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i. Characteristics of the weighted-average method:
1. This method makes no distinction between
work done in the prior and current periods.
It blends together units and costs from the
prior and current periods.
2. The equivalent units of production for a
department are the number of units
transferred to the next department (or
finished goods) plus the equivalent units in
the department’s ending work in process
inventory.
ii. Treatment of direct labor
1. Direct labor costs are often small in
comparison to the other product costs in
process cost systems.
2. Therefore, direct labor and manufacturing
overhead are often combined into one
classification of product cost called
conversion costs. The forthcoming example
combines these costs.
iii. An example of the weighted-average method
1. Assume that Smith Company’s Assembly
Department reported activity for June as
shown on this slide.
2. The first step in calculating the equivalent
units is to identify the units completed and
transferred out of the department in June
(5,400 units for materials and
conversion).
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3. The second step is to identify the equivalent
units of production in ending work in
process with respect to materials for the
month (540 units) and adding this to the
5,400 units from step one.
4. The third step is to identify the equivalent
units of production in ending work in
process with respect to conversion for the
month (270 units) and adding this to the
5,400 units from step one.
Helpful Hint: Explain that there will most likely be
differences in the equivalent unit calculations between
materials and conversion costs, as materials are
usually added at the beginning of production, while
conversion costs are added during the period.
5. The equivalent units of production equals
the units completed and transferred out
(5,400 units) plus the equivalent units
remaining in work in process (540 units for
materials and 270 units for conversion).
6. A different visual depiction of the equivalent
units calculation for materials is shown on
this slide.
7. A different visual depiction of the equivalent
units calculation for conversion is shown on
this slide.
Helpful Hint: The treatment of beginning inventory
under the weighted-average method often puzzles
students, since work done in the prior periods is
included in the equivalent units. Explain that this is
called the weighted-average method precisely because
it averages together beginning inventory and work
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performed in the current period. Costs and units are
treated consistently. Both the equivalent units and the
costs that go into the unit cost calculations under the
weighted-average method include amounts already in
beginning inventory.
IV. Compute and apply costs
Learning Objective 3: Compute the cost per equivalent
unit using the weighted-average method.
A. Computing the cost per equivalent unit—weighted
average method
i. Assume the following additional facts with respect
to Smith Company’s Assembly Department.
ii. The formula for computing the cost per equivalent
units is as shown.
1. The numerators for Smith Company
($124,740 for materials and $85,050 for
conversion) are computed as shown.
2. The cost per equivalent unit for materials
($21.00) and conversion ($15.00) is
computed as shown.
a. The equivalent units of production
(5,940 for materials and 5,670 for
conversion) were computed on a
prior slide.
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B. Applying Costs—Weighted Average Method
Learning Objective 4: Assign costs to units using the
weighted-average method.
i. Computing the cost of ending work in process
inventory.
1. The first step is to record the equivalent
units of production in ending work in
process inventory (540 units for materials
and 270 units for conversion).
2. The second step is to record the cost per
equivalent unit ($21.00 for materials and
$15.00 for conversion).
3. The third step is to compute the cost of
ending work in process inventory ($11,340
for materials, $4,050 for conversion, and
$15,390 in total).
ii. Computing the cost of units transferred out.
1. The first step is to record the units
transferred out to the next department (5,400
units for materials and conversion).
2. The second step is to record the cost per
equivalent unit ($21.00 for materials and
$15.00 for conversion).
3. The third step is to compute the cost of units
transferred out ($113,400 for materials,
$81,000 for conversion and $194,400 in
total).
Learning Objective 5: Prepare a cost reconciliation
report.
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iii. Reconciling costs
1. Computing the costs to be accounted for:
a. The first step is to record the cost of
beginning work in process as shown
on slide 43 ($10,039).
b. The second step is to record the costs
added to production during the period
as shown on slide 43 ($199,751).
c. The third step is to sum these two
costs ($209,790).
2. Computing the costs accounted for:
a. The first step is to record the
previously computed cost of ending
working process inventory ($15,390).
b. The second step is to record the
previously computed cost of units
transferred out ($194,400).
c. The third step is to sum these two
costs ($209,790).
3. Notice the two totals agree indicating that all
costs have been accounted for.
V. Operation costing
A. Operation costing is a hybrid of job-order and process
costing because it possesses attributes of both
approaches.
i. Operation costing is commonly used when batches
of many different products pass through the same
processing departments.
1. For example, similar to job-order costing, a
shoe manufacturer may charge each batch of
shoes for its own specific material costs
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(e.g., shoes made with expensive leather
would be charged accordingly, as would
shoes made with inexpensive synthetic
materials).
2. Similar to process costing, the shoe
manufacturer may accumulate the labor
and overhead costs by department and
assign the same conversion cost per unit to
each shoe regardless of the shoe style.
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