Page 291 - DCOM202_COST_ACCOUNTING_I

Unit 14: Equivalent Production in Process Costing

The problem on equivalent production may be divided into four groups. Notes
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 per
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-in-progress. 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

LOVELY PROFESSIONAL UNIVERSITY 285