Process Costing – Weighted Average Method

Process costing is how overhead allocates equally to the product regardless of how it consumes the activity. However, there is some product which is not yet complete at the end of the accounting period, and we also need to allocate overhead to them too.

There are two types of allocations that can be used in this situation; weighted average and FIFO.

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 of the accounting period and its remaining at the end of 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 20,000 units so there are 10,000 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