[sakti]

Willow co ltd. Using fifo in processing costing. During march department A has the following data :

Beginning work in progress 5,000 units
(100% materials, 30%conversion cost)

Unit trasfered to department B 90,000 units
Unit still in hand in department A 5,000 units
Ending work in progress 10,000 units
(100% materials completed, 60% conversion cost)


Question :

Determine the equivalent units

[rehmanvohra]

Can you please mention how have you attempted the question and I will try to help to correct your answer if it is wrong.

[sakti]

please correct the answer

direct material 100,000 = 10,000 + 90,000 x 100%

direct labour 60,000 = 10,000 + 90,000 x 60%

factory O/H 60,000 = 10,000 + 90,000 x 60%

[rehmanvohra]

please correct the answer

direct material 100,000 = 10,000 + 90,000 x 100%

direct labour 60,000 = 10,000 + 90,000 x 60%

factory O/H 60,000 = 10,000 + 90,000 x 60%

I think you got it wrong. The correct procedure is:

Explanation ----------Materials -----Conversion
Units transferred to B 90,000 ----- 90000
Units completed in hand 5000 ----- 5000
Total output in the month100000 --100000
Less beginning WIP units -- 5000 ---- 5000
Units started and completed
in current month ---------- 95000 ---- 95000
Work done on incomplete units
Beginning in process units ----0------ 3500 (70% x 5000)
Ending in process units------10000 ----6000 (60% x 10000)
Equivalent units -----------105000 ----99500

[morgaine300]

sakti, rehmanvohra's method is much closer to being the right way than yours, so try to pay a little attention to it. However, it's still not correct. I will answer that post in a minute.

The main things I want to point out about it, though, are:
You cannot add up inventories and transferred out, and then figure the percent on the total. They aren't equivalent to each other. That is, you can't 10,000 + 90,000 x 60%, because the 10,000 and the 90,000 aren't equivalent to each other to begin with, and therefore you can't apply the 60% to them both. Notice rehmanvohra is applying different percents to different categories.

You need to first understand what an equivalent unit is, or you won't understand how to do it.

(Draw a picture of this if you need to.) If you were filling Pepsi bottles, and you had two full ones and two only half-full ones, you have four total bottles, right? (That's "actual" units.) However, do you have four full bottles? No. Only two of them are full, and two of them are only half-full. If you wanted to apply your costs to these 4 Pepsi bottles, could you just divide the costs by 4 bottles? No, because they aren't equivalent to each other. Two are only half full.

What if I were to take the two half-full bottles and pour one into the other? Then I'd have one full bottle, right? So those two half-full bottles are the equivalent of one full bottle. Add that to my two full ones, and I have the equivalent of three bottles. I could now take my total costs and divide by 3 bottles and that would work and tell me what it cost per each full bottle.

That is what equivalent units does. If your ending inventory is only 60% complete, then they aren't equivalent to the ones that were complete and transferred out, are they? No. So you can't lump them together like that. The ones transferred out are whole units. (However, some of those are from beginning inventory, which complicates it further and I'm not going to go there yet.) The important point right now is that you see what an equavalent units is, and that you cannot lump things together which are not equivalent to each other. Hence, you can't take 10,000 + 90,000 x 60% because those two sets of units are not equivalent to each other.

What rehmanvohra did is the basic idea, but not correct. But you can follow it for a sort of example.

Oh, and no need to do direct labor and overhead separately like that. Conversion costs include both. If you're given conversion costs, you're meant to lump those together. (If direct labor and overhead are the same percent, they're lumped.)

[morgaine300]

OK - I looked this over again. I was trying to figure out why it was giving two ending inventories. Is the 5000 meant to be completed units that are still in a work in process account??

I've never seen that, and it makes no sense. If they're completed, they aren't "in process" anymore and don't belong to that account. But that little detail would change everything.

[rehmanvohra]

OK - I looked this over again. I was trying to figure out why it was giving two ending inventories. Is the 5000 meant to be completed units that are still in a work in process account????

I've never seen that, and it makes no sense. If they're completed, they aren't "in process" anymore and don't belong to that account. But that little detail would change everything.

In a mass production industry, it is possible to have completed units that could not be transferred immediately on the last working day of the month and, as such, they rae considered as completed units. I am sure if you were to consult books by Matz and Usry, Moriatry and Allen, Horgren, etc. my views will be confirmed.

In Process costing, we have to understand the flow of work. Finished production of one department becomes the material for the subsequent department. If you were to construct a quantity schedule, the usual format will be:

Units in process beginning
Units started this month - if it is the first department
Units received from preceding department - if a subsequent department
Total units to be accounted for

Units accounted for as follows:
Units transferred out
Units completed but not yet transferred
Units in process ending

For accounting purposes, the Work in Process will be valued as follows:
Units completed and on hand will be valued as fully completed units
Incomplete units in process will be valued as equivalent units

[morgaine300]

I didn't need an explanation of the flow of work. I was teaching the stuff 15 years ago. All I asked was a clarification of something in the problem, because I've never seen it in a problem like that, in any book I've used - that doesn't mean I don't understand the process. And you are the one who added the word "completed" to that 5000. The problem doesn't actually say that. It just says "in hand," like still in inventory but doesn't specify it's finished.

It still doesn't make any sense... just cause the inventory itself literally hasn't moved anywhere on the last day of a month doesn't mean you can't count it as moved in your books. After all, if it's finished, it's finished. Since when is inventory always recorded as to its literal physical location?

Now see below.

[morgaine300]

This is still not correct. All I basically did was add the 90,000 transferred out and the 5000 finished ones in ending inventory together and called it "finished." I left 10,000 as ending inventory. For the sake of equivalent units, it matters not that 5000 of finished is still in work in process. (That's only relevant when the cost is applied.)

Explanation ----------Materials -----Conversion
Units transferred to B 90,000 ----- 90000
Units completed in hand 5000 ----- 5000
Total output in the month100000 --100000
Less beginning WIP units -- 5000 ---- 5000
Units started and completed
in current month ---------- 95000 ---- 95000

Not correct. I don't know what you're referring to as "output," (finished ones or actual? ) but the actual units dealt with is 105,000 total. There are 95,000 finished ones and 10,000 unfinished ones. That means there are 100,000 newly started ones. 90,000 + 5000 doesn't equal 100,000. What's the missing 5000? It's not beginning inventory cause that's part of the 90,000 that was transferred. (FIFO)

Started & completed is 90,000 units.

Work done on incomplete units
Beginning in process units ----0------ 3500 (70% x 5000)
Ending in process units------10000 ----6000 (60% x 10000)
Equivalent units -----------110000 ----104500

How do you end up with more equivalent units than actual units?

[rehmanvohra]

Thank you for pointing out my error. I have now corrected my answer to 105,000 and 99,500 units for materials and conversion costs. Thanks again