SUMMARY

This paper focuses on the determination of the cost

completion rate used to calculate the equivalent units of
production in a continuous process costing system. The
paper aims at two research questions.

R1 What procedure do company utilize in practical terms?

R2 How should the completion level percentage be

calculated conceptually?

The present research arose from a review of a selected

collection of classic works by cost accounting authors. This
review says that these authors did not indicate a method for
calculating the completion level percentage. From a
conceptual perspective, this represents an exciting prospect
in cost accounting because this gap in the literature implies
that companies operating on a continuous process do not, in
practice, use the theoretical procedures of cost accounting
authors. The proposition of the present study is that cost
accounting theory does not offer an objective solution to the
problem of calculating the completion level, which is
required for determining the number of equivalent whole
units in continuous process systems producing
homogeneous products. This lack of an objective solution
means that enterprises in continuous production industries
do not adopt the fundamental concept defined by theory
regarding to the finished output and work-in-process
inventory measurement.

Backer and Jacobsen (1978, p. 288), in commenting on the

calculation of the
equivalent units of production, says that it should be
completed by a technical staff. These authors thus
transferred the problem to “qualified technical personnel”.
But who are these “qualified technical personnel”? It is likely
that the authors were referring to engineering, process
control, or production control technicians. The problem with
this approach is that, although Equivalent units of production
technical personnel might well be qualified to calculate the
physical completion rate, they are less likely to be qualified
to calculate the completion level in terms of costs. The
research carried out into the important cost accounting
books of the late twentieth century did not give any
indication of how to calculate the completion rate.
The books analyzed were: Bierman and Drebin (1968),
Howard (1966), Horngren (1972), Dopuch et al. (1974),
Dearden (1976), Moore and Jaedicke (1976), Corcoran
(1977), Nelson and Miller (1977), Backer and Jacobsen
(1978), Matz et al. (1978), Black and Edwards (1979), Leone
(1980), Morse (1981), Maher and Deakin (1994), Maher et al.
(1997), Hansen and Mowen (1997) and Cooper and Kaplan
(1999). These all books fail to present the method of
completion level of work in process units.

An exploratory study was conducted to obtain a general

understanding of the practical procedures used by
companies related to the costing of goods-in-process in the
various production segments of continuous processes in the
manufacture of homogeneous products. A total of 175
questionnaires were sent to pre-selected enterprises, each
with revenues of more than US$100 million per year, and the
50 returned questionnaires are analyzed.

FINDINGS:-

Question 1. Does any segment of the manufacturing plant

work as a continuous process – i.e. by continuous
manufacturing of a homogeneous product?

From the total of 50 returned questionnaires, 43 enterprises

worked on a continuous process and seven on a production
order system. Thus the return from 43 enterprises are
analyzed who works in a continuous process systems.

Question 2. What is the main activity of this segment?

Most firms were involved in food processing or chemical and
petrochemical
enterprises. The sectoral distribution of firms is as follows:
paper and cellulose MAJ 21,3 306 14 per cent; sugar and
alcohol, 5 per cent; heavy industries, 19 per cent; metals
mining, 12 per cent; food production, 27 per cent; and
petrochemical and chemical, 23 per cent. This shows that
most of the dirms which uses continous process system are
food industry or petrochemical related industries.

Question 3. In the segment of the manufacturing plant

operating by a continuous process system, does the
enterprise use the completion rate and equivalent units of
production concepts to assess the costing of goods-in-
process?

A sum of 11 enterprises stated that they used the concepts

of completion rate and equivalent units of production.
Twenty-three enterprises replied that they did not use these
concepts, even though they were well known. Nine
enterprises replied that these concepts were not known
internally. This shows that this concept is used very less by
the companies.

Question 4. Which department of the enterprise computes

the completion rate?

When this question was asked as it was expected mostly

firms replied that the accounting department is responsible
for it (46 per cent), followed by production/manufacturing
(27 per cent), production planning & control/process control
(18 per cent) and others (9 per cent).

Question 5. How does the enterprise calculate the

completion rate?

Through the answer of questionnaire it was found that only

one organization uses the explicit percentage but it did not
specified that how the percentage is obtained. There are
some organizations which makes the computation on the
basis of per unit or per product. organizations also has the
laboratories inside to measure the legal standards. The
calculation is done by the production department which uses
to measure the volume of existing units of production. They
also register each production order the operations and the
finished production generating at the end of each period It is
calculated for each type of product made by the enterprise.
For instance, crystal sugar, refined sugar, liquid sugar,
hydrated alcohol, etc. Specific codes are assigned that
indicate that a given product is in process and, therefore,
raw material costs can be attributed, variable expenses,
fixed expenses, depreciation and, in some cases, the
packing material. All production is controlled by lots, entries
of goods-in-process and the corresponding finished output.

Question 6. What procedure does the enterprise use to

evaluate the work-in-process inventory on a monthly basis?

Out of 32 companies who do not adopt the procedure of

completion level and equivalent units of Production. Two of
them replied that they were using the standard cost. Seven
enterprises considered the closing inventory of work-in-
process to have a “zero” value because of the characteristics
of the production process. Nine enterprises replied that they
used the standard cost, calculated cost variations, and
proportionally distributed the variations to production and to
the work-in-process inventory.
Mostly companies emphasis on the calculation of equivalent
production units on a per unit base. It must be noted,
however, that cost accounting does not use the concepts of
completion level and equivalent units of production for the
calculation of the unit cost. It can be said that, in practice,
the companies simplified in order to obtain the unit cost,
considering units in process as being equal to transferred or
finished goods in cost terms. Nine companies revealed the
use of the scientifically valid procedure, using the standard
costing method including the distribution of the cost
variations to production and to the ending inventory.
PROPOSED METHOD FOR CALCULATION OF THE
COMPLETION LEVEL:-

They used over here the Standard costing method for the
calculation of completion level. Given,

ga = completion rate

ep = each production stage of the product

cp = standard unit cost accumulated until the specific stage.

cf = finished product unit cost.

Q = quantity of goods in process at given specific stage.

Qp = quantity of goods in process

Keeping in mind that a company’s cost accounting is not,

with rare exceptions, analyzed stage-by-stage, because it
requires information and analytical controls that are not
always available, the completion level should be calculated
at the level of the manufacturing plant.

∑ ( qp. Cp)
ga = --------------
∑ (qp). Cf

This is the formula used to calculate the completion level in

cost terms.

A literature review of the theoretical procedure says that

there is no method for the calculation of the completion level
and for calculating the equivalent units of production. The
empirical research in the present study confirmed that, in
practice, companies do not adopt the general procedures
proposed by the theory responding to the first research
question of this study. The solution developed in this work
for determining the completion rate solves the problem, it
makes it possible to use the process-costing method
established in cost accounting theory, thus responding to the
second research question of this study. This study shows a
method for the calculation of completion level in process
costing.