Accounting for Decision Making

Definition of Management Accounting:

Management Accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating financial and non-financial information to internal management.

Key Characteristics:

1. Internal Focus: Designed specifically for managers at all levels to facilitate planning, decision-making, performance evaluation, and operational control.
2. Future-Oriented: While financial accounting looks backward at historical transactions, management accounting looks forward using projections, budgets, standard costing, and CVP analysis.
3. No Mandatory Format: Unlike financial accounting, it is not bound by GAAP/NFRS or statutory compliance; reports are formatted purely to serve managerial utility.

Meaning of Product Cost:

Product costs (also known as inventoriable costs) are all the direct and indirect manufacturing costs necessary to convert raw materials into finished goods ready for sale.

Key Elements of Product Cost:

• Direct Materials: Primary physical raw materials directly traceable to the finished item.
• Direct Labour: Wages paid to production workers directly assembling or processing the product.
• Manufacturing Overhead: Indirect factory costs, such as factory rent, supervisor salaries, machinery depreciation, and factory utilities.

Accounting Treatment: Under GAAP/NFRS, product costs are treated as inventory (current asset on the Balance Sheet) until the product is sold, at which point they become an expense (Cost of Goods Sold) on the Income Statement.

Meaning of Cost Sheet:

A Cost Sheet is a periodic accounting statement that presents a detailed chronological and structural compilation of all costs incurred in manufacturing a product or providing a service during a specified accounting period.

Core Functions and Structure:

1. Prime Cost: Direct Material + Direct Labour + Direct Expenses.
2. Factory / Works Cost: Prime Cost + Factory Overhead + Opening WIP - Closing WIP.
3. Cost of Production: Factory Cost + Administrative Overhead.
4. Cost of Goods Sold (COGS): Cost of Production + Opening Finished Goods - Closing Finished Goods.
5. Total Cost of Sales: COGS + Selling & Distribution Overhead.
6. Profit / Selling Price: Total Cost + Profit Margin = Total Sales Revenue.

Calculation of Total Cost for 5,000 Units using High-Low Method:

Step 1: Segregate Cost and Output

• High Level: Output = $7,000\text{ units}$, Cost = $\text{Rs } 90,000$
• Low Level: Output = $4,000\text{ units}$, Cost = $\text{Rs } 60,000$

$$\Delta \text{Output} = 7,000 - 4,000 = 3,000\text{ units}$$

$$\Delta \text{Cost} = \text{Rs } 90,000 - \text{Rs } 60,000 = \text{Rs } 30,000$$

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Step 2: Calculate Variable Cost per Unit ($b$)

$$b = \frac{\Delta \text{Cost}}{\Delta \text{Output}} = \frac{\text{Rs } 30,000}{3,000\text{ units}} = \text{Rs } 10\text{ per unit}$$

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Step 3: Calculate Fixed Cost ($a$)

$$\text{Total Cost} = a + (b \times \text{Output})$$

$$\text{Rs } 90,000 = a + (10 \times 7,000)$$

$$a = 90,000 - 70,000 = \text{Rs } 20,000$$

(Verification at low level: $\text{Rs } 60,000 - (10 \times 4,000) = \text{Rs } 20,000$)

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Step 4: Total Cost for 5,000 Units

$$\text{Total Cost}_{5,000} = a + (b \times 5,000) = 20,000 + (10 \times 5,000) = 20,000 + 50,000 = \mathbf{\text{Rs } 70,000}$$

Calculation of Profit Volume (P/V) Ratio:

Given Data:

• Year 2018: $\text{Sales} = \text{Rs } 10,00,000$; $\text{Profit} = \text{Rs } 2,00,000$
• Year 2019: $\text{Sales} = \text{Rs } 12,00,000$; $\text{Profit} = \text{Rs } 3,00,000$

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Formula:

$$\text{P/V Ratio} = \frac{\Delta \text{Profit}}{\Delta \text{Sales}} \times 100\%$$

Where:

• $\Delta \text{Profit} = 3,00,000 - 2,00,000 = \text{Rs } 1,00,000$
• $\Delta \text{Sales} = 12,00,000 - 10,00,000 = \text{Rs } 2,00,000$

$$\text{P/V Ratio} = \frac{1,00,000}{2,00,000} \times 100\% = \mathbf{50\%}$$

Calculation of Payback Period (PBP):

Step 1: Cumulative Cash Flow Table

Year	Cash Flow (Rs)	Cumulative Cash Flow (Rs)
0	$(30,000)$	Initial Outlay
1	$11,000$	$11,000$
2	$12,000$	$23,000$
3	$10,000$	$33,000$
4	$10,000$	$43,000$

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Step 2: Determine Payback Year

• At the end of Year 2, cumulative cash inflow is Rs 23,000.
• Unrecovered investment after Year 2 $= 30,000 - 23,000 = \text{Rs } 7,000$.
• Cash inflow during Year 3 $= \text{Rs } 10,000$.

$$\text{Payback Period} = \text{Minimum Full Years} + \frac{\text{Unrecovered Investment at Start of Year}}{\text{Cash Flow During That Year}}$$

$$\text{PBP} = 2 + \frac{7,000}{10,000} = 2 + 0.7 = \mathbf{2.7\text{ Years}}$$

(Or 2 years, 8 months and 12 days).

Differences Between Financial Accounting and Cost Accounting:

Basis of Comparison	Financial Accounting	Cost Accounting
1. Primary Users	External stakeholders (shareholders, banks, tax authorities, investors).	Internal management (executives, departmental managers, supervisors).
2. Primary Objective	To ascertain overall financial performance (profit/loss) and financial position (balance sheet).	To ascertain, control, and reduce unit costs and assist in operational decision-making.
3. Nature of Data	Records purely historical, verified financial transactions in monetary terms.	Uses both historical and projected future data; includes monetary and quantitative units.
4. Regulatory Mandate	Compulsory by law; governed by GAAP, NFRS, and Company Acts.	Voluntary for internal efficiency; no rigid statutory format.
5. Unit of Focus	Focuses on the organization as a single unified whole.	Breaks down costs into fine details: cost centers, cost units, jobs, processes, and products.

Concept of Job Order Costing with Example:

Job Order Costing is a specific order costing methodology applied in industries where production is non-continuous and executed strictly in accordance with individual customer specifications. Each job or batch has distinct specifications, so costs (direct materials, direct labour, and applied overheads) are tracked, accumulated, and charged separately to a specific Job Cost Sheet.

Practical Example:

A Commercial Printing Press receives three distinct customer orders:

• Job A: 1,000 customized corporate diaries with embossed leather covers.
• Job B: 5,000 full-color promotional flyers on gloss paper.
• Job C: 500 academic textbooks with hardbound stitching.

Because materials, paper grade, ink types, machine setup, and labor hours differ significantly across each job, the printer maintains an individual Job Cost Sheet for each job rather than calculating an aggregate average cost.

Cost Reconciliation Statement:

Statement of Reconciliation

(Starting from Net Loss as per Financial Account)

Particulars	Details (Rs)	Amount (Rs)
Net Loss as per Financial Account		$(30,000)$
Add: Items that decrease financial profit / increase financial loss:
1. Income tax paid shown in Financial Account only	$40,000$
2. Administrative expenses overcharged in Financial Account	$20,000$
3. Excess depreciation charged in Financial Account $(10,000 - 8,000)$	$2,000$	$62,000$
Sub-Total		$32,000$
Less: Items that increase financial profit / decrease financial loss:
1. Interest on investment credited in Financial Account only	$5,000$	$(5,000)$
Net Profit as per Cost Account		$\mathbf{27,000}$

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Alternative Check (Starting from Net Profit as per Cost Account):

• Net Profit as per Cost Account: Rs $27,000$
• Add: Interest on investment in FA ($+5,000$) = Rs $32,000$
• Less: Income tax paid in FA only ($-40,000$), Overcharged Admin in FA ($-20,000$), Excess depreciation in FA ($-2,000$) = Total less Rs $62,000$
• Net Loss as per Financial Account: $32,000 - 62,000 = \mathbf{-Rs\ 30,000}$ (Reconciled).

Income Statement under Variable Costing:

1. Cost Calculations:

• Unit Variable Manufacturing Cost:
  • Direct Material: Rs $10$
  • Direct Labour: Rs $8$
  • Variable Manufacturing Overhead: Rs $5$
  • Total Variable Production Cost per unit: $10 + 8 + 5 = \text{Rs } 23$
• Variable Selling Expense per unit: $6\% \text{ of selling price } (\text{Rs } 30) = \text{Rs } 1.80\text{ per unit}$
• Fixed Overhead: $30,000\text{ normal capacity} \times \text{Rs } 5 = \text{Rs } 150,000$
• Opening Stock: $30,000\text{ sales} - 28,000\text{ production} = 2,000\text{ units}$ (valued at Rs 23)

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2. Income Statement (Sales = 30,000 units)

Particulars	Amount (Rs)	Amount (Rs)
Sales Revenue $(30,000\text{ units} \times \text{Rs } 30)$		$900,000$
Less: Variable Cost of Goods Sold:
Opening Stock $(2,000\text{ units} \times \text{Rs } 23)$	$46,000$
Add: Current Production $(28,000\text{ units} \times \text{Rs } 23)$	$644,000$
Cost of Goods Available for Sale	$690,000$
Less: Closing Stock $(0\text{ units})$	-	$(690,000)$
Manufacturing Margin / Gross Margin		$210,000$
Less: Variable Selling Expense $(6\% \times 900,000)$		$(54,000)$
Contribution Margin		$156,000$
Less: Fixed Costs:
Fixed Manufacturing Overhead	$150,000$
Fixed Selling Expenses	$72,000$	$(222,000)$
Net Operating Loss		$\mathbf{(66,000)}$

Preparation of Flexible Budget for 60% and 90% Capacity Levels:

1. Working Notes and Cost Segregation

At 80% Capacity = $8,000\text{ units}$. Therefore:

• 100% Normal Capacity: $\frac{8,000}{0.80} = 10,000\text{ units}$
• 60% Capacity Output: $10,000 \times 60\% = 6,000\text{ units}$
• 90% Capacity Output: $10,000 \times 90\% = 9,000\text{ units}$

Analysis of Cost Behavior at 8,000 units:

1. Direct Materials: Pure variable cost:
   $$\text{Rate per unit} = \frac{\text{Rs } 120,000}{8,000} = \text{Rs } 15.00$$
2. Direct Labour: Pure variable cost:
   $$\text{Rate per unit} = \frac{\text{Rs } 80,000}{8,000} = \text{Rs } 10.00$$
3. Factory Overhead (Semi-Variable): Total = Rs $80,000$
   • Fixed Component $(40\%): 80,000 \times 0.40 = \mathbf{\text{Rs } 32,000}$ (constant across all output levels)
   • Variable Component $(60\%): 80,000 \times 0.60 = \text{Rs } 48,000$
   • Variable Rate per unit $= \frac{\text{Rs } 48,000}{8,000} = \mathbf{\text{Rs } 6.00}$
4. Selling & Administrative Overhead (Semi-Variable): Total = Rs $60,000$
   • Fixed Component $(60\%): 60,000 \times 0.60 = \mathbf{\text{Rs } 36,000}$ (constant across all output levels)
   • Variable Component $(40\%): 60,000 \times 0.40 = \text{Rs } 24,000$
   • Variable Rate per unit $= \frac{\text{Rs } 24,000}{8,000} = \mathbf{\text{Rs } 3.00}$

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2. Flexible Budget Statement

Cost Elements	Cost per Unit (Rs)	60% Capacity (6,000 units)	80% Capacity (8,000 units)	90% Capacity (9,000 units)
(A) Variable Costs:
Direct Materials	$15.00$	$90,000$	$120,000$	$135,000$
Direct Labour	$10.00$	$60,000$	$80,000$	$90,000$
Variable Factory Overhead	$6.00$	$36,000$	$48,000$	$54,000$
Variable Selling & Admin Overhead	$3.00$	$18,000$	$24,000$	$27,000$
Total Variable Cost (A)	$34.00$	$204,000$	$272,000$	$306,000$
(B) Fixed Costs:
Fixed Factory Overhead	-	$32,000$	$32,000$	$32,000$
Fixed Selling & Admin Overhead	-	$36,000$	$36,000$	$36,000$
Total Fixed Cost (B)	-	$68,000$	$68,000$	$68,000$
Total Budgeted Cost (A + B)	-	$\mathbf{272,000}$	$\mathbf{340,000}$	$\mathbf{374,000}$
Cost Per Unit	-	Rs 45.33	Rs 42.50	Rs 41.56

Cost Sheet of the Manufacturing Company: (Output = 10,000 units)

Statement of Cost and Profit

Cost Elements	Total Amount (Rs)	Cost Per Unit (Rs)
Direct Materials	$70,000$	$7.00$
Direct Labour	$120,000$	$12.00$
Direct Expenses	$30,000$	$3.00$
PRIME COST	$220,000$	$22.00$
Add: Factory Overhead:
- Factory Rent	$30,000$	$3.00$
WORKS / FACTORY COST	$250,000$	$25.00$
Add: Office & Administrative Overheads:
- Salaries	$10,000$	$1.00$
- Office Rent	$20,000$	$2.00$
COST OF PRODUCTION / COST OF GOODS SOLD	$280,000$	$28.00$
Add: Selling & Distribution Overheads:
- Advertising Expenses	$20,000$	$2.00$
- Sales Commission	$5,000$	$0.50$
TOTAL COST OF SALES	$305,000$	$30.50$
Add: Net Profit (20% on total cost):
$\text{Profit} = 20\% \times \text{Rs } 305,000$	$61,000$	$6.10$
SELLING PRICE / SALES REVENUE	$\mathbf{366,000}$	$\mathbf{36.60}$

“Break-even Analysis is a Useful Device of Profit Planning” — Discussion:

1. Conceptual Overview

Break-even Analysis (an integral element of Cost-Volume-Profit analysis) investigates the dynamic relationships between selling prices, sales volumes, variable costs, and fixed overheads. It identifies the operational output volume at which total revenues equal total expenses, yielding zero profit and zero loss ($TR = TC$).

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2. Practical Roles in Profit Planning

1. Determining Minimum Operating Safety Floor:

   • Establishes the non-negotiable sales milestone below which the firm incurs catastrophic financial losses.

2. Setting Sales Targets for Desired Profits:

   • Management uses target profit modeling to calculate the volume required to generate targeted returns:
     $$\text{Required Sales (Units)} = \frac{\text{Fixed Costs} + \text{Target Profit}}{\text{Contribution Margin Per Unit}}$$

3. Evaluating Operating Margin of Safety (MoS):

   • MoS indicates how much sales can drop before the firm begins incurring losses:
     $$\text{Margin of Safety} = \text{Actual / Budgeted Sales} - \text{Break-Even Sales}$$
   • A high MoS gives management confidence to invest in market expansion or withstand economic recessions.

4. Product Pricing and Discount Decisions:

   • Helps managers evaluate the impact of price cuts, special export discounts, or advertising campaigns by computing the extra volume needed to compensate for price reductions.

5. Make-or-Buy and Capital Investment Choices:

   • Assists in choosing between labor-intensive setups (low fixed costs, high variable costs) versus automated capital-intensive setups (high fixed costs, low variable costs) using the cost indifference point.

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3. Limitations in Real-World Application

• Assumes linear revenue and cost behavior across wide production ranges.
• Assumes constant sales mix in multi-product environments.
• Assumes complete inventory synchronization (production equals sales).

“Management reporting provides adequate business information to various levels of management in the form of reports and statements at regular intervals” — Commentary:

1. Significance of the Statement

Management reporting is the communication backbone of an organization. Effective decision-making cannot take place in a vacuum; managers require structured, timely, and actionable operational insights to formulate plans, monitor current execution, and implement corrective interventions.

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2. Reporting Structured by Managerial Levels

Management Level	Focus & Time Horizon	Reporting Characteristics	Typical Reports
Top Management (Strategic)	Long-term strategy, macro environment, capital allocation.	Highly aggregated, trend-focused, forward-looking, visual dashboards.	Capital expenditure budgets, ROI analyses, corporate strategic scorecards, cash flow forecasts.
Middle Management (Tactical)	Medium-term planning, departmental efficiency, resource optimization.	Semi-summarized, comparative, variance-oriented (actual vs. budget).	Departmental budget variance reports, monthly cost sheets, sales performance by region.
Lower Management (Operational)	Day-to-day execution, task monitoring, immediate quality control.	Detailed, highly quantitative, real-time or daily frequency.	Daily production logs, idle time sheets, scrap reports, machine utilization records.

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3. Essential Hallmarks of Effective Management Reports

1. Relevance: Tailored strictly to the decisions and authority of the specific recipient.
2. Timeliness: Delivered promptly enough to allow corrective action before variances escalate.
3. Accuracy and Objectivity: Reliable data free from bias.
4. Principle of Exception: Highlights significant adverse variances rather than overwhelming managers with routine data.
5. Clarity and Simplicity: Employs intuitive tables, graphs, and comparative indicators.

Cash Budget for Shrawan, Bhadra, and Ashwin:

1. Working Notes on Cash Collections from Sales:

• Terms: $50\%$ cash sales (current month); $50\%$ credit sales collected in following month.

Month	Total Sales (Rs)	Cash Sales (50%)	Credit Sales (50%)	Collections from Debtors	Total Cash Collected
Ashadh	$150,000$	$75,000$	$75,000$	-	-
Shrawan	$100,000$	$50,000$	$50,000$	$75,000$ (from Ashadh)	$125,000$
Bhadra	$200,000$	$100,000$	$100,000$	$50,000$ (from Shrawan)	$150,000$
Ashwin	$250,000$	$125,000$	$125,000$	$100,000$ (from Bhadra)	$225,000$

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2. Financing Policy:

• Minimum uniform balance required = Rs 20,000.
• Initial opening balance for Shrawan = Rs 20,000.
• Borrowings / repayments in multiples of Rs 10,000 at $12\%$ annual interest ($1\%$ per month), payable upon loan repayment.

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3. Cash Budget Statement

Particulars	Shrawan (Rs)	Bhadra (Rs)	Ashwin (Rs)
Opening Cash Balance	$20,000$	$25,000$	$34,700$
Add: Cash Receipts:
Cash Sales (50%)	$50,000$	$100,000$	$125,000$
Collections from Debtors (Credit sales of prior month)	$75,000$	$50,000$	$100,000$
Total Cash Available (A)	$145,000$	$175,000$	$259,700$
Less: Cash Payments:
Purchases	$40,000$	$80,000$	$100,000$
Monthly Expenses	$30,000$	$30,000$	$30,000$
Capital Expenditure (Computer Purchase)	$80,000$	-	-
Total Cash Disbursements (B)	$150,000$	$110,000$	$130,000$
Net Cash Balance before Financing (A - B)	$(5,000)$	$65,000$	$129,700$
Financing Section:
Borrowings needed to maintain min. Rs 20,000	$+30,000$	-	-
Loan Repayment (Principal)	-	$(30,000)$	-
Interest on Loan $(30,000 \times 12\% \times 1/12)$	-	$(300)$	-
Total Financing Effect (C)	$+30,000$	$(30,300)$	-
Closing Cash Balance (A - B + C)	$\mathbf{25,000}$	$\mathbf{34,700}$	$\mathbf{129,700}$

Process B Account, Normal Loss Account, and Abnormal Gain Account:

1. Working Notes:

1. Total Input Units:

   • Transferred from Process A $= 7,000\text{ units}$
   • Added Direct Materials $= 2,500\text{ units}$
   • Total Input $= 7,000 + 2,500 = 9,500\text{ units}$

2. Normal Loss:

   • $10\% \text{ of total input} = 10\% \times 9,500 = 950\text{ units}$
   • Scrap value $= 950\text{ units} \times \text{Rs } 8 = \mathbf{\text{Rs } 7,600}$

3. Expected Output:

   • $\text{Expected Output} = 9,500 - 950 = 8,550\text{ units}$
   • $\text{Actual Output transferred to Process C} = 8,700\text{ units}$
   • Since $\text{Actual Output} > \text{Expected Output}$, there is an Abnormal Gain:
     $$\text{Abnormal Gain} = 8,700 - 8,550 = \mathbf{150\text{ units}}$$

4. Total Costs Incurred in Process B:

   • Transferred from Process A: $7,000 \times 12 = \text{Rs } 84,000$
   • Direct Material (added): Rs $30,600$
   • Direct Labour: Rs $102,000$
   • Factory Overhead: $\text{Rs } 5 \text{ per unit of material consumed } (9,500 \times 5) = \text{Rs } 47,500$
   • Total Debit Cost $= 84,000 + 30,600 + 102,000 + 47,500 = \mathbf{\text{Rs } 264,100}$

5. Cost Per Unit of Normal Output:

   $$\text{Cost per unit} = \frac{\text{Total Cost} - \text{Normal Loss Scrap Value}}{\text{Total Units} - \text{Normal Loss Units}} = \frac{264,100 - 7,600}{9,500 - 950} = \frac{256,500}{8,550} = \mathbf{\text{Rs } 30.00}$$

6. Valuation:

   • Value of Process C Transfer: $8,700\text{ units} \times \text{Rs } 30 = \mathbf{\text{Rs } 261,000}$
   • Value of Abnormal Gain: $150\text{ units} \times \text{Rs } 30 = \mathbf{\text{Rs } 4,500}$

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2. Process B Account

Dr. Particulars	Units	Rate	Amount (Rs)	Cr. Particulars	Units	Rate	Amount (Rs)
To Process A transfer	$7,000$	$12$	$84,000$	By Normal Loss	$950$	$8$	$7,600$
To Direct Materials	$2,500$	-	$30,600$	By Process C transfer	$8,700$	$30$	$261,000$
To Direct Labour	-	-	$102,000$
To Factory Overhead	-	-	$47,500$
To Abnormal Gain A/c	$150$	$30$	$4,500$
Total	$9,650$		$268,600$	Total	$9,650$		$268,600$

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3. Normal Loss Account

Dr. Particulars	Units	Rate	Amount (Rs)	Cr. Particulars	Units	Rate	Amount (Rs)
To Process B A/c	$950$	$8$	$7,600$	By Abnormal Gain A/c	$150$	$8$	$1,200$
				By Cash / Bank (Sales)	$800$	$8$	$6,400$
Total	$950$		$7,600$	Total	$950$		$7,600$

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4. Abnormal Gain Account

Dr. Particulars	Units	Rate	Amount (Rs)	Cr. Particulars	Units	Rate	Amount (Rs)
To Normal Loss A/c (loss of scrap)	$150$	$8$	$1,200$	By Process B A/c	$150$	$30$	$4,500$
To Costing Profit & Loss A/c	-	-	$3,300$
Total	$150$		$4,500$	Total	$150$		$4,500$

Comprehensive Process Accounts for Himalayan Fertilizer Corporation:

Step 1: Analysis and Calculation for Process P1

1. Inputs:
   • Raw Materials: $5,000\text{ units} \times \text{Rs } 25.5 = \text{Rs } 127,500$
   • Direct Wages: Rs $78,800$
   • Factory Overhead: Rs $30,000$
   • Total Cost $= 127,500 + 78,800 + 30,000 = \mathbf{\text{Rs } 236,300}$
2. Losses & Output:
   • Weight Loss $(5\%): 5,000 \times 0.05 = 250\text{ units}$ (Zero scrap value)
   • Normal Loss: $40\text{ units} \times \text{Rs } 20 = \text{Rs } 800$
   • Normal expected output $= 5,000 - 250 - 40 = 4,710\text{ units}$
   • Actual Output $= 4,710\text{ units}$. (No abnormal loss or gain!)
3. Cost per unit:
   $$\text{Cost per unit} = \frac{\text{Rs } 236,300 - 800}{4,710\text{ units}} = \frac{\text{Rs } 235,500}{4,710} = \mathbf{\text{Rs } 50.00}$$
4. Distribution of Output:
   • Sold $(1/3): 4,710 \times 1/3 = 1,570\text{ units}$
     • Cost $= 1,570 \times 50 = \text{Rs } 78,500$
     • Sales value $= 1,570 \times 40 = \text{Rs } 62,800$
     • Loss on sale in P1 $= 62,800 - 78,500 = (\text{Rs } 15,700)$
   • Transferred to Process P2 $(2/3): 4,710 \times 2/3 = 3,140\text{ units}$
     • Transferred at cost $= 3,140 \times 50 = \text{Rs } 157,000$

Process P1 Account

Dr. Particulars	Units	Amount (Rs)	Cr. Particulars	Units	Amount (Rs)
To Raw Materials	$5,000$	$127,500$	By Loss in Weight $(5\%)$	$250$	-
To Direct Wages	-	$78,800$	By Normal Loss	$40$	$800$
To Factory Overhead	-	$30,000$	By Output Transferred to P2 $(2/3)$	$3,140$	$157,000$
			By Cost of Goods Sold $(1/3)$	$1,570$	$78,500$
Total	$5,000$	$236,300$	Total	$5,000$	$236,300$

(P1 Sales: $1,570 \times 40 = \text{Rs } 62,800$; Net Loss in P1 $= 62,800 - 78,500 = \mathbf{-Rs\ 15,700}$)

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Step 2: Analysis and Calculation for Process P2

1. Inputs:
   • Transferred from P1: $3,140\text{ units} = \text{Rs } 157,000$
   • Direct Wages: Rs $69,640$
   • Factory Overhead: Rs $25,000$
   • Total Cost $= 157,000 + 69,640 + 25,000 = \mathbf{\text{Rs } 251,640}$
2. Losses & Output:
   • Weight Loss $(10\%): 3,140 \times 0.10 = 314\text{ units}$ (Zero scrap)
   • Normal Loss: $36\text{ units} \times \text{Rs } 15 = \text{Rs } 540$
   • Normal expected output $= 3,140 - 314 - 36 = 2,790\text{ units}$
   • Actual Output $= 2,770\text{ units}$
   • Abnormal Loss $= 2,790 - 2,770 = \mathbf{20\text{ units}}$
3. Cost per unit:
   $$\text{Cost per unit} = \frac{\text{Rs } 251,640 - 540}{2,790\text{ units}} = \frac{\text{Rs } 251,100}{2,790} = \mathbf{\text{Rs } 90.00}$$
4. Valuation:
   • Abnormal Loss: $20\text{ units} \times 90 = \text{Rs } 1,800$
   • Actual Output: $2,770\text{ units} \times 90 = \text{Rs } 249,300$
   • Transferred to Process P3 $(1/2): 1,385\text{ units} \times 90 = \text{Rs } 124,650$
   • Sold $(1/2): 1,385\text{ units}$
     • Cost $= 1,385 \times 90 = \text{Rs } 124,650$
     • Sales value $= 1,385 \times 150 = \text{Rs } 207,750$
     • Profit on sale in P2 $= 207,750 - 124,650 = \mathbf{\text{Rs } 83,100}$

Process P2 Account

Dr. Particulars	Units	Amount (Rs)	Cr. Particulars	Units	Amount (Rs)
To Process P1 transfer	$3,140$	$157,000$	By Loss in Weight $(10\%)$	$314$	-
To Direct Wages	-	$69,640$	By Normal Loss	$36$	$540$
To Factory Overhead	-	$25,000$	By Abnormal Loss A/c	$20$	$1,800$
			By Output Transferred to P3 $(1/2)$	$1,385$	$124,650$
			By Cost of Goods Sold $(1/2)$	$1,385$	$124,650$
Total	$3,140$	$251,640$	Total	$3,140$	$251,640$

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Step 3: Analysis and Calculation for Process P3

1. Inputs:
   • Transferred from P2: $1,385\text{ units} = \text{Rs } 124,650$
   • Direct Wages: Rs $30,000$
   • Factory Overhead: Rs $10,550$
   • Total Cost $= 124,650 + 30,000 + 10,550 = \mathbf{\text{Rs } 165,200}$
2. Losses & Output:
   • Weight Loss $(20\%): 1,385 \times 0.20 = 277\text{ units}$
   • Normal Loss: $20\text{ units} \times \text{Rs } 100 = \text{Rs } 2,000$
   • Normal expected output $= 1,385 - 277 - 20 = 1,088\text{ units}$
   • Actual Output $= 1,120\text{ units}$
   • Since $\text{Actual Output} > \text{Expected Output}$, there is an Abnormal Gain:
     $$\text{Abnormal Gain} = 1,120 - 1,088 = \mathbf{32\text{ units}}$$
3. Cost per unit:
   $$\text{Cost per unit} = \frac{\text{Rs } 165,200 - 2,000}{1,088\text{ units}} = \frac{\text{Rs } 163,200}{1,088} = \mathbf{\text{Rs } 150.00}$$
4. Valuation:
   • Abnormal Gain: $32\text{ units} \times 150 = \text{Rs } 4,800$
   • Finished Goods Output: $1,120\text{ units} \times 150 = \text{Rs } 168,000$
   • $100\%$ Sold:
     • Sales value $= 1,120 \times 200 = \text{Rs } 224,000$
     • Cost $= \text{Rs } 168,000$
     • Profit on sale in P3 $= 224,000 - 168,000 = \mathbf{\text{Rs } 56,000}$

Process P3 Account

Dr. Particulars	Units	Amount (Rs)	Cr. Particulars	Units	Amount (Rs)
To Process P2 transfer	$1,385$	$124,650$	By Loss in Weight $(20\%)$	$277$	-
To Direct Wages	-	$30,000$	By Normal Loss	$20$	$2,000$
To Factory Overhead	-	$10,550$	By Finished Stock (100% Sold)	$1,120$	$168,000$
To Abnormal Gain A/c	$32$	$4,800$
Total	$1,417$	$170,000$	Total	$1,417$	$170,000$

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Step 4: Summary Statement of Process Profits

Process	Units Sold	Sales Value (Rs)	Cost of Sales (Rs)	Process Profit / (Loss) (Rs)
Process P1	$1,570$	$62,800$	$78,500$	$(15,700)$
Process P2	$1,385$	$207,750$	$124,650$	$83,100$
Process P3	$1,120$	$224,000$	$168,000$	$56,000$
Total Realized Profit		$494,550$	$371,150$	$\mathbf{123,400}$