Process Costing on the Assumption that No Waste accrues from Beginning Inventories of Work in Process

Abstract

The purpose of this article is to construct a theoretical model for process costing under the FIFO method, for any given two costing periods using the method of non-neglecting normal wastes, whereby direct materials are input at the beginning of the production process and waste accrues at a certain point in the process, but dispensing with the traditional assumption that “no waste accrues from beginning inventories of work in process”. The article also shows the correct calculation methods for the “cost of the beginning inventories of the work-in-process” and the “cost of the waste accrued therefrom”. This article further introduces the conversion coefficient of product equivalent of waste in place of the “rate of completion of waste” to measure waste costs. Lastly, this article proposes a new method to calculate the conversion coefficient for the work in process and shows that setting the maximum value for the completion ratio (conversion coefficient) to 1 under the conventional method is not necessarily valid.