Courses

# Valuation of Work-in-progress - Methods of Costing, Cost Accounting B Com Notes | EduRev

## Cost Accounting

Created by: Arshit Thakur

## B Com : Valuation of Work-in-progress - Methods of Costing, Cost Accounting B Com Notes | EduRev

The document Valuation of Work-in-progress - Methods of Costing, Cost Accounting B Com Notes | EduRev is a part of the B Com Course Cost Accounting.
All you need of B Com at this link: B Com

Valuation of Work-In-Progress

Meaning of Work-in-Progress:

Since in process industries, production is continuous, there may be some incomplete production at the end of an accounting period. Incomplete units mean those units on which percentage of completion with regular to all elements of cost (i.e. material, labour and overhead) is not 100%. Such incomplete production units are known as Work-in-Progress. Such Work-in-Progress is valued in terms of equivalent or effective production units.

Meaning of Equivalent Production Units:

This represents the production of a process in terms of complete units. In other words, it means converting the incomplete production into its equivalent of complete units. The term equivalent unit means 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. The principle applies when operation costs are apportioned between work in progress and completed units.

Equivalent units of work in progress = Actual no. of units in progress x Percentage of work completed

Equivalent unit should be calculated separately for each element of cost (viz. material, labour and overheads) because the percentage of completion of the different cost component may be different.

Accounting Procedure:

The following procedure is followed when there is Work-in- Progress

1. Find out equivalent production after taking into account of the process losses, degree of completion of opening and / or closing stock.
2. Find out net process cost according to elements of costs i.e. material, labour and overheads.
3. Ascertain cost per unit of equivalent production of each element of cost separately by dividing each element of costs by respective equivalent production units.
4. Evaluate the cost of output finished and transferred work in progress

The total cost per unit of equivalent units will be equal to the total cost divided by effective units and cost of work-in progress will be equal to the equivalent units of work-in progress multiply by the cost per unit of effective production.

In short the following from steps an involved.

Step 1 – prepare statement of Equivalent production

Step 2 – Prepare statement of cost per Equivalent unit

Step 3 – Prepare of Evaluation

Step 4 – Prepare process account

The problem on equivalent production may be divided into four groups.

I. When there is only closing work-in-progress but without process losses

II. When there is only closing work-in-progress but with process losses

III. When there is only opening as well as closing work-in progress without process losses

IV. When there is opening as well as closing work-in progress with process losses

Situation I: Only closing work-in-progress without process losses:

In this case, the existence of process loss is ignored. Closing work-in-progress is converted into equivalent units on the basis of estimates on degree of completion of materials, labour and production overhead. Afterwards, the cost pr equivalent unit is calculated and the same is used to value the finished output transferred and the closing work-in-progress

Situation II: When there is closing work-in-progress with process loss or gain.

If there are process losses the treatment is same as already discussed in this chapter. In case of normal loss nothing should be added to equivalent production. If abnormal loss is there, it should be considered as good units completed during the period. If units scrapped (normal loss) have any reliable value, the amount should be deducted from the cost of materials in the cost statement before dividing by equivalent production units. Abnormal gain will be deducted to obtain equivalent production.

Situation III: Opening and closing work-in-progress without process losses.

Since the production is a continuous activity there is possibility of opening as well as closing work-inprogress. The procedure of conversion of opening work-in-progress will vary depending on the method of apportionment of cost followed viz, FIFO, Average cost Method and LIFO. Let us discuss the methods of valuation of work-in-progress one by one.

(a) FIFO Method: The FIFO method of costing is based on the assumption of that the opening work-in-progress units are the first to be completed. Equivalent production of opening work-in-progress can be calculated as follows:

Equivalent Production = Units of Opening WIP x Percentage of work needed to finish the units

(b) Average Cost Method: This method is useful when price fluctuate from period to period. The closing valuation of work-in-progress in the old period is added to the cost of new period and an average rate obtained. In calculating the equivalent production opening units will not be shown separately as units of work-in-progress but included in the units completed and transferred.

(c) Weighted Average Cost Method: In this method no distinction is made between completed units from opening inventory and completed units from new production. All units finished during the current accounting period are treated as if they were started and finished during that period. The weighted average cost per unit is determined by dividing the total cost (opening work-in-progress cost + current cost) by equivalent production.

(d) LIFO Method: In LIFO method the assumption is that the units entering into the process is the last one first to be completed. The cost of opening work-in-progress is charged to the closing work-inprogress and thus the closing work-in progress appears cost of opening work-in-progress. The completed units are at their current cost.

Format of statement of Equivalent Production

 Input Output Equivalent Production Particulars Units Particulars Units Material                    Labour Overhead %            Units         %         Units %         Units Opening XX Units XX XX XX              XX              XX Stock completed Units XX Normal XX introduced XX LossAbnormalLoss XX XX XX              XX              XX Equivalentunits XX XX XX              XX              XX XX              XX

Statement of Cost per Equivalent units

 Elements of Costing Cost in Rs Equivalent Units Cost per equivalent Units in Rs Material Cost XX XX XX Labour Cost XX XX XX Overhead Cost XX XX XX

Statement of Evaluation

 Particulars Element ofCost EquivalentUnits Cost per equivalent units in Rs Cost in Rs Total Cost in Rs Units Completed Material XX XX XX XX Labour XX XX XX XX Overhead XX XX XX XX Closing WIP Material XX XX XX XX Labour XX XX XX XX Overhead XX XX XX XX Abnormal Loss Material XX XX XX XX Labour XX XX XX XX Overhead XX XX XX XX

## Cost Accounting

137 videos|139 docs

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

,

;