Process Costing – Weighted Average Method
Process costing is the accounting method which allocates equal overhead to each product regardless of its consumption. This costing method assume that all product consume the same level of overhead. At the end of each accounting period, some products are not yet finished. They are called the working in progress (WIP). These WIP also consume some overhead as well, so we need to allocate the cost to them.
There are two types of process costing which is weighted average and FIFO process costing.
In process costing using the weighted average method, there are several steps such as:
| Step in Process Costing | |
|---|---|
| Trace the work in progress | We need to find out the work in progress at the beginning and at the end of accounting period. We also require the amount of material input and finished product transfer out of the department. WIP ending = WIP beg + Addition WIP – Finished WIP |
| WIP at the beginning | Separate the cost of WIP at the beginning period into direct material and conversion cost (DL + OH). |
| Additional WIP | Separate the additional WIP, which injects into the department to direct material and conversion cost. |
| Calculate total direct material and conversion cost | Total the direct material cost of beginning WIP and addition during the period. Do the same for the conversion cost. |
| Calculate the equivalent units | The equivalent units which the department has completed during the accounting period. It is the total of finished WIP and the ending WIP. The finished WIP can add 100% as it already finishes, but the remaining WIP must only include the percentage of completion. |
| Calculate cost per equivalent units | Cost per equivalent is the division of total cost over the equivalent units. |
| Cost of ending WIP | Cost per equivalent multiply by the equivalent units. |
Example
Company A is a manufacturer that uses average process costing for the packaging department. During January 2020, we have the following information:
- 01 January, 5,000 units of working in progress which consist of $ 5,000 direct material and $ 7,000 conversion cost.
- During the month, 20,000 units are transferred to the department. $ 20,000 is a direct material cost and $25,000 of conversion cost.
- During the same month, the packaging department has completed 15,000 units and they are transferred to the next department.
- 10,000 units are still in process at the end of the period. 100% of direct material already includes 80% of conversion cost.
Solution
Work in progress (WIP) movement
WIP ending = WIP beginning + Additional WIP – Finished WIP
10,000 units = 5,000 units + 20,000 units – 15,000 units
During the month, the packaging department needs to complete 25,000 units (5,000 units + 20,000 units) but it can complete only 15,000 units so there are 10,000 units remaining.
Calculate the total cost
| Direct material | Conversion cost | Total | |
|---|---|---|---|
| Beginning | $ 5,000 | $ 7,000 | $ 12,000 |
| Addition | $ 20,000 | $ 25,000 | $ 45,000 |
| Total | $ 25,000 | $ 32,000 | $ 57,000 |
Calculate the equivalent units
| Direct material | Conversion Cost | |
|---|---|---|
| Finished | 15,000 units | 15,000 units |
| Ending WIP | 10,000 units | 10,000 units |
| % of completion | 100% | 80% |
| Ending Equivalent units | 10,000 units | 8,000 units |
| Total equivalent units | 25,000 units | 23,000 units |
Calculate cost per equivalent units
| Direct Material | Conversion cost | |
|---|---|---|
| Total cost | $ 25,000 | $ 32,000 |
| Total equivalent units | 25,000 units | 23,000 units |
| Cost per EU | $ 1 | $ 1.40 |
Cost of ending working in progress
Ending WIP cost = (10,000 * $1) + (8,000 units * 1.4) = $ 21,200