Beginning Work in Process Inventories Average Costing Method:

When beginning work in process inventory costs are merged with costs of the new period, the problem is essentially one of securing representative average costs. Ordinarily, the averaging process is quite simple.

Example:

The Clonex Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 19        

Quantity Schedule:
Units in process at beginning (1/3 labor and factory overhead)	3,000
Units received from preceding department	38,000	41,000
	-------	=====
Units transferred to next department	36,000
Units still in process (1/4 labor and FOH)	4,000
Units lost in process	1,000	41,000
	--------	=====
Cost Charged To the Department:	Total Cost	unit Cost
Cost from preceding department:
Work in process - beginning inventory (3000 units)	$5,400	$1.80
Transferred in during this period (38,000 units)	65,360	1.720
	-------	------
Total	$70,760	$1.726
	-------	------
Cost added by the department:
Work in process - Beginning inventory:
Labor	$910
Factory overhead	800
Cost added during period:
Labor	34,050	0.920
Factory Overhead (FOH)	30,018 -------	0.811 -----
Total cost added	$65,778	$1.731
Adjusted units cost for additional units		0.043*
	-------	------
Total cost to be accounted for	$136,538	$3.500
	======	======
Cost Accounted for as Follows:
Transferred to finished goods storeroom (36,000 × $3.50)		$126,000
Work in process - ending inventory:
Adjusted cost from preceding department(4,000 × $1.726 + $0.043)	$7,076
Labor (4,000 × 1/2 × $0.920)	1,840
Factory Overhead (4,000 × 1/2 × $0.811)	1,622 ------	10,538 ------
Total cost accounted for		$136,538
		======
Additional Computations: Unit cost from preceding department: $70,760 / 41,000 = $1.726 Equivalent Production: Labor and factory overhead = 36,000 + 4,000 / 2 = 38,000 units Unit Costs: Labor = $910 + $34,050 = $34,960; $34,960 / 38,000 = $0.920 per unit Factory overhead = $800 + 30,018 = $30,818;  $30,818/38,000 = 0.811 per unit *Adjustment for Additional Units Method No.1 - $70,760/40,000 =$1.769 - $1.726 = $0.043 Method No.2 - 1,000 units × $1.726 = $1.728; $1.728/40,000 = $0.043 per unit

When additional materials increase the number of units being processed, it is still possible to have lost units. However, should increase and lost units occur, no separate calculation is required for the lost units; only net units added are used. In the example above, 8,000 additional units resulted from added materials. It is quite possible, though, that the materials added should have yielded 10,000 units. The difference between the 8,000 units and the anticipated 10,000 units could be due to the loss of 2,000 units. I this is the case, the effect of the lost units is similar to that of units lost in the first department; that is, the cost is absorbed within the department as an increase in unit costs. However, if 10,000 additional units should have resulted, the effect of losing units can be determined as follows:

1. Compute the unit cost of work done in preceding departments and the Terminal Department as if no loss had occurred.
2. Compute the loss by multiplying the unit cost obtained in the preceding computation by the 2,000 lost units.