We now present the four steps used to prepare a departmental production report using weighted-average process costing.
Step 1: Analysis of Physical Flow of Units The first step is to prepare a table sum- marizing the physical flow of production units during March. The table is shown in Exhibit 4–5 and reflects the following inventory formula.
(
Physical units in beginning work in process) + (
Physical units started
) − (
Physical units completed and transferred out
) = (
Physical units in ending work
in process )
Step 2: Calculation of Equivalent Units The second step in the process-costing procedure is to calculate the equivalent units of direct material and conversion activity.
A table of equivalent units, displayed in Exhibit 4–6, is based on the table of physical flows prepared in step 1 (Exhibit 4–5). The 40,000 physical units that were completed and transferred out of the Cutting Department were 100 percent complete. Thus, they represent 40,000 equivalent units for both direct material and conversion. The 10,000 units in the ending work-in-process inventory are complete with respect to direct material, and they represent 10,000 equivalent units of direct material. However, they are only 50 percent complete with respect to conversion. Therefore, the ending work-in-process inventory represents 5,000 equivalent units of conversion activity (10,000 physical units × 50% complete).
As Exhibit 4–6 indicates, the total number of equivalent units is calculated as follows:
(
Equivalent units of activity in units completed
and transferred out ) + (
Equivalent units of activity in ending
work in process
) = (
Total equivalent units
of activity )
Learning Objective 4-3 Prepare a table of equivalent units under weighted-average process costing.
Exhibit 4–5
Step 1: Analysis of Physical Flow of Units—Cutting Department
Physical Units Work in process, March 1 ... 20,000 Units started during March ... 30,000 Total units to account for... 50,000 Units completed and transferred out during March ... 40,000 Work in process, March 31 ... 10,000 Total units accounted for... 50,000
Physical Units
Percentage of Completion with Respect to
Conversion
Equivalent Units Direct
Material Conversion Work in process, March 1 ... 20,000 10%
Units started during March ... 30,000 Total units to account for ... 50,000
Units completed and transferred out during March .... 40,000 100% 40,000 40,000
Work in process, March 31 ... 10,000 50% 10,000 5,000
Total units accounted for ... 50,000
Total equivalent units ... 50,000 45,000
Exhibit 4–6
Step 2: Calculation of Equiva- lent Units—Cutting Depart- ment (weighted-average method)
Direct Material Conversion Total Work in process, March 1 (from Exhibit 4–4) ... $ 50,000 $ 7,200 $ 57,200 Costs incurred during March (from Exhibit 4–4) ... 90,000 193,500 283,500 Total costs to account for ... $140,000 $200,700 $340,700 Equivalent units (from step 2, Exhibit 4–6) ... 50,000 45,000
Costs per equivalent unit ... $2.80 $4.46 $7.26
$140,000 ________
50,000 $200,700________
45,000 $2.80 + $4.46
Note that the total equivalent units of activity, for both direct material and conversion, exceeds the activity accomplished in the current period alone. Since only 30,000 physi- cal product units were started during March and direct material is added at the beginning of the process, only 30,000 equivalent units of direct material were actually placed into production during March. However, the total number of equivalent units of direct mate- rial used for weighted-average process costing is 50,000 (see Exhibit 4–6). The other 20,000 equivalent units of direct material were actually entered into production during the preceding month. This is the key feature of the weighted-average method. The number of equivalent units of activity is calculated without making a distinction as to whether the activity occurred in the current accounting period or the preceding period.
Step 3: Computation of Unit Costs The third step in the process-costing proce- dure, calculating the cost per equivalent unit for both direct material and conversion activity, is presented in Exhibit 4–7. The cost per equivalent unit for direct material is computed by dividing the total direct-material cost, including the cost of the beginning work in process and the cost incurred during March, by the total equivalent units (from step 2, Exhibit 4–6). An analogous procedure is used for conversion costs.
Step 4: Analysis of Total Costs Now we can complete the process-costing pro- cedure by determining the total cost to be transferred out of the Cutting Department’s Work-in-Process Inventory account and into the Stitching Department’s Work-in-Process Inventory account. Exhibit 4–8 provides the required calculations. For convenience, the computations in step 3 are repeated in Exhibit 4–8. At the bottom of Exhibit 4–8, a check is made to be sure that the total costs of $340,700 have been fully accounted for in the cost of goods completed and transferred out and the balance remaining in work-in- process inventory.
The calculations in Exhibit 4–8 are used as the basis for the following journal entry to transfer the cost of goods completed and transferred out of the Cutting Department.
On March 31, the Cutting Department’s Work-in-Process Inventory account appears as follows. The March 31 balance in the account agrees with that calculated in Exhibit 4–8.
Work-in-Process Inventory: Stitching Department ... 290,400
Work-in-Process Inventory: Cutting Department ... 290,400
Work-in-Process Inventory: Cutting Department
March 1 balance 57,200
March cost of direct material, direct labor, and applied manufacturing overhead
283,500 290,400 Cost of goods completed
and transferred out of the Cutting Department
March 31 balance 50,300
Learning Objective 4-4 Compute the cost per equivalent unit under the weighted-average method of process costing.
Learning Objective 4-5 Analyze the total production costs for a department under the weighted-average method of process costing.
Exhibit 4–7
Step 3: Computation of Unit Costs—Cutting Department (weighted-average method)
Learning Objective 4-6 Prepare a departmental production report under weighted-average process costing.
Direct Material Conversion Total Work in process, March 1 (from Exhibit 4–4) ... $ 50,000 $ 7,200 $ 57,200 Costs incurred during March (from Exhibit 4–4) ... 90,000 193,500 283,500 Total costs to account for ... $140,000 $200,700 $340,700 Equivalent units (from step 2, Exhibit 4–6) ... 50,000 45,000
Costs per equivalent unit ... $2.80 $4.46 $7.26
$140,000 ________
50,000 $200,700________
45,000 $2.80 + $4.46
Cost of goods completed and transferred out of the Cutting Department during March:
(Number of units
transferred out ) × ( Total cost per
equivalent unit ) ... 40,000 × $7.26 ... $290,400 Cost remaining in March 31 work-in-process inventory in the Cutting Department:
Direct material:
( Number of equivalent
units of direct material ) × ( Cost per equivalent
unit of direct material ) ... 10,000 × $2.80 ... $ 28,000 Conversion:
(Number of equivalent
units of conversion ) × (Cost per equivalent
unit of conversion ) ... 5,000 × $4.46 ... 22,300 Total cost of March 31 work in process ... $ 50,300 Check: Cost of goods completed and transferred out ... $290,400 Cost of March 31 work-in-process inventory ... 50,300 Total costs accounted for ... $340,700
Exhibit 4–8 Step 4: Analysis of Total Costs—Cutting Department (weighted-average method)
Departmental Production Report We have now completed all four steps necessary to prepare the March production report for the Cutting Department. The report, which is displayed in Exhibit 4–9, simply combines the tables presented in Exhibits 4–6 and 4–8. The report provides a convenient summary of all of the process-costing calculations made under the weighted-average method.
Why is this process-costing method called the weighted-average method?
Because the cost per equivalent unit for March, for both direct material and conver- sion activity, is computed as a weighted average of the costs incurred during two different accounting periods, February and March. To demonstrate this fact, we will focus on direct material. Since direct material is placed into production at the begin- ning of the process, the 20,000 physical units in the March 1 work in process already have their direct material. The direct-material cost per equivalent unit in the March 1 work in process is $2.50 ($50,000 ÷ 20,000, from Exhibit 4–4). This cost was actually incurred in February.
In March, 30,000 physical units were entered into work in process and received their direct material. The direct-material cost incurred in March was $90,000. Thus, the direct- material cost per equivalent unit experienced in March was $3.00 ($90,000 ÷ 30,000).
Under the weighted-average method of process costing, the cost per equivalent unit for direct material was calculated in Exhibit 4–7 to be $2.80. This $2.80 unit-cost figure is a weighted average as the following calculation shows.
The point of this demonstration is that under weighted-average process costing, unit- cost figures are weighted averages of costs incurred over two or more accounting periods.
“The goal is for management to use the [cost] information daily.
We want to . . . make sure that people have the information they need to make more informed decisions.” (4c)
UnitedHealth Group (formerly John Deere Health Care)
Weights
Direct-material cost per equivalent unit in February
Direct- material cost per equivalent unit in March
Proportion of total equivalent units of direct material added during March
Weighted- average cost per equivalent unit of direct material Proportion of total equiv-
alent units of direct material in the beginning work-in-process inventory
$2.50 × 20,000 $3.00 ×
20,000 30,000
30,000
+ + 20,000+ 30,000 = $2.80
Exhibit 4–9
March Production Report:
Cutting Department (weighted-average method)
MVP SPORTS EQUIPMENT COMPANY March Production Report: Cutting Department
Physical Units
Percentage of Completion with Respect to
Conversion
Equivalent Units Direct
Material Conversion Work in process, March 1 ... 20,000 10%
Units started during March ... 30,000 Total units to account for ... 50,000
Units completed and transferred out during March ... 40,000 100% 40,000 40,000
Work in process, March 31 ... 10,000 50% 10,000 5,000
Total units accounted for ... 50,000
Total equivalent units ... 50,000 45,000
Direct Material Conversion Total
Work in process, March 1 (from Exhibit 4–4) $ 50,000 $ 7,200 $ 57,200
Costs incurred during March (from Exhibit 4–4) 90,000 193,500 283,500
Total costs to account for $140,000 $200,700 $340,700
Equivalent units (from step 2, Exhibit 4–6) 50,000 45,000
Costs per equivalent unit $2.80 $4.46 $7.26
$140,000 ________
50,000 ________$200,700
45,000 $2.80 + $4.46 Cost of goods completed and transferred out of the Cutting Department during March:
(Number of units
transferred out ) × ( Total cost per
equivalent unit ) ... 40,000 × $7.26 ... $290,400 Cost remaining in March 31 work-in-process inventory in the Cutting Department:
Direct material:
( Number of equivalent
units of direct material ) × ( Cost per equivalent
unit of direct material ) ... 10,000 × $2.80 ... $ 28,000 Conversion:
(Number of equivalent
units of conversion ) × (Cost per equivalent
unit of conversion ) ... 5,000 × $4.46 ... 22,300 Total cost of March 31 work in process ... $ 50,300 Check: Cost of goods completed and transferred out ... $290,400 Cost of March 31 work-in-process inventory ... 50,300 Total costs accounted for ... $340,700
Other Issues in Process Costing
Several other issues related to process costing are worth discussion.