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

Earlier article(Part2) deal with a simple process costing without any 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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