Process Costing Part3

ACCA F2 - Management Accounting

IAS 2 permits using (FIFO) first in, first out or (WAC) weighted average cost for assigning costs to inventories.

Weighted average cost formula is used to determine average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basic, or as each additional shipment is received, depending upon the circumstances of the entity.

FIFO determines average cost of item under assumption that first produced goods are sold first and items in inventory at the end of the period are those most recently purchased or produced.

Equivalent unit is a measure, which accumulates partial units together and express them into the number of full units. Eg. 2 labor working 1/2 day shift each is equal to 1 full day shift. Here, 1 full day is equivalent to two half day.

Cost per equivalent unit allocates total cost to each equivalent unit of product produced for cost-incurred time.

Example and explanation:

WACC	FIFO
Opening WIP (For 5kg of Material = $10, =100% complete, Labor and overhead = 60% complete =$18
Accounts full opening unit and cost	Accounts only incomplete portion of unit and cost (equivalent unit for incomplete portion)
Opening Material Labor/Overhead Unit 5Kg 5Kg Cost $10 $18 (incurred in earlier period)	Opening Material Labor/Overhead Unit - 40% = 2kg Cost - for 2 kg incurred in current period **
Started and completed in period (50kg Material = $100, Labor and overhead = (6*50)+(6*0.4*5) =$312 **** Cost incurred for the period in closing WIP are $20 for material and $15 for labor **Note=(6*0.4*5) or $12 not included in opening cost for 40% incomplete process is accounted here
Recognise full unit and cost incurred for the period	Recognise full unit and cost incurred for the period
Material Labor/Overhead Unit 50Kg 50Kg Cost $120*/* $327 (incurred in this period)*	Material Labor/Overhead Unit 50Kg 50Kg Cost $120* $327 (incurred in this period)
**** Closing WIP (For 10kg of Material = $20, =100% complete, Labor and overhead = 25% complete =$15
Account completed portion of unit and cost (equivalent unit for completed portion)	Account completed portion of unit and cost (equivalent unit for completed portion)
Closing WIP Material Labor/Overhead Unit 10Kg 2.5Kg Cost (is included in */*) (is included in *)	Material Labor/Overhead Unit 10Kg 2.5Kg Cost (is included in */*) (is included in *)
Total equivalent cost and unit (Sum of above)
Material Labor/Overhead Equivalent Unit 65 57.5Kg Equivalent Cost 130 345	Material Labor/Overhead Equivalent Unit 60 54.5 Equivalent Cost 120 327