Thus, the term EUP has taken on a generic usage to mean "the denominator used to calculate the unit cost of production for a period in a process costing system." We use EUP in this generic way throughout the discussion of process costs. A detailed example of calculations of equivalent units of production and cost allocation for each of the cost flow methods is presented in the next section. Third, use either the weighted average or the FIFO method to determine the equivalent units of production for each cost component.
Fifth, calculate the cost per equivalent unit for each cost component using the weighted average or FIFO equivalent units of production calculated in step 3. The Decorative Waxes Company is used to demonstrate the steps involved in calculating equivalent production units and cost allocation. for both E
Opening inventory costs Current period Cost-weighted average equivalent units of production units started and. 7Several approaches exist to calculate equivalent units of production and unit costs under weighted average and FIFO. This calculation divides the total cost by the total number of units: the usual weighted average approach that yields average component costs per unit.
Exhibit 6–5 shows the Decorative Waxes Company's cost of production report using the weighted average method.
FIFO Method
When assigning costs to a department, the cost of (1) the goods completed and transferred during the period and (2) the units at the end of the work inventory is determined. Using the weighted average method, the cost of goods transferred is found by multiplying the total number of units transferred by the cost per unit which combines all costs of the components or the total cost per EUP. The weighted average total cost of $1.56 is the average total cost of each candle completed in April, regardless of when production began.
The total FIFO cost of $1.50 is the total cost of each candle produced (both started and finished) during the period. As shown in the manufacturing cost report in Figure 6-6, the two-step calculation required to determine the cost of goods transferred in clearly illustrates this FIFO logic. These units had material cost and some labor and overhead costs applied at the beginning of the period.
To determine the total cost of producing the units in beginning inventory, the beginning inventory costs are added to the current period costs needed to complete the goods. Then, the cost of units started and completed in the current period is calculated using the current period's costs. The FIFO costing process for ending work in process inventory is the same as the weighted average method.
8 Due to FIFO's two-step process for determining the cost of units transferred, there is a question of how to calculate a per-unit cost for the units that were in the beginning inventory and those that were in the current inventory. period started and completed. The candles started and completed in April are carried over at the current period cost of $1.50 (calculated in step 5). For the Decorative Waxes Company, the amended FIFO assigns an average cost of $1.56 per candle to all candles transferred from the department.
Exhibit 6–9 presents the cost of production report using the Decorative Waxes Company's standard cost information.9. Raw Materials Inventory is credited for the actual cost of the materials withdrawn during April ($433,500). WIP inventory is debited for the standard cost of labor allowed based on the equivalent units produced in April.
WIP inventory is debited for standard overhead cost based on EUPs produced in April. A standard costing system eliminates the need to worry about differentiating between the unit cost of the beginning units of inventory that were completed and the unit cost of the units started and finished in the current period.
REVISITING
A process costing system may use a weighted average or FIFO method to calculate equivalent units and assign costs to production. Determine the number of equivalent units of production on a weighted average or FIFO basis for each cost component. Different methods are used to calculate equivalent units of production under weighted average and FIFO methods.
Unlike FIFO, the weighted average method does not exclude the equivalent units that were in the beginning inventory. To convert from weighted average to FIFO, simply remove the corresponding units produced in the previous period from beginning work in process. The distinct relationship between the weighted average and FIFO costing models can also be used to derive the equivalent units of production.
Calculate the EUP for direct materials, direct labor, and overhead using weighted average process costing. What is the weighted average cost per equivalent unit for the cost components for October. Using weighted average process cost, what is the cost per equivalent unit for each cost component.
Prepare a schedule showing TakeThat's August 2001 calculation of weighted average equivalent units of production and cost per equivalent unit. Compute unit costs for February using the weighted average method for direct material and conversion. Determine the equivalent units of production for each cost component for each department by the weighted average method.
During the week, another 200,000 tons of ore were started in the process. week, 35,000 tons remained in Work in Process Inventory and were 70 percent complete in terms of material and 60 percent complete in terms of conversion. Prepare a schedule to calculate equivalent units of production by cost component assuming the weighted average method. For October, a production cost report is prepared assuming that the company uses the weighted average method.
The company has always used the weighted average method to determine equivalent production and unit costs. Prepare a manufacturing cost report for each cost element for May using the weighted average method.
