The cost of production reports illustrated earlier closing work in process inventory (ies). These inventories become opening inventories of the next period. Several methods are used in accounting for these opening inventory costs. In this discussion, two methods are illustrated:
1. Average costing: Where Opening inventory costs are added to the costs of the new period.
2. First-in, first-out costing: Where Opening inventory costs are kept separate and the new costs necessary to complete the work in process inventory are computed.
Average Costing: When opening work in process inventory costs are merged with costs of the new period, the problem is essentially one of securing representative average unit costs. Ordinarily, the averaging process is quite simple.
Total cost charged to the department is disposed of as follows : $65,360 is transferred to the Refining Department and $5,680 is the cost assigned to the closing work in process. The work in process inventory consists of $1,720 (1,000 units X $1.72) for units completed but on hand; $1,560 (3,000 units X $.52) for materials; $1,240 (2,000 units X $.62) for labor; and $1,160 (2,000 units X $.58) for factory overhead. The units completed but on hand are listed as work in process in the Mixing Department although all operations in that department have been performed on these units. The units remain in the work in process inventory of the Mixing Department to assign it responsibility for this part of total worlc in process. The cost assigned these units is obtained by multiplying the 1,000 completed units by $1.72, the cost of one completed unit. The cost transfer entry for the 38,000 units transferred to the next department is
Work in Process — Refining Department 65,360 Dr.
Work in Process — Mixing Department 65,360 Cr.
Refining Department. Accounting for opening work in process inventory costs in departments other than the first requires additional calculations because part of the cost assigned to the work in process inventory is classified as cost from a preceding department. When the closing work in process inventory was computed, part of the cost of this inventory came from costs added by the preceding department. It is this part of the inventory which now requires separate treatment.
Because costs assigned to the opening work in process inventory are added to costs incurred during the period and these totals are divided by equivalent production figures to secure average unit cost figures, the opening work in process inventory of departments other than the first must be split into two parts
1. That part of the opening inventory that consists of work which was done in preceding departments.
2. That part of the opening inventory which represents costs added by the department itself.