450 units are in process at the end of the accounting period.

To ascertain the value of these 2,450 units of work-in-progress we should have recorded the expenses incurred on the 7,550 units which were completed and the rest of 2,450 units separately.

This is practically not possible and is very very rarely done.

• How is the expenditure incurred on work-in-progress units ascertained ?The expenditure incurred on the work-in-progress units is ascertained on an estimated basis by estimating the percentage completion of the work-in-progress units with regard to the various elements of cost (expenses).

Consider a process involving Material, Labour/Labor and Overhead expenses. These three elements of cost would be present in the work-in-progress units depending on the proportion of work completed with regard to these elements.

» IllustrationConsider a production process where the value of a completed unit (i.e. expenditure incurred on a completed unit) is Rs. 140 with Rs. 70 on Materials, Rs. 50 on Labour/Labor and Rs. 20 on Overhead Expenses.

There are work-in-progress units in process at the end of the accounting period.

To ascertain the value of these work-in-progress units, an inspection was conducted on the shop floor and it was ascertained that the work-in-progress units are 100% complete with regard to material, 60% complete with regard to labor/labour and 75% complete with regard to overheads.

Element of Cost

Material Labour/Labor Overhead Expenses Total

a) Complete Cost (per unit in Rs.)b) % Completionc) Incurred Cost (per unit in Rs.) [(a) × (b)]

70100%

70

5060%30

2075%15

140—115

Explanation Hide/Show

Thus the work-in-progress units would be valued at the rate of Rs. 115/unit which indicates the total expenditure incurred on those units till that point of time.

If there are 2,100 units in process at the end of the accounting period.

Total Value of work-in-progress = 2,100 units × Rs. 115/unit= Rs. 2,41,500

Element wise CostsThe element wise costs can also be ascertained:

Element of Cost


a) Complete Cost (per unit in Rs.)b) % Completionc) Incurred Cost (per unit in Rs.) [(a) × (b)]d) Work-in-progress unitse) Total Cost

70100%

702,100

1,47,000

5060%30

2,10063,000

2075%15

2,10031,500

140—115

2,1002,41,500

The element wise cost per unit is ascertained first and then the total cost is ascertained from it.

Equivalent Complete Units

Work-in-Progress units are partially completed units. If these units are expressed in terms of complete units we call them their "Equivalent Complete Units".

Consider the same illustration as above:

The value of a completed unit (i.e. expenditure incurred on a completed unit) is Rs. 140 with Rs. 50 on Materials, Rs. 70 on Labour/Labor and Rs. 20 on Overhead Expenses.

If there are 2,100 units in process at the end of the accounting period.

For ascertaining the value of the work-in-progress units we found out the cost incurred with regard to each element based on the proportion of production completed with regard to those elements. Thereby we found the cost incurred per each unit of work in progress.

• Finding the value using Equivalent Completed UnitsThe total value of work in progress can also be ascertained using the equivalent completed units idea.

W-I-P UnitsPercent (%)

Complete


Cost Per Completed Unit

Total Cost

a) Material b) Labour/Labor

c) Overheadsd) Total

2,1002,1002,1002,100

100%60%75%

2,1001,2601,575

705020

1,47,00063,000 31,500 2,41,500

Explanation Hide/Show

The element wise total cost is ascertained first and then the cost per unit can be ascertained from it if needed.

Accounting for Work-in-Progress

• Using the Process accountWork-in-Progress is accounted for in the Process account itself.

The value of work-in-progress at the end of the accounting period is carried forward/down to the subsequent account period. Thus it is shown on the credit side of the process account at the end of the period as "By Balance c/d" and as "To Balance b/d" at the beginning of the subsequent period in the process account relating to the .

» At the end of an accounting periodDr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

By bal c/d (W-I-P) 2,100 2,41,500

In such a case the process account itself would form a real account for the purpose of preparation of balance sheet.

» At the beginning of the subsequent accounting periodDr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

To Balance b/d 2,100 2,41,500

• Using a Work-in-Progress accountThe value of Work-in-Progress being an asset to be carried forward to the subsequent accounting periods and be shown in the balance sheet is transferred to a separate account by name "Work-in-Progress a/c".

» At the end of an accounting periodDr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

By W-I-P a/c 2,100 2,41,500

Dr Work-in-Progress a/c Cr


Amount(in Rs)


Amount(in Rs)

To Process A a/c 2,100 2,41,500 By Balance c/d 2,100 2,41,500

2,100 2,41,500 2,100 2,41,500

To Balance b/d 2,100 2,41,500

» At the beginning of the subsequent accounting periodThe balance in the Work-in-Progress account is carried forward to the subsequent accounting period. At the beginning of the subsequent accounting period, the work-in-progress account is closed by transfer to the Process account.

Dr Work-in-Progress a/c Cr


Amount(in Rs)


Amount(in Rs)

To Balance b/d 2,100 2,41,500 By Process a/c 2,100

2,41,500

Dr Process A a/c Cr


Amount(in Rs)


Amount(in Rs)

To W-I-P a/c 2,100 2,41,500

Two ways to evaluate Work-in-Progress

The cost of a product is made up costs of various elements present in the cost. In general we find that the cost is made up of the elements material, labour/labor and overhead.

Where the data relating to cost of each element per unit, the percentage completion of work-in-progress with respect to each element and the number of units of work-in-progress is known, we will be able to ascertain the value of work-in-progress Consider the following cost data of an organisation relating to a process for the month of March 2007.

By evaluating the per unit expenditure with respect to each element Element of Cost


a) Complete Cost (per unit in Rs.)b) % Completionc) Incurred Cost (per unit in Rs.) [(a) × (b)]

70100%

70

5060%30

2075%15

140—115

The work-in-progress units would be valued at the rate of Rs. 115/unit which indicates the total expenditure incurred on those units till that point of time.

By converting the work-in-progress units into their equivalent complete units

W-I-P UnitsPercent (%)

Complete


Cost Per Completed Unit

Total Cost

a) Material b) Labour/Labor

c) Overheadsd) Total

2,1002,1002,1002,100

100%60%75%

2,1001,2601,575

705020

1,47,00063,000 31,500 2,41,500

In both these we need the cost per unit of each element of cost to arrive at the value of work-in-progress.

Absence of Cost per unit data

The cost per unit of each element is something that is derived by analysing the cost incurred. Thus, they are figures that are derived from the available information and not ones that are readily available.

Even if it is available it would be a figure based on estimated cost data and not a figure based on the actual cost incurred.

The cost data available would be in relation to the total expenditure incurred on both the completed units and the units in work-in-progress. Deriving the cost per unit is not as simple a task as finding the quotient (Total cost ÷ Total units).

Therefore, in process cost accounting, the first task in finding the value of closing work-in-progress is to find out the cost per unit of completed production based on the cost data available in relation to the process.

An Illustration

Consider the following cost data of an organisation relating to a process for the month of March 2007. 10,000 units of material were introduced into the process at a total cost of Rs. 2,63,200. Direct Wages incurred for the process - Rs. 1,14,800 Overhead Expenditure - Rs. 2,11,200 Production completed during the month was of 7,000 units. 3,000 units were in process (partially completed) as on 31st March.

These units were

1. 80% complete with regard to Direct Materials, 2. 40% complete with respect to Labour/Labor and 3. 60% complete with regard to Overhead Expenses

There were no stocks at the beginning of the month. There were no losses in processing.

Finding the cost per unit » The Rationale

The cost per unit of completed production is ascertained from the available cost data, the quantity of completed units, the quantity of work-in-progress units and the percentage completion of the work-in-progress units with respect to each element of cost.

• Material Cost per unitThe total cost incurred Rs. 2,63,200

= Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)} = 7,000 units × Complete Cost per unit + 3,000 units × 80% of Complete Cost per unit = 7,000 units × Complete Cost per unit + 3,000 units × 80% × Complete Cost per unit = 7,000 units × Complete Cost per unit + 2,400 units × Complete Cost per unit = 9,400 units × Complete Cost per unit

Complete Cost per unit⇒ = Rs. 2,63,200

9,400 units= Rs. 28/unit

3,000 units × 80% = 2,400 units Converting the Work-in-Progress units to equivalent complete ⇒

units.

• Labour/Labor Cost per unitThe total cost incurred Rs. 1,14,800


Complete Cost per unit⇒ = Rs. 1,14,8008,200 units

= Rs. 14/unit


units.

• Overhead Cost per unitThe total cost incurred Rs. 2,11,200


Complete Cost per unit⇒ = Rs. 2,11,2008,800 units

= Rs. 24/unit


units.

This total process is segregated into two steps and two separate statements are prepared for those steps.

• Statement of Equivalent Production (Or) Equivalent Production StatementThis statement gives the number of completed units on which the total expenditure might be considered to have been incurred.

• Statement of CostThis is a statement that gives the cost per unit of each element based on the total expenditure incurred and the number of completed units on which the expenditure might be considered to be incurred.

Statement of Equivalent Production

This statement is used to derive the information relating to the number of completed units on which the expenditure might be considered to have been incurred.

In Out Equivalent Units

Particulars

Units

Particulars

Units

Material Labour/Labor Overheads

% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

Totals

• Accommodating additional Elements of CostIf there are more elements of cost involved additional columns under the head Equivalent Units should be provided for the same.

IllustrationThe Equivalent production statement relating to the data in the above illustration would be:


Particulars

UnitsParticular

sUnits


% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

Material Introduced

10,000

Production Completed

Closing Work-in-Progress

7,0003,000

100%80%

7,0002,400

100%40%

7,0001,200

100%60%

7,0001,800

Totals10,00

0

10,000

9,400 8,200 8,800

• Relevance to Process a/cThe "In" and "Out" columns are a replica of the process account with only the unit columns shown.

Dr Process __ a/c Cr


Amount(in Rs)


Amount(in Rs)

To Material (Primary)

To Direct Wages To Overheads

10,000 2,63,2001,14,8002,11,200

By Process B a/c By bal c/d (W-I-P)

7,0003,000

????

10,000 5,89,200 10,000 5,89,200

Statement of Cost

The statement of cost is prepared to ascertain the cost per unit of completed production with respect to each element of cost.

Element of CostEquivalent Units

Cost Incurred (in the current period)

(in Rs.)

Cost per unit (Completed production)

(in Rs/Unit)

(a) (b) (c) [= (b) ÷ (a)]

Totals

IllustrationThe Statement of Cost relating to the data in the above illustration would be:



(in Rs.)


(in Rs/Unit)

(a) (b) (c) [= (b) ÷ (a)]

MaterialsLabour/LaborOverhead

9,4008,2008,800

2,63,2001,14,8002,11,200

281424

Totals 5,89,200 62

The data relating to equivalent units is derived from the statement of equivalent production. The cost data is derived from the information provided.

• Normal Cost of Normal Output per unitThe cost per unit arrived at in the Statement of Cost represents the Normal Cost of Normal Output per unit.

The difference we notice when there is closing work-in-progress is that, we have the per unit cost of each element of cost available unlike in other cases where we come across only the per unit total cost.

Statement of Evaluation

The last step in the process of finding the value of closing work-in-progress is evaluation.

This is done based on the data available in the statement of equivalent production and the statement of cost.

Where, there is closing work-in-progress, the evaluation of various output elements like finished product,

closing work-in-progress as well as others like abnormal loss, normal loss, are all evaluated in this statement itself.

Component to be Evaluated Equivalent Units Cost Per unit Total Cost Component Cost

a) Component One » Material » Labour/Labor » Overheads b) Component Two » Material » Labour/Labor » Overheads b) Component Three » Material » Labour/Labor » Overheads

–––

–––

–––

–––

–––

–––

xxx

xxx

Total Cost xxxx

IllustrationThe Statement of Cost relating to the data in the above illustration would be:

Component to be Evaluated » Element of Cost

Equivalent Units Cost Per unit Total Cost Component Cost

a) Completed Production » Material » Labour/Labor » Overheads b) Closing Work-in-Progress » Material » Labour/Labor » Overheads

7,0007,0007,000

2,4001,2001,800

281424

281424

1,96,00098,000

1,68,000

67,20016,80043,200

4,62,000

1,27,200

Total Cost 5,89,200

Cross CheckThe total cost arrived at in the Statement of Evaluation and the total of the cost column in the Statement of Cost should agree.

• Relevance to Process a/cThe values arrived at in the Statement of Evaluation are used to complete the process account.



Amount(in Rs)


Amount(in Rs)

To Material (Primary)

To Direct Wages To Overheads

10,000 2,63,2001,14,8002,11,200

By Process B a/c By bal c/d (W-I-P)

7,0003,000

4,62,0001,27,200

10,000 5,89,200 10,000 5,89,200

The values recorded on the credit should always be derived through calculations. In the absence of closing work-in-progress, these values are derived through calculations made in the working notes.

• Are we following the Valuation Principle?The principle for valuation which states that "Normal Loss is valued at its net realisable price and all others are valued at the Normal Cost of Normal Output per unit hold even when there is closing work in progress.

You can notice this in the evaluation statement where the normal cost of normal output per unit with respect to each element is what is considered for evaluating the various components.

Even in case of closing work-in-progress, this is what we followed.

Presence of Opening Work-in-Progress only

The closing work-in-progress of a period becomes the opening work-in-progress for the subsequent period.

• Statement of Equivalent Production not neededWe need to think of preparing the statement of equivalent production and thereby the statement of cost and statement of evaluation only when there is closing work in progress.

Where there is opening work-in-progress only and no closing work in progress no such statements need be prepared as the problem of valuing closing work in progress does not arise.

Opening work in progress would be an additional input that enters into the production process apart from the other inputs that might be received from the previous process or entered directly in the current process.

Illustration » Problem

Consider the following cost data of an organisation relating to a process for the month of March 2007. 1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material

cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead expenditure.

These units were

1. 80% complete with regard to Direct Materials,2. 40% complete with respect to Labour/Labor and3. 60% complete with regard to Overhead Expenses

6,000 units of material were introduced into the process at a total cost of Rs. 2,25,000. Direct Wages incurred for the process - Rs. 1,84,000 Overhead Expenditure - Rs. 92,800

There was no work-in-progress or any other stocks at the end of the period. There were no losses in processing.

Illustration » Solution : Process a/c



Amount(in Rs)


Amount(in Rs)

To Balance b/d 1,800 83,200 By Finished Production #* 7,800 5,85,000

To Direct Materials

To Labour/Labor To Overheads

6,000 2,25,0001,84,00092,800

7,800 5,85,000 7,800 5,85,000


• Opening Stock [OS]Opening Work in progress = 1,800 units [Given]

• Input Introduced [II]Opening Work in progress = 6,000 units [Given]

• Gross/Total Input [GI/TI] GI/TI⇒ = OS + II

= 1,800 units + 6,000 units = 7,800 units

• Actual Output [AO]AO = GI/TI

= 7,800 units

In the absence of information relating to losses, we assume that there are no losses and the actual output is equal to the total input.

• Normal Output [NO]NO = AO

= 7,800 units

In the absence of information relating to output, we assume that the actual output itself is the normal output


• Total Cost [TC]TC = Rs. 83,200 + Rs. 2,25,000 + Rs. 1,84,000 + Rs. 92,800

= Rs. 5,85,000

• Normal Cost [NC]NC = TC

= Rs. 5,85,000


NCNO/Unit = NCNO

= Rs. 5,85,0007,800 units

= Rs. 75/unit



= 7,800 units × Rs. 75/unit= Rs. 5,85,000

Notes/Assumptions # Quantities relating to these are derived through calculations.


Presence of both Opening and Closing Work-in-Progress

The closing work-in-progress of a period becomes the opening work-in-progress for the subsequent period. In the subsequent period there may be closing work-in-progress at the end of the period. In such situations we come across both opening and closing work-in-progress inventories during the same period.

• Statement of Equivalent Production is neededWe need to think of preparing the statement of equivalent production and thereby the statement of cost and statement of evaluation only when there is closing work in progress.

Thus, in this situation where there are both opening and closing work-in-progress inventories we need to prepare the above statements.

Opening work in progress would be an additional input that enters into the production process apart from the other inputs that might be received from the previous process or entered directly in the current process.

• Method of Valuation to be decided uponWhere there is opening work-in-progress and we are required to find the value of closing work-in-progress we need to decide upon whether or not to include/consider the previous period costs for the purpose of finding the cost per completed unit.

The two methods for valuation are

» FIFO MethodWhere we exclude the previous period costs and consider only the current period costs to be a part of the total cost of an element for finding the cost per completed unit in the "Statement of Cost" we are said to be adopting the "FIFO Method".



(in Rs.)


(in Rs/Unit)

(a) (b) (c) [= (b) ÷ (a)]

Totals

This is so called because we assume that the opening work-in-progress units are completed separately without being mixed with the input that has been introduced into the process during the current period.

The work-in-progress units are assumed to be processed and completed first and then only the other units dealt with (First in First Out).

To facilitate this, in the Statement of Equivalent Production, the output is segregated into two as

1. Opening Work-in-progress Completed2. Production started and completed in the current period


Particulars Units Particulars Units

Material

% Complete

EquivalentUnits

Opening W-I-PInput Introduced

2,300 Opening W-I-P CompletedProduction Started & Completed

2,300

Totals

» Weighted Average MethodWhere we include the previous period costs in the total cost of an element at the time of finding the cost per completed unit in the "Statement of Cost" we are said to be following the "Average Method" or the "Weighted Average Method"

Element of Cost

Equivalent Units

Cost Incurred (in Rs.) in the Cost per unit (Completed production)(in Rs/Unit)

Previous Period

Current Period

Total

(a) (b) (c)(d) [= (b) +

(c)](c) [= (e) ÷ (a)]

Totals

This is so called because the cost per unit is arrived at by considering a cost which includes both the previous period costs as well as current period costs.

In preparing the statement of equivalent production the total output is considered as a unit and no segregation is made between the opening work in progress completed and the units started and completed in the current period.

Illustration » Problem

Consider the following data relating to a process for the month of March 2007. 1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material

cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead expenditure.

These units were


12,000 units of material were introduced into the process during the period. Total Material Cost incurred for the process is Rs. 2,11,680. Direct Wages incurred were - Rs. 2,73,240 Overhead Expenditure - Rs. 1,32,480 There were 2,400 units in process at the end of the period

These units were


There were no losses in processing.

Illustration » Working Notes

Total Input = Opening Work in Progress Units + Units Introduced= 1,800 units + 12,000 units

= 13,800 units

Closing work-in-progress = 2,400 units

Completed Production = Total Input − Closing work-in-progress= 13,800 units − 2,400 units= 11,400 units

FIFO Method

• Statement of Equivalent ProductionThe Equivalent production statement relating to the data in the above illustration would be:


Particulars

UnitsParticular

sUnits


% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

Opening W-I-PInput Introduced

1,80012,00

0

Opening W-I-P CompletedProduction Started & Completed

(in the current period) Closing W-I-P

1,8009,600

2,400

20%100%

75%

3609,600

1,800

60%100%

50%

1,0809,600

1,200

40%100%

30%

7209,600

720

Totals13,80

0

13,800

11,760 11,880 11,040

Production Started and Completed in the current period

= Total Production/Output − Opening Work-in-Progress Complete= 11,400 units − 1,800 units = 9,600 units

» Opening Work-in-Progress Completed : % Completion The % completion is indicative of the proportion of expenditure (compared to a complete unit) incurred on the units during the current period.

The % completion given within the problem data indicates the proportion of expenditure that has been incurred in the previous period. The remaining proportion indicates the proportion of expenditure on the opening work-in-progress units incurred in the current period.

Therefore the %'s to be taken in the Equivalent production statement with regard to opening w-i-p units would be

1. Direct Materials - 20%, [Since they are 80% complete]2. Labour/Labor - 60% [Since they are 40% complete] and3. Overhead Expenses - 40% [Since they are 40% complete]

» Others : % Completion On units where production is started and completed in the current period, they are 100% complete with regard to all elements of cost.

With regard to closing work-in-progress, the units would be that much % complete as is indicated in the problem.

» Essential DataTo be able to work out this statement the most essential data is the detail relating to the % completion of the opening work in progress.

In the absence of this data, we cannot adopt FIFO method.

• Statement of Cost



(in Rs.)


(in Rs/Unit)

(a) (b) (c) [= (b) ÷ (a)]

MaterialsLabour/LaborOverhead

11,76011,88011,040

2,11,6802,73,2401,32,480

182312

Totals 6,17,400 53

The costs incurred in the current period are available from the cost data in the problem and the equivalent units from the statement of equivalent production.

• Statement of Evaluation



A) Opening Work in Progress » Opening Balance » Material » Labour/Labor » Overheads B) Production Started & Completed » Material

3601,080720

9,600

182312

18

83,2006,480

24,8408,640

1,72,800

1,23,160

» Labour/Labor » Overheads a) Total Output

b) Closing Work in Progress » Material » Labour/Labor » Overheads

9,6009,600

1,8001,200720

2312

182312

2,20,8001,15,200

32,40027,6008,640

5,08,8006,31,960

68,640

Total Cost [6,17,400 + 83,200] 7,00,600

The equivalent units data pertaining to each component is obtained from the statement of equivalent production and the cost per unit from the statement of cost.

To obtain the cost of output the value of opening work in progress is included in the statement of evaluation.

Cross CheckThe total cost in the statement of evaluation excluding the value of opening work in progress should be equal to the total cost of all the elements together in the statement of cost.

Since the value of opening work in progress is also included in the statement, the total cost shows a figure that would be in excess of the total cost from the statement of cost.

• Process AccountDr Process __ a/c Cr


Amount(in Rs)


Amount(in Rs)

To Balance b/d To Direct Materials


1,80012,000

83,2002,11,6802,73,2401,32,480

By Finished Production #*

By Bal c/d (W-I-P)

11,4002,400

6,31,96068,640

13,800 7,00,600 13,800 7,00,600

Weighted Average Method

• Statement of Equivalent ProductionThe Equivalent production statement relating to the data in the above illustration would be:


Particulars

UnitsParticular

sUnits


% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

% Complet

e

Equivalent

Units

Opening W-I-PInput

1,80012,00

0

Completed ProductionClosing

11,400

2,400

100%75%

11,4001,800

100%50%

11,4001,200

100%30%

11,400720

Introduced W-I-P

Totals13,80

0

13,800

13,200 12,600 12,120

» % Completion The value of opening work in progress is mixed up with the cost incurred in the current period, thereby eliminating the influence of the fact that some of the expenses on the opening work in progress have been incurred in the previous period.

For the purpose of this statement, all production is of the same kind, started and completed in the current period itself. Thereby, they are 100% complete with regard to all elements of cost.

The % completion data relating to closing work in progress is ascertained from the problem data.

• Statement of Cost

Element of Cost

Equivalent Units

Cost Incurred (in Rs.) in the Cost per unit (Completed production)(in Rs/Unit)

Previous Period

Current Period

Total

(a) (b) (c)(d) [= (b) +

(c)](c) [= (e) ÷ (a)]

a) Direct Materials b) Labour/Laborc) Overhead Expenses

13,20012,60012,120

38,40024,00020,800

2,11,6802,73,2401,32,480

2,50,0802,97,2401,53,280

18.945523.590512.6469

Totals 83,200 6,17,400 7,00,600 55.1829

» Essential DataTo be able to work out this statement the most essential data is the detail relating to the element wise distribution of the value of opening work in progress.

In the absence of this data, we cannot adopt AVERAGE method.

• Statement of Evaluation



a) Completed Production » Material » Labour/Labor » Overheads

11,40011,40011,400

18.945523.590512.6469

2,15,9792,68,9321,44,175

6,29,084

b) Closing Work in Progress » Material » Labour/Labor » Overheads

1,8001,200720

18.945523.590512.6469

34,10228,3099,106

71,516

Total Cost 7,00,600

» Cross CheckThe total cost in this statement should work out to the total cost as revealed by the statement of cost.

Where the cost per unit is obtained as an approximate decimal value, you may be required to make minor adjustments to ensure the same. Such an adjustment has to be inevitably made. Otherwise the process account would not balance.

• Process AccountDr Process __ a/c Cr


Amount(in Rs)


Amount(in Rs)

To Balance b/d To Direct Materials


1,80012,000

83,2002,11,6802,73,2401,32,480

By Finished Production #*

By bal c/d (W-I-P)

11,4002,400

6,29,08471,516

13,800 7,00,600 13,800 7,00,600

What method to use? What's the difference?

The ability to use a particular method is restricted by the availability of information in the problem.

FIFO MethodThe essential data required for using the FIFO method is the information relating to the % completion with respect to each element of opening work-in-progress.

The opening work-in-progress units were 1. 80% complete with regard to Direct Materials,2. 40% complete with respect to Labour/Labor and3. 60% complete with regard to Overhead Expenses

Weighted Average MethodThe essential data required for using the AVERAGE method is the information relating to the element wise distribution of cost of the opening work-in-progress value.

1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead

expenditure.

Where both these informations are available as in the case of the illustration shown above, you may be required to use the method that is specifically indicated.

In the absence of specific instruction and where the data is available, we can choose the method to be used.

The DifferenceApart from the difference in the workings of the two methods, the difference would lie in the values arrived at.

The ultimate difference would be in the value of the various components which are evaluated in the statement of evaluation. These are the values that are present on the credit side of the process account.

Considering the illustration worked out above, you can notice differences in these:

Particulars FIFO Method AVERAGE Method

Cost per unit (from the statement of cost)

Material Labour/Labor Overhead Value of Completed Production Value of Closing Work in Progress

Rs. 18Rs. 23Rs. 12

Rs. 6,31,960Rs. 68,640

Rs. 18.9455Rs. 23.5905Rs. 12.6469Rs. 6,29,084Rs. 71,516

Documents

Methods of Costing