Accounting Assignment Help With Process Cost Analysis With Incomplete Units

7.2.2 Process Cost Analysis With Incomplete Units

In a process, incomplete units often remain. For appropriate cost analysis, it is necessary to study the degree of completion of incomplete units. Incomplete process output is termed as work in progress (W.I.P). In case there remain incomplete units, process cost is apportioned between complete units, abnormal loss & W.I.P.

Let us study a problem.

Opening W.I.P. 1,000 units- cost from last period $ 14,000

Degree of complete materials 100%

Labour & OH 40%

Fresh input : 20,000 units at $ 190,000

Wages & OH : $ 95,600

Normal loss : 1000

Actual yield : 18,600

Closing W.I.P. : 1,200 units

Degree of completion : Materials 100%

Labour & Oh 60%

For cost analysis, it is necessary to prepare equivalent production units. Equivalent production units mean one effective unit in the production process. If the opening W.I.P was completed by 100% as regards materials, this means it was completed zero percent in the process. But this was 40% complete as regards labour & overhead. So it was completed to the extent of 60% in the current process, i.e. 1000 x 60%, i.e. 6000 units.

Let us now learn the technique of preparation of equivalent production chart. Let us follow FIFO assumption---that opening W.I.P was completed first.

Equivalent Production Statement

Materials Labour & OH

Units Degree of E.U. Units Degree of E.U.

Completed Completion Completion

units

Opening

W.I.P 1000 0 0 1000 60 600

Fresh units 17600 100 17600 17600 100 17600

Normal loss 1000 - - 1000 - -

Abnormal loss 200* 100 200 200 100 200

Closing

W.I.P 1200 100 1200 1200 60 720

19000 19120

Cost($) 190,000 95600

Cost per E.U.(equivalent units) ($) 10.00

Abnormal loss : Units

Opening W.I.P 1000

Fresh units 20000

(A) 21000

less Normal loss 1000

less Closing stock 1200

Output 18600

(B) 20800

Abnormal loss (A-B) 200

So from the equivalent production statement, it appears that cost of materials per E.U. is $ 10 and cost of labour & OH is $ 5.

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