The complication usually arises with the Work in Process Account.

At the end of each month/period, there are completed units and those that remain in process. We allocate costs based on completed units. As such, we need to compute for the Equivalent units of production (EUP).

Equivalent Units of Production – the measure of work done during the month, expressed in fully completed units.

Simple example: If we have 10,000 units that are completed and 2,000 units that are still in process which are 50% completed, the EUP would be 10,000 + (2,000 x 50%) = 11,000

Gets? You express the units as if they are completed units. The 10,000 have been completed, whereas the 2,000 units are in process but are 50% complete. The Equivalent unit of production of the WIP is the number of units multiplied by the completion rate or completion percentage. As such, the EUP for the work in process is 2,000 x 50% = 1,000 units. The total EUP then is 11,000 units.

Note that sometimes the given in the problem is the incomplete rate, as such you have to get the completion rate. Example, 2,000 units are 40% incomplete at the end of the period. It’s completion rate is 60%. If units are 2/10 incomplete, then they are 8/10 complete. For WIP ending, we always use the completion rate. Alright?

Moving on…

The above example is under the Average Method, and on the first department only.

You see, we have two methods of accounting for the quantity and cost schedule: FIFO and Average

FIFO method – First in, first out. In this method, the concept is that those units in the WIP – beginning are finished first before the company starts new units in process during that period.

Average method – You remember your inventory valuation? It’s pretty much like that. In Average method, the WIP – beginning and those units started during the accounting period are taken as a whole and their units are averaged.

It would be best to show you with examples, so wait for it in the next slides.

What else should I tell you before we delve into the computations?

Right, departments. Most of the time, a manufacturing process involves more than one department. Say… cutting department, then sewing department, then finishing department, up to packaging department. Costs are accumulated per department and allocated to our EUP in that department.

We’ll discuss this, too, during the sample problems. This involves the Transferred in costs.

Next is the Cost of Production Report. This is the report we are going to prepare. It involves computation of EUP, computing unit costs, and allocating the costs to our inventory accounts.

A Cost of Production Report has three sections. See next slide for a sample.

Try and familiarize yourself with this report. Be curious.

Where did the percentage come from?

Why are the percentages for WIP-ending different for Materials and Conversion?

The total units under both sections of Quantity schedule should be the same always?

The total cost under both sections of Cost schedule should be the same every time?

Is this the same for all departments?

What’s the difference when there’s WIP-beginning?

What’s the difference when it’s the second department already?

See… aren’t you curious about all these? When you wanted to learn, you have to be naturally curious about things.

Let’s truly start with the sample problem.

The Cost of Production Report has two sections.

The first one is the Quantity Schedule.

And the Quantity Schedule have two sections, too. (Still following that? XD)

So…

The first one shows the units to be accounted for. This shows the units available at the beginning of the month or period and those that are started in production.

The second one shows the units accounted for. This shows the classification of the units at the end of the period. How many were finished and how many were left on the production as WIP.

The total units under both sections should be equal.

Now, the second section is the one we use for the computation of the EUP or Equivalent Units of Production.

For the materials, it was stated that all materials are added at the beginning of the process. As such, all units that has been started contains 100% of materials.

For the conversion cost, it was stated that the WIP ending is 50% complete as to conversion so its EUP is only 1,000 units computed as 2,000 x 50%.

For the finished units, since they are finished units, it definitely contains 100% of the cost elements.

So, our total EUP are:

As to Materials, it is 17,000 units.

As to Conversion, it is 16,000 units.

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Now, let’s try that same problem on a FIFO method, shall we?

In FIFO, the difference lies in the section of Units accounted for.

The WIP-beginning is shown separately, and its EUP is accounted for separately.

Again, in FIFO, the WIP-beginning is assumed to be finished first before those that are started on that period.

So, if the given units of finished goods is 15,000, we should separate this into those coming from WIP-beginning and from the started units this month.

Since the WIP-beginning is 5,000, the 10,000 would be from the stated units this month. The total units would still be 17,000.

Now, for the EUP computation:

Why is the WIP-beginning at 0%? That would be because it has been accounted for in the previous month as WIP-ending (with 100% as to materials) and so, its cost for the materials has been recorded already.

Only the started this month and the WIP-ending would have the 100% EUP for materials. Again, it was stated in the problem that materials are added at the beginning of the process.

For the Conversion Cost, it was stated that the WIP-beginning is only 80% complete as to Conversion. Since it is already 80% complete, for this month, only 20% conversion cost would be added to make it complete at 100%. Right?

For the started – finished and transferred, it would be 100% as to all cost elements.

For the WIP-ending, since the method is FIFO, the concept is that this WIP-ending came from the units started this month, so its EUP for materials and conversion cost is only to be recorded this month. As to materials, that would be 100%. As to conversion, it was stated that it was 50% complete.

For the total EUP:

As to Materials, it is 12,000 units.

As to Conversion, it is also 12,000 units.

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Now, we use the EUP for the computation of unit cost.

But before we go into that. Let’s try a few more samples of EUP computation.

Are you ready?

After each exercise problem, don’t scroll down unless you have your answers.

Hit complete and see next section for your first exercise problem.