Statement of Equivalent Production Statement of Cost Statement of Evaluation

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Two ways to evaluate Work-in-Progress  
 
The cost of a product is made up costs of various elements present in the cost. In general we find that the cost is made up of the elements material, labour/labor and overhead.

Where the data relating to cost of each element per unit, the percentage completion of work-in-progress with respect to each element and the number of units of work-in-progress is known, we will be able to ascertain the value of work-in-progress Consider the following cost data of an organisation relating to a process for the month of March 2007.

  • By evaluating the per unit expenditure with respect to each element

    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

    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.

  • By converting the work-in-progress units into their equivalent complete units

    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

In both these we need the cost per unit of each element of cost to arrive at the value of work-in-progress.

Absence of Cost per unit data  
 
The cost per unit of each element is something that is derived by analysing the cost incurred. Thus, they are figures that are derived from the available information and not ones that are readily available.

Even if it is available it would be a figure based on estimated cost data and not a figure based on the actual cost incurred.

The cost data available would be in relation to the total expenditure incurred on both the completed units and the units in work-in-progress. Deriving the cost per unit is not as simple a task as finding the quotient (Total cost ÷ Total units).

Therefore, in process cost accounting, the first task in finding the value of closing work-in-progress is to find out the cost per unit of completed production based on the cost data available in relation to the process.

An Illustration  
 
Consider the following cost data of an organisation relating to a process for the month of March 2007.
  • 10,000 units of material were introduced into the process at a total cost of Rs. 2,63,200.
  • Direct Wages incurred for the process - Rs. 1,14,800
  • Overhead Expenditure - Rs. 2,11,200
  • Production completed during the month was of 7,000 units.
  • 3,000 units were in process (partially completed) as on 31st March.

    These units were

    1. 80% complete with regard to Direct Materials,
    2. 40% complete with respect to Labour/Labor and
    3. 60% complete with regard to Overhead Expenses

There were no stocks at the beginning of the month. There were no losses in processing.

Finding the cost per unit » The Rationale  
 
The cost per unit of completed production is ascertained from the available cost data, the quantity of completed units, the quantity of work-in-progress units and the percentage completion of the work-in-progress units with respect to each element of cost.

• Material Cost per unit

The total cost incurred Rs. 2,63,200
= Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)}
= 7,000 units × Complete Cost per unit + 3,000 units × 80% of Complete Cost per unit
= 7,000 units × Complete Cost per unit + 3,000 units × 80% × Complete Cost per unit
= 7,000 units × Complete Cost per unit + 2,400 units × Complete Cost per unit
= 9,400 units × Complete Cost per unit
⇒ Complete Cost per unit =
Rs. 2,63,200
9,400 units
= Rs. 28/unit
3,000 units × 80% = 2,400 units
⇒ Converting the Work-in-Progress units to equivalent complete units.

• Labour/Labor Cost per unit

The total cost incurred Rs. 1,14,800
= Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)}
= 7,000 units × Complete Cost per unit + 3,000 units × 40% of Complete Cost per unit
= 7,000 units × Complete Cost per unit + 3,000 units × 40% × Complete Cost per unit
= 7,000 units × Complete Cost per unit + 1,200 units × Complete Cost per unit
= 8,200 units × Complete Cost per unit
⇒ Complete Cost per unit =
Rs. 1,14,800
8,200 units
= Rs. 14/unit
3,000 units × 40% = 1,200 units
⇒ Converting the Work-in-Progress units to equivalent complete units.

• Overhead Cost per unit

The total cost incurred Rs. 2,11,200
= Expenditure incurred on {7,000 units (completed production) + 3,000 units (work-in-progress)}
= 7,000 units × Complete Cost per unit + 3,000 units × 60% of Complete Cost per unit
= 7,000 units × Complete Cost per unit + 3,000 units × 60% × Complete Cost per unit
= 7,000 units × Complete Cost per unit + 1,800 units × Complete Cost per unit
= 8,800 units × Complete Cost per unit
⇒ Complete Cost per unit =
Rs. 2,11,200
8,800 units
= Rs. 24/unit
3,000 units × 60% = 1,800 units
⇒ Converting the Work-in-Progress units to equivalent complete units.

This total process is segregated into two steps and two separate statements are prepared for those steps.

• Statement of Equivalent Production (Or) Equivalent Production Statement

This statement gives the number of completed units on which the total expenditure might be considered to have been incurred.

• Statement of Cost

This is a statement that gives the cost per unit of each element based on the total expenditure incurred and the number of completed units on which the expenditure might be considered to be incurred.

Statement of Equivalent Production  
 
This statement is used to derive the information relating to the number of completed units on which the expenditure might be considered to have been incurred.

In Out Equivalent Units
Particulars Units Particulars Units Material Labour/Labor Overheads
%
Complete
Equivalent
Units
%
Complete
Equivalent
Units
%
Complete
Equivalent
Units
     
 


         
Totals                

• Accommodating additional Elements of Cost

If there are more elements of cost involved additional columns under the head Equivalent Units should be provided for the same.

Illustration

The Equivalent production statement relating to the data in the above illustration would be:
In Out Equivalent Units
Particulars Units Particulars Units Material Labour/Labor Overheads
%
Complete
Equivalent
Units
%
Complete
Equivalent
Units
%
Complete
Equivalent
Units
Material Introduced 10,000 Production Completed
Closing Work-in-Progress
7,000
3,000
100%
80%
7,000
2,400
100%
40%
7,000
1,200
100%
60%
7,000
1,800
Totals 10,000   10,000   9,400   8,200   8,800

• Relevance to Process a/c

The "In" and "Out" columns are a replica of the process account with only the unit columns shown.

DrProcess __ a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Material (Primary)
To Direct Wages
To Overheads
10,000
2,63,200
1,14,800
2,11,200
By Process B a/c
By bal c/d (W-I-P)
7,000
3,000
??
??
  10,000 5,89,200   10,000 5,89,200
           

Statement of Cost  
 
The statement of cost is prepared to ascertain the cost per unit of completed production with respect to each element of cost.

Element of Cost Equivalent Units Cost Incurred
(in the current period)
(in Rs.)
Cost per unit
(Completed production)
(in Rs/Unit)
(a) (b) (c) [= (b) ÷ (a)]
 

   
Totals    

Illustration

The Statement of Cost relating to the data in the above illustration would be:

Element of Cost Equivalent Units Cost Incurred
(in the current period)
(in Rs.)
Cost per unit
(Completed production)
(in Rs/Unit)
(a) (b) (c) [= (b) ÷ (a)]
Materials
Labour/Labor
Overhead
9,400
8,200
8,800
2,63,200
1,14,800
2,11,200
28
14
24
Totals 5,89,200 62

The data relating to equivalent units is derived from the statement of equivalent production. The cost data is derived from the information provided.

• Normal Cost of Normal Output per unit

The cost per unit arrived at in the Statement of Cost represents the Normal Cost of Normal Output per unit.

The difference we notice when there is closing work-in-progress is that, we have the per unit cost of each element of cost available unlike in other cases where we come across only the per unit total cost.

Statement of Evaluation  
 
The last step in the process of finding the value of closing work-in-progress is evaluation.

This is done based on the data available in the statement of equivalent production and the statement of cost.

Where, there is closing work-in-progress, the evaluation of various output elements like finished product, closing work-in-progress as well as others like abnormal loss, normal loss, are all evaluated in this statement itself.

Component to be Evaluated Equivalent Units Cost Per unit Total Cost Component Cost
a) Component One
    » Material
    » Labour/Labor
    » Overheads
b) Component Two
    » Material
    » Labour/Labor
    » Overheads
b) Component Three
    » Material
    » Labour/Labor
    » Overheads




















xxx



xxx
Total Cost xxxx

Illustration

The Statement of Cost relating to the data in the above illustration would be:

Component to be Evaluated
  » Element of Cost
Equivalent Units Cost Per unit Total Cost Component Cost
a) Completed Production
    » Material
    » Labour/Labor
    » Overheads
b) Closing Work-in-Progress
    » Material
    » Labour/Labor
    » Overheads

7,000
7,000
7,000

2,400
1,200
1,800

28
14
24

28
14
24

1,96,000
98,000
1,68,000

67,200
16,800
43,200



4,62,000



1,27,200
Total Cost 5,89,200

Cross Check

The total cost arrived at in the Statement of Evaluation and the total of the cost column in the Statement of Cost should agree.

• Relevance to Process a/c

The values arrived at in the Statement of Evaluation are used to complete the process account.

DrProcess __ a/c Cr
Particulars Quantity
(in Units)
Amount
(in Rs)
Particulars Quantity
(in Units)
Amount
(in Rs)
To Material (Primary)
To Direct Wages
To Overheads
10,000
2,63,200
1,14,800
2,11,200
By Process B a/c
By bal c/d (W-I-P)
7,000
3,000
4,62,000
1,27,200
  10,000 5,89,200   10,000 5,89,200
           

The values recorded on the credit should always be derived through calculations. In the absence of closing work-in-progress, these values are derived through calculations made in the working notes.

• Are we following the Valuation Principle?

The principle for valuation which states that "Normal Loss is valued at its net realisable price and all others are valued at the Normal Cost of Normal Output per unit hold even when there is closing work in progress.

You can notice this in the evaluation statement where the normal cost of normal output per unit with respect to each element is what is considered for evaluating the various components.

Even in case of closing work-in-progress, this is what we followed.

Author Credit : The Edifier ... Continued Page 18

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