PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units

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Cost & Management Accounting (MGT-402)

LESSON# 23 & 24

PROCESS COSTING SYSTEM

(Opening balance of work in process)

Work-in-process and equivalent units

Partially-processed units

At the end of a period there may be some units which have been started but have not been

completed. These are closing work-in-process units.

At this stage we assume for simplicity that there is no opening work-in-process. In that case the

output for a period will consist of two classes of finished units of production:

· Those that have been started and fully processed within the period

· Those that have been started during the period, but not finished by the end of the period. This

closing work-in-process will be completed during the following period;

Further costs will be incurred in order to achieve this.

Equivalent units

Once processing has started on a unit; of output, to the extent that it remains in an uncompleted

state it can be expressed as a proportion of a completed unit. For example, if 100 units are exactly

half-way through the production process in terms of the amount of cost they have absorbed, they

are effectively equal to 50 complete units. Therefore, 100 units which are half-complete can be

regarded as 50 equivalent units that are complete.

Practice Question

A manufacturer starts processing on 1 March. In the month of March he starts work on 20,000

units of production. At the end of March there are 1,500 units still in process and it is estimated

that each is two thirds complete. Costs for the-period total Rs19,500.

Calculate the value of the completed units and the work-in-process at 31 March.

In practice it is unlikely that all inputs to production will take place at the same time, as was

suggested in the example above. For instance, materials are frequently added at the beginning of a

process, whereas labor may be applied throughout the process. Thus, work-in-process may be

more complete as regards one input or cost element than as regards another. Equivalent units must

thus be calculated for each input and costs applied on that basis,

Practice Question

In this activity, use the same data as in Activity 1 except that:

· all materials have been input to the process

· work-in-process is only one-third complete as regards labor

Costs for the period are as follows:

Materials

10,000

Labor

9,500

Total

19,500

Costs for a process are allocated to equivalent units to calculate valuations for finished goods and

work-in-process.

The FIFO and weighted average methods of cost allocation

In the previous examples it was assumed that there was no opening stock of work-in-process. In

reality, of course, this is unlikely to be the case, and changes in levels of work-in-process during me

period can give rise to problems. There are basically two methods of accounting for such changes.

· The weighted average (or averaging) method

· The FIFO method.

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