Question

1,000 units of raw material were introduced in a process at a cost of ₹ 4,000. The normal wastage allowed is 10%, each unit of waste realises ₹ 2.50. The actual production was 850 units (with abnormal wastage of 50 units). The expenses being as follows:
Direct wages {2cm} ₹ 6,500
Indirect expenses {1.6cm} ₹ 3,250
Prepare the process account to show the effect of wastage.

Hint:

Normal loss is expected, abnormal loss is extra and shown separately.

Answer 1

Step 1: Determine normal loss.
Normal loss is calculated as 10% of 1,000 units, resulting in 100 units.
Step 2: Calculate actual loss and abnormal loss.
With an actual production of 850 units, the actual loss is 1,000 units – 850 units = 150 units.
Abnormal loss = Actual loss – Normal loss = 150 units – 100 units = 50 units.
Step 3: Sum the total cost of the process.
Raw material: ₹ 4,000
Direct wages: ₹ 6,500
Indirect expenses: ₹ 3,250
Total cost: ₹ 13,750
Step 4: Calculate the scrap value of normal loss.
Realization from normal loss (scrap) = 100 units × ₹ 2.50 = ₹ 250.
This reduces the net cost to be absorbed by good units to:
₹ 13,750 – ₹ 250 = ₹ 13,500.
Step 5: Determine output units for cost absorption and calculate cost per unit.
Normal output = 1,000 units – 100 units (normal loss) = 900 units.
Cost per unit = ₹ 13,500 / 900 units = ₹ 15 per unit.
Step 6: Prepare the Process Account.
\[\begin{array}{|l|r|r|}\hline\text{Particulars} & \text{Units} & \text{Amount (₹)}
\hline\text{To Raw Material} & 1,000 & 4,000
\text{To Direct Wages} & & 6,500
\text{To Indirect Expenses} & & 3,250
\hline\text{Total} & 1,000 & 13,750
\hline\text{By Normal Loss (Scrap)} & 100 & 250
\text{By Abnormal Loss} & 50 & 750
\text{By Finished Output} & 850 & 12,750
\hline\text{Total} & 1,000 & 13,750
\hline\end{array}\]
Valuation of abnormal loss: 50 units × ₹ 15/unit = ₹ 750.
Valuation of finished output: 850 units × ₹ 15/unit = ₹ 12,750.
The Process Account accurately reflects the accounting for normal and abnormal losses, as well as the final output.