How to Calculate Work-in-Progress: With Methods, Formula

The following article will guide you about how to calculate opening and closing work-in-progress.

Accounting with Opening and Closing Work-in-Progress-FIFO Method:

FIFO method assumes that those units, which represent work-in-progress at the beginning, are completed first and the units partly complete at the end of the period are units introduced or transferred from the preceding process during the current period. Production in terms of equivalent units under FIFO method shows the total work done during the current period.

Under this method equivalent units are calculated as below:

(a) Opening WIP:

Equivalent units are calculated with reference to the work done in the current period for completing the units.

(b) Units Completely Processed during the Current Period:

It is essential to differentiate between units completed out of opening WIP and units completely processed during the current period.

(c) Closing WIP:

The assumption that opening WIP was completed and transferred to the next process leads to the assumption that the closing WIP does not include incomplete units brought forward from the previous period. To express closing WIP in terms of equivalent units, physical units are multiplied by the extent of completion expressed as a percentage of the total work required to complete one unit.

(d) Abnormal Loss:

In the absence of any indication to the contrary, it is assumed that units have been rejected after complete processing. Therefore, they are considered 100% com­plete. If the degree of completion of scrap can be established, equivalent units would be calculated by multiplying physical units by the estimated degree of completion.

(e) Abnormal Gain:

Abnormal gain represents additional complete units (i.e. excess over normal output) transferred to the next process. Therefore, equivalent units are the same as physical units.

Transferred-In Costs:

Where there is opening work-in-progress in a process that is not the first stage of the production process, the following special consideration is required.

Assume that we are calculating production in terms of equivalent units for Process II:

Inputs for Process II include the following two types of materials:

i. Finished output of Process I, which is termed as ‘Material 1′ or “Transferred-in cost’

ii. Material added in Process II. It is termed as ‘Material 2’.

It is obvious that partly completed units in Process II are partly completed only in respect of work to be done in Process II. Therefore, they are 100% complete as regards ‘Material 1’. It is necessary to calculate two rates for materials, one for ‘Material 1’ and another for ‘Material 2’ to evaluate production expressed in equivalent units.

Accounting with Opening and Closing WIP Weighted Average Cost Method:

The cost of opening stock (WIP) is added to the costs incurred during the current period to calculate weighted average cost of production. Each complete unit is assigned weighted average cost of completing one unit of the product.

Equivalent units, used as denominator in calculating the weighted average cost, represent work done to date and not work done in the current period only.

Weighted average costs are calculated as follows:

Under this method, equivalent production is calculated as below:

i. Opening WIP- It is ignored.

ii. Units completed during the period- Units completed and transferred to the next process or fin­ished stock are considered as 100% complete in respect of all cost elements. This method does not segregate the units carried forward from the previous period and units com­pletely processed during the current period.

iii. Closing W.I.P- Physical units produced are multiplied by the degree of completion.

iv. Abnormal loss- Physical units produced are multiplied by the degree of completion.

v. Abnormal gain- Physical units 100% complete.

Under this method, the cost of completed units is calculated by multiplying produc­tion expressed in terms of equivalent units by weighted average cost per equivalent unit.

Choice of the Method:

Average cost per unit under FIFO and weighted average cost methods usually do not differ significantly because:

(a) Fluctuations in output prices from month to month tend to be small; and changes in volume of production and inventory levels also tend to be small.

(b) FIFO method is seldom used in practice because it involves more detailed computa­tions than weighted average cost method. However, computation of FIFO equivalent units, which measure current works done, facilitates planning and control. It helps managers to measure the current output, and to calculate budget variances and vari­ances against standard costs.

(c) FIFO method can be used only if information on the degree of completion of beginning work-in-progress is available. In the absence of the same, the work done in the current period to complete incomplete units brought forward from the previous period cannot be ascertained.

Similarly, weighted average cost method can be used only if cost element-wise break-up of the value of beginning work-in-progress is available. In the absence of the same ‘cost to date’ for each cost element cannot be calculated.