Question

10,000 units of raw material were introduced in Process ‘A' at a cost of Rs. 80,000. The output of Process ‘A' is transferred to Process ‘B'. Normal wastage is 10% and each unit of waste is realised @ Rs. 10. Actual production was 8700 units. Direct wages incurred Rs. 16,000. Indirect expenses amounted to Rs. 4,000. Prepare Process ‘A' Account.

Hint:

To confirm your process account is balanced:
• Ensure total units on the Debit side ($10,000$) match the total units on the Credit side ($1,000 + 300 + 8,700 = 10,000$).
• Ensure the total value on the Debit side ($\text{Rs. } 1,00,000$) matches the total value on the Credit side ($\text{Rs. } 10,000 + \text{Rs. } 3,000 + \text{Rs. } 87,000 = \text{Rs. } 1,00,000$).
• Always value abnormal losses and final output using the calculated cost per good unit, never the scrap value.

Answer 1

Step 1: Identifying Total Input Cost and Quantities:
We must calculate total expenses debited to Process A: Direct Materials Introduced &= 10,000 units costing Rs. 80,000
Direct Wages Incurred &= Rs. 16,000
Indirect Expenses &= Rs. 4,000
Total Debit Expenses &= 80,000 + 16,000 + 4,000 = Rs. 1,00,000

Step 2: Calculating Normal Loss and Scrap Realization:
Normal loss is the expected wastage of material during production. Normal Loss Units &= 10% of Input Units = 10% \times 10,000 = 1,000 units
Scrap Realization Rate &= Rs. 10 per unit
Total Scrap Value Recovered &= 1,000 units \times Rs. 10 = Rs. 10,000

Step 3: Evaluating Abnormal Loss and Calculating Unit Cost:
We compare expected production against actual output to check for unexpected losses: Expected Output &= Input Units - Normal Loss Units
Expected Output &= 10,000 - 1,000 = 9,000 units
Actual Output &= 8,700 units Since Actual Output ($8,700$) is less than Expected Output ($9,000$), we have an Abnormal Loss of: Abnormal Loss Units = 9,000 - 8,700 = 300 units Now, we calculate the standard cost per unit of normal output: Cost per Good Unit &= \frac{Total Debit Costs - Scrap Value of Normal Loss}{Input Units - Normal Loss Units}
Cost per Good Unit &= \frac{Rs. 1,00,000 - Rs. 10,000}{10,000 - 1,000}
Cost per Good Unit &= \frac{Rs. 90,000}{9,000 units} = Rs. 10 per unit

Step 4: Valuing the Outputs:
We use the calculated cost per good unit (Rs. 10) to value the transfer to Process B and the abnormal loss: Value of Output Transferred to Process B &= 8,700 units \times Rs. 10 = Rs. 87,000
Value of Abnormal Loss &= 300 units \times Rs. 10 = Rs. 3,000

Step 5: Preparing the Process ‘A' Ledger Account:
We present the calculated ledger entries in a double-entry horizontal format: