ACCA MA: process accounts with opening and closing WIP
This outcome tests whether you can turn physical units into equivalent units when a process has opening and closing work in progress (WIP). The examiner likes it because one wrong choice of method or percentage changes every figure in the process account.
The rule
Equivalent units = units x percentage complete, worked out separately for each cost element. FIFO counts only work done this period: the work to finish opening WIP, plus units started and finished, plus closing WIP equivalents. Weighted average counts all units completed plus closing WIP equivalents, and adds opening WIP cost to the period cost. Cost per equivalent unit = cost / equivalent units. Value closing WIP element by element.
Worked example
Conversion only. Opening WIP is 1,000 units, 60% converted. 9,000 units are started. Closing WIP is 2,000 units, 50% converted. Units completed = 1,000 + 9,000 - 2,000 = 8,000.
FIFO equivalent units:
Finish opening WIP: 1,000 x 40% = 400
Started and finished: 8,000 - 1,000 = 7,000
Closing WIP: 2,000 x 50% = 1,000
Total = 8,400
Period conversion cost of $42,000 / 8,400 = $5.00 per equivalent unit.
Closing WIP conversion = 1,000 x $5 = $5,000. Cost to finish opening WIP = 400 x $5 = $2,000.
Weighted average would use 8,000 + 1,000 = 9,000 equivalent units, and would add the opening WIP conversion cost to the $42,000.
Remember: under FIFO, opening WIP only counts for the work still to be done this period, and each cost element uses its own percentage, so materials added at the start are 100% complete in closing WIP.
Where candidates lose marks
Applying the conversion percentage to materials that are added at the start of the process, which understates closing WIP.
Counting opening WIP as fully worked under FIFO, which gives the weighted average units instead of the FIFO units.
Under weighted average, dividing only the period cost by equivalent units and leaving out the cost in opening WIP.
Treating closing WIP units as 100% complete instead of using the stated percentage.
Try it: 4 questions
Brick Toys Ltd uses FIFO in its moulding process. The cost per equivalent unit for the period is $4.00 for materials, which are added at the start of the process, and $3.00 for conversion. Closing WIP is 800 units, 25% complete for conversion. What is the value of closing WIP?
Answer: A. Materials are 100% complete, so 800 x $4.00 = $3,200. Conversion is 25% complete, so 800 x 25% x $3.00 = $600. Closing WIP = $3,800. $1,400 applies 25% to both materials and conversion (200 x $7). $5,600 treats the units as fully complete (800 x $7). $3,200 includes materials only and omits the conversion cost.
Press Ltd, a printing firm, uses the weighted average method in its finishing process. Opening WIP was 1,000 units (materials 100%, conversion 40% complete) valued at $6,200. During the period 9,000 units were started and closing WIP was 2,000 units (materials 100%, conversion 50% complete). There were no losses. Conversion costs for the period were $41,400, and the opening WIP included $1,600 of conversion cost. What is the conversion cost per equivalent unit, to the nearest cent?
Answer: A. Weighted average treats opening WIP as if it were started and finished in the period, so its units and its costs are both included. Units completed = 1,000 + 9,000 - 2,000 = 8,000. Conversion equivalent units = 8,000 + (2,000 x 50%) = 9,000. Conversion cost = $41,400 + $1,600 = $43,000. Cost per equivalent unit = $43,000 / 9,000 = $4.78. $4.60 ($41,400 / 9,000) leaves out the opening WIP conversion cost, so the numerator is wrong. $4.81 is the FIFO figure ($41,400 / 8,600), which is the wrong method. $4.30 ($43,000 / 10,000) treats closing WIP as fully converted.
Parkside Leisure Services, run by a city council, uses FIFO for a process with opening WIP of 3,000 units (60% complete for conversion), 12,000 units started and closing WIP of 2,000 units (50% complete for conversion). A trainee calculates conversion equivalent units as 13,000 units completed + 1,000 closing WIP equivalents = 14,000. What is the error in the trainee's calculation?
Answer: A. Rule: under FIFO, equivalent units are only for work done in the current period = work to complete the opening WIP + units started and finished + equivalent units in closing WIP. Working: opening WIP completion = 3,000 x 40% = 1,200. Started and finished = 13,000 - 3,000 = 10,000. Closing WIP = 2,000 x 50% = 1,000. Total = 12,200. The trainee's 14,000 is the weighted average figure, since it includes the 1,800 equivalent units (3,000 x 60%) of work done in the previous period. Wrong options: counting closing WIP as 2,000 ignores its 50% completion. Ignoring opening WIP completely (11,000) leaves out the 1,200 units of work done in the period. Using 12,000 started instead of 10,000 started and finished double counts the 2,000 closing WIP units and ignores the opening WIP.
Cocoa Delight Co operates a single process with no opening or closing work in progress. During the period, 5,000 units were input. Normal loss is 10% of input, and all lost units can be sold as scrap for $2 per unit. Actual output was 4,300 units. Total process costs for the period were $36,000. What is the value of the abnormal loss in the process account, to the nearest $?
Answer: A. Rule: abnormal loss is valued at the same cost per unit as good output. Cost per unit = (process costs - scrap value of normal loss) / expected output. Working: Normal loss = 10% x 5,000 = 500 units. Expected output = 5,000 - 500 = 4,500 units. Abnormal loss = 4,500 - 4,300 = 200 units. Net cost = $36,000 - (500 x $2) = $35,000. Cost per unit = $35,000 / 4,500 = $7.7778. Abnormal loss value = 200 x $7.7778 = $1,555.56, which is $1,556 to the nearest $. Wrong options: $1,440 divides the gross cost of $36,000 by input of 5,000 units, giving $7.20 per unit. This makes two errors: it ignores the scrap value of normal loss and uses input instead of expected output. $1,600 divides $36,000 by the correct 4,500 expected units, giving $8.00 per unit, but it fails to deduct the $1,000 scrap value of normal loss. $1,400 deducts the scrap value correctly, giving $35,000, but divides by input of 5,000 units instead of expected output, giving $7.00 per unit. The $2 scrap value of the abnormal loss units is credited in the abnormal loss account. It does not reduce the value of the abnormal loss in the process account.
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What is the difference between FIFO and weighted average in process costing?
FIFO separates opening WIP from current work, so equivalent units and costs cover only this period's effort. Weighted average merges opening WIP into the period, adding both its units and its costs.
How do you calculate equivalent units with opening WIP under FIFO?
Add the units needed to complete opening WIP (units x percentage still to do), the units started and finished, and closing WIP x its percentage complete. Do this separately for materials and conversion.
How do you value closing WIP in a process account?
Multiply closing WIP equivalent units for each cost element by that element's cost per equivalent unit, then add the results. For example, 800 units with materials 100% and conversion 25% complete use 800 for materials and 200 for conversion.