3.3 Process Costing (Weighted Average)

Process Costing consists of the following steps:

  1. Physical flow of units
  2. Equivalent Units of Production
  3. Cost per Equivalent Unit
  4. Assign Costs to Units completed and Ending work in process inventory
  5. Reconcile Costs


Keep in mind, there are no Generally Accepted Accounting Principles (GAAP) that mandate how we must do a process cost report.  We will focus on the calculations involved and show you an example of a process cost summary report but know there are several ways to present the information, but the calculations are all the same.

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.

Step 3: Cost per Equivalent Unit

The formula we will use is notice we are primarily using the dollar costs and not units for this section (except we will use TOTAL equivalent units we calculated in the previous section):

Beg. Work in Process Costs
+ Costs added this period
= Total Costs
÷   Total Equivalent Units
= Cost per Equivalent Units
We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead).



Example - Jax Company

To continue with our previous example, we were given the following information:

The June production and cost data for Jax Company are:
  Department B
Beginning work in process -0-
Units started this period 11,000
Units completed and transferred 9,000
Ending work in process units 2,000
Direct materials cost $ 1,100
Direct labor cost $ 2,880
Applied overhead cost $ 8,880
We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion.

To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units.

Materials Conversion
Beg. Work in Process Costs -0- -0-
+ Costs added this period $   1,100 $   11,760
(Conv. Cost = DL $2,880 + OH $8,880)
= Total Costs $   1,100 $   11,760
÷   Total Equivalent Units 11,000 9,800
= Cost per Equivalent Units $  0.10 $    1.20
In this example, beginning work in process is zero.  This will not always be the case.  The problem will provide the information related to beginning work in process inventory costs and units.

Step 4:  Assign Costs

In this next section, we will combine the equivalent units (from step 2) and the cost per equivalent units (step 3) to assign costs to units completed and transferred out (also called cost of goods manufactured) and costs of units remaining ending work in process inventory.  The basic formula to assign costs is:

Equivalent Units per cost element

(direct materials, conversion)
x cost per equivalent unit for cost element

(direct materials, conversion)
Using the example company, Jax Company, we have the following information:

Materials Conversion Costs
Units Completed and Transferred 9,000 9,000
Units in Ending WIP  2,000  800
Total Equivalent Units 11,000 9,800
Cost per Equivalent Units $       0.10 $       1.20
We would assign costs as follows:

Cost assigned to units completed and transferred
    Direct Materials (9,000 equiv units  x $0.10)  $ 900
    Conversion (9,000 equiv units x $1.20) 10,800
    Total cost assigned to units completed $ 11,700
Cost assigned to ending work in process
    Direct Materials (2,000 equiv units x $0.10) 200
    Conversion (800 equiv units x $1.20) 960
    Total cost assigned to ending work in process inventory $ 1,160
For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit.  We do the same of ending work in process but using the equivalent units for ending work in process.

Step 5:  Cost Reconciliation

Finally, we can check our work.  We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory.

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.  Both totals should agree.

For Jax Company, the cost reconciliation would be:

Beg. Work in Process Cost -0-
+ Costs added this period $ 12,860
($1,100 DM + $2,880 DL + $8,880 OH) 
= Total costs to account for $ 12,860
Cost assigned to units completed and transferred (from step 4 above) $ 11,700
+ Cost assigned to ending work in process inventory (from step 4 above) 1,160
= Total costs accounted for $ 12,860
The full process cost report can be found by clicking Jax_process cost).

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