Process Account Closing Stock :: Raw Material, Finished Goods, Work in Progress

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Process Inventories  
 
In accounting, Inventories is a collective term used to represent raw materials, work in progress and finished goods.

Even in process cost accounting, inventories are classified as

  • Raw Materials

    Where the raw material charged to the process remains unused at the end of the period i.e. at the time the process account is being balanced, it forms part of closing inventory for that process.

    The raw material used in a process may be

    • The material that has been received into the process from a previous process
      (Or)
    • The material that was directly introduced into that process.
  • Finished Stock

    By Finished Stock in relation to a process, we mean the output (completed production) of that process.

    The output of a process is transfered to the subsequent process account or to the Final Product account (if the process in consideration is the last process).

    Where the transfer of output:

    • is being done immediately on completion of production, there would be no Finished Stock (Closing stock of finished goods) in relation to the process.

      The transfer of output is recorded through the process account itself in such cases.

    • is not done immediately on completion of production, there is a possibility for the presence of Finished Stock in relation to that process. Where the finished stock is present, it forms a part of the inventory for that process.

      In such cases, the output, immediately on completion of production is transferred to a Process Stock account (created separately for each process). Any transfer of output would be done thereon from that account.

      Where the closing finished stock is present, it can be identified within the process stock account

  • Work-In- Progress

    Where the processing of the input introduced into the process but not completed at the time the process account is being balanced, the partially completed production would form the work-in-progress.

    This also forms part of the process inventory.

Valuation and Accounting for Inventories  
 
The process inventories may consist of one or more of these i.e. raw materials, work-in-progress and finished goods.

In dealing with inventories, we would be handling two aspects.

  1. Valuation

    Valuation of inventory which is in the Raw Material Stage or the Finished Stock stage does not pose a problem as the values are figures that are derived from information available in relation to process accounts.

    Valuation of work in progress is a complex task which requires you to learn new methodologies for valuation.

  2. Accounting

    How and where we account for Process Inventories is dependent on the type of inventory in consideration.

    In general, Raw Material and Work In Progress Inventories are accounted for using the process account.

    Finished stock inventory is accounted for through a separate stock account. To enable this, the output of a process is carried over to a process stock account and any transfer of the output thereon is done through the process stock account.

Valuation » Rates/Methods  
 
The concept of the rates (methods) for valuation is relevant and applicable to all types of inventories, whether it be Raw Material or Work in Progress or Finished Goods.

The three methods most commonly used for valuing inventories are

  • FIFO [First in First Out] Method
  • LIFO [Last in First Out] Method
  • Average Method

In genearal each method gives a distinct unit rate for valuing the closing inventory. In certain cases, the rates may work out to be the same under two or more methods.

Consider the following example:
There is an opening stock of 1,800 units @ Rs. 42/unit; The current period receipts are 18,000 units @ Rs. 40 per unit and the closing stock is 1,200 units whose value is to be ascertained by choosing an appropriate rate for valuation.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period
1,800
18,000
75,600
7,20,000
42.00
40.00
Total Stock 19,800 7,95,600 40.18
Rate for Valuing Closing Stock::
      FIFO method
      LIFO method
      Average method
    40.00
42.00
40.18

Valuation » FIFO [First In First Out] Method  
 
Under this method, it is assumed that the stock received in the current period is used, only after disposing off the previous period stocks.
Previous Period Stocks ⇒ Opening Stocks
(i.e. stocks in relation to the process at the end of the previous period).

Thus, the inventory at the end (i.e. the current period closing stock) would be from ([or] a portion of) the stock received into the process during the current period.

Thus it would be appropriate to value stock at the rate that is relevant to the stock received in the current period.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period
1,800
18,000
75,600
7,20,000
42.00
40.00
Total Stock 19,800 7,95,600 40.18
Rate for Valuing Closing Stock::
      FIFO method
   
40.00

If this method is employed, then the closing stock in the above case would/should be valued @ Rs. 40/unit.

• Closing Stock more than the stock received in the Current Period

Where the closing stock is in excess of the stock received during the current period, all the closing stock cannot be related to the stock received during the current period.

In such a case, the stock equivalent of the current period receipt may be valued at the current period price and the rest at the rate relevant to the previous period stock (i.e. opening stock).

In problem solving, the total stock is sometimes valued at the current period rates, ignoring this aspect. It amounts to assuming that the total closing stock is relatable to the stocks received in the current period which should be stated clearly.

Valuation » LIFO [Last In First Out] Method  
 
Under this method, it is assumed that the stock received during the current period will be disposed off first and only then the previous period stock is used.
Previous Period Stocks ⇒ Opening Stocks
(i.e. stocks in relation to the process at the end of the previous period).

Thus, the inventory at the end (i.e. the closing stock) would be from ([or] a portion of) the stock of the previous period (i.e. opening stock) only. Therefore it would be appropriate to value stock at the rate that is relevant to the previous period stock.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period
1,800
18,000
75,600
7,20,000
42.00
40.00
Total Stock 19,800 7,95,600 40.18
Rate for Valuing Closing Stock::
      LIFO method
   
42.00

If this method is employed the closing stock in the above case would/should be valued @ Rs. 42/unit.

• Where Closing Stock is more than the Opening Stock

Where the closing stock is in excess of the previous period stock (opening stock) in relation to the process, all the closing stock cannot be related to the opening stock.

In such a case, the stock equivalent of opening stock may be valued at the previous period stock price and the rest at the rate relevant to the stock received in the current period.

In problem solving, the total stock is sometimes valued at the opening stock rate, ignoring this aspect. It amounts to assuming that the total closing stock is relatable to opening stock which should be stated clearly.

Valuation » Average Method  
 
Under this method, it is assumed that all the stocks are pooled up and there is no specific demarcation as to whether previous period stocks are being used up or the stocks from the current period receipts are being used up.

Thus, the closing stock would be from ([or] a portion of) the stocks of either of the periods. In such cases, it would be appropriate to value stock at a rate that is the average of the previous period rates and the current period rates.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period
1,800
18,000
75,600
7,20,000
42.00
40.00
Total Stock 19,800 7,95,600 40.18
Rate for Valuing Closing Stock::
      Average method
   
40.18

If this method is employed the closing stock in the above case would/should be valued @ Rs. 40.18/unit.

• Weighted Average Price

This is the weighted average of the previous period (opening) and current period rates. It is given by the relation
Weighted Average Rate =
Total Value (of the previous and current periods)
Total Quantity
=
Rs. 7,95,600
19,800 units
= Rs. 40.18/unit

This rate can also be interpreted as the "weighted average" of rates taking the quantity of stocks as the weights.
Weighted Average Rate =
(1,800 units × Rs. 42/unit) + (18,000 units × Rs. 40/unit)
(1,800 units + 18,000 units)
=
(Rs. 75,600 + Rs. 7,20,000)
(19,800 units)
=
Rs. 7,95,600
19,800 units
= Rs. 40.18/unit

• Simple Average

The simple average of stock rates is given by the average of just the prices.
Simple Average Price =
(Rs. 42/unit + Rs. 40/unit)
2
= Rs. 41/unit

This is not the rate that is intended by the term Average Rates.

Same Rate under all methods  
 
Under the following conditions, we will notice that the rate for valuation would be the same whatever may be the method we assume.

• Where there is no Opening Stock

Where there is no opening stock, the total stock at the end would be related to the stock received during the current period. The method of valuation would not be relevant and all the three methods would yield the same rate.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period

18,000

7,20,000

40.00
Total Stock 18,000 7,20,000 40
Rate for Valuing Closing Stock::
      FIFO method
      LIFO method
      Average method
    40
40
40

• Where the Previous and Current Period Rates are the Same

Where there is opening stock and the rates relating to the opening stock as well as the current period stock are the same, all the three methods would yield the same rate.

Particulars Quantity Amount Rate
Opening Stock
Received during the current period
1,800
18,000
75,600
7,56000
42.00
42.00
Total Stock 19,800 8,31,600 42
Rate for Valuing Closing Stock::
      FIFO method
      LIFO method
      Average method
    42
42
42


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