# Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 23 & 24
PROCESS COSTING SYSTEM
(Opening balance of work in process)
Work-in-process and equivalent units
Partially-processed units
At the end of a period there may be some units which have been started but have not been
completed. These are closing work-in-process units.
At this stage we assume for simplicity that there is no opening work-in-process. In that case the
output for a period will consist of two classes of finished units of production:
· Those that have been started and fully processed within the period
· Those that have been started during the period, but not finished by the end of the period. This
closing work-in-process will be completed during the following period;
Further costs will be incurred in order to achieve this.
Equivalent units
Once processing has started on a unit; of output, to the extent that it remains in an uncompleted
state it can be expressed as a proportion of a completed unit. For example, if 100 units are exactly
half-way through the production process in terms of the amount of cost they have absorbed, they
are effectively equal to 50 complete units. Therefore, 100 units which are half-complete can be
regarded as 50 equivalent units that are complete.
Practice Question
A manufacturer starts processing on 1 March. In the month of March he starts work on 20,000
units of production. At the end of March there are 1,500 units still in process and it is estimated
that each is two thirds complete. Costs for the-period total Rs19,500.
Calculate the value of the completed units and the work-in-process at 31 March.
In practice it is unlikely that all inputs to production will take place at the same time, as was
suggested in the example above. For instance, materials are frequently added at the beginning of a
process, whereas labor may be applied throughout the process. Thus, work-in-process may be
more complete as regards one input or cost element than as regards another. Equivalent units must
thus be calculated for each input and costs applied on that basis,
Practice Question
In this activity, use the same data as in Activity 1 except that:
·  all materials have been input to the process
·  work-in-process is only one-third complete as regards labor
Costs for the period are as follows:
Materials
10,000
Labor
9,500
Total
19,500
Costs for a process are allocated to equivalent units to calculate valuations for finished goods and
work-in-process.
The FIFO and weighted average methods of cost allocation
In the previous examples it was assumed that there was no opening stock of work-in-process. In
reality, of course, this is unlikely to be the case, and changes in levels of work-in-process during me
period can give rise to problems. There are basically two methods of accounting for such changes.
· The weighted average (or averaging) method
· The FIFO method.
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