job, batch and process costing

Process costing – WIP completion

Its really very simple ..once you understand it!..:)

Here goes:

15 cars were input in a process.
10 cars came out as FINISHED GOODS
3 cars remain in WIP.

ok?

Now, basically, we need to know the VALUE of the stuff still lying on the production floor. So, if its a car production line, and the shift ends at 5pm, you will go down the floor and say ..ok…. there are 10 cars that are totally complete, and there are 5 cars that are not complete.

Well, what does “not complete” mean? one car may just need the windshield to be put on. one car may need tyres and three cars where only the engine has been fitted in the chasis.

so, u kinda give an educated completion percentage to these unfinished cars … like 90% complete to the cars which need tyres and windshield. and u may give just 10% complete to the 3 cars with only engines fitted on to the chasis.

Ok so far?

Now, with out going into production details, lets say you say that the 5 cars in WIP are, on the average 60% complete. If you have 5 cars in WIP and they are 60% complete, that means 5X60%, 3 cars would have been fully complete HAD THE WORKERS WORKED ON JUST 3 CARS!

this rate of completion is a highly educated and a calculated guess.

NOw, with a figure of 3 completed cars in WIP and 10 cars fully completed, I get a total of 13 cars that are supposedly fully complete in theory.

I already know how much money i poured in at the time of input and i know the labor etc which went into that shift. Lets say that was $1200.

Now, to get a cost per unit, I will do 1200/13=$92.31 per car.

As you can see, this per unit figure allows me to value the finished goods and the stuff lying on the production floor (wip).

In this case, the value of finished goods will be 10×92.31 and the value of WIP will be 3X92.31

and whole purpose of using the concept of completion is to help us calculate a per unit cost of goods in process costing.

You can now read the formal definitions in ur book and come back if u have more questions.