Process Costing | Process Loss or Gain | Problems and Solutions

 

 

Process Costing 

The cost accounting system used by process is called process costing.

To prepare bread, we need mixing of white flour, ghee, sugar, eggs, baking powder etc.

From this mixture, different size of bread can be prepared.

These sized are baked in oven.

Baked bread cut and packed.

 

Process costing is applied in the oil refinery, chemical, timber, textile, sugar mill and food processing industries.

These companies set the right prices for their products and determine whether costs are tracking in line with forecasts.

 

A separate process account is prepared for each process.

Materials, labour, overhead, machine expenses etc are debited in each process.

Process costing helps to determine the cost of their products at each stage of the process of manufacturing.

It helps to control costs, evaluate performance and check the products at each stage.

 

 

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1A

A product passes through three distinct processes to complete. 500 units were introduced. The output was also 500 units. The following information is available:

	Process A	Process B	Process C
Direct materials	35,000	16,000	15,000
Direct labour	25,000	20,000	25,000
Direct expenses	10,000	8,000	7,000

The works expenses were $14,000 is to be apportioned on the basis of direct wages. There is not any stock and work in progress as opening stock and closing stock.

Required: Process A, B and C accounts with cost per unit (CPU).

[Answer: PA = $75,000 and 150;

PB = $123,000 and $246;

PC = $175,000 and $350]

SOLUTION:

Works expenses     = 14,000 x 25: 20: 25       = 5,000: 4,000: 5,000

CPU = Amount ÷ 500 units

Process A Account

Particulars	CPU	Amount	Particulars	CPU	Amount
To Direct materials	70	35,000	By Process B account	150	75,000
To Direct labour	50	25,000
To Direct expenses	20	10,000
To Works expenses	10	5,000
	150	75,000		150	75,000

 

Process B Account

Particulars	CPU	Amount	Particulars	CPU	Amount
To Process A account	150	75,000	By Process C account	246	123,000
To Direct materials	32	16,000
To Direct labour	40	20,000
To Direct expenses	16	8,000
To Works expenses	8	4,000
	246	123,000		246	123,000

 

Process C Account

Particulars	CPU	Amount	Particulars	CPU	Amount
To Process B account	246	123,000	By Finished goods  account	350	175,000
To Direct materials	30	15,000
To Direct labour	50	25,000
To Direct expenses	14	7,000
To Works expenses	10	5,000
	350	175,000		350	175,000

 

 

 

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Process Loss or Gain

While processing raw materials into finished goods, there may be some losses on nature of raw materials.

This type of loss incurred between input and output of the goods.

There are two types of losses and one gain in process account; they are:

·          Normal loss

·          Abnormal loss

·          Abnormal gain

 

 

NORMAL LOSS

When the company cannot stop or control loss of goods in natural basis; it is called normal loss.

Such as weight loss, shrinkage, evaporation, rusts etc.

If normal loss does not give any sales value is called wastage.

However, if sales price realized is called scrap value.

A provision for such a loss is made before starting production.

Normal loss units = Input units – Normal output units

 

Normal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process A account	xxx	xxx	By Cash/Debtors	xxx	xxx
To Process B account	xxx	xxx	(Units x Scrap rate
To Process C account	xxx	xxx	according to related process)
	xxxx	xxxx		xxxx	xxxx

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1B

A product passes through two processes named A and B. the normal wastage of each process is as following:

            Process A      10%    Process B      5%

Normal loss of process A was sold at $10 per unit while process B at $30 per unit. 2,000 units of raw materials were issued to process A at cost of $20 per unit. The other expenses were as following:

Expenses	Process A	Process B
Sundry expenses	$20,000	$30,000
Direct labour	$50,000	$60,000
Direct expenses	$29,000	$28,500
Output  in units	18,000	17,100

The factory overhead of $55,000 is allocated on the basis of direct labour ratio of each process.

There were no opening and closing stock.

Required: (1) Process A account; (2) Process B account; (3) Normal loss account

[Answer: PA = 1,800 units and $162,000;

PB = 1,710 units and $307,800;

NL = 290 units and $4,700]

SOLUTION:

Factory overhead = 55,000 x 5: 6 = 25,000^: 30,000

 

Process A Account

Particulars	Units	Amount	Particulars	Units	Amount
To Raw materials	2,000	40,000	By Normal loss account	200	2,000
To Sundry materials		20,000	[2,000 units@10% x $10]
To Direct labour		50,000	By Process B  account	1,800	162,000
To Direct expenses		29,000
To Factory overhead		25,000
	2,000	164,000		2,000	164,000

 

Process B Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process A account	1,800	162,000	By Normal loss account	90	2,700
To Sundry materials		30,000	[1,800 units@5% x $30]
To Direct labour		60,000	By Finished goods  account	1,710	307,800
To Direct expenses		28,500
To Factory overhead		30,000
	1,800	310,500		1,800	310,500

 

Normal Loss Account

Particulars	Units	Amount	Particulars		Units	Amount
To Process A	200	2,000	By Cash	(PA: 200 x $10)	200	2,000
To Process B	90	2,700		(PB: 90 x $30)	90	2,700
	290	4,700			290	4,700

 

 

ABNORMAL LOSS

When the company can stop or control loss but could not control, it is known as abnormal loss.

This loss is due to carelessness, fatigue, rough handling, abnormal or bad working condition, lack of proper knowledge, low quality raw materials, machine break down, accident etc.

So it is called avoidable loss.

It is controllable loss and can be avoided by proper knowledge.

 

Abnormal loss units	= Input – Normal loss – Actual output
Abnormal loss	= Total scrap – Normal loss
Value of abnormal loss	= (Normal cost ÷ Normal output) x Abnormal loss units
Or	= (Dr amount – Cr amount) ÷ (Dr units – Cr units) x Abnormal loss units

 

 

Abnormal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process A account	xxx	xxx	By Cash/Debtors	xxx	xxx
To Process B account	xxx	xxx	(Input rate of normal loss)
			By P&L Account       (b/f)	xxx	xxx
	xxxx	xxxx		xxxx	xxxx

 

 

Differences between Normal Loss and Abnormal Loss

Bases	Normal Loss	Abnormal Loss
Factor	Normal arises due to internal factors	Abnormal arises due to external factors
Nature	It is recurring/frequent  in nature	It is accidental in nature
Estimation	It can be estimated from the past experience	It cannot be estimated in advance
Insurance	It is not insurable loss	It is insurable loss
Prevention	It is un-avoidable loss	It is avoidable loss

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1C

Following data are taken from Magic Footwear Company:

Received from second last process 1,000 units @ $50 per unit

Expenses related to last process:

Output of last process	850 units	Factory overhead	$10,000
Wages	$20,000	Normal loss	10% of input
Indirect materials	$20 per unit	Scrap value	$10 per unit

Required: (a) Last process account; (b) Normal loss account; (c) Abnormal loss account

[Answer: LP = 850 units and $92,500; LN = 100 units and $1,000;

 ANL = P & L (Cr, b/f) $5,000]

SOLUTION:

Last Process Account

Particulars	Units	Amount	Particulars	Units	Amount
To Second last process A/c	1,000	50,000	By Normal loss account	1001	1,000*
To Wages		20,000	[1,000 units@10% x $10]
To Raw materials		20,000	By Abnormal loss account	502	5,5003
To Factory overhead		10,000	By Finished goods account	850	93,500
	1,000	100,000		1,000	100,000

 

Normal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Last process account	100	1,000	By Cash    (100 units x $10)	100	1,000
	100	1,000		100	1,000

 

Abnormal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Last process account	50	5,500	By Cash A/c   (50 x $10)	50	500
			By P&L A/c     (loss; b/f)		5,000
	50	5,500		50	5,500

 

Given and working note:

Abnormal loss units

= Input – Normal loss – Actual output

= 1,000 – 100 – 850

= 50 units

 

Value of abnormal loss

 

 

= (Normal cost ÷ Normal output) x Abnormal loss units

= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal loss units

= [($100,000 – $1,000) ÷ (1,000 – 100)] x 50

= [$99,000 ÷ 900 units] x 50 units

= $110 x 50

= $5,500

 

 

ABNORMAL GAIN

Sometime it may be possible to realize more output than expected.

It is due to efficiency in performance or abnormal effective in raw materials used.

Abnormal gain reduces the normal loss.

Abnormal gain gives profit to industry.

 

 

Abnormal loss units	= Input – Normal loss – Actual output
Value of abnormal gain	= (Normal cost ÷ Normal output) x Abnormal gain units
Or	= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units

 

 

Abnormal Gain Account

Particulars	Units	Amount	Particulars	Units	Amount
To Normal loss account	xxx	xxx	By Process A, B or C   account	xxx	xxx
[Units x scrap rate]
To P&L account  (profit; b/f )	–	xxx
	xxx	xxx		xxx	xxx

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1D

Following data are taken from Bagmati Plastic Industry related to bucket:

Received from second last process 5,000 units @ $40 per unit

Expenses related to last process:

Direct labour	$60,000	Normal loss	8% of input
Direct expenses	$40,000	Scrap value	$20 per unit
Factory overhead	50% of direct labour	Output of last process	4,800 units

Required: (b) Last process account; (b) Abnormal gain account; (c) Normal loss account

[Answer: LP = 4,800 units and $336,000;

AG = P & L (Dr, b/f) $10,000; NL = 200 units cash 400

SOLUTION:

Last Process Account

Particulars	Units	Amount	Particulars	Units	Amount
To Second last process account	5,000	200,000	By Normal loss account	400	8,000
To Wages		60,000	[5,000 units@8% x $20 scrap]
To Raw materials		40,000	By Finished goods account	4,800	336,000
To Factory OH [60,000@30%]		30,000
To Abnormal gain account	200	14,000
	5,200	344,000		5,200	344,000

 

 

Abnormal gain units

= Input – Normal loss – Actual output

= 400 + 4,800 – 5,000

= 200 units

 

Value of abnormal gain

= (Normal cost ÷ Normal output) x Abnormal gain units

= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal gain units

= ($330,000 – $8,000) ÷ (5,000 units – $400 units) x 200 units

= ($322,000 ÷ 4,600 units) x 200 units

= $14,000

 

Abnormal Gain Account

Particulars	Units	Amount	Particulars	Units	Amount
To Normal loss account	200	4,000	By Last process account	200	14,000
[400 units x scrap rate $20]
To P&L account (profit; b/f )		10,000
	200	14,000		200	14,000

 

Normal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Last process account	400	8,000	By Abnormal gain account	200	4,000
			By Cash account	200	4,000
			(200 units x scrap $20)
	100	8,000		400	8,000

 

 

Keep in Mind (KIM)

Abnormal Loss:

Debit side:  As it is transferred from process account

Credit side: Units x Scrap Rate (scrap rate from related process account)

Balance transfer to profit and loss (loss) account

Abnormal Profit:

Debit side:    As it is transferred from process account

Credit side: Units x Scrap Rate (scrap rate from related process account)

Balance transfer to profit and loss (profit) account

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1E

ABC Manufacturing Company produces its products through process system.  Product passes through two processes named A and B. And these products are transferred to finished stock. Following information is available:

Particulars	Process A	Process B
Materials consumed	$12,000	$15,000
Direct labour	$13,000	$24,000
Manufacturing expenses	$3,040	$8,094
Input in process A [10,000 units]	$10,000	–
Output in units	9,400 units	8,300 units
Normal loss	5%	10%
Value of normal wastage (per 100 units)	$8	$10

You are required to prepare:

(1) Process A account; (2) Process B account; (3) Normal loss account; (4) Abnormal loss account

[Answer: PA = 9,400 units and $37,600; AL = 100 units and $400;

PB = 8,300 units and $82,000; AL = 160 units and $1,600;

NL = 1,440 units and $134; AL = P & L (Cr, loss) $1,976]

SOLUTION:

Process A Account

Particulars	Units	Amount	Particulars	Units	Amount
To Input expenses	10,000	10,000	By Normal loss account	500	40
To Materials consume		12,000	[10,000@5%x $0.08]
To Direct labour		13,000	By Abnormal loss account	100	400
To Manufacturing expenses		3,040	By Process B account	9,400	37,600
	10,000	38,040		10,000	38,040

 

Given and working note:

1. Normal loss

= 10,000 @ 5%

= 500 units

 

2. Abnormal loss units 

= Input – normal loss – output

= 10,000 – 500 – 9,400 output

= 100 units

 

3. Value of abnormal loss 

= (Normal cost ÷ Normal output) x Abnormal gain units

= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal loss units

= ($38,000 – $40) ÷ (10,000 units – $500 units) x 100 units

= ($322,000 ÷ 4,600 units) x 100 units

= $400

 

4. Balancing figure $37,600

 

 

Process B Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process A account	9,400	37,600	By Normal loss account	940	94*
To Materials consume		15,000	[9,400@10% x $0.10]
To Direct labour		24,000	By Abnormal loss account	160	1,600
To Manufacturing expenses		8,094	By Finished goods account	8,300	83,0004
	9,400	84,694		9,400	38,040

 

Given and working note:

1. Normal wastage

= 9,400 @ 10 %     

= 940 units

 

2. Abnormal loss units 

= Input – normal loss – output

= 9,400 – 940 – 8,300 output    

= 160 units

 

3. Value of abnormal loss 

= (Normal cost ÷ Normal output) x Abnormal gain units

= [(Dr amount – Cr amount) ÷ (Dr units – Cr units)] x Abnormal loss units

= ($84,694 – $94) ÷ (9,400 units – 940 units) x 160 units

= ($84,600 ÷ 8,460 units) x 160 units

= $1,600

 

Normal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process  A account	500	40	By Cash account
To Process  B account	940	94	(500 units x $0.08)	500	40
			(940 units x $0.08)	940	94
	1,440	134		1,440	134

 

 

Abnormal Loss Account

Particulars	Units	Amount	Particulars	Units	Amount
To Process  A account	100	400	By Cash account
To Process  B account	160	1,600	(100 units x $0.08)	100	8
			(160 units x $0.10)	160	16
			By P&L account (loss; b/f )		1,976
	260	2,000		260	2,000

 

#####

Problems  and  Answers  of  Process  Costing

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1A

Maha Laxmi Hume Pipe manufactures PVC products. The product passes through two processes named A and B. 2,000 units of raw materials were issued to process A at cost of $20 per unit. There was not opening and closing stock.

The normal loss of each process is as following:

          Process A     10% @ $10 per unit

          Process B      5% @ $30 per unit

The other expenses were as following:

Expenses	Process A	Process B
Sundry expenses	20,000	30,000
Direct labour	50,000	60,000
Direct expenses	29,000	28,500
Output  in units	1,800	1,710

The factory overhead of $55,000 is allocated on the basis of direct labour ratio of each process.

Required: Prepare process accounts

[Answer: Output: A = 1,800 units; $162,000; B = 1,710 units; $307,800]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1B

National Pipe Industries, Kathmandu manufactures plastic items. Following information is given for a product passes through two processes named A and B:

Particulars	Process A	Process B
Input in process A 10,000 units	$100,000	–
Materials consumed	$120,000	$150,000
Direct labour	$130,000	$240,000
Manufacturing expenses	$30,000	$81,000
Output in units	9,400 units	8,300 units
Normal loss	5%	10%
Value of normal loss per unit	$8	$10

Required: (a) Process A accounts; (b) Process B account

 [Answer: Process A: Abnormal loss 100 units; $3,958;

Output 9,400 units; $372,042;

Process B: Abnormal loss 160 units; $15,766;

Output 8,300 units; $817,876]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 1C

The following particulars for the last process are given:

Particulars	Units	Amount
Transferred  from the first process (input of last process):	4,000	620,000
Output from the last process	3,700	?
Direct wages		200,000
Materials consume		300,000
Factory overhead  of materials consume		150%
Normal loss		10%
Scrap value of normal loss per unit		$50

You are required to prepare: (a) Last process Account; (b) Normal loss Account; (c) Abnormal loss Account

 [Answer: Last process: Abnormal loss 100 units; $43,056;

Output 3,700 units; $15,93,056;

Normal loss A/c: abnormal gain 100 units; $5,000;

Cash (b/f) 300 units; $15,000;

Abnormal gain A/c: normal loss 100 units; $5,000;

P&L (profit, b/f) $38,056]

 

 

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