CAT / FIA FMA Syllabus C. Cost Accounting Techniques - Apportion process costs - Notes ^{10 / 17}

Work remaining in process (WIP) and fully-completed units can be valued using either weighted average method or the FIFO method.

Weighted average costing of production

In the weighted average method, opening inventory values are added to current costs to provide an overall average cost per unit. 

The cost of opening inventory is added to the costs incurred during the period, and completed units of opening inventory are each given a value of one full equivalent unit of production. 

Therefore, no distinction is made between units in process at the start of a period and those added during the period.

Illustration - Weighted Average Method

Op WIP 700 units (50% complete) $3,000
Total process costs $21,000
Units finished in process 2,100
Closing WIP 500 units (20% complete)

What is the cost of an E.U.?

1. Step 1: Calculate the Total Cost

   Total cost  = Opening WIP cost + Process cost 
   Total Cost = $21,000 + $3,000 = $24,000

2. Step 2: Calculate Closing WIP E.U.

   Closing WIP E.U. = Closing WIP units * % Completion
   Closing WIP E.U. = 500 * 20% = 100 units

3. Step 3: Calculate the Equivalent Unit  (EU)

   EU = Total cost / (Finished Goods + Closing WIP)
   EU = $24,000 / (2,100 + 100) = $10.91

FIFO costing of production

The FIFO method of valuation deals with production on a first in, first out basis. 

The assumption is that the first units completed in any period are the units of opening inventory that were held at the beginning of the period.

This means that the process costs must be allocated between

• Opening WIP units

• Units started and completed in the period

• Closing WIP units

Illustration

Op WIP 100 units (60% complete) valued at $3,000
350 units were produced and transported to the warehouse 
Equivalent Units $10

What is the total cost of the goods transferred to the warehouse?

1. Step 1: Get the cost of WIP of completed units (given in the exam)
   60% was competed at value of $3,000

2. Step 2: Calculate the remaining value of the Opening WIP
   100% - 60% = 40% is the remaining that needs to be finished
   40% of 100 units x $10 = $400

3. Step 3: Find the value of production in this period 
   350 units need to be made 
   We have 100 units already
   Therefore, we need 350 - 100 = 250 units to make in the period
   Therefore, the value is 250 units x $10 = $2,500

4. Step 4: Calculate the Total cost
   $3,000 + $400 + $2,500 = $5,900