Closing Stock (at Work in Progress Stage) in Process Account

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What is Work in Progress?  
 
Work-in-Progress is a term used to indicate incomplete work.

Something which has been started but has not yet been completed.

This term is used both in case of an asset as well as a product being manufactured.

• Asset

Where there is an asset under construction, we consider it to be work-in-progress till the time the construction is completed.

• Product

Where a product is being manufactured, we consider it to be work-in-progress till the production process is completed and the finished output is obtained.

Inventories are Assets  
 
We come across inventories of three kinds (a) Raw Materials, (b) Work-in-Progress and (c) Finished Goods.

Whatever may be the stage of the inventory, it would be treated as an asset at the time of assessing the value of assets and liabilities of the organisation.

This can be understood from the fact that all these inventories are considered as a part of what we call Closing Stock. Since Closing Stock is treated as an asset, it is shown on the assets side of the balance sheet.

 Balance Sheet of M/s as on ___  
Liabilities Amount
(Rs.)
Amount
(Rs.)
Assets Amount
(Rs.)
Amount
(Rs.)
     

Closing Stocks:
    Raw Materials
    Work-in-Progress
    Finished Goods




45,000
1,25,000
1,08,000
 





2,78,000
 

• Principle for Valuation of Assets

The value of an asset includes all the expenses incurred before bringing the asset into usable condition.

• Capitalising Expenses

Where an expenditure incurred is treated as a part of the value of an asset, we say that the expenditure has been capitalised. Some examples:
  • Installation expenses incurred for a new machine.
  • Repair and renewal expenses incurred for bringing up a second hand machine purchased into use.
These may be treated as revenue natured expenses in the normal course of business. But since they are expended in relation to an asset and that too during the period prior to bringing the asset into usable condition, they are to be treated as part of the value of the asset.

Recording and Posting

  • If such expenses are already recorded using accounting heads indicating expenses such as "Installation Expenses", "Repair Charges" etc, they are to be capitalised by transferring the same to the asset account.

    Hide/Show

    Journal in the books of M/s __ for the period from ____ to _____
    Date V/R No. L/F Debit Amount
    (in Rs)
    Credit Amount
    (in Rs)
    30/06/2006 Dr 12,000
    12,000

    DrAsset a/c Cr
    Particulars Amount
    (in Units)
    Amount
    (in Rs)
    Particulars Quantity
    (in Units)
    Amount
    (in Rs)

    To Repair Charges a/c


    12,000




               
               

  • If they are not already recorded, then they are directly debited to the asset account.

    Hide/Show

    Journal in the books of M/s __ for the period from ____ to _____
    Date V/R No. L/F Debit Amount
    (in Rs)
    Credit Amount
    (in Rs)
    30/06/2006 Dr 12,000
    12,000

    DrAsset a/c Cr
    Particulars Amount
    (in Units)
    Amount
    (in Rs)
    Particulars Quantity
    (in Units)
    Amount
    (in Rs)

    To Cash/Bank a/c


    12,000




               
               

Valuation of Inventories  
 
Since inventories are assets, the principle for valuation of assets is used in valuing inventories also. All the expenses incurred on the inventories before they are brought into usable condition would form part of the value of the inventories.

• Usable Condition

The inventory acquiring usable condition would form the basis for deciding what expenses are to be capitalised and what not.

These expenses that form the part of the value of inventory would be different for the three different types of inventory.

» Raw Materials

Usable condition for raw materials would be the state where they are ready for being used in the production process. Thus, all the expenses incurred before bringing the raw material to the actual production environment would have to form part of the value of raw materials.

Ascertaining all the expenses that need to form part of the value of raw materials would be difficult and impractical. It would be possible to ascertain such expenses only till the raw materials are placed in the stores. Any expenses relating to storage and carriage from the stores to the production environment are thus ignored for valuing raw materials.

In Process Accounting

In process cost accounting, by valuation of raw materials we mean valuation of the raw materials purchased or received during the current period. We rarely come across the problem of valuing raw materials as it would be given or known from the available data in almost all cases.
  • In case of the primary and secondary materials for the initial process as well as the secondary materials for the second and subsequent processes, the value would be dependent on the cost of purchase or acquisition which is given in almost all cases.
  • In case of the primary materials for the second and subsequent processes, the cost is ascertained as the cost of output of the process from which the input has been received.

» Finished Goods

Usable condition for finished goods would be the state where they are ready for being sold or disposed off otherwise. Thus, all the expenses incurred before the completion of production would have to form part of the value of finished goods. This is what we call the normal cost of normal output.

In Process Accounting

In process cost accounting, by valuation of finished goods we mean valuation of the finished goods manufactured during the current period.

This value is obtained from the process cost data shown in the Process account. The "Normal Cost of Normal Output" per unit is what decides the value of finished goods.

» Work in Progress

Work in Progress is incomplete production. It may be complete to any extent depending on the case in consideration.

Trying to ascertain the value of work in progress based on the same principle would not be possible as the state of Usable condition for work in progress does not carry any meaning.

Thus, we interpret the same principle in a different way. The value of an asset includes all the expenses in relation to an asset to make it usable.

The value of work in progress includes all the expenses incurred on it. These are the expenses which ultimately go into the value of the final product.

Thus, to ascertain the value of work-in-progress we need to know the expenditure incurred on the same till that time when it is being valued.

In Process Accounting

In process cost accounting, by valuation of work-in-progress we mean valuation of the work-in-progress at the end of the current period.

This value is not straight away obtainable from the process cost data shown in the Process account. We need to make additional efforts to find the value of work-in-progress in processes.

• Closing Stock Valuation

Once the value of current period inventory (raw materials and finished stock) is ascertained, it would be possible to ascertain the value of the respective closing stocks by choosing either the FIFO, LIFO or AVERAGE methods for valuation.

This is what we dealt with in the earlier notes. With regard to Work-in-Progress, we ascertain the value of closing work-in-progress itself through calculations.

Valuation of Work-in-Progress  
 
By valuation of work-in-progress we mean valuation of closing work-in-progress.

The value of work-in-progress is equal to the total amount of expenditure incurred on the units in progress till the time of valuation. To be able to ascertain the value this way, the expenditure incurred on the units in process at the end should be ascertainable separately, which practically is not possible almost in all cases.

  • Assume that 10,000 units have been input into the production process and 2,450 units are in process at the end of the accounting period.

    To ascertain the value of these 2,450 units of work-in-progress we should have recorded the expenses incurred on the 7,550 units which were completed and the rest of 2,450 units separately.

    This is practically not possible and is very very rarely done.

• How is the expenditure incurred on work-in-progress units ascertained ?

The expenditure incurred on the work-in-progress units is ascertained on an estimated basis by estimating the percentage completion of the work-in-progress units with regard to the various elements of cost (expenses).

Consider a process involving Material, Labour/Labor and Overhead expenses. These three elements of cost would be present in the work-in-progress units depending on the proportion of work completed with regard to these elements.

» Illustration

Consider a production process where the value of a completed unit (i.e. expenditure incurred on a completed unit) is Rs. 140 with Rs. 70 on Materials, Rs. 50 on Labour/Labor and Rs. 20 on Overhead Expenses.

There are work-in-progress units in process at the end of the accounting period.

To ascertain the value of these work-in-progress units, an inspection was conducted on the shop floor and it was ascertained that the work-in-progress units are 100% complete with regard to material, 60% complete with regard to labor/labour and 75% complete with regard to overheads.

Element of Cost
Material Labour/Labor Overhead Expenses Total
a) Complete Cost (per unit in Rs.)
b) % Completion
c) Incurred Cost (per unit in Rs.) [(a) × (b)]
70
100%
70
50
60%
30
20
75%
15
140

115

Explanation Hide/Show

  • 100% complete with regard to Materials
    ⇒ Material Expenditure incurred per unit = 100% of expenditure to be incurred on completed units
    = Rs. 70/unit × 100%
    = Rs. 70/unit of work-in-progress
  • 60% complete with regard to Labour/Labor
    ⇒ Labour/Labor Expenditure incurred per unit = 60% of expenditure to be incurred on completed units
    = Rs. 50/unit × 60%
    = Rs. 30/unit of work-in-progress
  • 75% complete with regard to Overheads
    ⇒ Overhead Expenditure incurred per unit = 75% of expenditure to be incurred on completed units
    = Rs. 20/unit × 75%
    = Rs. 15/unit of work-in-progress

Thus the work-in-progress units would be valued at the rate of Rs. 115/unit which indicates the total expenditure incurred on those units till that point of time.

If there are 2,100 units in process at the end of the accounting period.

Total Value of work-in-progress = 2,100 units × Rs. 115/unit
= Rs. 2,41,500

Element wise Costs

The element wise costs can also be ascertained:
Element of Cost
Material Labour/Labor Overhead Expenses Total
a) Complete Cost (per unit in Rs.)
b) % Completion
c) Incurred Cost (per unit in Rs.) [(a) × (b)]
d) Work-in-progress units
e) Total Cost
70
100%
70
2,100
1,47,000
50
60%
30
2,100
63,000
20
75%
15
2,100
31,500
140

115
2,100
2,41,500

The element wise cost per unit is ascertained first and then the total cost is ascertained from it.

Equivalent Complete Units  
 
Work-in-Progress units are partially completed units. If these units are expressed in terms of complete units we call them their "Equivalent Complete Units".

Consider the same illustration as above:

The value of a completed unit (i.e. expenditure incurred on a completed unit) is Rs. 140 with Rs. 50 on Materials, Rs. 70 on Labour/Labor and Rs. 20 on Overhead Expenses.

If there are 2,100 units in process at the end of the accounting period.

For ascertaining the value of the work-in-progress units we found out the cost incurred with regard to each element based on the proportion of production completed with regard to those elements. Thereby we found the cost incurred per each unit of work in progress.

• Finding the value using Equivalent Completed Units

The total value of work in progress can also be ascertained using the equivalent completed units idea.

W-I-P Units Percent (%)
Complete
Equivalent
Complete Units
Cost Per
Completed Unit
Total Cost
a) Material
b) Labour/Labor
c) Overheads
d) Total
2,100
2,100
2,100
2,100
100%
60%
75%
2,100
1,260
1,575
70
50
20
1,47,000
63,000
 31,500
2,41,500

Explanation Hide/Show

  • 100% complete with regard to Materials
    ⇒ Equivalent Complete Units with regard to Material = 100% of work-in-progress units
    = 2,100 units × 100%
    = 2,100 units
    ⇒ Total material cost incurred on 2,100 w-i-p units = Total Material Cost of 2,100 complete units
  • 60% complete with regard to Labour/Labor
    ⇒ Equivalent Complete Units with regard to Labour/Labor = 60% of work-in-progress units
    = 2,100 units × 60%
    = 1,260 units
    ⇒ Total labour/labor cost incurred on 2,100 w-i-p units = Total labour/labor Cost of 1,260 complete units
  • 75% complete with regard to Overheads
    ⇒ Equivalent Complete Units with regard to Overheads = 75% of work-in-progress units
    = 2,100 units × 75%
    = 1,575 units
    ⇒ Total overhead cost incurred on 2,100 w-i-p units = Total overhead Cost of 1,575 complete units

The element wise total cost is ascertained first and then the cost per unit can be ascertained from it if needed.

Accounting for Work-in-Progress  
 

• Using the Process account

Work-in-Progress is accounted for in the Process account itself.

The value of work-in-progress at the end of the accounting period is carried forward/down to the subsequent account period. Thus it is shown on the credit side of the process account at the end of the period as "By Balance c/d" and as "To Balance b/d" at the beginning of the subsequent period in the process account relating to the .

» At the end of an accounting period

DrProcess A a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)







By bal c/d (W-I-P)

2,100

2,41,500
           
           

In such a case the process account itself would form a real account for the purpose of preparation of balance sheet.

» At the beginning of the subsequent accounting period

DrProcess A a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Balance b/d

2,100
2,41,500




           
           

• Using a Work-in-Progress account

The value of Work-in-Progress being an asset to be carried forward to the subsequent accounting periods and be shown in the balance sheet is transferred to a separate account by name "Work-in-Progress a/c".

» At the end of an accounting period

DrProcess A a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)







By W-I-P a/c

2,100

2,41,500
           
           

DrWork-in-Progress a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Process A a/c
2,100
2,41,500
By Balance c/d 2,100
2,41,500
  2,100 2,41,500   2,100 2,41,500
To Balance b/d 2,100 2,41,500      

» At the beginning of the subsequent accounting period

The balance in the Work-in-Progress account is carried forward to the subsequent accounting period. At the beginning of the subsequent accounting period, the work-in-progress account is closed by transfer to the Process account.

DrWork-in-Progress a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Balance b/d
2,100
2,41,500
By Process a/c 2,100
 
2,41,500
           
           

DrProcess A a/cCr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To W-I-P a/c

2,100
2,41,500




           
           

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