A2zNotes.com -Best Bcom BBA Bed Study Material # Bba Cost Accounting Topic Wise Short Notes of Process Costing Topic is Valuation of Work in progress (Equivalent Production)

## Valuation of Work – in – Progress (Equivalent Production)

CIMA defines equivalent units as “a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress, when the aggregate work content of the incomplete units is deemed to be equivalent to that of the substituted quantity of completed unit’s e.g.

150 units per cent complete = 75 equivalent units”

In the process industries there is likely to be partly completed units at the end of the accounting period which will be carried to the next accounting period. It is also called ‘closing’ and ‘opening work – in – progress. This work – in –progress in the process causes difficulty in ascertainment of cost of each unit of fully completed unit. To compute the realistic cost of completed products and incomplete products, the concept of ‘equivalent production’ is used to ascertain the unit cost. Equivalent production represents the production of a process in terms of completed units. To apportion costs fairly and proportionately, units of production must be converted into the equivalent of completed units i.e. into equivalent units of production. It is the expression of physical units in terms of charges of work applied. When work carried out in the process includes work done on incomplete units also, equivalent production is ascertained by preparing a statement of equivalent production.

### When Only Closing WIP Exists

Illustration

XYZ Ltd. introduced 10,000 units in process out of which 8,000 units are completed and 2,000 units are in progress on which labour and overheads cost is incurred only 50%. The following costs are incurred during the period:

Material  –  Rs. 40,000     Labour and overheads Cost  –   Rs. 27, 000

Calculate the equivalent production and Cost of finished products and work-in-progress.

SOLUTION

Statements of Equivalent production

Statements of Cost Per Equivalent Unit

### When Opening and Closing WIP exists

In reality, in most practical situations, there is both opening and closing work – in – progress and in such cases; the equivalent production is calculated using the following two principal methods:

1. Weighted average cost method and
2. FIFO method.

#### Weighted Average Cost Method

Under this method, average unit cost is ascertained taking the total value of opening WIP value plus costs incurred during the current accounting period. the effect of this is that both WIP and completed units are valued at average unit cost. Under this method, it is assumed that value of opening WIP is merged with the units introduced in the current period and can no longer be identified separately. In this method, the opening stock values, which are at the previous period’s price levels, are added to the current costs to provide an overall average cost per equivalent unit. No distinction is, therefore, made between units in progress at the start of the period and those added during the period. There is no separation between units brought forward and completed and units commenced and finished during the period under review. Closing stocks, if any, would be valued on this average, and not at the costs ‘exclusive’ to these units deemed to be introduced during the period. This means that the previous period’s cost (contained in the opening WIP valuation) influence the closing WIP valuation which is carried forward to the next period. It is for this reason that it is sometimes argued that the average cost method makes the comparison of performance between periods more difficult than when the FIFO method is used.

#### FIFO Method

Under FIFO method, the costs are apportioned assuming that units already in the process are finished first and it distinguished between units completed that are in the opening work – in – progress and those started and completed in the period.

The main effect of FIFO is that opening work – in – progress costs brought forward incurred at the previous period’s price levels, i.e. ‘first in’ is the ‘first out’  in that it is charged wholly to output. Hence, closing work – in – progress is valued at this period’s prices. Under inflationary conditions FIFO there results in a higher, more realistic closing work – in – progress value.

# Bba Cost Accounting Topic Wise Short Notes of Process Costing Topic is Steps in Valuation of Equivalent Units

## Steps in Valuation of Equivalent units

The steps involved in process costing for valuation equivalent units are as follows:

1. Trace the physical flow of units so that units input to the production process are reconciled with units output or in process at the end of the period.
2. Convert the physical units determined in (1) above into equivalent units of production for each factor of production i.e., materials, labour, overheads etc.
3. Calculate the total costs for each factor for the period.
4. Divide the total costs by equivalent units to establish a cost per equivalent unit.
5. Multiply equivalent unit by cost per ascertain the cost of finished production and work – in – progress. Reconcile these values with the total costs for the period as calculated in (3) above.

# Bba Cost Accounting Topic Wise Short Notes of Process Costing

## Summary

• Process costing is applicable where production moves from one process or department to the next until the final production comes out of process
• Process costing is applied where continuous mass production of identical units are processed in a sequence of repetitive operations or processes.
• The process costing is used basically in industries like chemicals, drugs, food processing oil refining, textile, paper etc.
• In process costing the costs are accumulated to each process cost centre and the stock records are maintained separately for each process centre.
• The unit cost is the average cost of the process for a given period.
• The process losses may arise due to wastage, spoilage, evaporation etc. and the process losses are categorised into (a) Normal process loss and (b) Abnormal process loss.
• When the loss arises due inherent characteristics of the process, which is unavoidable, called ‘normal loss’ which can be predetermined.
• Abnormal losses are those losses which exceed the normal expected level of loss.
• Abnormal gain arises when the actual process loss is less than the normal predetermined process loss.