 Dear students, in last few sessions, we are discussing about cost accounting for products as well as processes. We have learnt that there are two major methods. One is process costing, the other is product costing. Which amongst the two is more useful for a mass production, do you remember? Amongst process and product or amongst the process costing and job costing, which one is more useful for mass production, you are right? For mass production, the process costing is more useful. So, the features of process costing include large output of identical production. The production is essentially as per the manufacturer specification and not as per the customer specification. It is difficult to identify input to output, because units are being made in the large scale and for calculating the cost per unit, we take the total cost and divide it by number of units in a particular period to get cost per unit. Today, we are going to discuss some more problems on process costing and we will also see little advance concept in process costing like equivalent production and consideration of losses. Before that, let us also discuss about job costing. Now, job costing is exactly opposite to process costing. This is where in smaller lots, specialized products are prepared. So, production is as per the specification of the customer. For costing of that output, we have to identify the input material, labor, overheads going into a particular job. So, usually a job cost sheet is prepared, whereas in process costing, process accounts are prepared. So, last time we have seen today also, we will see one more case regarding preparation of job cost sheet. Before going into that, please tell me in which industries process costing is useful and which industry job costing is useful. Last time, we have discussed a lot. So, I think you will be able to recollect. Just think over. You are right. In process costing uses, we can use it in refineries. We can use it in plastic manufacturing, steel manufacturing, manufacturing of readymade garments. So, these are where large scale manufacture happens and where is the job costing used? Job costing is typically used in construction. Amongst the garment, you can say that readymade garments more useful is process costing, but tailor made garment is appropriate for job costing, then specialized professional services like doctors, lawyers, chartered accountants, customized software, all these are examples of job costing. Let us go now into the cases of process costing. Let us have a glance through whatever we have done. So, we have discussed the use of product costing, then the two types which we have revised today also. All these things we have revised today, I am just showing so that you get more clarity. Usually, this type of cost sheet is prepared for job costing. We are going to see one case today on job costing. Then we are also discussed about treatment of losses. There are two major types of losses. One is a normal loss, other is abnormal loss. So, when as per technical specification, certain loss is inherent to the process, it is considered normal. When the actual losses exceed the normal loss, the treatment in such scenario, it is called abnormal loss. Usually this may happen because of accident or some irregularity. Then we had seen how process cost accounts are prepared. We had discussed this particular case. Now let us go to excel sheet and try to do some more cases on process costing. Even before process costing, I have put up one case on job costing so that it is more clear to you how to prepare a cost sheet. So, here is a data for job A 21. You know that each job is identified by a specific name because in job costing, you have to prepare a separate cost sheet for each job. So, following estimates are available, material direct labor hours as well as time is estimated. It is given that there are three departments W, Q and M. So, it takes two hours, it is likely to take two hours in W, one hour in Q and two hours in M. Then the method of charging the overheads is also given, production overheads are charged at 40 percent of direct labor and selling overheads are charged at one-third of works cost. I think you remember that we have discussed about absorption of overheads. It is a process where the overheads are charged to the products. So, here you can see the method and the rate of absorption is given. So, production overheads is to be charged at 40 percent and selling overheads are required to be charged at one-third. So, on the basis of this data, we can make an estimated cost sheet. Further, some actual information for the year is given like profit and loss account at the end of the year and actual hours which were worked in those particular departments. So, you have to calculate the estimated and the actual job cost. So, have a look at data once again. How will you proceed? First, let us start with the calculation of estimated job cost, how to calculate it with this data. So, you can see that material labor you can directly charge and for overheads using a particular method, we will make an estimate. So, let us see how the cost sheet will look like. So, this is the estimated cost sheet for job 821. Total cost as was given is 80, direct labor is 50. So, prime cost which is total of all direct expenses is 130, to this production overheads are charged, you know that they are to be charged at 40 percent of direct labor. So, 20 is charged 40 percent of 50, then works overheads they are charged at one-third of, sorry, selling overheads they are charged at one-third of works cost. So, prime cost plus production overhead we get works cost which is 150 and one-third of works cost that is 50 rupees are charged. So, total cost becomes 200 as per the estimates. We know that the calculations are made using pre-determined overhead rates. So, based on the estimates the cost is 200, now let us see what is the actual cost. Now, before going for actual cost we have to calculate the actual absorption rate for overheads. Now, if you see the actual hours worked in department WQM were given that is 2500, 2500 and 1250 and the wages of the three departments was also given that is the direct labor which is 18, 15 and 20. Now, we know that the company absorbs the production overheads on the basis of direct labor that is why we have divided 18,000 by 2500. So, we get a wage rate of 7.2 this is not overheads we are still calculating the wage rate. We know that this is the actual wage cost and we also know the actual hours. So we can divide 18,000 by 2500 to get the wage rate which comes to 7.2 in case of Q it comes to 10 and in case of M comes it comes to 16. So this is for calculation of actual wage rate. Now let us go to actual rate for absorption of overheads. So, in department W the overheads which are actually given have been picked up if you remember in PNL account overheads were given as 15, 13 and 17 this is the actual overhead cost. So these are picked up the absorption of overheads of the company is based on direct wages. So we are dividing this 15 by 18,000 which is the direct wage cost for department W. So 15 upon 18 we get 83 percent in case of Q it is 52 percent and in the case of M it is 85 percent. So this is the percentage at which the overheads will be absorbed. Same way for absorption of selling expenses. You can see what rate is used for selling expenses. As for the estimate the rate was very high they were using one-third of works cost. Now here we have tried to make the actual estimate. If you go to PNL account you will realize that the works cost is 17,000. So 15,000 upon 17,000 becomes the actual selling expenses. I think if 172 is not clear to you you can look at a PNL account. Can you calculate the works cost on the basis of this? We can just take a sum of everything from material up to production overheads. So depending on the works cost I will just show the calculation again you have given material direct labor and production overheads. This all together it is called as works cost it is come to 228. So I think I will have to recalculate and actual selling expenses are given as 15,000. So 15,000 divided by 228 which is the correct works cost it is 8.5789 percent of works cost. I hope it is clear to you now. So to before going for calculation of actual cost sheet we have calculated the actual wage rate actual rates for absorption of production overheads which is based on percentage of direct labor and we have also calculated absorption of selling overheads as a percentage of works cost. Here also I will just specify for more clarity this is percentage of direct wages. All these three are the percentage of direct wages. Now let us go for preparation of actual job cost sheet. So you can see material cost is 80 rupees which is anyway given to us. Wage cost is now we have calculated earlier there was estimate of 50 rupees was used. So which you can see in the estimates. Now actual calculation is done number of hours are known to us that is 2 1 and 2. Now this 2 multiplied by 7.2 which is the actual wage rate is calculated same way here it is 1 into 10 and 2 into 16. So we get total of 56.50. So instead of the estimate of 50 the actual wages have gone up to 56.40. So prime cost comes to 136.40. Now let us look at production overheads. Production overheads now these are the new rates which we have calculated. So for each department we will look at the wage cost and multiply it by the respective rate. So 14.4 into 83.33 percent we get 12 for department Q we get 5.2 which is at 52 percent and for department M we get at 85 percent of 32 which is 27.20. So the total is 44.40 this is the total production overheads. So now prime cost plus production overhead the wage cost come to 180.80. You can see that the estimated work cost was only 150 actual is now calculated at 180.80. Selling overheads are at I will just recalculate because there was a slight error. It is 180 into 6.57 percent. So it is just 6 percent of wage cost as per the calculations which we have done. So it comes to only 11.89. So total cost is 192.69 as against estimate of 200. Are you getting me? So I hope you have now more clarity on how the cost accounting is done in case of jobs. Is it fine? If you have clearly understood it now let us go to process costing and try to contrast the two. So in process costing we were discussing about the normal and abnormal loss and now we are going to actual preparation of process accounts. Let us go to the case once again in the excel sheet. So now have a look at case number 2. So in case number 2 you can see please read the case carefully. So from the following data we are required to prepare process accounts. The total units produced are 250 and same number of units are passed through all the processes and the material wages as well as direct expenses are given for process number 1, 2 and 3. So essentially the material is put in at the beginning of process 1, it passes through process 2, it passes through process 3 and it comes out. There is no opening or closing stock. Indirect expenses or overheads are given as 50,000 and they are to be apportioned on the basis of wages paid. So how will you proceed now for preparation of process accounts? Even before preparation of process accounts first we have to calculate how much of the overheads should be charged to processes. You know that the total overheads are 50,000 and they are apportioned on the basis of wages, wage amount for process 1, 2, 3 is given. So you can see the working which I have tried to do. The indirect expenses are 50,000, the wages are given as 18, 26 and 22. So total comes to 66 and indirect expenses are given as 50,000. So try to distribute 50,000 in the proportion of this 66. So here is a calculation. So you will take 18 upon 66 into 50. So you get 13,656 for process 1, 19,697 for process 2 and 16,667 for process 3. I hope it is clear to you. So we have first calculate the overheads chargeable. Now let us go to process accounts. So if you look at process 1 now, what will come in process account? So we have to charge material, wages, direct expenses and indirect expenses. So these 3 amounts plus the indirect expenses calculated for process 1 will be charged to process 1 and on the output side we know that same 250 units which were entered at process 1 have passed on to process 2 but they are not same at the phase. Because before entering process 1, the material was just a raw material. Now it has gone through process 1. It has slightly gone closer to the finished goods. At the end of process 2 it will go to process 3 and at the end of process 3 it will become finished goods. Now let us make process 1 account. Have a look at it. I hope it is very simple you will easily understand. So the material cost, wage cost and expenses are charged 25, 18, 11 we had already calculated indirect expenses 13, 6, 3, 6. Now to calculate per unit rate each of these items are divided by 250. You know that number of units entering the process and coming out is 250. So we divide the total cost by 250 so that we know each of the element per unit basis. So this is material, wage, indirect cost, indirect cost. Then same way you can take the total. So we will know the total of total cost which is 6, 76 I will just make it bold. Now on the credit side we are going to transfer this entire cost to process 2. So transfer to process 2 and we get per unit as 270. So 67, 636 upon 250 so I get 270.55. Is it okay? Are you getting me? So here I think it will be clear to you how a particular process account can be prepared. Now we have discussed how process 1 account can be prepared. Now think of preparing process 2. So in process 2 what will you show? If we go up we had been given direct material, wage and direct expenses they will be repeated. Apart from that this cost which is transferred from process 1 will also be there to begin with. So we will take in material from process 1 to that we add material, labor and expenses that will be the total cost plus indirect expenses will be the total cost of process 2. Now look at the process 2 account. So I hope it is clear to you now you have got transfer from process 1, then material, wages and direct expenses plus indirect expenses. Same like in the earlier we have divided it by 250 to get per unit cost of each of the elements in process 2. On credit side the amount will be transferred to process 3. There is no normal loss, there is no abnormal loss. So entire amount 97, 6, 9, 7 which is the total of at that process level will be transferred to process 3. I hope it is clear. Now process 3 you can make very easily we will go back. Look at the process 3 and try to make process 3 account. So have you thought of how to make process 3 account very, very similar to process 2. So we start with the charge in the process 3 account. So transfer from process 2 97, 6, 9, 7 is first charge in process 3. Then we add material, labor, direct expenses and indirect expenses. And the entire amount is now ready because we had only 3 processes, process 1, 2 and 3. So the output is now transferred to finished stock account. I hope it is very clear now how to make process accounts. Is it understood? Now let us go to one more case wherein we will try to understand normal and abnormal loss. The current problem we have seen how to make process accounts, but we have not seen the treatment of normal and abnormal loss. Before that do you remember what is normal, abnormal loss? So I think it is clear you have understood it. Normal loss is a loss which is normal to the process. It is inherent to the operations of the process that is why it is charged to the customer. Whereas abnormal loss is caused by some abnormal reason. It is required to be borne by the company. Please read the case. I think then it will be more clear to you. So there are only 2 processes involved. Process 1 and 2, material, wages and factory overheads all are given. This time there is no need to calculate the factory overheads. There is no opening closing stock. 10,000 units are introduced in the process 1. Now only problem is input and output is not same. In question number 2, our input and output was 250 if you remember this particular question. In this case the output is lesser than the input. So we put in 10,000 units, but we got output of 9700 only. From 9700 in process 1, we got output of only 9215 in process 2. This is happening because of normal and abnormal losses. Now let us see how they are dealt with. So when you make process account for process 1, as you can see here we have charged the material cost and taken number of units as 10,000. So we have added one more column that is number of units column. Processes are 11250, factory overheads are 11,000, no problem. But on credit side, the transfer to process 2 is not same as that input. It is only 9700 which is given to us. Then we also have to calculate the normal loss which is given as 2 percent. So 2 percent of the input that is 2 percent of 10,000. So I get normal loss at 200. So you will observe that there is some more abnormal loss. Because 10,000 is put in 200 normal loss. So I should have got the output of 9800, but actual output is 9700. So 100 more units are lost and that is treated as abnormal loss. Is it clear to you? Now still we are not very sure how to calculate this cost. So how would they have been calculated? Can you guess? Now you know that the total cost is 37250 which is we can take the total of all the cost incurred. This cost is for a normal output of 9800 units. Because normal loss of 200 do not have any cost. No cost can be charged to it. It is just a normal loss. So 10,000 minus 200, my output should have been 9800 for which I will charge a cost of 37250. So using this try to calculate cost per unit and then that can be used for calculation of abnormal losses and the transfer. I will show you how it can be done. So here you can see that the normal output is 9800 which is 10,000 minus 2 percent. We also know that the total cost which is these 3 items 37250 and it is to be charged on 9800. You can cross check if you want. So it is 37250 divided by 9800. So you get 3.8012 which is what you see here. So this is the cost to be charged to 1 unit. Now we know that 100 unit is a abnormal loss. So 100 into 3.8, 380 rupees will be charged as abnormal loss and the output which is 9700 units that will be charged at 9700 into 3.8. You can see here. So 100 units we have taken the cost to be 3800 and the balance is charged to 9700 at 3.8. So it is 36870. It is clear to you. Now let us try to make process 2 account. So I think by now you can make it on your own. Just think of how will you make process 2 account. So in process 2 first there will be transfer from process 1. Then you charge for material, wages and factory overheads and on the credit side look for the losses whether there is a normal loss, abnormal loss or abnormal gain and so on. So have a look at process 2 account. So you will observe that this 36870 is charged. Then we charge 5000, 13000 and 12000. So total cost you get is 66870 for an input of 9700. Now go to the credit side. We had been given that 5 percent is a normal loss. So 5 percent of 970 so which comes to 485 and 9700 minus 485 we get finished stock output of 9215. You can see the actual output is also 9215. So there is neither any abnormal loss nor any abnormal gain. So calculation becomes very simple entire 66870 charge to stock of finished goods. Is it clear? So now there is no need to calculate the cost of abnormal loss because the output exactly matches the normal output. Now let us look at one more case. So now you would have seen in question number 2 we understood how to make process account. In question number 3 we have seen process account with normal and abnormal losses. In question number 4 we will once again see the same thing but with little more difficulty. I hope then the concept will be much more clear to you. So please read this case. If you remember in the last session we had discussed we had seen this case on a PPT but I think it will be better understood today. Now we will actually try to solve it on an extension. So we have to make process accounts for process 1, 2, 3. Now material, labour and expenses are given to you. Factory overheads which are 40,000 are charged on the basis of direct wages. Again there is no opening and closing stock 15,000 units have been introduced at the beginning of process 1. Output is given and normal losses are given at 3 percent, 6 percent and 2 percent. Now start preparing process 1 account. Partly it is visible on the screen so you can easily make it. So how you can make process 1 account as you can see first start charging the direct expenses which are given that is material, labour and other expenses. Then factory overheads are given at 40,000. How will you deal with them? It is given that factory overheads are charged on the basis of wages paid. We have wages paid of 38, 40 and 25. So in the ratio of 38 is to 40 to 25 we have to charge the factory overheads of 40,000. So how much will it come for process 1? Try to make the calculation it is in the ratio of 38, 40 to 25. So I will make a rough calculation here for more clarity I think most of you would have already understood it. So we will try to take a sum. So you know that 1,00,000 is the total wages and we are going to charge 40,000 as the factory overheads in this proportion. So 38 upon 103 into 40. So you get 14,757 is it clear to all? I am just showing it again so that you can yourself calculate it. The calculations are already done in the solution where in the factory overheads are taken at 14,457 you can see the formula which is used. Now look at the credit side. In the credit side we have calculated normal loss at 3 percent. So 15,000 into 3 percent. So 450 is a normal loss and the 15,000 minus 450 if you do 14,550 is a normal output coincidentally the actual output is also same. So there is no issue of normal or abnormal loss at least in process 1. So in process 1 entire cost of manufacture which is 13,757 will be charged to the next process. So here 13,757 I will just make a change here it is transferred to process 2 not to process 1. So transfer to process 2 is 133,757 for 14,550 units. So rate is calculated here for more clarity. So you get a rate at 9.19 which is 133,757 upon 14,550 I get a rate of 9.19. Is it okay? This is process 1 account. Now think of making process 2 account. Now I am not going to show try to do it on your own. You can see the data of process 2 is given you also have the solution for process 1. So you can easily think of making process 2 account. Let us try to make process 2 account try to yourself I will wait for a moment. I think you are on the right direction. So in process 2 account first you will charge the amount which is transferred from process 1 which is 133,757 for 14,550 units. Then you will charge material wages and expenses which are 15, 40 and 12 for process 2. Next what will you charge? You will also charge the factory overheads in the proportion of direct labor. So let us calculate how much they will come to. So 103 in the ratio of 40. So you will get 15,534 I hope you are also able to calculate. So you are going to charge 15, 40, 12 plus 15,534. If you have done it let us also see the correct solution. Check your answer with the solution given. So for transfer from process 1 it was charged at 133,757. Material 15 wages 40, other expenses 12 and factory overheads 15. So if we take a sum 216,251 is the total cost incurred at process 2 level. Now on credit side look at the normal loss percent which is 6 percent. Now this 6 percent is not on 15,006 percent of the input of this process. So 14,550 on that 6 percent is charged so it comes to 873. Now what is the actual output? It is given that the actual output is only 13,500 which has been copied. So 14,550 minus 873 minus 13,500 you will get abnormal loss of 177. So what it means is actual loss is more than normal. So normal loss of 873 and plus there is some extra loss which is abnormal loss of 177. Now try to calculate the amount of abnormal loss and the transfer. How to do it? Take the total cost and divide it by the normal output so that you get the rate per unit. I will show you the working done below. So we are in process 2, the normal output is 14,550 minus 6 percent that is 13,677 and the actual cost you are aware from process 2 which is 216,291 so 216,291 divided by 13,677. So you get 15.81 as a rate per unit for the output. This is at a normal cost. Now we know that the abnormal loss is 177 units. So 177 into 15.81 you will get 2799 which is the cost of abnormal loss. Now let us go to process account. So on credit side normal loss 673 cost is 0, abnormal loss 177 the cost is 2799 it is calculated at a rate of 15.81 which is a cost per unit. Now the transfer to process I am sorry it is not 2 it is actually process 3. So transfer to process 3 comes to 13,500 units at a cost of 213,492 which is again at a rate of 15.81. Is it very clear to you now? So we have dealt with a case in process 1 where there is no abnormal loss. Case to process 2 there is a abnormal loss. Now let us go to process 3. So I am going back to problem. Now look at the data and try to prepare process 3. So in process 3 you can see 30, 25, 15 is a cost plus the proportionate share of factory overheads plus the charge from process 2 will be the total cost and normal loss is 2 percent. So try to calculate the abnormal loss or abnormal gain. Let us first look at the overhead cost. So 25 upon 103 into 40. So 9708 is a chargeable overheads. Now let us go to process 3 account. So we have charged from process 2 this 213492 then material, labour, other expenses, overheads. Now we have to calculate the normal loss which you know is 2 percent of input. So input here is 13,500 so 2 percent of 13,500 so I get 27t. Now you will observe that 13,500 minus 27t this is a normal output but actual output is more than this actual output is 13,300. So the difference should be treated as abnormal gain which you can see here. The amounts we do not know we have to calculate the rate you can look at the working. So 13,500 minus 2 percent my normal output was 13,230 but actual output is 13,300. So there is a gain of 70. So the cost of normal output first we calculate 293201 divided by 130, 13,230. So 22.16 is a rate. The cost of 70 units comes to 1551 got it? So this is the gain now. So this is a cost but it is not actually cost it is a gain because we have made more production than what was normal. Now look at the process account. So in the process account now apart from all this cost we will also show abnormal loss on debit side it will go to the credit of profit and loss account because this is a profit. So right now we will show on debit side 70 units 15,1551 on credit side normal loss of 270 and finish goods of 13,300 at the rate of 22.16. So 13,570 units at 294752 is it clear? So now in question number three we had just seen two processes and you were introduced to the concept of abnormal loss. In question number four you have seen three processes with normal loss one with abnormal loss and one with abnormal gain. I hope all the concepts are very clear to you now. Now let us try to understand a next concept which revolves around equivalent production. Now what is equivalent production and why do you need to think about it? Now what happens is in all the cases which we have discussed so far you will realize that there is no opening or closing stock. What will happen if there are opening and closing stocks in the processes? How will you do the cost accounting? Can you think of? What will happen? So if there is a in process material which is neither fully complete nor fully incomplete and how will you deal with that material or how will you deal with that work in progress as it is typically called. So let us look at our PPT. We have discussed with all this cost sheet etcetera. We have also seen now preparation of process cost account and we are here a concept known as equivalent production. So now you know that in process costing the cost per unit is essentially calculated as the cost divided by output units. Not like job costing where we know the cost of each job. Here we do not know anything about each unit. We calculate the total cost in the process account. We divide it by number of units. So we get cost per unit. It is clear now to you. Now the issue is if you have partly finished goods what will you do with it? So what happens is if there is partly incomplete units then we have to convert them into fully completed units because I cannot divide with a partial unit. So let us say I have got 100 units which are 50 percent complete. I will assume that they are equivalent to 50 full units. So if my output is 1000 and there is a partially produced output of 100 units I will take 1000 plus 50 percent of 100 that is 50. So my output will be taken as 1050 and then I will calculate the cost per unit. Now let us see how it is actually done. So to ascertain the cost of each of the completed unit it is necessary to ascertain the cost of work in progress. In the beginning and in the end hence there is a need to convert partly finished goods into equivalent output. Now how will you calculate? So equivalent production means converting the incomplete production units into their completed units. So take the actual number of units in the process and multiply it by percentage completion. This in the process means those incomplete units or work in progress. So for those work in progress actual units will calculate, will estimate some percentage completion will multiply by that percentage. So we get that approximately how many completed units have been produced that is nothing but an equivalent production. So for direct and conversion plus the direct material applied the term equivalent cost refers to conversion of direct material applied to physical units. Now physical and equivalent units completed in each batch. If a batch of goods has been completed the number of physical units and equivalent units will be same because once the batch is ready there is no problem of incomplete unit. Now work in progress in case of partly finished units what happens is the unit in the closing work in progress inventory or itself could be at a different stage of completion. For example material might have been brought in and some labor work has been done. Material may be fully brought in but labor may be done just 50 percent. So even if the unit is incomplete in terms of material it may be complete and in terms of labor it may be 50 percent complete. So here is an example which I was talking that 100 percent of material may be present but only 50 percent of labor or overheads may be done. Now conversion costs are added continuously throughout the process. So generally they are not fully put in like 100 percent put in in the beginning they are put in at 40, 50, 60 percent as the stage may be but material is usually fully put in at the beginning itself. So we have to make these estimates so if 100 units are 60 percent produced we can say that they are 60 equivalent units but as far as material is concerned it may be 100 units but for labor and overheads they may be only 60 units. Generally the direct material are added only at specific points so usually the material is fully finished. If material is partly finished we have to consider equivalent for that also. So as far as the material is concerned once it is added the units are fully finished for material if it is not added the units will be 0 percent finished. So for calculating the unit cost based on equivalent units what we have to do is we take the total cost and divide it by equivalent units and not the physical units. So this is what I was saying you cannot add the total cost and divide it by some fully finished units and some partly finished units. So we take all fully finished units and take proportionate or equivalent partly finished units and the total equivalent units are divided so that we get a fair cost per unit. In the next session we will look at the cases on equivalent production. Today to take a brief recap we have today discussed various cases on process account. So we have looked at even one case on job costing we have looked at in process costing we have seen how to make process accounts then we have seen the fundamentals of normal abnormal loss and also the abnormal gain and we have discussed about equivalent production in the next session we will do cases on equivalent production. Thank you so much.