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: Find normal loss.
Normal loss = 10% of 1,000 units = 100 units
Step 2: Actual production is 850 units, so actual loss = 1,000 – 850 = 150 units.
Abnormal loss = Actual loss – Normal loss = 150 – 100 = 50 units
Step 3: Total cost of process.
Raw material: ₹ 4,000
Direct wages: ₹ 6,500
Indirect expenses: ₹ 3,250
Total: ₹ 13,750
Step 4: Scrap value of normal loss.
Normal loss realisation = 100 units × ₹ 2.50 = ₹ 250
So, net cost to be absorbed by good units:
₹ 13,750 – ₹ 250 = ₹ 13,500
Step 5: Output units to absorb cost.
Normal output = 1,000 – 100 = 900 units
Cost per unit = ₹ 13,500 / 900 = ₹ 15 per unit
Step 6: Prepare Process Account.
\[ \begin{array}{|l|r|r|} \hline \text{Particulars} & \text{Units} & \text{Amount (₹)}
\hline \text{To Raw Material} & 1,000 & 4,000
\text{To Direct Wages} & & 6,500
\text{To Indirect Expenses} & & 3,250
\hline \text{Total} & 1,000 & 13,750
\hline \text{By Normal Loss (Scrap)} & 100 & 250
\text{By Abnormal Loss} & 50 & 750
\text{By Finished Output} & 850 & 12,750
\hline \text{Total} & 1,000 & 13,750
\hline \end{array} \]
Abnormal Loss = 50 units × ₹ 15 = ₹ 750
Finished Output = 850 units × ₹ 15 = ₹ 12,750
Thus, the Process Account shows the proper treatment of normal loss and abnormal loss, along with the final output.