Process Costing

Process Costing is used when the goods or services being produced are the same or
uniform. For example, the television sets that Sony sells to Hartono Electronics are the
same as the television sets sold to Hypermart or Giant. Similarly, the gallon of gas that
Crabs sells to you is the same as the gallon that Crabs sells to your neighbor. These are
typically assembly-line operations. You can also have process costs in service industries
(e.g., check processing in a bank, checking baggage at an airport; washing and ironing
shirts, and doing a basic estate plan).

Because the products are the same, then the costs for every product should be identical.
Therefore, there is no reason to keep track of how much each order costs to produce.
With Process Costing, you find the average cost of all the units that you produced
during the period in question and treat the average as the actual cost of each unit. For
example, if Sony makes 300,000 television sets at a cost of $6,000,000, then each
television costs $20. Because you are not keeping records on every order, Process
Costing is less expensive to maintain.

Cost Allocation
Recall that there are three components of cost:

 Direct Materials;
 Direct Labor; and
 Manufacturing Overhead.

In Process Costing, you calculate a separate average cost for each of these
components. The reason that you calculate a separate average cost for each
component of cost is because the components may be incurred differently. If the
components of cost are incurred in the same manner (e.g., they have the same Cost
Driver) then you can combine them and treat them as one cost pool. For example, if
you apply Manufacturing Overhead using Direct Labor Hours as its Cost Driver, then
you can combine Manufacturing Overhead and Direct Labor, and treat the Conversion
Costs as one cost. This is because the same driver (Direct Labor Hours) is being used
to measure both components.
Grouping Of Units
As noted above, in Process Costing we calculate average costs for each component of
cost for a given period of time. For example, we would calculate the average cost for
this month as follows:

Cost Incurred This Month

---------------------------------------------
Work Done During This Month

This average cost calculation can become more complicated if you are dealing with
units that were only partially made during this month. In this case, the numerator would
only include the cost incurred on those units during this month, and the denominator
would include only the work done on those units during this month.

When calculating average costs, we divide the units that passed through Work In
Process during this month into three groups of similarly situated units:

Name Description
Beginning Inventory Units left over from the prior period and completed during this
period.
Started and Completed Units that were started during this period and completed
during this period.
Ending Inventory Units that were started during this period but not finished.

These groups have the following characteristics:

Units Started This Period? Units Finished This Period?

Beginning Inventory NO (Started Last Period) YES
Started and Completed YES YES
Ending Inventory YES NO (Not Yet Finished)

The units that are finished this month consist of Beginning Inventory and Started &
Completed. The units that are started this month consist of Started & Completed and
Ending Inventory:

Units Started = Started and Completed + Ending Inventory

Units Finished = Beginning Inventory + Started and Completed

Knowing these relationships can help you calculate the number of units that are in each
of the three groups of units.
For example, if you know that: (i) 10,000 units were started; (ii) 6,000 units were
completed; and (iii) 2,000 units were in Beginning Inventory, then you can compute the
following:

Group Number of Units

Beginning Inventory 2,000 Given
Started and Completed 4,000 Units Finished – Beginning Inventory (6,000-2,000)
Ending Inventory 6,000 Units Started – Started & Completed (10,000 – 4,000)

You are told that Beginning Inventory consists of 2,000 units, and that you finished
6,000 units. Since you know that the units finished consist of Beginning Inventory and
Started & Completed, then you can calculate the number of units in Started &
Completed by taking the units finished (6,000) and subtracting the Beginning Inventory
(2,000). The remaining 4,000 units are in Started and Completed. Similarly, you are
told that you started work on 10,000 units. Since you know that the units started consist
of Started & Completed and Ending Inventory, then you can calculate the number of
units in Ending Inventory by taking the units started (10,000) and subtracting the
number of units in Started & Completed (4,000). The remaining 6,000 units are in
Ending Inventory.

Percentage Compete
In this area, you will often see Beginning and Ending Inventories described as being a
certain percentage complete (e.g., Ending Inventory is 40% complete). This notation is
not stating that 40% of the units in Ending Inventory are complete. If any unit were
complete, it would not be in Ending Inventory. By definition, none of the units in Ending
Inventory are completed. This notation is stating that we have done 40% of the work
that needs to be done in order to complete the Ending Inventory; and 60% of the work
on those units still needs to be done.

In real life, the units in either Beginning Inventory or Ending Inventory are probably not
all at the same stage of completion. This notation is stating that on average, the Ending
Inventory is 40% complete. The use of the average rate of completion in these
calculations is a common convention in this area.

Cost Behavior
In real life, the average amount of work done is known (e.g., you would know that the
Beginning Inventory is 55% complete as to Direct Materials and 75% complete as to
Conversion Costs). Sometimes, problems in this area do not provide you with the
actual percentage completed for each group. Instead, the problem describes the
behavior of the cost, and it asks you to calculate the appropriate percentage. For this
reason we will discuss two types of costs: Initial Costs and Uniform Costs.
Initial Costs

Consider the following example. Clampett Co. makes

baseball bats by whittling (carving) the bats into shape
from a piece of wood. Clampett Co. hires Jed to whittle
the baseball bats. During this period, Clampett Co. paid
$20 for wood, and Jed started work on 20 bats:

 He completed 10 baseball bats; and

 He did half of the work on 10 more baseball bats.

How much did Clampett Co. spend on the cost of wood for each baseball bat? As soon
as Jed starts work on a baseball bat, he uses all the wood that he is ever going to use
on that bat. This is because he is adding all of a bat’s wood cost at the start of the
manufacturing process. This is sometimes referred to as an Initial Cost. Initial Costs are
added “at the beginning of the process”.

Because the bats have the same wood cost, whether or not they are completed, you
treat completed and partially completed bats exactly the same when calculating the
average cost of wood in a bat. This is true of all Initial Costs. Thus, the wood cost is
calculated as follows:
$20 total wood cost / 20 baseball bats = $1 per bat
Each bat cost $1 regardless of whether it was finished.

If Clampett Co. had five bats left over from last month, it would not affect our calculation.
These 5 bats in Clampett Co.’s Beginning Inventory would have received all of the wood
that they were going to receive when Jed started work on them last month. The $20 in
our calculation is the amount that Clampett Co. spent on wood this month, and this
month’s wood cost has nothing to do with the Beginning Inventory. Beginning Inventory
is not included in the denominator when calculating the average wood cost for this
month.

Uniform Costs

Another way that costs can behave is that they can be added “evenly throughout the
manufacturing process”. This is the way we often think of costs. For example, assume
that you hire a student to paint your house, and you estimate that the work will take 20
hours at a cost of $10 an hour. When half of the house is painted, we would expect that
the labor cost incurred up to that point would be $100 (10 hours at $10 an hour). Our
expectation is due to the fact that we assume that the student works at an even or
uniform rate. These costs are often called Uniform Costs.
Continuing the Clampett Co. example, assume that Jed’s labor cost is added evenly
throughout the process, and Clampett Co. paid Jed $30 for his labor in making this
month’s bats:

 10 completed baseball bats; and

 10 half-completed baseball bats.

The amount of labor in a half-completed baseball bat is half of the amount of labor in a
completed bat. Let the variable "x" represent the labor cost of a completed bat, and “½x”
represent the labor cost to complete half of one bat. You can solve for the labor cost of
a completed bat as follows:

Labor Cost of 10 Whole Bats + Labor Cost of 10 Half-Bats = Total Labor Cost
10(x) + 10 (½x) = $30
10x + 5x = $30
15x = $30
x = $30/15
x = $2

Each completed bat has a labor cost of $2, and each half-completed bat has a labor
cost of $1 so far.

Equivalent Units

When calculating the average labor cost of each baseball bat, our denominator of 15
was arrived at by converting the 10 half-completed bats into 5 completed bats. We call
this process calculating Equivalent Units. In other words, the amount of labor needed to
do 10 half-completed bats is the same as (“equivalent to”) the amount of labor that is
needed to make 5 completed bats. Similarly, the decision to treat half completed bats
the same as (“equivalent to”) whole bats when calculating the wood cost of each
baseball bat is an example of calculating Equivalent Units. The calculation of the
Equivalent Units provides the denominator used in the calculation of average costs.

We are going to discuss two methods of calculating costs when using Process Costing.
We will first focus on the FIFO (First In First Out) Costing Method. Afterwards, we will
discuss the Weighted Average Costing Method. Under the FIFO Costing Method:

 Equivalent Units for Uniform Costs are calculated by multiplying: (i) the number
of units involved, by (ii) the percentage of work done this period (e.g., 10 x 50%).

 Equivalent Units for Initial Costs are zero for Beginning Inventory, and 100% of
the units for Started & Completed and Ending Inventory.

When using the Weighted Average Costing Method, the Equivalent Units are slightly
different.
Other Cost Behavior Patterns

Initial and Uniform Costs are not the only two ways that costs can behave. Non-Uniform
Costs can behave a number of different ways. Initial and Uniform Costs merely provide
discussion scenarios. These problems may not describe the cost behavior. Instead,
they may just give the percentage of work done during the time period. If the problem
gives you that percentage, then use the percentage given and do not worry about
whether you are dealing with Initial and/or Uniform Costs. The sole purpose of talking
about whether a cost is an Initial or Uniform Cost is to give you those percentages.

Process Costing Steps

When calculating the cost of units using Process Costing, you do the following:

Step 1: Physical Flow Analysis

You calculate the number of units in each of the following three groups of
units: Beginning Inventory, Started & Completed, and Ending Inventory.
Step 2: Calculation of Equivalent Units
You calculate the number of units to include in the denominator of the
average cost calculation (e.g., 20 bats for wood cost and 15 bats for labor
cost).
Step 3: Computation of Unit Cost
You calculate the average cost for each component of cost (cost per
Equivalent Unit).
Step 4: Valuation of Inventories
You calculate the cost of each of the three groups of units.
Step 5: Cost Reconciliation
You make sure that you have allocated all of your costs to the three groups of
units.

FIFO Example
Assume that Paul, Inc. uses Process Costing to calculate the cost to produce its salad
dressing. Direct Materials are added at the beginning of the process, and Direct Labor
and Manufacturing Overhead are added evenly throughout the process. Paul had the
following cost data:

Beginning Inventory, May 1 $ 42,360

Operating costs for May:
Direct Materials $360,000
Direct Labor 211,200
Manufacturing Overhead 316,800
888,000
Total Costs $930,360
Beginning Inventory consisted of 20,000 gallons (30% complete). During May, 180,000
gallons were started. On May 31, the Ending Inventory consisted of 30,000 gallons
(40% complete).

Step 1: Physical Flow Analysis.

First, we need to calculate the number of units that are in each of the three groups of
units described above. You know that Beginning Inventory consists of 20,000 gallons
because it is given. You also know that Ending Inventory consists of 30,000 gallons
because it is also given. In addition, you are also told that Paul started work on 180,000
gallons. Using the fact that the units started consist of Ending Inventory and Started &
Completed, you can calculate the number of units that were Started and Completed:

Units Started = Ending Inventory + Started & Completed = 180,000

30,000 + Started & Completed = 180,000
Started & Completed = 180,000 – 30,000
Started & Completed = 150,000

Let us start a table to calculate the average cost of the units that Paul produces, and
include this information about the units:

Units
Beg. Inv. 20,000
S&C 150,000
End. Inv. 30,000

Step 2: Calculation of Equivalent Units

In FIFO, our average cost calculation involves only this month’s costs and the work
done this month. We, therefore, need to know the percentage work done this month in
order to calculate the number of units in the denominator of an average cost calculation.
The summary of the Beginning Inventory describes the Beginning Inventory as it existed
at the start of the month. At the beginning of the month, the Beginning Inventory was
30% complete. Therefore, Paul had to complete the remaining 70% of the Beginning
Inventory this month in order to finish those units. The summary of Ending Inventory
describes those units as they existed at the end of the month. At the end of the month,
the Ending Inventory was 40% complete. Thus, Paul did 40% of those units this month.
The Started and Completed units were started this month and finished this month. So,
Paul did 100% of those units this month.
Put the information regarding the percentage of work done this month in our table:

This
Month’s
Units %
Beg. Inv. 20,000 70%
S&C 150,000 100%
End. Inv. 30,000 40%

Paul spent $360,000 on Direct Materials this month. This is the numerator of our
average cost calculation. We are told that the Direct Materials were added at the
beginning of the process (an Initial Cost). If you wish, you can note that Direct Materials
is an Initial Cost by adding “I” to the column heading. Include this information in our
table:
This
Month’s DirMat.
Units % $360K (I)
Beg. Inv. 20,000 70%
S&C 150,000 100%
End. Inv. 30,000 40%

Next, consider the Equivalent Units for the Direct Materials cost calculation. Remember
that the Equivalent Units are the denominator of our average cost calculation. Because
(i) the Beginning Inventory was started last month, and (ii) Direct Materials is an Initial
Cost (added at the start of the manufacturing process), then Paul did not add any
additional Direct Materials to its Beginning Inventory this month in order to finish the
Beginning Inventory. Thus, Beginning Inventory has no share of this month’s Direct
Materials cost. Its Equivalent Units for Direct Materials cost are zero.
This
Month’s DirMat.
Units % $360K (I)
Beg. Inv. 20,000 70% 0
S&C 150,000 100%
End. Inv. 30,000 40%

The Ending Inventory was started this month, and all the Direct Materials that were
needed to complete the Ending Inventory were added at the beginning of the
manufacturing process. Therefore, each unit of Ending Inventory has the same amount
of Direct Materials Cost as a unit that was completely manufactured this month. So, in
the denominator of the average cost calculation, we should treat incomplete units the
same as completed units (as was the case for the wood cost in the Clampett Co.
example). In our calculation, we will include 30,000 units in the denominator for the
Ending Inventory. We include all of the Started and Completed units in the denominator
because all of the work done on those units occurred this month.
Thus, Direct Materials will have 180,000 Equivalent Units as the denominator of its
average cost calculation:
This
Month’s DirMat.
Units % $360K (I)
Beg. Inv. 20,000 70% 0
S&C 150,000 100% 150K
End. Inv. 30,000 40% 30K
180K

Next, consider the Direct Labor ($211,200) and Manufacturing Overhead ($316,800).
They are both “added evenly throughout the process”. Because they are both Uniform
Costs, we can add them together and treat the Conversion Costs ($528,000) as one
cost. This is the numerator of the average cost calculation.

Beginning Inventory was 70% done this month. That means that each of the Beginning
Inventory units has 70% of the Conversion Costs (for this month) that are contained in
each of the Started and Completed units. So, convert Beginning Inventory’s 20,000
7/10ths-completed units into 14,000 (20,000 x 70%) completed units (Equivalent Units)
just like we did for Clampett Co.'s labor cost. Similarly, you convert Ending Inventory’s
30,000 4/10ths-completed units into 12,000 (30,000 x 40%) completed units (Equivalent
Units). Again, you include all of the Started and Completed units in the denominator.
Thus, Conversion Costs will have 176,000 Equivalent Units as the denominator in its
average cost calculation for Conversion Costs. If you wish, you can note that
Conversion Costs are a Uniform Cost by adding a “U” to the column heading.
This
Month’s DirMat. Conv.
Units % $360K (I) $528K (U)
Beg. Inv. 20,000 70% 0 14K
S&C 150,000 100% 150K 150K
End. Inv. 30,000 40% 30K 12K
180K 176K
Chapter 4 Notes Page 10

Step 3: Computation of Unit Cost

Next, we calculate cost per Equivalent Unit for each component of cost. We divide the
numerator (the Cost) by the denominator (Equivalent Units) for each component of cost.
This
Month’s DirMat. Conv.
Units % $360K (I) $528K (U)
Beg. Inv. 20,000 70% 0 14K
S&C 150,000 100% 150K 150K
End. 30,000 40% 30K 12K
Inv.
Equivalent Units: 180K 176K
Calculation: $360K $528K Cost (
180K 176K
Equivalent Units )
Cost Per Equivalent Unit: $2.00 $3.00

Step 4: Valuation of Inventories

Now we figure out how much each group of units cost to make.

The Beginning Inventory’s total cost will include the $42,360 that was incurred last
month. This was the cost to make 30% of these units last month. This month, Paul
spent nothing on Direct Materials for the Beginning Inventory. Thus, we add nothing to
the $42,360 on account of Direct Materials for this month. The amount of Conversion
Cost work done this month on the Beginning Inventory is equivalent to the amount of
work that would have been needed in order to do 14,000 full units (Equivalent Units),
and the cost of this work is $3 per Equivalent Unit. So, we add $42,000 ($3 x 14,000)
for Conversion Cost to the $42,360 from last month in order to get the total cost of the
Beginning Inventory ($84,360):
This
Month’s DirMat. Conv.
Units % $360K (I) $528K (U) Cost of Group
Beg. Inv. 20,000 70% 0 14K [42,360+(3x14K)] $84,360
S&C 150,000 100% 150K 150K
End. Inv. 30,000 40% 30K 12K
Equivalent Units: 180K 176K
Calculation: $360K $528K
180K 176K
Cost Per Equivalent Unit: $2.00 $3.00

The Started and Completed units were completely done this month, and the cost to
make a unit this month is $5 per unit ($2 per unit for Direct Materials & $3 per unit for
Conversion Costs). Since Started & Completed consists of 150,000 units produced at a
cost of $5 per unit, the total cost to make these units is $750,000 (150,000 x 5).
Chapter 4 Notes Page 11

Beginning Inventory and Started and Completed represent all of the units that we
completed and sent to Finished Goods. The total cost of these units is referred to
Transferred Out.
This
Month’s DirMat. Conv.
Units % $360K (I) $528K (U) Cost of Group
Beg. Inv. 20,000 70% 0 14K [42,360+(3x14K)] $84,360
S&C 150,000 100% 150K 150K 150K(2+3) $750,000
End. Inv. 30,000 40% 30K 12K Transferred Out $834,360
Equivalent Units: 180K 176K
Calculation: $360K $528K
180K 176K
Cost Per Equivalent Unit: $2.00 $3.00

Paul spent $60,000 ($2x30,000) on Direct Materials for the Ending Inventory. It also
spent $36,000 ($3x12,000) on Conversion Costs for the Ending Inventory. Thus, Paul
spent $96,000 to complete 40% of the Ending Inventory.
This
DirMat.
Month’s Conv.
Units % $360K (I) $528K (U) Cost of Group
Beg. Inv. 20,000 70% 0 14K [42,360+(3x14K)] $84,360
S&C 150,000 100% 150K 150K 150K(2+3) $750,000
End. Inv. 30,000 40% 30K 12K Transferred Out $834,360
Equivalent Units: 180K 176K (2x30K)+(3x12K) $96,000
Calculation: $360K $528K Total Cost of Units: $930,360
180K 176K
Cost Per Equivalent Unit: $2.00 $3.00

Step 5: Cost Reconciliation

In this step, we confirm that we took all of Paul’s costs, and applied them to the units
that Paul produced:

Costs Incurred Cost of Units

Last Month’s Cost: $42,360
Direct Materials: $360,000 Beginning Inventory: $84,360
Direct Labor: 211,200 Started & Completed: $750,000
Manufacturing Overhead: 316,800 Ending Inventory: $96,000
Total: $930,360 Total: $930,360
Chapter 4 Notes Page 12

PRODUCTION COST REPORT

All of this information is then summarized in an internal report (Production Cost Report).
You are not responsible for knowing how to construct such a report, but you are
required to know how to get the numbers used in that report (as we did above).

Production Cost Report

Unit Information
Physical Equivalent Units
Flow of Production Units Direct Material Conversion Costs
Work In Process, Beginning: 20,000
Started During Current Period: 180,000
To Account For: 200,000
Completed & Transferred Out:
From Beginning Work In Process: 20,000 0 14,000
Started & Completed: 150,000 150,000 150,000
Work In Process, Ending 30,000 30,000 12,000
Accounted For: 200,000
Work Done In Current Period Only: 180,000 176,000
Cost Information
Production Direct Conversion
Costs Material Costs
Work In Process, Beginning $42,360 (Work Done In Prior Period)
Costs Added In Current Period: 888,000 $360,000 $528,000
Divide By Equivalent Units This Period: ÷180,000 ÷ 176,000
Costs Per Equivalent Unit $2.00 $3.00
Total Costs To Account For: $930,360
Costs Accounted For:
Goods Transferred Out:
Beginning Work In Process: $42,360
Direct Materials, Current Period: 0 x $2.00
Conversion Costs, Current Period: 42,000 14,000 x $3.00
Total From Beginning Inventory: 84,360
Started & Completed: 750,000 (150,000 x $2.00) + (150,000 x $3.00)
Total Cost of Units Transferred Out: 834,360
Work In Process, Ending:
Direct Materials: 60,000 30,000 x $2.00
Conversion Costs: 36,000 12,000 x $3.000
Total Work In Process, Ending 96,000
Total Costs Accounted For: $930,360
Chapter 4 Notes Page 13

Use of Calculations

You can see how these calculations are used in the accounting process by considering
the Work In Process t-account:

WORK IN PROCESS
$42,360 (Beginning Balance) $84,360 (Beginning Inventory)
211,200 (Direct Labor) 750,000 (Started & Completed)
316,800 (Manufacturing Overhead)
360,000 (Direct Materials)
$96,000 (Ending Balance)

Weighted Average Costing Method

With the Weighted Average Costing Method, we want to take the costs incurred on the
Beginning Inventory during last month; add those costs to the costs incurred this month;
and calculate an average cost for the work done over the last two months on all of the
units in Work In Process. With the FIFO Costing Method, we calculated the average
cost for the current month by including this month’s costs in the numerator and dividing
them by the number of Equivalent Units made this month (the denominator). Other the
other hand, with the Weighted Average Costing Method, we will calculate the average
cost for the last two months by including the last two months’ costs in the numerator and
dividing their total by the Equivalent Units produced over the last two months (the
denominator).

You can calculate the cost of units using the Weighted Average Costing Method by
making the following changes to the FIFO Costing Method that we discussed above.

 Add the costs of the Beginning Inventory from last month to the costs for the
current month (numerator).
 The percentage of work done on the Beginning Inventory becomes 100%
regardless of whether you are dealing with an Initial or Uniform Cost. [For an
Initial Cost, the question that we ask when we determine whether to include a
unit in Equivalent Units is, “Were the units started during the last two months?”
(With FIFO, the question was “Were the units started this month?”) For a
Uniform Cost, the question that we ask when we determine whether to include a
unit in Equivalent Units is, “How much work was done during the last two
months?” (With FIFO, the question was “Was the work was done this month?”)
 Do not add the Beginning Inventory cost from last month back to the cost of the
Beginning Inventory in the calculation of the cost of Beginning Inventory. (This
cost is already reflected in the average cost per Equivalent Unit, and Beginning
Inventory was given a full share (100%) of those costs.)

Complete the remainder of the table in the same way as you did before.
Chapter 4 Notes Page 14

Weighted Average Example

Take the Paul, Inc. example that we did above, and add the following information
regarding the $42,360 that was spent on the Beginning Inventory last month:

Cost
Direct Materials in Beginning Inventory $35,000
Conversion Costs in Beginning Inventory 7,360
Total Cost From Last Month $42,360

You can now calculate the cost of the units using the Weighted Average Costing
Method. The changes from FIFO are shaded in the following table. Keep in mind that:

 The Direct Materials Cost to be allocated becomes $395,000 [$35,000 (last

month) + $360,000 (this month)];
 The Conversion Cost to be allocated become $535,360 [$7,360 (last month) +
$528,000(this month)];
 The Direct Materials percentage becomes 100%; and
 Do not add the $42,360 to the cost of the Beginning Inventory.

Weighted Average Costing Method:

2 Month’s DMat(I) Conv.(U)

Units % $395K $535,360 Cost of Group
Beg. Inv. 20,000 100% 20K 20K 20K(1.98+2.94) $ 98,340*
S&C 150,000 100% 150K 150K 150K(1.98+ 2.94) $737,550*
End. Inv. 30,000 40% 30K 12K Transferred Out $835,890*
Equivalent Units: 200K 182K (1.98x30K)+(2.94x12K) $ 94,554
Calculation: $395K $535,360 Total Cost of Units: $930,444*
200K 182K
Cost Per Equivalent Unit: $1.975 $2.942 *includes rounded numbers

Compare this calculation with our FIFO Costing Method calculation:

This
Month’sDirMat. Conv.
Units % $360K (I) $528K (U) Cost of Group
Beg. Inv. 20,000 70% 0 14K [42,360+(3x14K)] $84,360
S&C 150,000 100% 150K 150K 150K(2+3) $750,000
End. Inv. 30,000 40% 30K 12K Transferred Out $834,360
Equivalent Units: 180K 176K (2x30K)+(3x12K) $96,000
Calculation: $360K $528K Total Cost of Units: $930,360
180K 176K
Cost Per Equivalent Unit: $2.00 $3.00
Chapter 4 Notes Page 15

The per unit costs from last month were lower than the per unit costs for the current
month. Under FIFO, these cheaper costs were allocated solely to the Beginning
Inventory. With Weighted Average, the cheaper costs are allocated to all of the units in
Work In Process this month. As a result, Beginning Inventory replaced these cheaper
costs with higher costs from the current month, and the cost of Beginning Inventory has
increased. On the other hand, Ending Inventory and Started & Completed have
replaced this month’s higher costs with last month’s lower costs, thereby reducing their
costs.

Two Group Approad

With the Weighted Average Method, the BI is treated the same as S&C. They are both
always 100%. Because of this you can treat them as the same group (Units Finished).
EI is treated the same.

Using the foregoing example:

Weighted Average Costing Method:

2 Month’s DMat(I) Conv.(U)

Units % $395K $535,360 Cost of Group
Units
Finished 170,000 100% 170K 170K 170K(1.98+2.94) $835,890*
End. Inv. 30,000 40% 30K 12K Transferred Out $835,890*
Equivalent Units: 200K 182K (1.98x30K)+(2.94x12K) $ 94,554
Calculation: $395K $535,360 Total Cost of Units: $930,444*
200K 182K
Cost Per Equivalent Unit: $1.975 $2.942 *includes rounded numbers