Illustration » Problem

Consider the following cost data of an organisation relating to a process for the month of March 2007. 1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead expenditure. These units were 80% complete with regard to Direct Materials, 40% complete with respect to Labour/Labor and 60% complete with regard to Overhead Expenses 6,000 units of material were introduced into the process at a total cost of Rs. 2,25,000. Direct Wages incurred for the process - Rs. 1,84,000 Overhead Expenditure - Rs. 92,800 There was no work-in-progress or any other stocks at the end of the period. There were no losses in processing.

Illustration » Solution : Process a/c

Dr Process __ a/c Cr Particulars Quantity (in Units) Amount (in Rs) Particulars Quantity (in Units) Amount (in Rs) To Balance b/d To Direct Materials To Labour/Labor To Overheads 1,800 6,000 83,200 2,25,000 1,84,000 92,800 By Finished Production #* 7,800 5,85,000   7,800 5,85,000   7,800 5,85,000             Working Notes » Hide/Show • Opening Stock [OS] Opening Work in progress = 1,800 units [Given] • Input Introduced [II] Opening Work in progress = 6,000 units [Given] • Gross/Total Input [GI/TI] ⇒ GI/TI = OS + II = 1,800 units + 6,000 units = 7,800 units • Actual Output [AO] AO = GI/TI = 7,800 units In the absence of information relating to losses, we assume that there are no losses and the actual output is equal to the total input. • Normal Output [NO] NO = AO = 7,800 units In the absence of information relating to output, we assume that the actual output itself is the normal output • Abnormal Loss/Gain [AL/AG] Since AO = NO, there is neither abnormal loss nor abnormal gain. • Total Cost [TC] TC = Rs. 83,200 + Rs. 2,25,000 + Rs. 1,84,000 + Rs. 92,800 = Rs. 5,85,000 • Normal Cost [NC] NC = TC = Rs. 5,85,000 • Normal Cost of Normal Output per unit [NCNO/U] NCNO/Unit = NC NO = Rs. 5,85,000 7,800 units = Rs. 75/unit Valuation » Normal loss is valued at market price and all others are valued at the "Normal Cost of Normal Output per unit". • Actual Output [VAO] VAO = AO × NCNO/Unit = 7,800 units × Rs. 75/unit = Rs. 5,85,000 Notes/Assumptions # Quantities relating to these are derived through calculations. * Values relating to these are derived through calculations.

Presence of both Opening and Closing Work-in-Progress

The closing work-in-progress of a period becomes the opening work-in-progress for the subsequent period. In the subsequent period there may be closing work-in-progress at the end of the period. In such situations we come across both opening and closing work-in-progress inventories during the same period. • Statement of Equivalent Production is needed We need to think of preparing the statement of equivalent production and thereby the statement of cost and statement of evaluation only when there is closing work in progress. Thus, in this situation where there are both opening and closing work-in-progress inventories we need to prepare the above statements. Opening work in progress would be an additional input that enters into the production process apart from the other inputs that might be received from the previous process or entered directly in the current process. • Method of Valuation to be decided upon Where there is opening work-in-progress and we are required to find the value of closing work-in-progress we need to decide upon whether or not to include/consider the previous period costs for the purpose of finding the cost per completed unit. The two methods for valuation are » FIFO Method Where we exclude the previous period costs and consider only the current period costs to be a part of the total cost of an element for finding the cost per completed unit in the "Statement of Cost" we are said to be adopting the "FIFO Method". 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     This is so called because we assume that the opening work-in-progress units are completed separately without being mixed with the input that has been introduced into the process during the current period. The work-in-progress units are assumed to be processed and completed first and then only the other units dealt with (First in First Out). To facilitate this, in the Statement of Equivalent Production, the output is segregated into two as Opening Work-in-progress Completed Production started and completed in the current period In Out Equivalent Units Particulars Units Particulars Units Material % Complete Equivalent Units Opening W-I-P Input Introduced 2,300 Opening W-I-P Completed Production Started & Completed 2,300 Totals           » Weighted Average Method Where we include the previous period costs in the total cost of an element at the time of finding the cost per completed unit in the "Statement of Cost" we are said to be following the "Average Method" or the "Weighted Average Method" Element of Cost Equivalent Units Cost Incurred (in Rs.) in the Cost per unit (Completed production) (in Rs/Unit) Previous Period Current Period Total (a) (b) (c) (d) [= (b) + (c)] (c) [= (e) ÷ (a)]   Totals         This is so called because the cost per unit is arrived at by considering a cost which includes both the previous period costs as well as current period costs. In preparing the statement of equivalent production the total output is considered as a unit and no segregation is made between the opening work in progress completed and the units started and completed in the current period.

Illustration » Problem

Consider the following data relating to a process for the month of March 2007. 1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead expenditure. These units were 80% complete with regard to Direct Materials, 40% complete with respect to Labour/Labor and 60% complete with regard to Overhead Expenses 12,000 units of material were introduced into the process during the period. Total Material Cost incurred for the process is Rs. 2,11,680. Direct Wages incurred were - Rs. 2,73,240 Overhead Expenditure - Rs. 1,32,480 There were 2,400 units in process at the end of the period These units were 75% complete with regard to Direct Materials, 50% complete with respect to Labour/Labor and 30% complete with regard to Overhead Expenses There were no losses in processing.

Illustration » Working Notes

Total Input = Opening Work in Progress Units + Units Introduced = 1,800 units + 12,000 units = 13,800 units Closing work-in-progress = 2,400 units Completed Production = Total Input − Closing work-in-progress = 13,800 units − 2,400 units = 11,400 units

FIFO Method

• Statement of Equivalent Production 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 Opening W-I-P Input Introduced 1,800 12,000 Opening W-I-P Completed Production Started & Completed   (in the current period) Closing W-I-P 1,800 9,600 2,400 20% 100% 75% 360 9,600 1,800 60% 100% 50% 1,080 9,600 1,200 40% 100% 30% 720 9,600 720 Totals 13,800   13,800   11,760   11,880   11,040 Production Started and Completed in the current period = Total Production/Output − Opening Work-in-Progress Complete = 11,400 units − 1,800 units = 9,600 units » Opening Work-in-Progress Completed : % Completion The % completion is indicative of the proportion of expenditure (compared to a complete unit) incurred on the units during the current period. The % completion given within the problem data indicates the proportion of expenditure that has been incurred in the previous period. The remaining proportion indicates the proportion of expenditure on the opening work-in-progress units incurred in the current period. Therefore the %'s to be taken in the Equivalent production statement with regard to opening w-i-p units would be Direct Materials - 20%, [Since they are 80% complete] Labour/Labor - 60% [Since they are 40% complete] and Overhead Expenses - 40% [Since they are 40% complete] » Others : % Completion On units where production is started and completed in the current period, they are 100% complete with regard to all elements of cost. With regard to closing work-in-progress, the units would be that much % complete as is indicated in the problem. » Essential Data To be able to work out this statement the most essential data is the detail relating to the % completion of the opening work in progress. In the absence of this data, we cannot adopt FIFO method. • Statement 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)] Materials Labour/Labor Overhead 11,760 11,880 11,040 2,11,680 2,73,240 1,32,480 18 23 12 Totals 6,17,400 53 The costs incurred in the current period are available from the cost data in the problem and the equivalent units from the statement of equivalent production. • Statement of Evaluation Component to be Evaluated   » Element of Cost Equivalent Units Cost Per unit Total Cost Component Cost A) Opening Work in Progress     » Opening Balance     » Material     » Labour/Labor     » Overheads B) Production Started & Completed     » Material     » Labour/Labor     » Overheads a) Total Output b) Closing Work in Progress     » Material     » Labour/Labor     » Overheads 360 1,080 720 9,600 9,600 9,600 1,800 1,200 720 18 23 12 18 23 12 18 23 12 83,200 6,480 24,840 8,640 1,72,800 2,20,800 1,15,200 32,400 27,600 8,640 1,23,160 5,08,800 6,31,960 68,640 Total Cost [6,17,400 + 83,200] 7,00,600 The equivalent units data pertaining to each component is obtained from the statement of equivalent production and the cost per unit from the statement of cost. To obtain the cost of output the value of opening work in progress is included in the statement of evaluation. Cross Check The total cost in the statement of evaluation excluding the value of opening work in progress should be equal to the total cost of all the elements together in the statement of cost. Since the value of opening work in progress is also included in the statement, the total cost shows a figure that would be in excess of the total cost from the statement of cost. • Process Account Dr Process __ a/c Cr Particulars Quantity (in Units) Amount (in Rs) Particulars Quantity (in Units) Amount (in Rs) To Balance b/d To Direct Materials To Labour/Labor To Overheads 1,800 12,000 83,200 2,11,680 2,73,240 1,32,480 By Finished Production #* By Bal c/d (W-I-P) 11,400 2,400 6,31,960 68,640   13,800 7,00,600   13,800 7,00,600

Weighted Average Method

• Statement of Equivalent Production 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 Opening W-I-P Input Introduced 1,800 12,000 Completed Production Closing W-I-P 11,400 2,400 100% 75% 11,400 1,800 100% 50% 11,400 1,200 100% 30% 11,400 720 Totals 13,800   13,800   13,200   12,600   12,120 » % Completion The value of opening work in progress is mixed up with the cost incurred in the current period, thereby eliminating the influence of the fact that some of the expenses on the opening work in progress have been incurred in the previous period. For the purpose of this statement, all production is of the same kind, started and completed in the current period itself. Thereby, they are 100% complete with regard to all elements of cost. The % completion data relating to closing work in progress is ascertained from the problem data. • Statement of Cost Element of Cost Equivalent Units Cost Incurred (in Rs.) in the Cost per unit (Completed production) (in Rs/Unit) Previous Period Current Period Total (a) (b) (c) (d) [= (b) + (c)] (c) [= (e) ÷ (a)] a) Direct Materials b) Labour/Labor c) Overhead Expenses 13,200 12,600 12,120 38,400 24,000 20,800 2,11,680 2,73,240 1,32,480 2,50,080 2,97,240 1,53,280 18.9455 23.5905 12.6469 Totals 83,200 6,17,400 7,00,600 55.1829 » Essential Data To be able to work out this statement the most essential data is the detail relating to the element wise distribution of the value of opening work in progress. In the absence of this data, we cannot adopt AVERAGE method. • Statement of Evaluation 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 11,400 11,400 11,400 1,800 1,200 720 18.9455 23.5905 12.6469 18.9455 23.5905 12.6469 2,15,979 2,68,932 1,44,175 34,102 28,309 9,106 6,29,086 6,29,084 71,516 71,517 Total Cost 7,00,603 7,00,600 » Cross Check The total cost in this statement should work out to the total cost as revealed by the statement of cost. Where the cost per unit is obtained as an approximate decimal value, you may be required to make minor adjustments to ensure the same. Such an adjustment has to be inevitably made. Otherwise the process account would not balance. • Process Account Dr Process __ a/c Cr Particulars Quantity (in Units) Amount (in Rs) Particulars Quantity (in Units) Amount (in Rs) To Balance b/d To Direct Materials To Labour/Labor To Overheads 1,800 12,000 83,200 2,11,680 2,73,240 1,32,480 By Finished Production #* By bal c/d (W-I-P) 11,400 2,400 6,29,084 71,516   13,800 7,00,600   13,800 7,00,600

What method to use? What's the difference?

The ability to use a particular method is restricted by the availability of information in the problem. FIFO Method The essential data required for using the FIFO method is the information relating to the % completion with respect to each element of opening work-in-progress. The opening work-in-progress units were 80% complete with regard to Direct Materials, 40% complete with respect to Labour/Labor and 60% complete with regard to Overhead Expenses Weighted Average Method The essential data required for using the AVERAGE method is the information relating to the element wise distribution of cost of the opening work-in-progress value. 1,800 units were in process at the beginning valued at Rs. 83,200 made up of Rs. 38,400 of material cost, Rs. 24,000 of labour/labor cost and Rs. 20,800 of overhead expenditure. Where both these informations are available as in the case of the illustration shown above, you may be required to use the method that is specifically indicated. In the absence of specific instruction and where the data is available, we can choose the method to be used. The Difference Apart from the difference in the workings of the two methods, the difference would lie in the values arrived at. The ultimate difference would be in the value of the various components which are evaluated in the statement of evaluation. These are the values that are present on the credit side of the process account. Considering the illustration worked out above, you can notice differences in these: Particulars FIFO Method AVERAGE Method Cost per unit (from the statement of cost)     Material     Labour/Labor     Overhead Value of Completed Production Value of Closing Work in Progress Rs. 18 Rs. 23 Rs. 12 Rs. 6,31,960 Rs. 68,640 Rs. 18.9455 Rs. 23.5905 Rs. 12.6469 Rs. 6,29,084 Rs. 71,516

Author Credit : The Edifier

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