Weighted Average, FIFO methods for valuation of work-in-progress in Process Accounts
Element wise cost per unit
No opening or closing work-in-progress
When there is neither opening nor closing work in progressElement Cost per unit
= Total Element Cost incurred in the current period Output units on which the cost is incurred When there is no opening or closing work-in-progress we do not need the element wise cost per unit but just the total cost per unit for evaluating the various components of output.
Total Cost per unit =Total Cost Total Units Output Since the element wise cost per unit is not needed, there is no need to prepare the statement of equivalent production, statement of cost and statement of evaluation.
only closing work-in-progress
When there is only closing work in progressElement Cost per unit
= Total Element Cost incurred in the current period Completed Output units + Equivalent Complete units of closing work-in-progress relating to the element To ascertain the equivalent complete units of closing work-in-progress a statement of equivalent production is prepared. After that by preparing the statement of cost, the cost per unit of each element of cost is ascertained. Using this cost per unit, the values of various components of output are derived.
both opening and closing work-in-progress
When there is opening work in progress, the fact that some of the cost in relation to the units of opening work in progress has already been spent in the previous period has to be taken into consideration in calculating the element wise cost per completed unit based on which the values of various components of output are evaluated.There are two approaches to handling the previous period costs.
Excluding Previous Period costs (FIFO Method)
The previous period costs are excluded and only the current period costs are considered for ascertaining the cost per completed unit.Element Cost per unit
= Total Element Cost incurred in the current period Equivalent complete units relating to element cost incurred on opening work-in-progress + Completed Output units started and completed in the current period + Equivalent Complete units of closing work-in-progress relating to the element Including Previous Period costs (Average Method)
The previous period costs are added up with the current period costs and the total cost is considered for ascertaining the cost per completed unit.Element Cost per unit
= Element cost included in the Opening work-in-progress + Total Element Cost incurred in the current period Equivalent complete units relating to element cost incurred on opening work-in-progress + Completed Output units started and completed in the current period + Equivalent Complete units of closing work-in-progress relating to the element only opening work-in-progress
The need for evaluating work-in-progress arises only when there is closing work in progress. The closing work-in-progress of a period becomes the opening work-in-progress for the subsequent period. Thus the opening work-in-progress is an asset which has already been evaluated in the previous period and needs no evaluation in the current period.The value of opening work-in-progress is added up to the other costs incurred in the current period in arriving at the total cost.
Total Cost per unit =Total Cost (including value of opening work-in-progress) Total Units Output (including opening work-in-progress units) This total cost per unit would be the Normal cost of normal output per unit (NCNO/U) and is used in evaluating the various components of output as finished output, abnormal loss, abnormal gain etc.
Element wise cost/unit not needed
When there is no need to evaluate closing work-in-progress, the element wise cost per unit is not needed for ascertaining the values of various components of output.Since the element wise cost per unit is not needed, there is no need to prepare the statement of equivalent production, statement of cost and statement of evaluation.
Valuation of work in progress - FIFO Method
Under the FIFO (First in First Out) method for evaluation of components of cost, the previous period costs are excluded and only the current period costs are considered for finding out the element cost per completed unit.
The statement of equivalent production, statement of cost and statement of evaluation under the FIFO method would have the following formats.
Statement of Equivalent Production
In preparing the statement of equivalent production, the output is seggregated into two as- Opening Work-in-progress Completed
- Production started and completed in the current period
In | Out | Equivalent Units | |||||
---|---|---|---|---|---|---|---|
Particulars | Units | Particulars | Units | Material | Wages | ||
% Complete | Equivalent Units | % Complete | Equivalent Units | ||||
Opening W-I-P Input Introduced | 2,300 12,000 | Opening W-I-P Completed Started & Completed Closing W-I-P | 2,300 10,000 2,000 | 70% | 1,610 | 40% | 920 |
Totals | 14,300 | 14,300 | 12,450 |
% completion relating to opening work in progress units completed during the current period would be the complementary of the % completion of opening work in progress with respect to the element
Eg : If Opening work-in-progress units 2,300 are 30% complete with regards to Materials and 60% complete with regards to Wages. They are 70% (100 − 30) and 40% (100 − 60) complete respectively with regards to Material and Wages in the current period.
Statement of Cost
In preparing the statement of cost, only the current period cost has to be consideredElement of Cost | Equivalent Units (a) | Cost Incurred (current period) (b) | Cost/Unit (b) ÷ (a) |
---|---|---|---|
Material Wages | 12,450 | 2,98,800 | 24 |
Total |
Statement of Evaluation
In preparing the statement of evaluation, the value of opening work-in-progress is added to the current period value of opening work-in-progress arrived at using the cost per unit and equivalent output units. Component Element of Cost | Equivalent Units (a) | Cost/Unit (b) | Total Cost (a) × (b) | Value |
---|---|---|---|---|
a) Opening Work in Progress Opening Balance b) Started & Completed Material Wages Material 1) Total OutputWages c) Closing Work in Progress Material Wages | 1,610 – – – | 24 – – – | 42,000 38,640 – – – | – – – |
Total Cost [42,000 + –] | – |
Cross Check
The total of the value column of the Statement of evalaution should be the same as the total cost column of the Statement of Cost plus the value of opening work in progress.Essential Data
To evaluate the components of output under FIFO method, the following information is essential.- the total value of opening work-in-progress
- the element wise % completion of opening work-in-progress
Why called FIFO method?
Since the opening work in progress units are assumed to have been handled separately, it amounts to working on opening work-in-progress units first, completing them and then handling the inputs of the current period. Such a methodology is similar to the first in first out mechanism used for inventory handling and valuation. As such this method is called FIFO method.The total cost for ascertaining the element cost per unit consists of only the current period cost. Thus the element cost per unit represents only the current period costs.
Valuation of work in progress - Weighted Average Method
Under the Weighted Average method for evaluation of components of cost, the previous period costs are added up to the current period costs and the total cost is considered for finding out the element cost per completed unit.
The statement of equivalent production, statement of cost and statement of evaluation under the weighted average method would have the following formats.
Statement of Equivalent Production
In preparing the statement of equivalent production, no differentiation is made with regards to opening work in progress units completed and production started and completed in the current period.In | Out | Equivalent Units | |||||
---|---|---|---|---|---|---|---|
Particulars | Units | Particulars | Units | Material | Wages | ||
% Complete | Equivalent Units | % Complete | Equivalent Units | ||||
Opening W-I-P Input Introduced | 2,300 12,000 | Completed Closing W-I-P | 12,300 2,000 | 100% | 12,300 | 100% | 12,300 |
Totals | 14,300 | 14,300 | 13,500 |
All completed units are considered to have been started and completed in the current period itself.
Statement of Cost
In preparing the statement of cost, since the opening work-in-progress units are considered to have been started and completed in the current period itself, the cost incurred on them in the previous period has to be added to the cost incurred in the current period in arriving at the total cost considered for finding the element unit cost.Element of Cost | Equivalent Units (a) | Cost Incurred | Cost/Unit (d) ÷ (a) | ||
---|---|---|---|---|---|
Previous Period (b) | Current Period (c) | Total (d) = (b) + (c) | |||
Material Wages | 13,500 | 11,700 | 2,98,800 | 3,10,500 | 23 |
Total |
Statement of Evaluation
In preparing the statement of evaluation, we need to be conscious that the opening work in progress would not be separately evaluated as the output includes both the work-in-progress completed and the production started and completed in the current period. Component Element of Cost | Equivalent Units (a) | Cost/Unit (b) | Total Cost (a) × (b) | Value |
---|---|---|---|---|
a) Completed Output Material b) Closing Work in Progress Wages Material Wages | 12,300 – – – | 23 – – – | 2,82,900 – – – | – – – |
Total Cost | – |
Essential Data
To evaluate the components of output under Weighted Average method, the following information is essential.- the element wise distribution of the value of opening work-in-progress
Why called Average method?
The costs of the previous period included in the value of the opening work in progress are combined with the costs incurred in the current period in arriving at the total cost used for ascertaining the element cost per unit. Since the element cost per unit includes both the previous period costs and the current period costs, it is interpreted as being an average (or weighted average) of the costs of the two periods. As such this method is called the Weighted Average method.Illustration - Problem
- 1,800 units were in process at the beginning valued at 83,200 made up of 38,400 of material cost, 24,000 of labour/labor cost and 20,800 of overhead expenditure.
These units were
- 80% complete with regard to Direct Materials,
- 40% complete with respect to Labour/Labor and
- 60% complete with regard to Overhead Expenses
- 12,000 units of material were introduced into the process during the period.
- Total Material Cost incurred for the process is 2,11,680.
- Direct Wages incurred were - 2,73,240
- Overhead Expenditure - 1,32,480
- There were 2,400 units in process at the end of the period
These units were
- 75% complete with regard to Direct Materials,
- 50% complete with respect to Labour/Labor and
- 30% complete with regard to Overhead Expenses
Illustration - Solution - Working Notes
The process account filled with the information available from the problem
Dr Cr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Balance b/d To Direct Materials To Labour/Labor To Overheads | 1,800 12,000 | 83,200 2,11,680 2,73,240 1,32,480 | By Process A Stock a/c By Process W-I-P a/c |
Total Input | = | Opening Work in Progress Units + Units Introduced |
= | 1,800 units + 12,000 units | |
= | 13,800 units |
Closing work-in-progress = 2,400 units
Completed Production | = | Total Input − Closing work-in-progress |
= | 13,800 units − 2,400 units | |
= | 11,400 units |
Illustration - Solution - FIFO Method
In | Out | Equivalent Units | |||||||
---|---|---|---|---|---|---|---|---|---|
Particulars | Units | Particulars | Units | Material | Labor/Labour | Overheads | |||
% Complete | Equivalent Units | % Complete | Equivalent Units | % Complete | Equivalent Units | ||||
Opening W-I-P Input Introduced | 1,800 12,000 | Opening W-I-P Completed Started & Completed Closing W-I-P | 1,800 9,600 2,400 | 20% 100% 75% | 360 9,600 1,800 | 60% 100% 50% | 1,080 9,600 1,200 | 40% 100% 30% | 720 9,600 720 |
Totals | 13,800 | 13,800 | 11,760 | 11,880 | 11,040 |
Production Started and Completed in the current period
= | Total Production/Output − Opening Work-in-Progress Complete |
= | 11,400 units − 1,800 units |
= | 9,600 units |
Element wise opening work-in-progress % completion in the current period
Element | % Completion | |
---|---|---|
Previous Period (Opening) (a) | Current Period 100 − (a) | Material Labour/Labor Overheads | 80% 40% 60% | 20% 60% 40% |
Units started and completed in the current period are 100% complete with regards to all elements and the closing work-in-progress is complete to the extent as given.
Element of Cost | Equivalent Units (a) | Cost Incurred (current period) (b) | Cost/Unit (b) ÷ (a) |
---|---|---|---|
Material Labour/Labor Overheads | 11,760 11,880 11,040 | 2,11,680 2,73,240 1,32,480 | 18 23 12 |
Total | 6,17,400 | 53 |
Component Element of Cost | Equivalent Units (a) | Cost/Unit (b) | Total Cost (a) × (b) | Value |
---|---|---|---|---|
a) Opening Work in Progress Opening Balance b) Started & Completed Material Labour/Labor Overheads Material 1) Total OutputLabour/Labor Overheads c) Closing Work in Progress Material Labour/Labor Overheads | 360 1,080 720 9,600 9,600 9,600 1,800 1,200 720 | 18 23 12 18 23 12 18 23 12 | 83,200 6,480 24,840 8,640 1,72,800 2,20,800 1,15,200 32,400 27,600 8,640 | 1,23,160 5,08,800 6,31,96068,640 |
Total Cost [83,200 + 6,17,400] | 7,00,600 |
Cross Checking for adjusting approximations
- Total of Total Cost column in Statement of Cost + Value of opening work-in-progress = 7,00,600 (6,17,400 + 83,200)
- Total of Value column in Statement of Evaluation = 7,00,600
- No adjustment needed.
Dr Cr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Balance b/d To Direct Materials To Labour/Labor To Overheads | 1,800 12,000 | 83,200 2,11,680 2,73,240 1,32,480 | By Process A Stock a/c By Process W-I-P a/c | 11,400 2,400 | 6,31,960 68,640 |
13,800 | 7,00,600 | 13,800 | 7,00,600 |
Illustration - Solution - Weighted Average Method
In | Out | Equivalent Units | |||||||
---|---|---|---|---|---|---|---|---|---|
Particulars | Units | Particulars | Units | Material | Labour/Labor | Overheads | |||
% Complete | Equivalent Units | % Complete | Equivalent Units | % Complete | Equivalent Units | ||||
Opening W-I-P Input Introduced | 1,800 12,000 | Completed Closing W-I-P | 11,400 2,400 | 100% 75% | 11,400 1,800 | 100% 50% | 11,400 1,200 | 100% 30% | 11,400 720 |
Totals | 13,800 | 13,800 | 13,200 | 12,600 | 12,120 |
Units completed are 100% complete with regards to all elements and closing work-in-progress units are complete to the extent given in the problem.
Element of Cost | Equivalent Units (a) | Cost Incurred | Cost/Unit (d) ÷ (a) | ||
---|---|---|---|---|---|
Previous Period (b) | Current Period (c) | Total (d) = (b) + (c) | |||
Material Labour/Labor Overheads | 13,200 12,600 12,120 | 38,400 24,000 20,800 | 2,11,680 2,73,240 1,32,480 | 2,50,080 2,97,240 1,53,280 | 18.9455 23.5905 12.6469 |
Total | 83,200 | 6,17,400 | 7,00,600 | 55.1829 |
Component Element of Cost | Equivalent Units (a) | Cost/Unit (b) | Total Cost (a) × (b) | Value |
---|---|---|---|---|
a) Completed Output Material b) Closing Work in Progress Labour/Labor Overheads Material Labour/Labor Overheads | 11,400 11,400 11,400 1,800 1,200 720 | 18.9455 23.5905 12.6469 18.9455 23.5905 12.6469 | 2,15,979 2,68,932 1,44,175 34,102 28,309 9,106 | 6,29,084 71,516 |
Total Cost | 7,00,600 |
Cross Checking for adjusting approximations
- Sum of Total Cost column in Statement of Cost = 7,00,600
- Sum of Value column in Statement of Evaluation = 7,00,603
- A value of 3 is adjusted from the output and closing work-in-progress to adjust approximate values.
Dr Cr | |||||
---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount |
To Balance b/d To Direct Materials To Labour/Labor To Overheads | 1,800 12,000 | 83,200 2,11,680 2,73,240 1,32,480 | By Process A Stock a/c By Process W-I-P a/c | 11,400 2,400 | 6,29,084 71,516 |
13,800 | 7,00,600 | 13,800 | 7,00,600 |
Which method to use? What's the difference?
FIFO Method
The essential data required is- Total value of opening work-in-progress
- Element wise % completion with respect to opening work-in-progress
Eg : There are 12,000 units of opening work-in-progress units at a total value of 45,000 which are 80% complete with regard to Direct Materials, 40% complete with respect to Labour/Labor and 60% complete with regard to Overhead Expenses
Weighted Average Method
The essential data required is- Element wise distribution of value of opening work-in-progress
Eg : 1,800 units were in process at the beginning valued at 83,200 made up of 38,400 of material cost, 24,000 of labour/labor cost and 20,800 of overhead expenditure.
In problem solving, in the absence of specific instruction regarding the method to use and the information required for both the methods is available, we can choose any method for evaluation.
Difference
Apart from the difference in the workings of the two methods, the difference would lie in the element wise cost per unit arrived at and the values of output components.The ultimate difference would be in the value of the various components which are evaluated in the statement of evaluation. These are the values that are present on the credit side of the process account.
Considering the illustration worked out above, we can notice differences in these:
Particulars | FIFO Method | AVERAGE Method |
---|---|---|
Cost per unit (from the statement of cost) Material Value of Completed ProductionLabour/Labor Overhead Value of Closing Work in Progress | 18 23 12 6,31,960 68,640 | 18.9455 23.5905 12.6469 6,29,084 71,516 |
Only Open Work-in-Progress - Illustration
Problem
Consider the following cost data of an organisation relating to a process for the month of March 2007.- 1,800 units were in process at the beginning valued at 83,200 made up of 38,400 of material cost, 24,000 of labour/labor cost and 20,800 of overhead expenditure.
These units were
- 80% complete with regard to Direct Materials,
- 40% complete with respect to Labour/Labor and
- 60% complete with regard to Overhead Expenses
- 6,000 units of material were introduced into the process at a total cost of 2,25,000.
- Direct Wages incurred for the process - 1,84,000
- Overhead Expenditure - 92,800
Solution
Dr Cr | |||||||
---|---|---|---|---|---|---|---|
Particulars | Quantity (in Units) | Amount | Particulars | Quantity (in Units) | Amount | ||
To Balance b/d To Direct Materials To Labour/Labor To Overheads | 1,800 6,000 | 83,200 2,25,000 1,84,000 92,800 | By Finished Production | 7,800 | 5,85,000 | ||
7,800 | 5,85,000 | 7,800 | 5,85,000 |
Particulars | Quantity | Cost | Cost/Unit |
---|---|---|---|
Opening Work-in-Progress Materials | 1,800 6,000 | 83,200 2,25,000 | |
Input Processed (IP) + Other Costs Labour/Labor Overheads | 7,800 | 3,08,200 1,84,000 92,800 | |
Total (IP | TC) | 7,800 | 5,85,000 | 75 |
Normal (NO | NC | NCNO/U) − Actual Output | 7,800 7,800 | 5,85,000 5,85,000 | 75 |
Abnormal Loss(+)/Gain(−) |
- Normal Cost of Normal Output per unit
NCNO/U = - Actual output (7,800 × 75) is valued at NCNO/U