PROCESS COSTING

Samit Paul
IIM, Ranchi
WIP and Equivalent production (EP)

 Products are there in different stages of

Treatment of
partly finished
completion.
products.

1. WIP can be valued on actual basis- actual

amount of material, labor, and expenses
incurred.
2. Alternative method: convert partly finished
units into equivalent finished units.

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For example:

 120 units of which are still in process (1/4th

25% work has
been done on
completed) is equivalent to 30 completed units.
an average the
units in
process.

 The cost of WIP = cost of 30 finished units.

Note; This is known as the concept of equivalent

production or equivalent units.

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Technique of calculating equivalent
production
1. Opening WIP (or incomplete units) should be
converted into equivalent units as complete.
i.e. WIP 600 units which are 60% complete,
hence only 40% yet to be completed. Thus on
these units a cost of 600*40% = 240 units to
be incurred in the process to complete these.
2. To above units add units started and finished
during the period.
3. Add equivalent units of closing units
4. Total of all these will be equivalent production.

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1. Valuation of WIP under FIFO method
 Opening WIP is completed first and the units
introduced will be completed next.

 Closing WIP during the period – Degree of

completion is to be evaluated for EP.

 In case of opening WIP- under FIFO method the

EP is 100%- stage of completion (given in
opening).

 Closing stock is valued at current cost.

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Example-1
Compute the equivalent production for the month of May from
the following data related to the manufacture of a product.

Opening inventory of WIP 300 units

Stage of completion Material 30%

Labor 40%
Overheads 50%

Number of units put into the process 10,000 units

Transferred to the next process 9600 units
Closing inventory of WIP 700 units

Stage of completion Material 80%

Labor 75%
Overheads 60%

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2. Normal and abnormal losses
1. Normal losses are considered as a part of cost
of good production- not charged to closing WIP.
 Only the scrap realized from such units will be
deducted from the cost of raw material.
 Thus while computing equivalent units normal
losses are ignored, and the cost of normal loss
is automatically apportioned to the units
produced.

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2. Treatment of ABNORMAL LOSS

2. When there is abnormal loss, these units

should be valued at their cost at stage of
completion i.e. at their equivalent units.

The abnormal loss is charged to a separate

account and written off as a period cost to the
profit and loss account.

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3. Treatment of ABNORMAL GAIN
A. Abnormal gain is 100% completed units. Valued
at full cost basis (per unit material + labor +
overhead)

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Valuation of WIP under average method:

 Under FIFO method, opening WIP are completed

by adding cost of completing incomplete units and
thereafter newly introduced units are completed.
 When average method of valuation of WIP is
followed no distribution is made between partly
completed units of preceding period (opening
WIP) and those units which we introduced and
completed during the period.
 Cost of opening inventory is added to cost
incurred during inventory current period element
wise.

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Implication
 Thus under average method the average
process cost is obtained by adding the cost of
opening WIP and current cost and dividing the
total by total equivalent units . It is not
presumed that the opening units will be
completed first.

 Unit cost = (cost brought forward from previous

period + cost of current period)/ total
equivalent units.

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Accounting for closing WIP with FIFO Method

CASE: RP LTD.

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Valuation of WIP under LIFO:
 According to this method, units entering into the
process at last are first to be completed.
 The completed units will be shown at the current
cost and closing inventory of WIP will be valued
at the cost of opening inventory of WIP, because
units representing opening inventory are to be
completed at last.
 The closing inventory will be thus divided into
two categories when number of units of closing
inventory are more than opening inventory (i)
units of opening WIP lying as closing WIP (ii)
Newly introduced units lying in closing WIP.
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