 So, dear students, we are discussing about job and process costing in last few sessions. You know now that the job costing is typically used for relatively small quantity customer oriented output. So, in the last session, we had seen how to make a cost sheet. So, we take one job, go on adding all the cost incurred for that job and a separate cost sheet is required to be produced to get the cost of that job. In process costing, it is relatively simple because it is a mass production, all goods are same, they are not being made for the customer, they are being made in identical goods in larger quantities. So, we make process accounts, we charge the entire cost to that process account, we divide it by number of units to get the cost per unit. This is basics are clear to you. Next we saw the concept of abnormal and normal loss. So, what happens is in many of the processes because of technical specifications, input is not same as output. So, if you put in 100 units, the output is 95 units. So, it is inherent that 5 units are lost, such loss is treated as normal loss. Can you give an example where such normal loss happens? In most of the machining processes, if you put in some raw material, some of the material will be scrapped out and the output will be of a lesser weight than what you put in. So, there will be some normal loss depending on what you are producing. Now, when you put in 100 units but you get out 95 units, you will charge the customers for the whole of the 100 units. That is why your total cost you will divide by 95 to get the cost per unit. Is it clear? That is why normal loss we charge to the customer. Suppose instead of 95 units, I can produce only 92 units because of some mistakes made by the workers. Now, these 3 units cannot be charged to the customer, they have to be born by the company. So, the total cost, I still divide by 95 and I get cost per unit for 92 units, I charge the customer and for the 3 units, they are transferred to PNL account. That is why in Kuros' account, we have to segregate the cost of abnormal loss and the cost of finished goods. Are you getting? So, abnormal loss is a situation where actual loss is more than the normal loss. Sometimes, reverse happens. That I expect output of 95, actually I get output of 96. So, this one unit extra will be treated as abnormal gain. This is a gain to the company, it need not be passed on to the customer. So, total cost is still divided by normal output which is 95, I get cost per unit and that cost per unit into 96, it charge to the customer. One unit which I have gained will be credited to PNL. So, in the last session, we had done 2 cases wherein we had dealt with abnormal losses and abnormal gain also. Now, there is one more issue involved in process costing that there may be some units which remain as a opening or closing stock at the level of each process. Now, you know that the total cost of the process, let us say 1 lakh, we are dividing it by 95 units because that is the output. But instead of having full output of 95, we may have 3 units which are in process. So, neither they are raw material nor they are fully finished. So, I cannot treat them as 0, I cannot treat them as fully finished units also. That is why I have to convert these units into equivalent units. So, I will look at these 3 units. If I feel that they are 50 percent finished, I will treat them as 1.5 units ready. So, my output will be 95 plus 1.5. Further, what may happen is these 3 units element wise may be fully or partly finished. For example, they may be fully finished as far as material is concerned because generally material is put in at the beginning and then the conversion process starts. So, material wise they may be fully finished, but labor and overhead wise they may be only 50 percent finished. So, for material I take them as equivalent to 3, but for labor I take them as equivalent to 50 percent of 3 that is 1.5. This was the concept of equivalent production which we discussed towards the end of last session. Are you getting me? So now, we will start with a case on that equivalent production and then we will go to operation costing, a little bit discussion on operation costing. Now, let us look at the case on equivalent production. Now, here you can see that from the following data, we are required to calculate the equivalent output and the value of finished goods and the work in progress is given. So, as far as the opening work in progress is concerned, the percentage completion is 70 percent, closing work in progress is 65 percent. The units are 8000 and the costs both are given. I hope you are getting what is work in progress. So, this is the output which is not ready and is partly finished at the end of the period. So, you are both out opening and closing WIP. Now, units introduced during the process are 10000, the cost is given 125000, transfer to next process is only 8900. So, I have put in 10, I have sent out 8900, the normal loss is estimated at 10 percent of the total input including units in the process at the beginning. Scrap is realized at 5 per unit and the units scrapped are also 100 percent complete. Now, we have to calculate the number of equivalent units and what is the cost of equivalent units. So, how will you go about? So, for each item like say material labor overheads, we have to look what is the number of units. Let us look at the calculation. So, please make a chart like this with particulars, percentage of work done and output units and the equivalent units. Now, first we start with opening work in progress. It is already given that they were 70 percent complete. That means in the last process itself, last time itself 70 percent of the work was done not in the last process, in the last period say I am in the month of May, then in the month of April 70 percent of these units were anyway ready. So, what I have done is I have only worked 30 percent more that is why on opening work in progress and completed, I take the percentage work done as only 70, the number of units are given as 800, so 800 into 30, 70 is done, 30 percent more was done in the current period. So, 800 into 30, so equivalent units are 240, get it? Now, new units which are started and completed, we as you do not know how much was completed, but you know that the total output is 8900, so of 8900, 800 must have been from opening work in progress, so remaining might be started and completed. Let us also look at the normal loss, normal loss it is very clearly given that it is to be estimated at 10 percent of total input including the units in process at the beginning. So, the total input is 10000, units in the beginning is 800, so 10000 plus 800 into 10 percent, so 10 percent of that that is 1080, closing work in progress is given as 1000, it is also mentioned that it is 65 percent complete, so 1000 into 65 percent, so I get 650. Now, I will also have to calculate the abnormal loss, now abnormal loss units calculation you can see that opening work in progress was 800, units introduced is 10000, the normal loss is 10800, so expected output was 9720, you are getting me, so 10000 plus 800 minus 1080, so if I would have fully finished that, I should have expected output of 9720, closing work in progress which is again given is 1000, so out of 9720, 1000 units are incomplete, so expected output after reducing work in progress becomes 8720, so 8720 units must have been finished for transfer to next process, but actually transferred units are given to be only 8900, I am sorry here there is a small mistake, so 8900 units have been transferred, so I get abnormal loss as minus 170, in other words there is no abnormal loss, really speaking there is a abnormal gain, so whereas I expect the output of 8720, I have got output of 8900, so in other words there is a abnormal gain of 180, now let us go up, here there is one mistake also with the units started and completed, you know that the total output is 8900, of that 800 is from opening WIP, so remaining 8100 must be from the current output, so I will just show the calculation for more clarity, total output is 8900 minus 800, so the units which were newly put in and completed comes to 8100 and there is a abnormal gain, there is no abnormal loss as such and this abnormal gain we have just now calculated is to the tune of 180, now let us look at the output and the percentages, so of the total production 800 was the opening WIP, we have worked only 30 percent on it, so equivalent units are 240, started and completed there are 8100 units which are all fresh raw material introduced fully complete, so they are 100 percent, so I get equivalent output as 8100, normal loss is 1080, 10 percent of input plus opening WIP, I will put a dash because no work can be taken as it, even if it was given that units scrapped are 100 percent complete, we do not take in the equivalent output because they are to be charged to the customer, so we have to take it as nil only, closing WIP is 1065 percent complete, so equivalent output is 650 and abnormal gain is 180, so here we have shown the required calculation, so 800 units opening plus 8100 completed minus a loss of 1800 minus 1000 minus abnormal gain, you will get a output of here I will make a small change because there is a abnormal gain, now there is no abnormal loss, so total output minus 180 that is 10800 is the total which I get, are you waiting me, so what is more important is I take a sum of equivalent production which is 88110, I will just take it here, this will be easier I think for you to understand to simply take abnormal gain as a negative figure because there is no loss actually we have gain, so total output is 10800, but equivalent output is 97, now I think it is more correct, so equivalent output is 8810, are you getting me, so this is the concept of abnormal loss and gain which is now with equivalent production, so partly finished goods also we have accounted for, now we will do one more case on this, so that there is more clarity in the next session, but right now look at one more aspect about product costing, we have already dealt with process and job costing, but the similar fundamentals can also be used in service industry, though most of our discussion was on production or manufacturing industries, the similar concepts can be also used in service industry, wherein we call it as a operation costing, so you know that process costing is for mass produced goods which are identical in nature, same way on large scale services, the costing method used is known as operation costing, can you name some industries where it is a large scale identical services, say railways, so railways all the passengers are being carried and they are being provided same type of service, there may be classes like you may have a sleeper class, third AC, second AC, first AC and so on, but within the sleeper class all the customers are same, that is why there is no need to make a separate calculation for each customer, just like process costing we can take the total cost divided by number of customer, same way for the carriage of goods, the unit is on number of kgs carried, there is no need for a separate calculation for each kg, are you getting me, so in case of passenger as well as goods transport, you can use operation costing, any other industry you can think of, it is a mass scale, large scale service like electricity, like telephone, so for each unit of electricity you can get the total cost of electricity distribution divided by number of units distributed, you will get cost per unit, this is the way operation costing can be used, as against this for professional and specialized services, we have already dealt with we use job costing, can you give one or two examples, in case of a doctor or a chartered accountant or for a customized software, these are specific services or professional services, so here you cannot take total cost and divided by number of customers, because each customer is unique in nature, you have to make a separate job cost sheet for the customer, so for such services job costing is appropriate, but for a mass scale, large scale services we use a costing method known as operation costing, so let us do one more some on the concept of equivalent production, as we have already discussed what happens is in process accounts, the calculation of cost per unit is essentially based on total cost upon number of units, so we do not get data on per unit like in job costing, so we are taking the total cost for a period and averaging it out to know the cost per unit, now whenever the units are partly complete, you cannot add a fully complete unit to partly complete unit, hence partly completed units need to be converted to equivalent number of full units, that is where we need to calculate equivalent production, we have already seen one sum, so we will do one more sum, I think then the concept will become even more clear to you, so let us see the sum, so from the following details calculate the equivalent production units and the value of finished production and WIP, the normal loss is estimated at 10 percent of the total input including the units in process in the beginning, opening WIP percentage completion is given to be 80 percent, 1500 units and the cost is 25,000, closing WIP the percentage completion is 60 percent and the number of units are 1100, units introduced during the process is 22,000 at a cost of 2,20,000 that is it is you can see around 10 rupees per unit, the units which are transferred to next process are 15,000, direct labor and overhead costs are 2,80,000, the normal loss is estimated at 10 percent which was anyway given above and units scrapped are 100 percent complete, so now we have to calculate the number of equivalent units and also the cost per unit, so how will you go ahead, what do you suggest, just think over a bit. Now, various data on equivalent production is given, so first we have to calculate how much will be the equivalent output for work in progress, closing stock, normal abnormal loss or gain etcetera, so before the cost calculation actually let us go to calculation of normal or abnormal loss, so you can see the opening WIP is 1500 units introduced are 22,000, so we calculate the normal loss at 2,3,5,0 I hope you remember how we are doing, we are taking opening WIP plus units introduced, so 23,500 10 percent of that, so 2,3,5,0 expected output will be 23,500 minus 2,3,5,0 which comes to 2,1,1,5,0 closing stock is 1,1,0,0 expected output, so expected output to be transferred I will just increase the size for more clarity, so total expected output is 21,500 of that 1,1,0,0 is in the closing WIP, so it is semi-finished, so the output which is completed and transferred becomes 20,050 the output which is actually transferred is only 15,000, so we expected output of 20,050 the actual output is 15, so difference is bound to be abnormal loss, so 5,050 is the units of abnormal loss it is clear to you, now let us go to understanding and calculation of equivalent production for the same, so now we will see we have to look at the percentage completion during this particular period for each of the lots separately, first we have a lot of opening WIP which is last time semi-finished goods which are now completed, you know that they were 80 percent complete in the beginning, so we have only done 20 percent more work on it, total number of units are 1500, so 1500 at 20 percent we get 300 as equivalent units, then there are units which are newly started and completed, we know that the total output expected was 20,050, so of 20,050, 1500 are the units which are in the nature of opening stock being completed and transferred, so out of 20,050, 1500 will come from the opening units remaining that is 18,550 are newly units entered and to be completed of this 2,3,5,0 is a normal loss, we have already calculated 1100 is a closing stock and abnormal units are 5500, so now we apply the percentages, so 60 percent is a percentage completion for closing stock, you can go back and check opening stock was 80 and closing stock is 60, so in this period we have done 60 percent work on it, unit started and completed we take at 100 percent, normal loss we take at 0 percent because that cost is to be charged to the customer, so in case of normal loss we do not take any percentage as equivalent production, closing stock is 60 percent abnormal loss is 100 percent, so you can see that the equivalent units are calculated for each of them, it is clear, now let us go for actual cost calculations, so here are the cost calculations, I have tried to make a small process account for your clarity, so in process account the opening work in progress, it was given above that 1500 units charge is 25000, so that has been retained 1500 units at 25000, next the cost given is the cost of units introduced 22000 units at 2200, so here I will add the number of units, so 22000 units the cost is 2200, this is our direct material cost, am I correct next is it is given that direct labor and overhead cost are 28000, so that is already accounted here, now let us go to credit side I will add the headings for more clarity, so this is particulars these are the units and these are rupees or the amount, same thing on the other side I hope everyone is getting the picture clear, so now we have seen the cost side, total cost is coming to I have taken the sum of these three items, the cost consist of opening WIP that is the semi finish units as they were there in the beginning plus direct material was added plus labor and overheads was added, so if you take the sum of all these the total cost comes to 525000, now before going to credit side we need to calculate the cost per unit which is our main requirement for calculating the cost of finish goods, so the total cost is 525000, here you should keep in mind that we are going to divide by number of equivalent units and not number of total units, number of total units may be more, but we are looking at number of equivalent units you can see this chart of equivalent production, so I will make a small change before we go ahead because what has happened is 300 where the opening units which were entered the completed units as you know are 20500 minus 1500 this was the expected completion, actual completion is less because of abnormal loss and that abnormal loss of 5500 is accounted for doubt, so total cost is 525000 we divided by equivalent output which is 24500, so I get cost per equivalent unit, so filec 25500 divided by number of equivalent units we get 21.37, everyone is getting, now let us go to the credit side, on credit side first item we have taken is normal loss we will go to the chart you know that out of the units some units are bound to be lost and that percentage was given at 10 percent, so we have already calculated this I will write in full for more clarity, this is normal loss 2350, normal loss is not charged anywhere because it is to be charged to the customer, so we take its value as 0, then we have abnormal loss we know that abnormal loss was calculated at 5050, it is 100 percent completion, so equivalent units are also 5050 multiplied by the rate I get 107, 950 the rate used is this 21.37, then closing work in progress in case of closing work in progress there are 1100 units but they are only 60 percent complete, so we will take it as 660, so closing work in progress taken as 660 equivalent units charged at the rate 21, so we get 14000, this is the stock of work in progress in hand at the end of the period. Now I have written two transfers, why two transfers because one 300 if you go up you will realize that this 300 was the opening units transferred got it plus units which were newly introduced and transferred, so total units if you take some now you will find that there is some difference, why is this difference can you tell me is it correct or there is some mistake there is a mistake, so that you clearly understand what is happening if you find the difference you will realize that 3410 is a difference, now from where this is coming because units which are newly introduced and transferred have been slightly overstated, actual units transferred if you know the production of the process was 15000 of that 1500 units where from the opening stock, so how much units are transferred 15000 minus 1500, so I will need to correct here I hope everyone is getting it right is it correct because 15000 units have come out of that 1500 units are these units, so units which are completed and transferred should be 13500, now normal loss is anyway lost, so there is no need to account closing WIP comes to 1100 as was given and abnormal loss also we have already calculated, now you will see the rate had changed are you getting me I was just seeing whether you are able to locate the difference I hope now the things are clear, so I will just go back, so normal loss 2350 at 0 abnormal loss 5050 at 13500 closing WIP 660 at 17 at 26 rupees it comes to 17760, transferred units 300 and another transferred units are not 18500, but they are 13550, are you getting what is happening, so out of 1500 units in the beginning 22000 were newly added, so we have 23500 units of this the normal loss abnormal loss closing stock these two transfers means this is transfer from opening WIP for more clarity and this is, so in full if you see this is the output newly introduced and transferred, so total of 15000 is now categorized into two categories, now take a look at calculation of abnormal units to see that all units are properly accounted, so our opening stock was 1500 units introduced was 22000 normal loss, so if you take a sum here we have 233500 units of that 2350 were lost where to be lost, so you get expected output or normal output of 21550 of that 110 is a closing stock, so you have 20500 of this 15000 was transferred and 5050 remains as a abnormal loss, so everything is accounted now, now we will try to look at the equivalent units, we have got a normal loss which is 2350 accounted as nil abnormal loss 5050 100 percent complete and we are accounting it at 26 rupees closing stock it is 1100 units, but we are looking at equivalent units which are 660 transfer from opening WIP, so what has happened is opening units have been introduced and transferred, so we have accounted it at 300 only then output which is newly put in and transferred 13500 it comes to 363750, now look at the difference, so you will realize that now these two sums are exactly matching are you getting what has been done, so I hope now you have fully understood exactly how this accounting is done, why is this difference 1640, actually this difference because these units are equivalent units whereas these units are actual units, so there is bound to be some difference if you want to ensure that there is no difference I will just add one more column, so that you do not feel that we are doing something which is not correct, so abnormal loss there is no question of equivalent units sorry normal loss, abnormal loss also we will account for all the units in case of closing WIP number of units are 1100, here it is opening WIP units transferred are 1500 and 13500 are the actual units which are newly introduced and transferred, so we get a sum of 23500 these are the actual units whereas these are the equivalent units are you getting me or there is any doubt, now if we add one more column for units then we are looking at equivalent units on this side also, but actually on this side there is no need to go for equivalent units, so we can delete it you can just be sure that actual units column is telling and the accounting is done based on the equivalent units, so we will remove this difference I hope now the things are clear to you, now so here is how we understand that how using the concept of equivalent production we are doing the accounting, now let us try to go into new area if process costing is more or less clear to you we will go for the next module, this next module is on a very interesting theme that is known as activity based costing. You very clearly understand activity based costing you will have to slightly go back and remember the traditional way of doing the costing because activity based costing is giving an alternative to the traditional cost accounting system, so in traditional cost accounting system if you remember we followed some steps, step number one was allocation, so total cost were divided into direct and indirect, direct cost were directly charged indirect cost were charged to were taken as a common pool, next step was apportionment here the indirect cost were apportion to cost centers, third step was reapportionment, so service cost centers cost were charged to production cost centers, fourth step was absorption here indirect cost which are collected at cost centers were charged to products and then we did under or over absorption, so you will see that all the cost are first collected at cost center level and all the indirect cost especially direct cost are charged to the products, but indirect cost are first collected at cost center and through cost center they are charged to products. In activity based costing we try to identify cost drivers, so that based on the activity or based on the function they serve the cost can be charged directly to the products, now let us see actually what is being done and we will also try to solve some cases on the same. So, here we are starting with our next module on activity based costing, this presentation include these things we will first start with concept of ABC, then we will compare the traditional with the activity based costing, we will look at the treatment of cost under ABC steps, the benefits and limitations of ABC, we will also discussed about activity based management and its relationship with activity based costing. Now, you all know that it is very important that we arrive at a correct cost, whether it is product, whether it is process, whether it is a project, it is very important that company knows what is the cost, it is incurring for the same, because we can identify money makers and money users, we can find an economic break even, then it facilitates the opportunities for cost control, it permits the comparison of different options and it enables strategic decisions, so strategic decisions like company may want to automate a process, it may want to outsource, so various types of decisions can be taken based on the cost information. Now, as I just now discussed that there is a problem with overhead absorption, because direct cost can be charged directly, but indirect cost do not have a direct linkage to product, so we will have to route it through something, for that various methods are used. The most simplistic method is plant wise overhead rate, slightly more sophisticated and giving more details is departmental overhead rates and even more advanced form is activity based costing, earlier we have discussed department wise overhead rates, today we are going to go into deep of activity based costing, plant wise rates anyway are too simple, so normally no company uses the method of plant wise overhead rates. Now, let us try to understand exactly what this is, I hope you remember what is absorption, so in absorption essentially we have some cost and we are trying to charge it to products, very very simpler way is get the total cost for the plant and get a plant wise rate, so as you can see here plant overhead rate is the plant overhead cost divided by machine hours, so if you have the factory let us say you have got 10 types of overhead cost which may include rent, it may include security, plant manager, salary, indirect material, helper's wages and so on, all these overhead costs are simply added and an appropriate base is chosen, I have assumed machine hour is a good base, so the total cost for plant is collected and it is simply divided by machine hours, so we get machine hour rate, so whatever product passes through the plant or produced in a plant based on the machine hours consume for that product, we go on charging that product. Now, this is too simplistic method, it does not categorize the plant into cost centers or the departments, so we do not have any way to control the cost at each department, secondly certain departments may have more cost some other departments may have less cost, but we have one common rate, we are charging all only on that rate, in departmental overhead rate system there is more sophistication, so if you have total rent, we cannot charge it to the product, but we can apportion it to the departments, so the total plant rate is first apportion to the departments, total plant manager salary is apportion to the department based on time, may be rent is apportion based on the area used, we may have storage cost or maintenance cost, they may be charged to the departments as per the services they consume, so we get the total overhead cost for the department and then divided by machine hours in that department, so we get departmental overhead rate, so here you can see department D 1 overhead rate, so overhead apportion upon machine hours, so like that if you have say four departments D 1, D 2, D 3, D 4 for each department there will be a rate and any product passing through D 1 will be charged with the for those hours in D 1, then if it goes to D 2 it will be charged for D 2, it will then it goes to D 3 it will be charged for D 3 and if it goes out it will not be charged for D 4, in plant wise rate one lump sum rate was there, in departmental rates we have rate for each department, so departmental rate slightly an improvement over plant wise rate, but still it is not giving enough details because all costs have to be routed through departments, in activity based costing an attempt is made to identify the cost drivers, so that cost can be directly charged to the product, now let us see how that will be done, so ABC is a costing system which focuses on activities performed to produce the products, it relates the cost to work accomplished, so costs are the resources consumed they are consumed for some work, so we try to see that this cost is for what and try to directly link it to the product through cost drivers, now it is a tool which enables to management for better allocation of resources, ABC or cost unit goal is a benchmark that represents an expectation of cost incurred, it aligns the cost to output, so cost visibility increases, so we know that this cost is for this particular thing and it is useful for forecasting financial baselines also, now again let us look at how we move from a traditional system to ABC, in traditional system all the overhead costs are allocated apportion to cost centers, through cost centers they go to objects that is cost units or the products, in ABC the total resources are consumed which are consumed are traced by the cost drivers, so resources are linked to the activity that for what the resources being done and through activity drivers they are charged to objects that is product services customers and so on, so we have two sets of cost drivers, one are the resource drivers where we know we try to link resources to activity and then your activity drivers which try to link activities to objects, so this is more sophisticated system than traditional costing it requires more details, so basic premises are that cost objects consume activities and activities consume resources, so this consumption of resources is what drives the cost because no resource will come for free, so we have to pay for the resource, so we have to incur some cost, now if we try to understand this relationship it will be very good because we can link then the cost better to the products, now in ABC the products are assigned to overhead cost that are supposed to be related to the allocation base, so various cost like non manufacturing cost, manufacturing cost, plant wise rates these are all used in ABC, so we will stop for this session, so today what we have discussed is first we started with the concept of equivalent production which we had already done in the last session but today done we have done a case on it, then we have gone into understanding of ABC, in next sessions we will do some cases and practical sums on ABC then I think it will be more clear to you, thank you so much.