Chapter 3

Process Costing- With WIP

Learning Outcomes
 Calculate for the equivalent units
 Calculate unit costs using weighted average and first-in, first-
out methods
References:-
• Essential Reading :

• Periasamy, P., Textbook of Financial Cost and Management Accounting, Global Media.

• http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011183

• Arora, M N., Advanced Cost Accounting : Theory, Problems and Solutions, Himalaya
Publishing House
• http://ebookcentral.proquest.com/lib/momp/detail.action?docID=588039

• Suggested Reading :

• Arora, M N., Cost and Management Accounting : Theory, Problems and Solutions, Himalaya
Publishing House
Preparation of Process Accounts
(With Work-in-Process)
Equivalent Production
Process costing mainly deals with continuous type of production.
At the end of the accounting period, there may be some work-
in-progress, i.e. semi-finished goods may be in the pipeline. The
valuation of such work-in-progress is done in terms of
equivalent or effective production.
Preparation of Process Accounts
(With Work-in-Process)
Equivalent Production
Equivalent production represents the production process in
terms of completed units. The Work-in-progress at the end of
an accounting period are converted into equivalent completed
units by using the formula :
Equivalent Units  No. of units of WIP  Degree of Completion in %

Example:
50 Units are in work-in-progress and these are estimated to be
50% complete, then their equivalent production is 50 Units x
50% = 25 Units.
Valuation of Closing WIP
Solved Problem 1

Assume that the closing WIP is 100% complete for materials and
25% complete for labour and overheads.
Solution
• Valuation of Closing WIP
Step 1:- Statement of Equivalent Units
Step 2:- Statement of Costs per Equivalent Units

Step 3:- Statement of Evaluation

• Step 4:- Process A/C
Practice Problem 1
In process A on 1st March, there was no work-in-progress.
During the month of March, 2,000 units of material were issued
at a cost of RO 18,000. Labour and overheads totaled RO 9,000
and RO 6,600 respectively. On 31st March, 1,500 units were
completed and transferred to the next process. On the
remaining 500 units, which are incomplete, degree of
completion was as follows : Materials 100% Labour 60% Overhead
30%
Prepare (a) Statement of Equivalent Production (b)
Statement of Cost (c) Statement of Evaluation (d) Process
Account
Practice Problem 2
Ashley Co operates a process costing system. The following
details are available for Process 2.
Materials input at beginning of process 12,000 kg, costing
$18,000. Labour and overheads added $2,800
10,000 kg were completed and transferred to the Finished
Goods account. The remaining units were 60% complete with
regard to labour and overheads. There were no losses in the
period.
What is the value of closing WIP in the process account?
Practice Problem 3
During January, 2,000 units were introduced into Process 1. The
normal loss was estimated at 5% on input. At the end of the month
1,400 units had been produced and transferred to next process, 460
units were uncompleted and 140 units had been scrapped. It was
estimated that uncompleted units had reached a stage in production
as follows :
Material - 75% completed
Labour - 50% completed
Overhead - 50% completed
The cost of 2,000 units introduced was RO 5,800.
Preparation of Process Accounts
(With Closing WIP and Process Losses)

Solved Problem 2
During January, 2,000 units were introduced into Process 1. The
normal loss was estimated at 5% on input. At the end of the month
1,400 units had been produced and transferred to next process, 460
units were uncompleted and 140 units had been scrapped. It was
estimated that uncompleted units had reached a stage in production
as follows :
Material - 75% completed
Labour - 50% completed
Overhead - 50% completed
The cost of 2,000 units introduced was RO 5,800.
Preparation of Process Accounts
(With Closing WIP and Process Losses)

Solved Problem 2
Direct materials introduced during the process amounted to RO 1,440.
Direct labour cost was RO 3,340.
Production overhead incurred were RO 1,670.
Units scrapped realized RO 1 each. The units scrapped have passed
through the process, so were 100% completed as regards material,
labour and overheads.
You are required to (a) prepare a Statement of Equivalent Production,
(b) evaluate the cost of abnormal loss, finished goods and closing
Stock, and (c) prepare the Process I Account
Solution

Step 1:- Statement of Equivalent Units

Step 2:- Statement of Costs per Equivalent Units
Step 3:- Statement of Evaluation
Step 4:- Process Account
Practice Problem 4
Practice Problem 5
During January, 1,000 units costing OMR 6,000 were introduced in process I. There was no work-in-progress
at the beginning. At the end of January, 700 units were transferred to Process II. 250 units were incomplete
and 150 units had been scrapped. The normal process loss was 10% of input. It was estimated that
incomplete units had reached the following stages:
Materials 80%
Labour 60%
Overhead 60%
The cost incurred during the month are as under:
Direct materials introduced OMR 2,700
Direct wages OMR 3,200
Production overhead OMR 1,600
Value of scrap is OMR 2 each. The units scrapped have passed through the process and are 100% complete
as regards material, labour and overhead.
You are required to :
Prepare Process I Account
Preparation of Process Accounts
with opening and Closing WIP
There are two methods of calculating equivalent production:
(i) FIFO Method and
(ii) Average Cost Method.
FIFO Method
This method is based on the assumption that work-in-progress moves on a
first in first out basis. This means that unfinished work on the opening stock is
completed first, before work on any new units is taken up.
Thus no units from opening work-in-progress will be left incomplete and none
of these find a place in the closing work-in-progress. In other words, closing
stock will be from out of the materials introduced during the current period
and will be valued at the current cost
FIFO Method
The costs incurred during the current period will be distributed over
opening stock of work-in-progress (for its completion), units
introduced and completed during the period and closing stock of work-
in-progress.
This is done by dividing the costs incurred by the relevant equivalent
production so as to arrive at the per unit cost of equivalent production.
Solved Problem 3
The information relating to process 1 of a two-stage production process is as
follows for August 2019.
Opening inventory 500 units (degree of completion 60%)
Cost to date RO 2,800
Costs incurred in August 2019
Direct materials (2,500 units introduced) RO 13,200
Direct labour RO 6,600
Production overhead RO 6,600
RO 26,400
Closing inventory 300 units (Degree of completion 80%)
There was no loss in the process. Prepare Process Account for the month of
august.
 Preparation of Process Accounts
(With opening and Closing WIP)
Step 1:
Statement of Equivalent Units
Input
Units Output Equivalent Units
Items Units Material Labour P. Overheads
Qty % Qty % Qty %
Completed Units
(from opening WIP)
Completed Goods
(from Units
Introduced)
Closing WIP
Preparation of Process Accounts
(With opening and Closing WIP)
Step 2:
Statement of Costs per Equivalent Units
Equivalent Cost per
Element of Cost Cost Units unit
Material
Labour
Overheads
Preparation of Process Accounts
(With opening and Closing WIP)
Step 3:
Statement of Evaluation
Material Labour Overheads Total
Completed Units
(from opening WIP)
Completed Goods
(from Units
Introduced)
Closing WIP
Solution
Step 1:-Statement of Equivalent Units
Step 2:- Statement of Costs per Equivalent Units

Step 3: Statement of Evaluation

Step 4:- Process A/C
Practice Problem 5
A company follows process costing and manufactures a product in one process.
The work-in-progress at the end of each month is valued according to FIFO
method. At the beginning of the month of January, the inventory of work-in-
progress showed the 400 units, 40% completed, valued at RO 8000.
In the month of January, 2600 units amounting to RO 68,500 were introduced into
the process. Wages and overheads amounted to RO 79,200 and RO 21,120
respectively. Finished production taken into stock in the month was 2,500 units. At
the end of the month, the work-in-progress inventory was 500 units, 80%
complete as regards materials and 60% complete as regards labour and overhead.
You are required to compute equivalent production and prepare process account
Practice Problem 6
Following are the details extracted from cost sheet of a firm.
Work in progress (opening) Stage of Completion
200 units @ Rs. 4 per unit 100% Material, 40% Labour, 40% Overhead
Units introduced 1050
Material cost : RO 1050, Labour: RO 2250, Production overhead: RO 3375
Transfer to next process 1100 units
Closing Stock 150 units Stage of Completion
100% Material, 70% Labour, 70% Overhead
You are required to compute equivalent production and prepare process account
 Preparation of Process Accounts
(With opening and Closing WIP)
Step 1:
Statement of Equivalent Units
Input
Units Output Equivalent Units
Items Units Material Labour P. Overheads
Qty % Qty % Qty %
Completed Units
(from opening WIP)
Completed Goods
(from Units
Introduced)
Closing WIP
Preparation of Process Accounts
(With opening and Closing WIP)
Step 2:
Statement of Costs per Equivalent Units
Equivalent Cost per
Element of Cost Cost Units unit
Material
Labour
Overheads
Preparation of Process Accounts
(With opening and Closing WIP)
Step 3:
Statement of Evaluation
Material Labour Overheads Total
Completed Units
(from opening WIP)
Completed Goods
(from Units
Introduced)
Closing WIP
Practice Problem 7
A Process has an opening work in process of 1200 units for the month costing RO.3600.
(80% completion on material, 50% on labor and 100% on overheads) 3000 additional units
introduced in the month and direct material, labor and overhead costs are Ro. 6000, Ro.
4000 and. Ro. 2000 respectively. At the end of the month, 3600 units were completed an
transferred to next process and balance units are closing work in process. (50% completed
for labor, 60% completed for material 20% completed for overhead.) There is no process
loss in the account. You are required to prepare process account.
Average Cost Method
Average Cost Method
In this method, the cost of opening work-in-progress is not kept
separate but is averaged with the additional costs incurred during the
period. This method thus combines the cost of opening work-in-
progress and new units introduced. Information relating to degree of
completion of opening WIP is not required.
Solved Problem 4
Solution
Step 1:- Statement of Equivalent Units
Step 2:- Statement of Costs per Equivalent Units
Step 3: Statement of Evaluation
Step 4:- Process A/C
Practice Problem 8
Practice Problem 9