Weighted Average Costing
In the weighted average method of process costing, the costs are averaged out and
evenly applied to both units transferred out and units in closing work in process. Unlike FIFO
method, which assumes costs introduced first into a department are transferred out first,
weighted average method does not assume any specific order. Weighted average costing is
commonly used in situations where:
Inventory items are so intermingled that it is impossible to assign a specific cost
to an individual unit.
The accounting system is not sufficiently sophisticated to track FIFO or LIFO
inventory layers.
Inventory items are so commoditized (i.e., identical to each other) that there is
no way to assign a cost to an individual unit.
Process costing under weighted-average method involves the following steps:
1. Preparing the quantity schedule: i.e. finding units in the beginning work in process for the
period, units started or units transferred-in from prior departments, units transferred out to
next department or units of finished goods, and units in closing work in process.
2. Bringing forward the cost of units in the beginning work in process from last period. The cost
should be broken up into all its components: direct materials and conversion costs (=direct
labor and manufacturing overheads).
3. Finding the costs added in the current department under different heads: direct materials,
direct labor and manufacturing overheads.
4. Finding total cost to be accounted for under each head i.e. direct materials, direct labor and
manufacturing overheads. This would involve adding the cost included in the opening work
in process on account of direct materials, direct labor and manufacturing overheads to the
corresponding amounts added during the period on account of the relevant cost
component.
5. Finding total equivalent units.
6. Finding cost per equivalent unit for each cost component by dividing the total cost for the
cost component by total equivalent units for the relevant cost component.
7. Allocating the cost between the units transferred out and units included in the closing work
in process.
Evaluation of the Weighted Average Method
The major benefit of the weighted average method is simplicity. By treating units in
beginning work in process as belonging to the current period, all equivalent units belong to the
same category when it comes to calculating unit costs. Thus, unit cost computations are
simplified. The main disadvantage of this method is reduced accuracy in computing unit costs
for current-period output and for units in beginning work in process. If the unit cost in a process
is relatively stable from one period to the next, the weighted average method is reasonably
accurate. However, if the price of manufacturing inputs increases significantly from one period
to the next, the unit cost of current output is understated, and the unit cost of beginning work-
in-process units is overstated. If greater accuracy in computing unit costs is desired, a company
should use the FIFO method to determine unit costs.
Example
Let us prepare a process cost sheet under weighted average method using the following data
for Company ABC's packaging department for the month of December 2013.
20,000 units in work in process as at 1 December: $20,000 direct materials and $40,000 for
conversion costs (i.e. $10,000 direct labor and $30,000 manufacturing overheads)
200,000 units transferred in from production department during the month: at a total cost of
$555,000.
Costs added included: direct materials of $22,000 and conversion costs of $20,000.
180,000 units transferred to finished goods
40,000 units in work in process as at 31 December: 100% complete as to costs transferred-in,
80% complete as to materials and 50% complete as to conversion costs.
Solution
Let us prepare the quantity schedule.
As at 1 December 20,000
Transferred in 200,000
Units to be accounted for 220,000
Transferred out 180,000
As at 31 December 40,000
Units accounted for 220,000
Next, calculate the equivalent units.
Transferred- Direct Conversion
in Materials Costs
Transferred out (A) 180,000 180,000 180,000
Units as at 31 December (B) 40,000 40,000 40,000
Percentage of completion (C) 100% 80% 50%
Equivalent units as at 31 Dec (D=B×C) 40,000 32,000 20,000
Total equivalent units (A+D) 220,000 212,000 200,000
Next, calculate the cost per equivalent unit.
Transferred- Direct Conversion
Total
in Materials Costs
As at 1 December $0 $20,000 $40,000 $60,000
Added during the month $555,000 $22,000 $20,000 $597,000
Costs to be accounted for $555,000 $42,000 $60,000 $657,000
Total equivalent units 220,000 212,000 200,000
Cost per equivalent unit $2.52 $0.20 $0.30 $3.02
Now, we need to find the cost of units transferred out. It equals $543,600 [= $3.02 ×
180,000].
We also need the figure for cost of work in process as at 31 December. It can be
calculated as shown in the table below.
Transferred- Direct Conversion
Total
in Materials Costs
Units as at 31 December (A) 40,000 40,000 40,000 40,000
Cost per equivalent unit (B) $2.52 $0.20 $0.30 $3.02
Percentage of completion (C) 100% 80% 50%
Total cost (A×B×C) 100,909 6,340 6,000 113,249
Since cost of opening WIP plus cost added must equal cost transferred out and cost in
closing WIP, the cost of closing WIP can be calculated using as short-cut formula given
below:
Cost of closing WIP = Costs to be Accounted for − Costs Transferred Out
In this example, it turns out a figure of $113,400 (total cost to be accounted for of
$657,000 minus costs transferred out of $543,600). The minor difference is due to
rounding off.
The final process cost sheet should look like as follows:
Company ABC
Packaging Department
Cost of Production Report
Dec-13
QUANTITY SCHEDULE
As at 1 December 20,000
Transferred in 200,000
Units to be accounted for 220,000
Transferred out 180,000
As at 31 December 40,000
Units accounted for 220,000
COST SCHEDULE
Direct materials 20,000
Conversion costs 40,000
As at 1 December (A) 60,000
Costs-transferred in (B) 555,000
Company ABC
Packaging Department
Cost of Production Report
Dec-13
Direct materials 22,000
Conversion costs 20,000
Costs added (C) 42,000
Total costs to be accounted for (A+B+C) 657,000
Transferred to finished goods (D) 543,751
Costs transferred-in 100,909
Direct materials 6,340
Conversion costs 6,000
As at 31 December (E) 113,249
Total costs accounted for (D+E) 657,000
