3.4: Process Costing (Weighted Average)
- Page ID
- 26046
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Process Costing consists of the following steps:
- Physical flow of units
- Equivalent Units of Production
- Cost per Equivalent Unit
- Assign Costs to Units completed and Ending work in process inventory
- Reconcile Costs
Keep in mind, there are no Generally Accepted Accounting Principles (GAAP) that mandate how we must do a process cost report. We will focus on the calculations involved and show you an example of a process cost summary report but know there are several ways to present the information, but the calculations are all the same.
In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method. We will continue the discussion under the weighted average method and calculate a cost per equivalent unit.
Step 3: Cost per Equivalent Unit
The formula we will use is notice we are primarily using the dollar costs and not units for this section (except we will use TOTAL equivalent units we calculated in the previous section):
| Beg. Work in Process Costs |
| + Costs added this period |
| = Total Costs |
| ÷ Total Equivalent Units |
| = Cost per Equivalent Units |
We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead).
A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llmanagerialaccounting/?p=74
Example – Jax Company
To continue with our previous example, we were given the following information:
| The June production and cost data for Jax Company are: | |
| Department B | |
| Beginning work in process | -0- |
| Units started this period | 11,000 |
| Units completed and transferred | 9,000 |
| Ending work in process units | 2,000 |
| Direct materials cost | $ 1,100 |
| Direct labor cost | $ 2,880 |
| Applied overhead cost | $ 8,880 |
We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion.
To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units.
| Materials | Conversion | |
| Beg. Work in Process Costs | -0- | -0- |
| + Costs added this period | $ 1,100 | $ 11,760 |
| (Conv. Cost = DL $2,880 + OH $8,880) | ||
| = Total Costs | $ 1,100 | $ 11,760 |
| ÷ Total Equivalent Units | 11,000 | 9,800 |
| = Cost per Equivalent Units | $ 0.10 | $ 1.20 |
In this example, beginning work in process is zero. This will not always be the case. The problem will provide the information related to beginning work in process inventory costs and units.
Step 4: Assign Costs
In this next section, we will combine the equivalent units (from step 2) and the cost per equivalent units (step 3) to assign costs to units completed and transferred out (also called cost of goods manufactured) and costs of units remaining ending work in process inventory. The basic formula to assign costs is:
|
Equivalent Units per cost element (direct materials, conversion) |
x cost per equivalent unit for cost element (direct materials, conversion) |
Using the example company, Jax Company, we have the following information:
| Materials | Conversion Costs | |
| Units Completed and Transferred | 9,000 | 9,000 |
| Units in Ending WIP | 2,000 | 800 |
| Total Equivalent Units | 11,000 | 9,800 |
| Cost per Equivalent Units | $ 0.10 | $ 1.20 |
We would assign costs as follows:
| Cost assigned to units completed and transferred | ||
| Direct Materials (9,000 equiv units x $0.10) | $ 900 | |
| Conversion (9,000 equiv units x $1.20) | 10,800 | |
| Total cost assigned to units completed | $ 11,700 | |
| Cost assigned to ending work in process | ||
| Direct Materials (2,000 equiv units x $0.10) | 200 | |
| Conversion (800 equiv units x $1.20) | 960 | |
| Total cost assigned to ending work in process inventory | $ 1,160 |
For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending work in process.
Step 5: Cost Reconciliation
Finally, we can check our work. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory.
First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. Both totals should agree.
For Jax Company, the cost reconciliation would be:
| Beg. Work in Process Cost | -0- |
| + Costs added this period | $ 12,860 |
| ($1,100 DM + $2,880 DL + $8,880 OH) | |
| = Total costs to account for | $ 12,860 |
| Cost assigned to units completed and transferred (from step 4 above) | $ 11,700 |
| + Cost assigned to ending work in process inventory (from step 4 above) | 1,160 |
| = Total costs accounted for | $ 12,860 |
The full process cost report can be found by clicking Jax_process cost).
- Accounting Principles: A Business Perspective.. Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University.. Provided by: Endeavour International Corporation. Project: The Global Text Project.. License: CC BY: Attribution
- Cost Per Equivalent Unit (weighted average method) . Authored by: Education Unlocked. Located at: youtu.be/Txv05196CWs. License: All Rights Reserved. License Terms: Standard YouTube License