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 Costing

This 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 Costing

2. Batch Costing
3. Contract Costing

2. Operation Costing
This 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 Costing

2. Process Costing

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

4. Composite or Multiple Costing

This 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 Costing
2. Marginal Costing
3. Standard Costing
4. Differential Costing

5. Uniform Costing
Process Costing » Method and Techniques  
  
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

applied
A common example of an industry where process costing may be applied is "Sugar Manufacturing Industry".

The processes in this industry are

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

 Milling
The 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 lime

The extracted juice is then heated to make it a concentrate and lime is added to the heated juice.

 Clarification
 Muddy substance is removed from the concentrate through this process

 Evaporation
Water is removed from the juice by evaporation.

 Crystallisation and Separation

Sugar crystals are grown from the dry juice concentrate in this process.

 Spinning
Molasses are separated from sugar using Centrifugals in this process.

 Drying
Sugar 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 I Process II Process III Total

Rs. Rs. Rs. Rs.
Materials 2,600 2,000 1,025 5,625
Direct Wages 2,250 3,680 1,400 7,330
Production Overheads 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:

Normal loss
Output Value of scrap
as a percentage
(Units) (per unit)
of input
Process I 450 10% Rs. 2
Process II 340 20% Rs. 4
Process III 270 25% 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
All these costs are debited to the process account.
 
Apportionment of Production Overhead
 
Production overheads are absorbed as a % of direct wages.
Total Production Overheads
Rate of Absorption of Production Overhead = × 100
Total Direct Wages
Rs. 7,330
= × 100
Rs. 7,330
= 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 500 2,000 By Process II a/c 500 9,100
To Material (Secondary) 2,600
To Direct Labour/Labor 2,250
To Production Overheads 2,250
  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 NC
Normal Cost of Normal Production (Per Unit) = ⇒ NCNP/unit =
Normal Output NO
NC
Here it is » NCNP/unit =
NO
Rs. 9,000
=
450 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 Output

The 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 500 2,000 By Normal Loss a/c 50 100
To Material (Secondary) 2,600 450 9,000
To Direct Labour/Labor 2,250 By Process II a/c
To Production Overheads 2,250
  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 Loss
The 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
 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 Loss
The 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 presence

These 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 presence

These 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 normal

Say, 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 Value Rate

(Units) (Rs.) (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

Note
The 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 Loss

We 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 Units

The 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 Loss

The 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
 
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.

Considering the loss as abnormal

Say 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 Value Rate

(Units) (Rs.) (Rs./Unit)
Gross Input 1,000 1,00,000 100.00
Less: Abnormal Loss 100 10,000 100
Net Output 900 90,000 100

Note
The data in the rate column should always be obtained as the quotient of Value ÷ Quantity.
 
Abnormal Loss Valuation » Interpretation
 
The following conclusions can be derived from the above:

1. Value of Abnormal Loss

We 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 Units

The 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 Units

The 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 Loss

The 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 Value Rate
(Units) (Rs.) (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].

Caution
The 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 _____
Debit Amount Credit Amount
Date V/R No. Particulars L/F
(in Rs) (in Rs)
30/06/2006 – Normal Loss a/c Dr – 100
      To Process I a/c 100
[For the value of normal loss.]
Dr Process I a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

To Input 1,000 1,00,000 By Normal Loss a/c 100 100

900 99,900
By Process II a/c
  1,000 1,00,000   1,000 1,00,000
           
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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)

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
xx/xx/20xx –Cash/Bank/Drs a/c Dr – 120
      To Normal Loss a/c – 120
[For the sale of 80 units of normal loss stock @ Rs.
1.50/unit i.e. at a value of Rs. 120.]
30/06/2006 – Normal Loss a/c Dr – 40
      To Costing Profit & Loss a/c – 40
[For the profit on sale of normal loss stock.]
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 100 By Cash/Bank/Drs a/c 80 120
To Costing P&L a/c – 40 20 20
By bal c/d
  100 140   100 140
To bal b/d 20 20      
Dr Costing Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

By Normal Loss a/c 40

           
           

Note
1. Profit or loss is assessed by taking only the value of 80 units into consideration.
 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 _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
xx/xx/20xx – Cash/Bank a/c Dr – 120
      To Normal Loss a/c – 80
      To Costing Profit & Loss a/c – 40
[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 Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 100 By Cash/Bank/Drs a/c 80 80
– 20 20
By bal c/d
  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 Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (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)

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Cash/Bank a/c Dr – 90
Costing Profit & Loss a/c – 10
      To Normal Loss a/c – 100
[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 Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 100 By Cash/Drs a/c 100 90
By Costing P&L a/c – 10
  100 100   100 100
           
Dr Costing Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

To Normal Loss a/c 10

           
           

Note
1. 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.

Alternative
The above journal entry can be broken down into two entries as
Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Cash/Bank/Dr a/c Dr – 90
      To Normal Loss a/c – 90
[For the sale of 100 units of normal loss stock @ Rs.
0.90/unit i.e. at a value of Rs. 90.]
30/06/2006 – Costing Profit & Loss a/c Dr – 10
      To Normal Loss a/c – 10
[For the loss on sale of normal loss stock i.e. Rs. 10.]

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)

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Cash/Bank a/c Dr – 40
      To Normal Loss a/c 40
[For the sale of 40 units of normal loss stock @ Rs.
1.00/unit i.e. at a value of Rs. 40.]
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 100 By Cash/Drs a/c 40 40
60 60
By bal c/d
  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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
By Normal Loss a/c 100 100
To Input 1,000 1,00,000
[Includes Normal Loss: By Bal c/d 900 99,900
100 units; Cost : 10,000] [Includes Normal Loss:

0 units Cost : 9,900]

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

1,000 units @ Rs. 6 per unit were introduced in process I. Production overheads are absorbed as a percentage
of direct wages.

The actual output and normal loss of the respective processes are given below:

Normal loss
Output Value of scrap
as a percentage
(Units) (per unit)
of input
Process I 950 5% Rs. 4
Process II 840 10% Rs. 8
Process III 750 15% Rs. 10

Prepare the process accounts and the other relevant accounts.

 
Working Notes (Direct » Materials, Labour/Labor)
 
There is a primary direct material introduced in the first process whose value is to be debited to the process
account.
Primary Direct Materials = 1,000 units @ Rs. 6/unit
= Rs. 6,000

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

The direct wages Rs. 4,000 are also to be debited to the process account.
 
Working Notes (Apportionment of Production Overhead)
 
Since production overhead is incurred over all the processes together, it is to be apportioned among the
process on some rational basis.

It is given that Production overheads are absorbed as a % of direct wages. Therefore,

Total Production Overheads

Rate of Absorption of Production Overhead = × 100
Total Direct Wages
Rs. 18,000
= × 100
Rs. 18,000
= 100%

⇒ Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the Process × 100%

Thus, Production Overheads chargeable to : Process I = Rs. 4,000 × 100%

= Rs. 4,000
Process II = Rs. 6,000 × 100%
= Rs. 6,000
Process III = Rs. 8,000 × 100%
= Rs. 8,000
 
Ledger Accounts
 
Dr Process I a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 1,000 6,000 By Normal Loss a/c 50 200
To Material (Secondary) 5,200 By Process II a/c 950 19,000
To Direct Labour/Labor 4,000   [Output Transferred]
To Production Overheads 4,000
  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.

Dr Normal Loss a/c Cr

Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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]

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

• Value of Actual Output [VAO]

VAO = AO × NCNO/Unit
= 950 units × Rs. 20/unit
= Rs. 19,000
Normal loss is valued at market price and all others are valued at the "Normal Cost of Normal Output per
unit". The value of output transferred to the next process should always be ascertained using this method and
not as a balancing figure.

 
Abnormal Loss » Related Quantities & Values
 
Quantity Value Rate
(Units) (Rs.) (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].

Caution
The 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.

Journal in the books of M/s __ for the period from ____ to _____
Debit Amount Credit Amount
Date V/R No. Particulars L/F
(in Rs) (in Rs)
30/06/2006 – Abnormal Loss a/c Dr – 10,000
      To Process A a/c 10,000
[For the value of abnormal loss.]
Dr Process A a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

To Input 1,000 1,00,000 By Abnormal Loss a/c 100 10,000

900 90,000
By Process B a/c
  1,000 1,00,000   1,000 1,00,000
           
Dr Abnormal Loss a/c Cr
 Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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".

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
xx/xx/xxxx – Abnormal Loss a/c Dr – 2,300
      To Cash/Bank a/c 2,300
[For the expenditure incurred on abnormal loss stock
to make it saleable.]
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process A a/c 100 10,000
To Cash/Bank a/c – 2,300

           
           
 
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)

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Cash/Bank a/c Dr – 2,000
      To Abnormal Loss a/c 2,000
[For the sale of 50 units of abnormal loss stock @ Rs.
40/unit i.e. at a value of Rs. 2,000.]
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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 _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Cash/Bank/Insurance Co. a/c Dr – 1,500
      To Abnormal Loss a/c 1,500
[For the amount of insurance realisation received or
receivable on the abnormal loss stock.]
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process A a/c 100 10,000 By Bank/Ins. Co a/c 1,500
–
           
           

Insurance Company indemnifies the loss

The 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 Stock
The 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

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Abnormal Loss a/c Dr – 800
      To Costing P & L a/c 800
[For the surplus on disposal of the abnormal loss stock
(sale and insurance realisation).]
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process A a/c 100 10,000 By Cash/Bank/Dr. a/c 40 2,300
To Costing P&L a/c – 800 – 2,500
By Bank/Ins Co. a/c 60 6,000
By bal c/d
  100 10,800   100 10,800
To bal b/d 60 6,000      
Dr Costing Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

By Abnormal Loss a/c 800

           
           

Note
1. 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.

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.
 
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.

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/2006 – Costing Profit & Loss a/c Dr – 4,000
      To Abnormal Loss a/c 4,000
[For the loss on disposal of the abnormal loss
stock.]
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 10,000 By Cash/Drs a/c 100 6,000
By Costing P&L a/c – 4,000
  100 10,000   100 10,000
           
Dr Costing Profit & Loss a/c Cr
Amount Amount Amount Amount
Particulars Particulars
(in Rs) (in Rs) (in Rs) (in Rs)

To Abnormal Loss a/c 4,000

           
           

Note
1. 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.

Dr Abnormal Loss a/c Cr

Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 100 10,000 By Cash/Drs a/c 75 2,500
By Bank/Ins Co. a/c – 5,000
25 2,500
By bal c/d
  100 10,000   100 10,000
To bal b/d 25 2,500      

Note
1. 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.

2. 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.
 
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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
By Abnormal Loss a/c 100 10,000
To Input 1,000 1,00,000
[Includes Ab. Loss: 900 90,000
100 units; Cost : 10,000] By Bal c/d
[Includes Ab. Loss:
0 units Cost : 0]
           
           

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.

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

1,000 units @ Rs. 6 per unit were introduced in process I. Production overheads are absorbed as a percentage
of direct wages.

The actual output and normal loss of the respective processes are given below:

Normal loss
Output Value of scrap
as a percentage
(Units) (per unit)
of input
Process I 950 5% Rs. 4
Process II 840 10% Rs. 8
Process III 750 15% Rs. 10

Prepare the process accounts and the other relevant accounts.

 
Working Notes (Direct » Materials, Labour/Labor)
 
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)

The secondary direct material Rs. 3,960 is also to be debited to the process account.

The direct wages Rs. 6,000 are also to be debited to the process account.
 
Working Notes (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,

Total Production Overheads

Rate of Absorption of Production Overhead = × 100
Total Direct Wages
Rs. 18,000
= × 100
Rs. 18,000
= 100%

⇒ Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the Process × 100%

Thus, Production Overheads chargeable to : Process I = Rs. 4,000 × 100%

= Rs. 4,000
Process II = Rs. 6,000 × 100%
= Rs. 6,000
Process III = Rs. 8,000 × 100%
= Rs. 8,000
Note
Calculations for apportionment of production overheads are done only once. They are given here just for
reference
 
Ledger Accounts
 
Dr Process II a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c (Primary) 950 19,000 By Normal Loss a/c 95 760
3,960 By Abnormal Loss a/c 15 600
To Material (Secondary) 6,000 840 33,600
To Direct Labour/Labor 6,000 By Process III a/c
To Production Overheads   [Output Transferred]
  950 34,960   950 34,960
           
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 50 200
To Process II a/c 95 760
           
           
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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).
Assumption
The additional material added would not result in an increase in the units input.
[In the absence of any information relating to quantities]

• Normal Loss [NL]

NL = 10 % of input
= 950 units × 10%
= 95 units

• Normal Output [NO]

NO = GI − NL
= 950 units − 95 units
= 855 units

• Actual Output [AO]

AO = 840 units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO < NO, there is abnormal loss.

• Abnormal Loss [AL]

AL = NO − AO
= 855 units − 840 units
= 15 units

• Total Cost [TC]

TC = Rs. 19,000 + Rs. 3,960 + Rs. 6,000 + Rs. 6,000
= Rs. 34,960

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
= 95 units × Rs. 8/unit
= Rs. 760

• Normal Cost [NC]

NC = TC − NLR
 = Rs. 34,960 − Rs. 760
= Rs. 34,200

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

NC
NCNO/Unit =
NO
Rs. 34,200
=
855 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:

Consider the following example:

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

• Normal Loss [NL]

NL = 10 % of input
= 1,000 units × 10%
= 100 units

• Normal Output [NO]

NO = GI − NL
= 1,000 units − 100 units
= 900 units
Quantity Value Rate
(Units) (Rs.) (Rs./Unit)
Gross Input 1,000 1,00,000 100.00
Less: Normal Loss 100 100 1.00
Net/Normal Output 900 99,900 111.00

Note
The data in the rate column should always be obtained as the quotient of Value ÷ Quantity.
 
Dealing with Abnormal Gain units
 

• Actual Output [AO]

AO = 920 units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO > NO, there is abnormal gain.

• Abnormal Gain [AG]

AG = AO − NO
= 920 units − 900 units
= 20 units

Actual Output ≠ Normal Output

The actual output is 920 units whereas the normal output is 900 units only.
To arrive at the figure of actual output we need to add these 20 units to the normal output.

Quantity Value Rate

(Units) (Rs.) (Rs./Unit)
Gross Input 1,000 1,00,000 100.00
Less: Normal Loss 100 100 1.00
Net/Normal Output 900 99,900 111.00
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 Value Rate

(Units) (Rs.) (Rs./Unit)
 Gross Input 1,000 1,00,000 100.00
Less: Normal Loss 100 100 1.00
Net/Normal Output 900 99,900 111.00
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
Total Value Attributed
• Rate at the abnormal gain units are valued =
Abnormal Gain units
Rs. 2,220
=
20 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"

Journal in the books of M/s __ for the period from ____ to _____
Debit Amount Credit Amount
Date V/R No. Particulars L/F
(in Rs) (in Rs)
30/06/2006 – Process I a/c Dr – 2,220
      To Abnormal Gain a/c 2,220
[For the value of abnormal gain.]
Dr Process I a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
 To Input 1,000 1,00,000 By Normal Loss a/c 100 100
To Abnormal Gain a/c 20 2,220 920 1,02,120
By Process II a/c
  1,020 1,02,220   1,020 1,02,220
           
Dr Abnormal Gain a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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 Units

The 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 Units

The 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/Rectification
To 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).

Journal in the books of M/s __ for the period from ____ to _____
Debit Credit
Date V/R No. Particulars L/F Amount Amount
(in Rs) (in Rs)
30/06/2006 – Abnormal Gain a/c Dr – 20
      To Normal Loss a/c 20
 [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) .]
Normal
Dr Cr
Loss a/c
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

To Process I a/c 100 100 By Abnormal Gain a/c 20 20

80 80
By Balance c/d
  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 account

The 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 _____
Debit Credit
Date V/R No. Particulars L/F Amount Amount
(in Rs) (in Rs)
30/06/2006 – Abnormal Gain a/c Dr – 2,200
      To Costing Profit & Loss a/c 2,200
[For the abnormal gain a/c closed by
transferring the balance gain to the costing
profit and loss account.]
Abnormal
Dr Cr
Gain a/c
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

To Normal Loss a/c 20 20 By Process I a/c 20 2,220

– 2,200
To Costing P&L a/c
  20 2,220   20 2,220
           

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

1,000 units @ Rs. 6 per unit were introduced in process I. Production overheads are absorbed as a percentage
of direct wages.

The actual output and normal loss of the respective processes are given below:

Normal loss
Output Value of scrap
as a percentage
(Units) (per unit)
of input
Process I 950 5% Rs. 4
Process II 840 10% Rs. 8
Process III 750 15% Rs. 10

Prepare the process accounts and the other relevant accounts.

 
Working Notes (Direct » Materials, Labour/Labor)
 
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)

The secondary direct material Rs. 5,924 is also to be debited to the process account.

The direct wages Rs. 8,000 are also to be debited to the process account.
 
Working Notes (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,

Total Production Overheads

Rate of Absorption of Production Overhead = × 100
Total Direct Wages
Rs. 18,000
= × 100
Rs. 18,000
= 100%

⇒ Production overheads are 100% of Direct Wages.

Therefore, Production overheads Chargeable to a process = Direct Wages of the Process × 100%

Thus, Production Overheads chargeable to : Process I = Rs. 4,000 × 100%

= Rs. 4,000
Process II = Rs. 6,000 × 100%
= Rs. 6,000
Process III = Rs. 8,000 × 100%
= Rs. 8,000

Note
Calculations for apportionment of production overheads are done only once. They are given here just for
reference
Ledger Accounts  
  
Dr Process III a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process II a/c (Pr) 840 33,600 By Normal Loss a/c 126 1,260
To Material (Secondary) 5,924
To Direct Labour/Labor 8,000 By Finished Stock a/c 750 57,000
To Production Overheads 8,000
36 2,736<br< td=""> </br<>   [Output
To Abnormal Gain a/c Transferred]
  876 58,260   876 58,260
           
Dr Normal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c 50 200 By Ab Gain a/c 36 360
To Process II a/c 95 760
To Process III a/c 126 1,260 235 1,860
By bal c/d
  271 2,220   271 2,220
To Bal b/d 235 1,860      
Dr Abnormal Loss a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process II a/c 15 600

           
           
Dr Abnormal Gain a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

To Normal Loss a/c 36 360 By Process III a/c 36 2,736

– 2,376
To Costing P&L a/c
  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).

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

• Normal Loss [NL]

NL = 15 % of input
= 840 units × 15%
= 126 units

• Normal Output [NO]

NO = GI − NL
= 840 units − 126 units
= 714 units

• Actual Output [AO]

AO = 750 units [Given]

• Abnormal Loss/Gain [AL/AG]

Since AO > NO, there is abnormal gain.

• Abnormal Gain [AG]

AG = AO − NO
= 750 units − 714 units
= 36 units
• Total Cost [TC]
TC = Rs. 33,600 + Rs. 5,924 + Rs. 8,000 + Rs. 8,000
= Rs. 55,524

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
= 126 units × Rs. 10/unit
= Rs. 1,260

• Normal Cost [NC]

NC = TC − NLR
= Rs. 55,524 − Rs. 1,260
= Rs. 54,264

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

NC
NCNO/Unit =
NO
Rs. 54,264
=
714 units
= Rs. 76/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
= 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

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.

 
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 Materials
Where 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 Stock
By 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
 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- Progress
Where 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. Valuation
Valuation 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. Accounting
How 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.

Consider the following example:

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 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::
40.00
      FIFO method
    42.00
      LIFO method
40.18
      Average method
 
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.

Particulars Quantity Amount Rate

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::
   
      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 Period
Where 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.

Particulars Quantity Amount Rate

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::
   
      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.

Particulars Quantity Amount Rate

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 Price

This is the weighted average of the previous period (opening) and current period rates. It is given by the
relation
Total Value (of the previous and current periods)
Weighted Average Rate =
Total Quantity
Rs. 7,95,600
=
19,800 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.

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

Weighted Average Rate =
(1,800 units + 18,000 units)
(Rs. 75,600 + Rs. 7,20,000)
=
(19,800 units)
Rs. 7,95,600
=
19,800 units
= Rs. 40.18/unit

• Simple Average
The simple average of stock rates is given by the average of just the prices.
(Rs. 42/unit + Rs. 40/unit)
Simple Average Price =
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 Stock

Where 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.
Particulars Quantity Amount Rate
 Opening Stock – – –
Received during the current period 18,000 7,20,000 40.00
Total Stock 18,000 7,20,000 40
Rate for Valuing Closing Stock::
40
      FIFO method
    40
      LIFO method
40
      Average method

• Where the Previous and Current Period Rates are

the Same
Where 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.
Particulars Quantity Amount Rate
Opening Stock 1,800 75,600 42.00
Received during the current period 18,000 7,56000 42.00
Total Stock 19,800 8,31,600 42
Rate for Valuing Closing Stock::
42
      FIFO method
    42
      LIFO method
42
      Average method

 
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
  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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process I a/c (Primary) 2,500 50,000 By Normal Loss a/c ** 300 1,500
500 15,000 By Process III a/c * 2,100 84,000
To Material (Secondary) 24,000 By Abnormal Loss a/c ** 150 6,000
To Direct Labour/Labor 12,000
To Production Overheads By Mat. Stock (Primary) * 400 8,000
By Mat. Stock (Secondary) * 50 1,500
   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.

 Accounting Treatment

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 Valuation

When 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Bal b/d (Pr. Mat) 500 21,000 By Nor. Loss (wt) a/c ** 710 –
To Bal b/d (Sec. Mat) 100 2,400 426 5,112
To Process I a/c (Pri) 12,800 5,12,000 By Nor. Loss (scr) a/c ** 13,400 7,11,144
To Material (Sec) 1,600 40,000
To Direct Labour/Labor 86,480 By Finished Stock a/c * 725 29,000
To Production Overheads 64,766 75 1,875
386 20,485 By Mat. Stock (Pri) *
To Abnormal Gain ** By Mat. Stock (Sec) *
  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.

Working Notes » Hide/Show

 
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

Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Bal b/d 500 21,000
To Process I a/c 12,800 5,12,000 By Pr. Mat. Consumed a/c 12,575 5,04,000
725 29,000
By Mat. Stock (Primary) *
  13,300 5,33,000   13,300 5,33,000
           
Dr Secondary Material (Process C) a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Bal b/d 100 2,400
To Mat. Introduced 1,600 80,000 By Sec. Mat. Consumed a/c 1,625 78,650
By Mat. Stock (Secondary) * 75 3,750
  2,500 82,400   2,500 82,400
           
Dr Process C a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Pr. Mat. Consumed 12,575 5,04,000 By Nor.l Loss (weight) a/c ** 710 –
To Sec. Mat. Consumed 1,625 78,650 426 5,112
To Direct Labour/Labor 86,480 By Nor. Loss (scrap) a/c ** 13,400 7,50,400
To Production Overheads 64,766 By Finished Stock a/c *
386 21,616
To Abnormal Gain **
  14,536 7,55,512   14,536 7,55,512
           
 * Values relating to these are derived through calculations.
 ** Quantities and Values relating to these are derived through calculations.

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 Stocks
The 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 Stock
Opening 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 Stock
Rate 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Materials Introduced # 8,400 48,000 By Normal Loss a/c * 400 –
24,000 8,000 1,08,800
To Manufacturing Wages 13,600 By Process B a/c *
15,200
To Other Direct Expenses

To Factory Overheads
  8,400 1,00,800   8,400 1,00,800
           

Working Notes » Hide/Show

• 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

• Abnormal Loss/Gain [AL/AG]

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

• Total Cost [TC]

TC = Rs. 48,000 + Rs. 24,000 + Rs. 13,600 + Rs. 15,200
= Rs. 1,00,800

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
= 400 units × Rs. 0/unit
=0

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

• Normal Cost [NC]

NC = TC − NLR
= Rs. 1,00,800 − Rs. 0
 = Rs. 1,00,800

• Normal Cost of Normal Output per unit

[NCNO/U]
NC
NCNO/Unit =
NO
Rs. 1,00,800
=
8,000 units
= Rs. 12.60/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
= 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.

 * Values relating to these are derived through calculations.

 
Solution » Process B a/c
 
Dr Process B a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Opening Mat. Stock * 580 7,308 By Normal Loss a/c * 284 568
8,000 1,00,800 By Process C a/c ** 7,656 1,64,604
To Process A a/c 34,000 By Closing Mat. Stock * 640 8,064
To Manufacturing Wages 16,128
15,000
To Other Direct Expenses

To Factory Overheads
  8,580 1,73,236   8,580 1,73,236
           

Working Notes » Hide/Show

• 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 Loss [NL]

NL = 284 units [Given]

• 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
• Abnormal Loss/Gain [AL/AG]
Since AO = NO, there is neither abnormal loss nor abnormal gain.

• 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.

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
= 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

Particulars Quantity Amount Rate
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::
12.60
      FIFO method
    12.60
      LIFO method
12.60
      Average method

• 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

• Normal Cost of Normal Output per unit

[NCNO/U]
NC
NCNO/Unit =
NO
Rs. 1,64,604
=
7,656 units
= Rs. 21.50/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
= 7,656 units × Rs. 21.50/unit
= Rs. 1,64,604

• Normal Loss [VNL]

VNL = NLR
= Rs. 568

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.

Notes/Assumptions
 Material stocks are recorded through the "Process a/c" itself without using a separate account for
 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Opening Mat. Stock * 738 15,867 By Normal Loss a/c * 356 1,780
7,656 1,64,604 By Abnormal Loss a/c ** 204 5,712
To Process A a/c 18,000 7,000 1,96,000
To Manufacturing Wages 13,452 By Finished Stock a/c * 834 17,931
9,500 By Closing Mat. Stock *
To Other Direct Expenses

To Factory Overheads
  8,394 2,21,513   8,394 2,21,513
           

Working Notes » Hide/Show

• 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 Loss [NL]

NL = 356 units [Given]

• 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.

• Normal Loss Realisation [NLR]

NLR = NL in units × Scrap Rate/unit
= 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

Particulars Quantity Amount Rate
Opening Stock 738 15,867 21.50
Received during the current period 7,656 1,64,604 21.50
Total Stock 8,394 1,80,471 21.50
Rate for Valuing Closing Stock::
21.50
      FIFO method
    21.50
      LIFO method
21.50
      Average method

• 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

• Normal Cost of Normal Output per unit

[NCNO/U]
NC
NCNO/Unit =
NO
= Rs. 2,01,712
 7,204 units
= Rs. 28/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
= 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

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.

Notes/Assumptions
 Material stocks are recorded through the "Process a/c" itself without using a separate account for
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.
 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.
 
Accounting Treatment
 
 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process X a/c 24,200 4,35,600 By Normal Loss a/c ** 2,000 10,000
(Primary) 800 24,000 By Abnormal Loss a/c ** 500 18,000
 To Material (Secondary) 1,43,400 22,500 8,10,000
To Direct Labour/Labor 2,35,000 By Process Y Stock a/c *
To Production Overheads
  25,000 8,38,000   25,000 8,38,000
           

Working Notes » Hide/Show

Dr Process Y Stock a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Bal b/d 1,200 40,800 By Process Z a/c ** 22,200 7,96,800
To Process Y a/c 22,500 8,10,000 1,500 54,000
By Bal c/d *
  23,700 8,50,800   23,700 8,50,800
           
 * Values relating to these are derived through calculations.
 ** Quantities and Values relating to these are derived through calculations.

Working Notes » Hide/Show

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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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To bal b/d (Fin. Stock) 1,200 40,800 By Normal Loss a/c ** 2,000 10,000
To Process X a/c 24,200 4,35,600 By Abnormal Loss a/c ** 500 18,000
(Primary) 800 24,000 22,200 7,96,800
To Material (Secondary) 1,43,400 By Process Z a/c * 1,500 54,000
To Direct Labour/Labor 2,35,000 By Bal c/d (Fin. Stock)
To Production Overheads
  26,200 8,78,800   26,200 8,78,800
           

Caution :: Workaround
Abundant 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Process X a/c (Primary) 24,200 4,35,600 By Normal Loss a/c ** 2,000 10,000
To Material (Secondary) 800 24,000 By Abnormal Loss a/c ** 500 18,000
To Direct Labour/Labor 1,43,400 By Completed Production c/d * 22,500 8,10,000
To Production Overheads 2,35,000
  25,000 8,38,000   25,000 8,38,000
To Bal b/d (Fin. Stock) 1,200 40,800 By Process Z a/c ** 22,200 7,96,800
To Completed Production b/d 22,500 8,10,000 By Bal c/d (Fin. Stock) * 1,500 54,000
  23,700 8,50,800   23,700 8,50,800

 
A Problem (illustration)
 
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
Rs.     Rs.     Rs.    
Direct Materials 1,24,000 – –
Direct Wages 2,36,000 34,000 18,000
Factory Overheads 84,000 16,128 13,452
Scrap Value of Loss/unit – 15,000 9,500
 2 5

Output Units    Units    Units   

Opening Finished Stock 8,000 – 7,000
Closing Finished Stock 400 284 356
– 580 738
Rate of Valuation (Opening Stock) – 640 834

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.

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

• Product
Where 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 ___  

Amount Amount Amount Amount
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)

Closing Stocks:
          Raw Materials 45,000
    Work-in-Progress 1,25,000
    Finished Goods 1,08,000 2,78,000
   
 • Principle for Valuation of Assets
The value of an asset includes all the expenses incurred before bringing the asset
into usable condition.

• Capitalising Expenses
Where 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 Condition
The 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 Accounting
In 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 Accounting
In 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 Progress
Work 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 Accounting
In 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 Valuation
Once 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.

» Illustration
Consider 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.) 70 50 20 140
b) % Completion 100% 60% 75% —
c) Incurred Cost (per unit in Rs.) [(a) × (b)] 70 30 15 115
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 Costs

The element wise costs can also be ascertained:
Element of Cost
Material Labour/Labor Overhead Expenses Total
a) Complete Cost (per unit in Rs.) 70 50 20 140
b) % Completion 100% 60% 75% —
c) Incurred Cost (per unit in Rs.) [(a) × (b)] 70 30 15 115
d) Work-in-progress units 2,100 2,100 2,100 2,100
e) Total Cost 1,47,000 63,000 31,500 2,41,500

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

Units
The total value of work in progress can also be ascertained using the equivalent completed units idea.
Percent (%)
Equivalent Cost Per
W-I-P Units Total Cost
Complete Units Completed Unit
Complete
a) Material 2,100 100% 2,100 70 1,47,000
b) Labour/Labor 2,100 60% 1,260 50 63,000
2,100 75% 1,575 20  31,500
c) Overheads 2,100 2,41,500
d) Total
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 account

Work-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 period

Dr Process A a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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 period

Dr Process A a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Balance b/d 2,100 2,41,500

           
           

• Using a Work-in-Progress account

The 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 period

Dr Process A a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)

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

           
            
Dr Work-in-Progress a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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 period

The 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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (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
Material Labour/Labor Overhead Expenses Total
a) Complete Cost (per unit in Rs.) 70 50 20 140
b) % Completion 100% 60% 75% —
c) Incurred Cost (per unit in Rs.) [(a) × (b)] 70 30 15 115
 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

Percent (%)
Equivalent Cost Per
W-I-P Units Total Cost
Complete Units Completed Unit
Complete
 a) Material 2,100 100% 2,100 70 1,47,000
b) Labour/Labor 2,100 60% 1,260 50 63,000
2,100 75% 1,575 20  31,500
c) Overheads 2,100 2,41,500
d) Total

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 unit

The 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 unit

The total cost incurred Rs. 1,14,800

=
Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)}
=
7,000 units × Complete Cost per unit + 3,000 units × 40% of Complete Cost per unit
=
7,000 units × Complete Cost per unit + 3,000 units × 40% × Complete Cost per unit
=
7,000 units × Complete Cost per unit + 1,200 units × Complete Cost per unit
=
8,200 units × Complete Cost per unit
Rs. 1,14,800
⇒ Complete Cost per unit =
8,200 units
= Rs. 14/unit
3,000 units × 40% = 1,200 units
⇒ Converting the Work-in-Progress units to equivalent complete
units.

• Overhead Cost per unit

The total cost incurred Rs. 2,11,200

=
Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)}
=
7,000 units × Complete Cost per unit + 3,000 units × 60% of Complete Cost per unit
=
7,000 units × Complete Cost per unit + 3,000 units × 60% × Complete Cost per unit
=
7,000 units × Complete Cost per unit + 1,800 units × Complete Cost per unit
=
8,800 units × Complete Cost per unit
Rs. 2,11,200
⇒ Complete Cost per unit =
8,800 units
= Rs. 24/unit
3,000 units × 60% = 1,800 units
⇒ Converting the Work-in-Progress units to equivalent complete
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 Statement
This statement gives the number of completed units on which the total expenditure might be considered to
have been incurred.
• Statement of Cost
This 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
Material Labour/Labor Overheads
Particular Unit Particular Unit % Equivalen % Equivalen % Equivalen
s s s s Complet t Complet t Complet t
e Units e Units e Units

 
               

Totals                

• Accommodating additional Elements of Cost

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

Illustration
The Equivalent production statement relating to the data in the above illustration would be:
In Out Equivalent Units
Material Labour/Labor Overheads
Particular Particular % Equivalen % Equivalen % Equivalen
Units Units
s s Complet t Complet t Complet t
e Units e Units e Units
Material 10,00 Production 7,000 100% 7,000 100% 7,000 100% 7,000
Introduced 0 Completed 3,000 80% 2,400 40% 1,200 60% 1,800

Closing
Work-in-
Progress
10,00 10,00
Totals     9,400   8,200   8,800
0 0

• Relevance to Process a/c

The "In" and "Out" columns are a replica of the process account with only the unit columns shown.
Dr Process __ a/c Cr
 Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 10,000 2,63,200 By Process B a/c 7,000 ??
1,14,800 By bal c/d (W-I-P) 3,000 ??
To Direct Wages 2,11,200
To Overheads
  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.
Cost Incurred Cost per unit
Equivalent Units (in the current period) (Completed production)
Element of Cost (in Rs.) (in Rs/Unit)
(a) (b) (c) [= (b) ÷ (a)]
     

Totals    

Illustration
The Statement of Cost relating to the data in the above illustration would be:
Cost Incurred Cost per unit
Equivalent Units (in the current period) (Completed production)
Element of Cost (in Rs.) (in Rs/Unit)
(a) (b) (c) [= (b) ÷ (a)]
Materials 9,400 2,63,200 28
Labour/Labor 8,200 1,14,800 14
Overhead 8,800 2,11,200 24
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 unit

The 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 – – – xxx
    » Overheads
b) Component Two – – –
    » Material – – –
    » Labour/Labor – – – xxx
    » Overheads
b) Component Three
    » Material
    » Labour/Labor
    » Overheads
Total Cost xxxx

Illustration
The Statement of Cost relating to the data in the above illustration would be:
Component to be Evaluated
Equivalent Units Cost Per unit Total Cost Component Cost
  » Element of Cost
a) Completed Production
    » Material 7,000 28 1,96,000
    » Labour/Labor 7,000 14 98,000
    » Overheads 7,000 24 1,68,000 4,62,000
b) Closing Work-in-Progress
    » Material 2,400 28 67,200
    » Labour/Labor 1,200 14 16,800
    » Overheads 1,800 24 43,200 1,27,200
Total Cost 5,89,200

Cross Check
The 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/c

The values arrived at in the Statement of Evaluation are used to complete the process account.
Dr Process __ a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Material (Primary) 10,000 2,63,200 By Process B a/c 7,000 4,62,000
1,14,800 By bal c/d (W-I-P) 3,000 1,27,200
To Direct Wages 2,11,200
To Overheads
  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 needed

We 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 and
3. 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
 
Dr Process __ a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Balance b/d 1,800 83,200 By Finished Production #* 7,800 5,85,000
 To Direct Materials 6,000 2,25,000
1,84,000
To Labour/Labor 92,800
To Overheads
  7,800 5,85,000   7,800 5,85,000
           

Working Notes » Hide/Show

• 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

• Abnormal Loss/Gain [AL/AG]

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

• Normal Cost of Normal Output per unit

[NCNO/U]
NC
NCNO/Unit =
NO
Rs. 5,85,000
=
7,800 units
= Rs. 75/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
= 7,800 units × Rs. 75/unit
= Rs. 5,85,000

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

 * Values 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 needed

We 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 upon

Where 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 Method
Where 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".
Cost Incurred Cost per unit
Equivalent Units (in the current period) (Completed production)
Element of Cost (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 Completed

2. Production started and completed in the current period

In Out Equivalent Units

Material
Particulars Units Particulars Units % Equivalent
Complete Units
Opening W-I-P 2,300 Opening W-I-P Completed 2,300
Input Introduced Production Started & Completed

Totals          
  

» Weighted Average Method

Where 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"
Cost Incurred (in Rs.) in the Cost per unit
Equivalent (Completed
Units Previous Current production)
Element of Total
Period Period (in Rs/Unit)
Cost
(d) [= (b) +
(a) (b) (c) (c) [= (e) ÷ (a)]
(c)]

 
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

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
 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

1. 75% complete with regard to Direct Materials,

2. 50% complete with respect to Labour/Labor and
3. 30% complete with regard to Overhead Expenses

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 Production

The Equivalent production statement relating to the data in the above illustration would be:
In Out Equivalent Units
Material Labour/Labor Overheads
Particular Particular % Equivalen % Equivalen % Equivalen
Units Units
s s Complet t Complet t Complet t
e Units e Units e Units
Opening 1,800 Opening 1,800 20% 360 60% 1,080 40% 720
W-I-P 12,00 W-I-P 9,600 100% 9,600 100% 9,600 100% 9,600
Input 0 Completed
Introduced Production 2,400 75% 1,800 50% 1,200 30% 720
Started &
Completed

  (in the
current
period)
Closing
W-I-P
13,80 13,80
Totals     11,760   11,880   11,040
0 0

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] and
3. 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 Data
To 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
Cost Incurred Cost per unit
Equivalent Units (in the current period) (Completed production)
Element of Cost (in Rs.) (in Rs/Unit)
(a) (b) (c) [= (b) ÷ (a)]
Materials 11,760 2,11,680 18
Labour/Labor 11,880 2,73,240 23
Overhead 11,040 1,32,480 12
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
Component to be Evaluated
Equivalent Units Cost Per unit Total Cost Component Cost
  » Element of Cost
A) Opening Work in Progress
    » Opening Balance 83,200
    » Material 360 18 6,480
    » Labour/Labor 1,080 23 24,840
    » Overheads 720 12 8,640 1,23,160
B) Production Started & Completed
    » Material 9,600 18 1,72,800
     » Labour/Labor 9,600 23 2,20,800
    » Overheads 9,600 12 1,15,200 5,08,800
a) Total Output 6,31,960

b) Closing Work in Progress

    » Material 1,800 18 32,400
    » Labour/Labor 1,200 23 27,600
    » Overheads 720 12 8,640 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 Check
The 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 Account
Dr Process __ a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Balance b/d 1,800 83,200 By Finished Production #* 11,400 6,31,960
To Direct Materials 12,000 2,11,680 2,400 68,640
2,73,240 By Bal c/d (W-I-P)
To Labour/Labor 1,32,480
To Overheads
  13,800 7,00,600   13,800 7,00,600
           
 
Weighted Average Method
 

• Statement of Equivalent Production

The Equivalent production statement relating to the data in the above illustration would be:
In Out Equivalent Units
Material Labour/Labor Overheads
Particular Particular % Equivalen % Equivalen % Equivalen
Units Units
s s Complet t Complet t Complet t
e Units e Units e Units
Opening 1,800 Completed 11,40 100% 11,400 100% 11,400 100% 11,400
W-I-P 12,00 Production 0 75% 1,800 50% 1,200 30% 720
Input 0 Closing 2,400
Introduced W-I-P
13,80 13,80
Totals     13,200   12,600   12,120
0 0

» % 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
Cost Incurred (in Rs.) in the Cost per unit
Equivalent (Completed
Units Previous Current production)
Total
Element of Cost Period Period (in Rs/Unit)
(d) [= (b) +
(a) (b) (c) (c) [= (e) ÷ (a)]
(c)]
a) Direct Materials
13,200 38,400 2,11,680 2,50,080 18.9455
b) Labour/Labor
12,600 24,000 2,73,240 2,97,240 23.5905
c) Overhead
12,120 20,800 1,32,480 1,53,280 12.6469
Expenses
Totals 83,200 6,17,400 7,00,600 55.1829

» Essential Data
To 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
Component to be Evaluated
Equivalent Units Cost Per unit Total Cost Component Cost
  » Element of Cost
a) Completed Production
    » Material 11,400 18.9455 2,15,979
    » Labour/Labor 11,400 23.5905 2,68,932
    » Overheads 11,400 12.6469 1,44,175
6,29,084
 b) Closing Work in Progress
    » Material 1,800 18.9455 34,102
    » Labour/Labor 1,200 23.5905 28,309 71,516
    » Overheads 720 12.6469 9,106

Total Cost
7,00,600

» Cross Check
The 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 Account
Dr Process __ a/c Cr
Quantity Amount Quantity Amount
Particulars Particulars
(in Units) (in Rs) (in Units) (in Rs)
To Balance b/d 1,800 83,200 By Finished Production #* 11,400 6,29,084
To Direct Materials 12,000 2,11,680 2,400 71,516
2,73,240 By bal c/d (W-I-P)
To Labour/Labor 1,32,480
To Overheads
  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 Method
The 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 and
3. 60% complete with regard to Overhead Expenses

 Weighted Average Method

The 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 Difference
Apart 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)

Rs. 18 Rs. 18.9455
    Material Rs. 23 Rs. 23.5905
    Labour/Labor Rs. 12 Rs. 12.6469
    Overhead Rs. 6,31,960 Rs. 6,29,084
Value of Completed Production Rs. 68,640 Rs. 71,516
Value of Closing Work in Progress