Process Costing With Work-In-Progress: Equivalent Units(Part3)

November 17th, 2007 Comments off
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Earlier article(Part2) deal with a simple process costing without any work-in-progress

In this article, we shall deal with process costing with work-in-progress.

Process Costing With Work-In-Progress

  • Work-in-progress is really uncompleted units hence this should not receive the full costs of the material, labor and overhead to complete it.
  • Therefore it’s misleading if for the purpose of calculating average unit cost, to treat this work-in-progress as fully completed unit.
  • The remedy is to use EQUIVALENT UNITS

So What is Equivalent Units?

  • Equivalent units are the result of expressing partially completed units in terms of the stage of completion.
  • For illustration: 100 units which are one-half completed in terms of production costs are equivalent to 50 completed units.
  • To calculate equivalent units for a process for an accounting period, the NUMBER OF INCOMPLETE UNITS IS MULTIPLIED BY THE STAGE OF COMPLETTION AT THE END OF THE ACCOUNTING PERIOD.

ILLUSTRATION:

For Company A, the August ’07 data for Process I is as follows:

Units

Opening work-in-progress

Nil

Units introduced in August

1,000

Units finished

800

Units not completed

200

$

Materials

7,000

Labor

6,000

Overhead

5,000

It was estimated that for the 200 incomplete units, the whole of the raw materials to complete these 200 units had been issued. As regards labor and overhead they were 50% complete.

Required:

To show the unit cost of the process for the month of August and the value at which the completed units should be transferred to Process 2

Solution:

PROCESS COST SHEET

Material

Labor

Overhead

Units

Units

Units

Opening work-in-progress

Completed

800

800

800

Closing work-in-progress:

100% material

200

50% labor

100

50% overhead

100

(a) Equivalent units

1,000

900

900

Cost for the month

$7,000

$6,000

$5,000

(b) Cost per equivalent unit

$7.00

$6.67

$5.56

©Unit cost of process=$19.23

Unit Cost($)

$

(d) Transferred to Process 2

Completed units:

Material

$7

5,600

Labor

$6.67

5,336

Overhead

$5.56

4,448

15,384

(e) Closing work-in-progress:

Material 100% complete

$7

1,400

Labor 50% complete

$6.67

200

Overhead 50% complete

$5.56

556

2,156

 

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Financial Accounting

 
 

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