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Vare produces various inks at its Normanton factory. Production details for process 1 are as follows:
OWIP 1 April 400 units 60% complete
CWIP 30 April 600 units 20% complete
Units started 1000
Units finished 800The degree of completion quoted relates to labour and overhead costs. Three-quarters of the materials are added at the start of the process and the remaining quarter added when the process is 50% complete. The company uses the FIFO method of cost allocation.
What are the equivalent units of production for materials in the period?
The solution:
Opening inventory completed (400×0%) =0
Units started and finished in the period (800-400) = 400
Closing inventory (600×75%) = 450
Total EUs produced: 850I’m beyond confused on this one..
Does the phrase “Three-quarters of the materials are added at the start of the process” somehow equals to “Closing inventory (600×75%) = 450”
and
“the remaining quarter added when the process is 50% complete” equals to “Units started and finished in the period (800-400) = 400”
if so.. how?
How is the start of the process the closing inventory?
How is the remaining 1/4 of the materials 400 when the total of materials is 850 instead of 1600?Any help is deeply appreciated!
The opening work-in-progress was 60% complete and therefore had all the material already (because it is more than 50% complete) and therefore there is no material to add in this period.
The closing work-in-progress is only 20% complete. Since this is less than 50% it will only have had 3/4 (75%) of the materials in this period. Therefore the effective units for the closing WIP in 75% x 600 = 450.
The units that have been both started and finished during this period will have had the full materials. The units started and finished were 400 (800 were finished, but 400 had already been started in the previous period. Alternatively, 1,000 were started but 600 of them were not finished in this period.)
Have you watched my free lectures on process costing?
Hello, thanks for taking the time to reply. I did watch your lectures and I have also attended classes on process costing. However, I am still very confused.
I’d be grateful if you could clear up some stuff for me:
1. I still don’t understand why is the CWIP the start of the process. Isn’t the OWIP the start of the process ?
2. Why does more than 50% complete OWIP determine that all the material has already been added?
3. Is the phrase “the remaining quarter added when the process is 50% complete.” useless to our requirement and meant to be ignored?
1. I don’t know why you are writing that the closing WIP is at the start of the process – it is not. The opening WIP is 400 and it will already have all of the material and so there is no extra material needed in this period.
2. The question says that when the product is more than 50% complete then the remaining 25% of the material is added (the first 75% of the material was there as soon as the product was started).
3. It is not useless to the requirement – see (2).
Alright I think I’m starting to understand.
Please correct me if I’m wrong.
The way it was worded I thought that the whole April period is one process, but there are actually 3 processes: OWIP, start to finish and CWIP. right?
No – there is only one process.
First they finish the WIP brought forward, then they fully complete more units, and then they start the WIP carried forward but do not finish them.
I do suggest that you watch my free lectures again.
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