Since processes are continuous, when a cost of production report is prepared, the unfinished units in the opening work in process or closing work in process are assigned an estimated percentage of completion. Based on this percentage of completion, number of equivalents units is calculated in order to find cost per completed unit. partnership First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for.
2 Equivalent Units (Weighted Average)
For example, forty units that are \(25\%\) complete would be ten (\(40 × 25\%\)) units that are totally complete. We have 4,000 total units for which to account, with 750 in process at the beginning of the month, and the last batch that is still in process at the end of the month will be 1,000 shells once it is done. On the last day of February, it was only 25% through the process, meaning that the EUs for ending inventory for direct materials was 1,000 units and for conversion costs was 25% of 1,000 units which is 250 EUs. For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending work in process.
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Instead of counting these as 200 incomplete bars, we use equivalent units to measure them. Since they are halfway done, it’s like having 100 fully completed chocolate bars. This helps the factory calculate costs more accurately for the partially finished products.
Calculating Inventory Transferred and Work in Process Costs
Conversion costs are those costs incurred to convert raw materials into the final product (meaning, direct labor and overhead). To illustrate more completely the operation of the FIFO process cost method, we use an example of the month of June production costs for a company’s Department B. Department B adds materials only at the beginning of processing. The May 31 inventory in Department B (June’s beginning work in process) consists of 2,000 units that are fully complete as to materials and 60% complete as to conversion. The calculation of equivalent units depends on the cost flow assumption used i.e. the calculation is different for first-in-first-out and weighted average. In the weighted average method, total equivalent units for the process for a period are calculated using the following formula. For example, a factory is making chocolate bars and they have 200 bars that are halfway done at month-end.
Step 1 of 3
We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. These costs are then used to calculate the equivalent units and total production costs in a four-step process. In the current period, we transferred 500 units to process 2, and have 350 equivalent units in our WIP inventory. So our equivalent units of production for the period would be 850 units. Essentially saying, that process 1 completed 850 units to completion of process 1 in this period. The 750 shells in production at the end of January were 60% complete as to conversion costs and 100% complete as to direct materials, so in February they will need 40% more conversion but 0% more direct materials.
For example, in the case of chocolate bars, conversion costing means the cost for mixing, molding, and packaging. Work In Progress (WIP) are the products that are still being made and not finished yet. In the case of chocolate bars, WIP means the bars that are partially made and not ready to be sold. The shaping department completed \(7,500\) units and transferred them to the testing and sorting department. No units were lost to spoilage, which consists of any units that are not fit for sale due to breakage or other imperfections.
If these defects are non recurring then such units should be excluded from equivalent production. Finally, the equivalent units of production calculated via the previous three steps should be aggregated to ascertain the total output in terms of equivalent units or equivalent production. We started with 750 units that were 100% complete as to materials and 60% processed, so the beginning work-in-process EUs for direct materials is 0% of 750 and for conversion costs is 40% of 750 which is 300. To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units. While process costing tracks costs for huge number of identical products, job costing tracks costs for specific, individual jobs or orders, which are often unique.
For those units that were in the beginning inventory, we need to figure out how much work was DONE on them in this period to get them to the point of being transferred to the next process. For those items in the ending inventory, it is the same as the weighted-average method, where we need to calculate how much work has been done to them already. Our equivalent units of production for the period is 1,200 units (700 + 500). If the closing work-in-progress is 800 units, 70% complete in all respects, the equivalent units of production of closing work-in-progress is 560 units (i.e., 800 x 70%).
Therefore, there are a few more steps in creating the Production Cost Report. However, the first step is the same as with the weighted average method. The problem will provide the information related to beginning work in process inventory costs and units. Weighted average takes the units completed during the period and adds it to your ending WIP. For example, during the month of July, Rock City Percussion purchased raw material inventory of \(\$25,000\) for the shaping department. Although each department tracks the direct material it uses in its own department, all material is held in the material storeroom.
- Assume that Department B adds all materials at the beginning of the production process.
- The reason why is because the figure of completed units alone is not an accurate measure of a department’s output since some of the department’s efforts during a period are expended on units that are only partially complete.
- The units that remain in the ending work-in-process inventory, however, are not complete.
- Since the maximum number of units that could possibly be completed is \(8,700\), the number of units in the shaping department’s ending inventory must be \(1,200\).
On the other hand, the Weighted-Average method blends all the costs together to find an average cost per unit. So, if the factory had different costs for chocolate bars at different times, the Weighted-Average method would add up all the costs and divide by the total number of bars produced to get a single average cost per bar. This makes it easier to calculate costs when there are many different costs over a period. Establish the total inventory in production by adding units started into production to beginning work in process (what was left only partially finished at the end of the prior month).