2 4: Process Costing Weighted Average Business LibreTexts

Knowing how to calculate equivalent units of production is an important tool in the business and accounting world. There are two ways to calculate this metric, known as the weighted average method or the first-in, first-out method. Knowing how to calculate equivalent units of production is an important tool for those in the business and accounting world. When thinking about how goods are manufactured and sent in a finished form to their destination, there are a lot of steps. There are costs involved at each step, from starting production to mid-production to finished production.

Therefore, in terms of direct materials, the 1,000 sheets of plywood are 100% complete because all the logs came in at the beginning of the process. A unit that has been completed and transferred out is 100% complete. The equivalent unit cost of materials is, therefore, $1.31 ($118,000/90,000 EU).

Equivalent Units

The treatment of the beginning WIP units will depend on which costing method, usually weighted average or FIFO, the business is using. Process costing is a costing approach used mostly in manufacturing when units are mass-produced in a continuous manner using one or more processes. Manufacturing erasers, chemicals, and processed foods are all examples of this. https://turbo-tax.org/of-the-services/ The trick is to make sure you completely understand how to calculate Equivalent Units and to take the allocation of costs base on EUs step-by-step, which is what we will do in the next section. Units transferred in, completed, and then transferred out are 100% complete, and the Equivalent Units and Actual Units will always be the same for those items.

In process costing, the FIFO and weighted average approaches are utilized. The distinction between the two is that in determining Units that are equivalent, the weighted average integrates units and expenses across two periods. The FIFO method calculates Units that are equivalent based only on current manufacturing activity. Although rounding differences still may occur, this will minimize the size of rounding errors when attempting to reconcile costs to be accounted for (step 2) with costs accounted for (step 4). Recall that Desk Products, Inc., has two departments—Assembly and Finishing. Although this chapter focuses on the Assembly department, the Finishing department would also use the four steps to determine product costs for completed units transferred out and ending WIP inventory.

MCQ – Process Costing

For units in ending work in process, we would take the units unfinished x a percent complete. The percent complete can be different for direct materials, direct labor or overhead. 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. 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.

Accountants often assume that units are at the same stage of completion for both labor and overhead. Accountants call the combined labor and overhead costs conversion costs. Conversion costs are those costs incurred to convert raw materials into the final product (meaning, direct labor and overhead).

Exam Secrets Cheat Sheet

Those are considered 100% complete for the work done in that department, otherwise they wouldn’t be moving forward to the next process. Remember, in the weighted average method, we add the beginning WIP and the product started and finished in the period, adding the units started, but not completed based on the percentage completed. The costs per equivalent unit are used to value the units in the ending inventory and the ones that have been moved to the next process. When calculating the equivalent units with the weighted average method and the FIFO method we  will end up with a different quantity, using the same data.

The key difference between the FIFO and weighted average methods, according to the Accounting for Management website, is how starting work-in-process or incomplete items inventory is treated. The weighted average technique takes this inventory into account when calculating process costs, while the FIFO method does not. C This must match total costs to be accounted for shown in Figure 4.5 «Summary of Costs to Be Accounted for in Desk Products’ Assembly Department». Although not an issue in this example, rounding the cost per equivalent unit may cause minor differences between the two amounts. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead.