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.
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Process Costing With Work-In-Progress
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- 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
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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.
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ILLUSTRATION:
For Company A, the August ’07 data for Process I is as follows:
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Units
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Opening work-in-progress
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Nil
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Units introduced in August
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1,000
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Units finished
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800
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Units not completed
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200
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$
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Materials
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7,000
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Labor
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6,000
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Overhead
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5,000
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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
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Material
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Labor
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Overhead
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Units
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Units
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Units
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Opening work-in-progress
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–
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–
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–
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Completed
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800
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800
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800
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Closing work-in-progress:
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100% material
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200
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50% labor
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100
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50% overhead
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100
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(a) Equivalent units
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1,000
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900
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900
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Cost for the month
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$7,000
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$6,000
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$5,000
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(b) Cost per equivalent unit
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$7.00
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$6.67
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$5.56
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©Unit cost of process=$19.23
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Unit Cost($)
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$
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(d) Transferred to Process 2
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Completed units:
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Material
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$7
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5,600
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Labor
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$6.67
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5,336
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Overhead
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$5.56
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4,448
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15,384
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(e) Closing work-in-progress:
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Material 100% complete
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$7
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1,400
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Labor 50% complete
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$6.67
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200
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Overhead 50% complete
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$5.56
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556
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2,156
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