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ABC Company produces chemicals. During Dec work started on 110000 units. This was in addition to 20000 that were 50% complete at the beginning of the month. At the end of Oct there were 40000 units that were 50% complete . Costs for Dec are b/f : 5 million and incurred this period 100 million. Calculate the cost per unit for dec production ?
Now i understand it is 100 + 5 / no of units completed + no of eu in ending wip
No of eu in ending wip is 40000*.50 from oct .
I cant figure out how many is completed ?I mean i understand its 90. But the 40000 is from October , So should we take that into account while calculating EU of closing WIP ?
Also , when finding cost/unit , we take opening wip + started and finished + closing wip right. that should be (20000*.50) + (110000-40000) + (40000*.50) . But the answer says total EUis 110000+20000. I don’t understand it
You have not said whether the question requires you to use a FIFO approach or a weighted average cost approach.
If it is FIFO, then:
110,000 units were started during the period, but 40,000 of them were still in WIP at the end of the month.
So 70,000 units were both started and finished during the period and therefore had full work done on them.In addition, the opening WIP of 20,000 units were finished, by doing the remaining 50% work on them, which is equivalent to 20,000 x 50% = 10,000 full units.
In addition 50% work was done on the 40,000 units WIP at the end of the months, which is equivalent to 40,000 x 50% = 20,000 units.
So…as you have written, the equivalent units = 10,000 + 70,000 + 20,000 = 100.000.
If it is weighted average, then the equivalent units include all of the opening WIP, and so the total equivalent units are 20,000 + 70,000 + 40,000 = 130,000. Since this is the answer in your book, it would seem that the question was wanting you to use the weighted average cost approach.
I do suggest that you watch my free lectures on process costing, where I explain both approaches.
sorry John . The Q requires weighted average method.
Answer given is 105/ ( 90 +20 ) ? is that wrongI learned these questions from master John and I believe it is right.
For weighted average method, we are solely interested in the final state of units assuming that they were all started at 0%.
Correspondingly, the costs should also be for units from 0% to final state, so 100m+5m=105m.
So 90, 000 were complete and 50% of 40, 000 equivalent to 20, 000 were WIP, give à total of 110, 000.
So Cost per unit =total cost /total units
105,000,000/110,000Is that right Master Moffat ?
Looks like when asked to calculate cost per unit, only conversion costs are considered.
I wonder might be required for cases where not all matériels are input at start of the Process.iza1: Sorry, I mistyped in my previous answer.
If using weighted average, then the equivalent units are 20,000 + 70,000 + (50% x 40,000) = 110,000.
(It is only 50% of the closing WIP because only 50% of the work has been done), and so the cost is 105,000,000 / 110,000.Again, I do suggest that you watch my free lectures!
fredymaila: The cost per units includes all costs – materials as well as conversion costs. This question does not separate materials and conversion costs.
Usually they are separated and the materials and conversion costs need to be calculated separately and we assume that materials are always fully complete.
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