Reference no: EM13692721

Process Costing using the Weighted Average Method

A process cost system is used when a company produces a product that is homogeneous-that is, individual units are indistinguishable from each other.

Costs flow from one production department to the next, and materials, labor and overhead are added until the final product is moved to finished goods inventory ready to be sold. The flowchart illustrates the flow of costs into Work in Process and Finished Goods in a process costing system.

Cost Flows in Process Cost System

Materials Work in Process-Mixing Dept Work in Process-Bottling Dept Finished Goods

Beg Inventory
+ Purchases Direct Materials
End Inventory

Beg Inventory Cost of Units
+ Direct Materials transferred out
+ Direct Labor
+ Factory Overhead
applied

End Inventory

Beg Inventory Cost of Units
+ Cost of units transferred out
transferred in
+ Direct Labor
+ Factory Overhead
applied
End Inventory

Beg Inventory
+ Cost of units Cost of Goods
transferred in Sold



End Inventory
Factory Overhead
Actual Factory Overhead:
+ utilities expense Factory overhead
+ depreciation of machinery applied
+ supplies

Production costs are assigned to the units transferred out of WIP and to the units in ending WIP by multiplying the equivalent units by the per-unit cost. The following steps are involved:

1. Compute the equivalent units of production

2. Determine the cost per equivalent unit

3. Assign costs to ending WIP and cost of goods transferred out

Consider the T account showing the detail costs and units in the Mixing Dept using the weighted average costing method.

Work in Process-Mixing Dept

$Amt #units %completed $Amt #units %completed
Beg Inventory $5,796 4,600 70%
+ Cost of units Units transferred out $85,739 60,700 100%
transferred in $60,461 58,700
+ Direct Labor $12,400
+ Factory Overhead $8,184
applied
End Inventory: $1,102 2,600 30%

Inventory in process, July 1, 4,600 units (70% complete) $ 5,796
Direct materials cost incurred in July, 58,700 units 60,461
Direct labor cost incurred in the period 12,400
Factory overhead applied in the period 8,184
Total production costs to account for $ 86,841


60,700 units were completed and transferred out

2,600 units remain in WIP, 30% complete

Total whole units to account for:
Units transferred out 60,700 Beginning inventory 4,600
Ending inventory 2,600 Units transferred in 58,700
63,300 63,300

Equivalent units:
Completed units 60,700
Ending WIP x 30% 780
61,480


Cost per equivalent unit:

$86,841 / 61,480 = $1.41251

Note that the number of whole units used to calculate equivalent units (completed units + equivalent units in ending WIP) agrees with the number of whole units in - Select your answer -completed units and units transferred incompleted units and beginning WIPbeginning WIP and units transferred in. Another important point is that - Select your answer -only current period materialonly current period laborall materialall costs incurred are used in the cost per unit calculation when the weighted average costing method is used.

Fill in the formula for calculating cost per unit:



- Select your answer -Current period material costsCurrent period conversion costsCurrent period material and conversion costsTotal production costs (including beginning WIP costs)
Cost per unit formula =

- Select your answer -Units started and completedEquivalent units of outputEquivalent units in ending WIPEquivalent units in ending WIP less equivalent units in beginning WIP


What if ending WIP is 30% complete and production costs are the same? Select if the below statements are True or False.



The value of ending WIP would increase and the cost of goods transferred out would decrease by the same amount.
- Select your answer -TrueFalse
The cost per equivalent unit would decrease because the same cost is spread over more units. - Select your answer -TrueFalse
The value of ending WIP and the value of the cost of goods transferred out will stay the same. - Select your answer -TrueFalse


This example assumes that materials and conversion costs are added to the process evenly. When materials and conversion costs are added at different times in a process, the equivalent units for materials may be different than the equivalent units for conversion costs. For example, if materials are added at the beginning of a process, the units may be 100% complete for materials and unfinished for labor and overhead.

Fill in the schedule to show how the calculation changes when materials are added at the beginning of the Mixing Dept in the above example. (The cost of beginning WIP, split between materials and conversion costs, is provided.) Round cost per unit to four decimal places.



Cost Equivalent Units
Beginning WIP Current Period
Total Completed Units Ending WIP
Total Cost per unit
Materials $4,460 $60,461 $64,921 60,700 $
Conversion costs $1,336 $20,584 $21,920 60,700 $
$5,796 $81,045 $86,841 $1.3821


Valuing WIP inventory using the Weighted Average Method:

Hennessey Manufacturing produces fortified milk beverages in a production process whereby units are indistinguishable from one another. Therefore, the company uses process costing to calculate the cost of its products and also employs the weighted average method in its calculations.

The following information is available for July:



Beginning work in process
Current period
Materials $ 9,856 $ 15,680
Conversion costs 27,200 61,600
Total costs $ 37,056 $ 77,280




Gallons of fortified milk beverage in process on July 1 (30% complete)* 15,300
Gallons of fortified milk beverage completed and transferred out during July 32,800
Gallons of fortified milk beverage in process on July 31 (60% complete)* 12,000
*All materials are added at the beginning of the process.


Fill in the calculation of cost per unit and the following proof using the weighted average method. Round cost per unit to two decimal places.



Calculation of cost per unit

Cost element Opening
WIP value Current
period cost
Total cost Completed
units WIP equivalent
units Total equivalent
units
Cost per unit
Materials $9,856 $15,680 $ 32,800 $
Conversion costs 27,200 61,600 32,800 $
$37,056 $77,280 $ $


Calculate the cost of:

Completed units: $

Ending WIP: $