Under the weighted average method, the stage of completion of beginning work in process

In manufacturing facilities, equivalent units of production are calculated to determine the value of a department’s work-in-process inventory at the end of an accounting period. EUPs represent the number of completed goods that could have been produced using the direct materials, direct labor and manufacturing overhead inputs actually consumed during the period. The methods of calculating EUP are slightly different between weighted average costing and first-in, first-out costing.

Accounting for Direct Materials and Conversion Costs

1. In both costing methods, direct materials and conversion costs -- direct labor and manufacturing overhead required to convert direct materials into completed units -- are calculated separately when determining EUP. Direct materials may all be added at the beginning of the manufacturing process or consumed evenly throughout the process. Conversion costs are generally assumed to be incurred evenly throughout the production process. In order to calculate EUP, it is important to know the percentage of completeness for beginning WIP inventory and ending WIP with respect to direct materials and conversion costs using a separate percentage for each type of cost.

Weighted Average EUP Calculation for Direct Materials

1. Under the weighted average costing method, beginning WIP is considered to be started and completed during the current period, regardless of when the units were actually started. Therefore, all units transferred out (completed) during the current period are multiplied by 100 percent when calculating EUP. Ending WIP units are multiplied by the percentage they are considered complete. These two products are added to get the weighted average EUP for direct materials.

FIFO Costing EUP Calculation for Direct Materials

1. Under FIFO costing, beginning WIP units for EUP are calculated by multiplying beginning WIP units by the percentage remaining to be completed at the beginning of the period because the percentage completed was included in the prior period calculation. If direct materials are added at the beginning of the process, the number of beginning WIP units would be multiplied by zero percent because all of the direct materials were consumed in the prior period. The units started and completed during the current period -- equal to units transferred out minus beginning WIP units -- are multiplied by 100 percent in calculating EUP. Ending WIP units are multiplied by the percentage they are considered complete. These three products are added to get the weighted average EUP for direct materials.

Weighted Average EUP Calculation for Conversion Costs

1. As with direct materials, under weighted average costing, beginning WIP is considered to be started and completed during the current period, regardless of when the units were actually started. Again, all units transferred out during the current period are multiplied by 100 percent when calculating EUP for weighted average costing. Ending WIP units are multiplied by the percentage they are considered complete with respect to conversion costs. It is important to note that the percentage of completeness for conversion costs will likely not be the same percentage of completeness for direct materials. The two products are added to get the weighted average EUP for conversion costs.

FIFO Costing EUP Calculation for Conversion Costs

1. As with direct materials, under FIFO costing, beginning WIP units for EUP are calculated by multiplying beginning WIP units by the percentage remaining to be completed at the beginning of the period with respect to conversion costs. The units started and completed during the current period -- equal to units transferred out minus beginning WIP units -- are multiplied by 100 percent in calculating EUP. Ending WIP units are multiplied by the percentage they are considered complete. These three products are added to get the weighted average EUP for conversion costs. Be sure to use the percentage remaining to be completed when calculating EUP for beginning WIP, and use percentage completed when calculating EUP for ending WIP for both conversion costs and direct materials under FIFO costing.

Most companies use either the weighted average or first-in-first-out (FIFO) method to assign costs to inventory in a process costing environment. The weighted average methodA method of process costing that includes costs in beginning inventory and current period costs to establish an average cost per unit. includes costs in beginning inventory and current period costs to establish an average cost per unit. The first-in-first-out (FIFO)A method of accounting for product costs that assumes that the first units completed within a processing department are the first units transferred out; beginning inventory costs are maintained separately from current period costs. method keeps beginning inventory costs separate from current period costs and assumes that beginning inventory units are completed and transferred out before the units started during the current period are completed and transferred out. We focus on the weighted average approach here and leave the discussion of the FIFO method to more advanced cost accounting textbooks.

Answer: Costs are assigned to completed units transferred out and units in ending WIP inventory using a four-step process. We list the four steps in the following and then explain them in detail. Review these steps carefully.

Step 1. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead.

Step 2. Summarize the costs to be accounted for (separated into direct materials, direct labor, and overhead).

Step 3. Calculate the cost per equivalent unit.

Step 4. Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory.

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. Table 4.2 "Production Information for Desk Products’ Assembly Department" presents information for the Assembly department at Desk Products for the month of May. Review this information carefully as it will be used to illustrate the four key steps.

Table 4.2 Production Information for Desk Products’ Assembly Department

Question: Costs for the Assembly department totaled $386,000 for the month of May ($386,000 = $161,000 in beginning WIP inventory + $225,000 incurred during May). How much of the $386,000 should be assigned to (1) completed units transferred out to the Finishing department and (2) units remaining in the Assembly department ending WIP inventory?

Answer: Let’s use the four key steps as follows to answer this question.

Step 1. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead.

This step uses the basic cost flow equation presented in Chapter 2 "How Is Job Costing Used to Track Production Costs?" to identify the physical flow of units (the basic cost flow equation applies to costs and to units):

Question: What are the two categories used to summarize the physical flow of units?

Answer: The first category, units to be accounted for, includes the beginning balance (BB) and transfers in (TI). The second category, units accounted for, includes the ending balance (EB) and transfers out (TO). As you can see from the previous equation, units to be accounted for must equal units accounted for. Here is how it looks for the Assembly department for the month of May:

This step shows that 3,000 units were in WIP inventory on May 1 and 6,000 units were started during May. Thus 9,000 units must be accounted for. These 9,000 units will end up in one of two places, either completed and transferred out (to the Finishing department) or not completed and therefore in ending WIP inventory. The previous schedule shows that 4,000 units were completed and transferred out (3,000 from beginning WIP inventory and 1,000 from the units started and completed during the month), and 5,000 units remain in ending WIP inventory.

Question: Based on the previous information for Desk Products, Inc., we now know that 4,000 units were completed and transferred out, and 5,000 units were in ending WIP inventory at the end of May. How do we convert this information into equivalent units?

Answer: The units accounted for (4,000 transferred out and 5,000 in ending WIP inventory) must be converted into equivalent units for direct materials, direct labor, and overhead, as shown in Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department". The 4,000 units transferred out are 100 percent complete for direct materials, direct labor, and overhead (otherwise, they would not be transferred out), which results in equivalent units matching the physical units. However, the 5,000 units in ending WIP inventory are at varying levels of completion for direct materials, direct labor, and overhead, and must be converted into equivalent units using the following formula (as described earlier in the chapter):

Later in step 3, we will use equivalent unit information for the Assembly department to calculate the cost per equivalent unit.

Figure 4.4 Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department

a This column represents actual physical units accounted for before converting to equivalent units.

b Equivalent units = Number of physical units × Percentage of completion. Units completed and transferred out are 100 percent complete. Thus equivalent units are the same as the physical units. (Information is from Table 4.2 "Production Information for Desk Products’ Assembly Department".)

c Equivalent units = Number of physical units × Percentage of completion. For direct materials, 3,000 equivalent units = 5,000 physical units × 60 percent complete; for direct labor and overhead, 1,500 equivalent units = 5,000 physical units × 30 percent complete. (Information is from Table 4.2 "Production Information for Desk Products’ Assembly Department".)

Step 2. Summarize the costs to be accounted for (separated into direct materials, direct labor, and overhead).

Question: How do we summarize the costs that are used to calculate the cost per equivalent unit?

Answer: The total costs to be accounted for include the costs in beginning WIP inventory and the costs incurred during the period. Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department" shows these costs for the Assembly department. Notice that the costs are separated into direct materials, direct labor, and overhead.

Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department" shows that costs totaling $386,000 must be assigned to (1) completed units transferred out and (2) units in ending WIP inventory.

Step 3. Calculate the cost per equivalent unit.

Question: We now have the costs (Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department") and equivalent units (Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department") needed to determine the cost per equivalent unit for direct materials, direct labor, and overhead. How do we use this information to calculate the cost per equivalent unit?

Answer: The formula to calculate the cost per equivalent unit using the weighted average method is as follows:

Key Equation

In summary, the same formula is as follows:

*From the bottom of Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department".

**From the bottom of Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department".

Figure 4.6 "Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department" presents the cost per equivalent unit calculation for Desk Products’ Assembly department.

The cost per equivalent unit is calculated for direct materials, direct labor, and overhead. Simply divide total costs to be accounted for by total equivalent units accounted for. It is important to note that the information shown in Figure 4.6 "Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department" allows managers to carefully assess the unit cost information in the Assembly department for direct materials, direct labor, and overhead. We discuss this further later in the chapter.

Step 4. Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory.

Question: Recall our primary goal of assigning costs to completed units transferred out and to units in ending WIP inventory. How do we accomplish this goal?

Answer: Costs are assigned by multiplying the cost per equivalent unit (shown in Figure 4.6 "Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department") by the number of equivalent units (shown in Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department") for direct materials, direct labor, and overhead. Figure 4.7 "Assigning Costs to Products in Desk Products’ Assembly Department" shows how this is done.

Figure 4.7 Assigning Costs to Products in Desk Products’ Assembly Department

a The total cost assigned to units transferred out equals the cost per equivalent unit times the number of equivalent units. For example, the cost assigned to direct materials of $120,000 = 4,000 equivalents units (Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department") × $30 per equivalent unit (Figure 4.6 "Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department").

b The total cost assigned to units in ending inventory equals the cost per equivalent unit times the number of equivalent units. For example, the cost assigned to direct materials of $90,000 = 3,000 equivalent units (Figure 4.4 "Flow of Units and Equivalent Unit Calculations for Desk Products’ Assembly Department") × $30 per equivalent unit (Figure 4.6 "Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department").

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.

Figure 4.7 "Assigning Costs to Products in Desk Products’ Assembly Department" shows that total costs of $248,000 are assigned to units completed and transferred out and that $138,000 in costs are assigned to ending WIP inventory.

On completion of step 4, it is important to reconcile the total costs to be accounted for shown at the bottom of Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department" with the total costs accounted for shown at the bottom of Figure 4.7 "Assigning Costs to Products in Desk Products’ Assembly Department". The two balances must match (note that small discrepancies may exist due to rounding the cost per equivalent unit). This reconciliation relates back to the basic cost flow equation as follows:

**From Figure 4.5 "Summary of Costs to Be Accounted for in Desk Products’ Assembly Department".

***From Figure 4.7 "Assigning Costs to Products in Desk Products’ Assembly Department".

Although the examples in this chapter have been created in a way that minimizes rounding errors, always round the cost per equivalent unit calculations in step 3 to the nearest thousandth (e.g., if the cost per equivalent unit is $2.3739, round this to $2.374 rather than to $2). 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).

Question: Once the four-step process is complete, a journal entry must be made to record the transfer of costs out of the Assembly department and into the Finishing department. How do we record the costs associated with units completed and transferred out?

Answer: At Desk Products, Inc., 4,000 units were transferred from the Assembly department to the Finishing department. Costs totaling $248,000 were assigned to these units as shown in Figure 4.7 "Assigning Costs to Products in Desk Products’ Assembly Department". The journal entry to record this at the end of May is as follows:

(Note that this was journal entry number four, presented without dollar amounts earlier in the chapter.)

Figure 4.8 "Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department" shows the flow of costs through the work-in-process inventory T-account for the Assembly department. Note that four key steps were performed for the Assembly department to determine the costs assigned to (1) completed units transferred out to the Finishing department ($248,000) and (2) units in Assembly’s WIP inventory ($138,000). Both amounts are highlighted.

Figure 4.8 Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department

The Production Process for Hershey’s Chocolate

Hershey Foods Corp. is best known for its chocolate products, including brands like Almond Joy, Hershey’s Kisses, and Reese’s. Hershey’s products are sold in more than 90 countries worldwide. According to Hershey, more than 80 million Kiss-shaped products are made every day!

Several sequential stages of production are required to produce chocolate at Hershey:

1. Fermentation. Cocoa beans are placed in large heaps for one week to allow the cocoa flavor to develop.
2. Roasting. The cocoa beans are roasted at very high temperatures.
3. Hulling. A hulling machine separates the shell from the inside of the bean (called the nib).
4. Milling. The nibs are ground into chocolate liquor (a liquid with a pure chocolate flavor that contains no alcohol).
5. Mixing. The chocolate liquor is mixed with cocoa butter, sugar, and milk. This mixture is dried into a brown powder, called chocolate crumb, and processed into chocolate paste.
6. Molding. Machines are used to fill more than 1,000 molds per minute with chocolate. The chocolate is then chilled to form solid candy.
7. Packaging. The candy is wrapped, packaged, and ready to be shipped.

Hershey likely uses a process costing system since it produces identical units of product in batches employing a consistent process. Process costing systems require the use of work-in-process inventory accounts for each process. Thus Hershey would track production costs using separate work-in-process inventory accounts for each stage of production.

Key Takeaways

• Four steps are used to assign product costs to (1) completed units transferred out and (2) units in work-in-process inventory at the end of the period.
• The four-step process must be performed for each processing department and results in a journal entry to record the costs assigned to units transferred out.

Kelley Paint Company uses the weighted average method to account for costs of production. Kelley manufactures base paint in two separate departments—Mixing and Packaging. The following information is for the Mixing department for the month of March.

• A total of 40,000 units (measured in gallons) were in beginning WIP inventory. All were completed and transferred out during March.

• A total of 70,000 units were started during March. Of the 70,000 units started,

  • 20,000 units were completed and transferred out to the Packaging department (100 percent complete with respect to direct materials, direct labor, and overhead), and
  • 50,000 units were partially completed and remained in ending WIP inventory on March 31 (90 percent complete for direct materials, 70 percent complete for direct labor, and 30 percent complete for overhead, which is applied based on machine hours).
• Costs in beginning WIP inventory totaled $229,000 (= $98,000 in direct materials + $41,000 in direct labor + $90,000 in overhead).
• Costs incurred during March totaled $165,000 (= $70,000 in direct materials + $35,000 in direct labor + $60,000 in overhead).

Required:

1. Use the four key steps to assign costs to units completed and transferred out and to units in ending WIP inventory for the Mixing department.
2. Prepare the journal entry necessary at the end of March to record the transfer of costs associated with units completed and transferred to the Packaging department.

Solution to Review Problem 4.4

1. The four steps are as follows:

   Step 1. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead.

   

   a 60,000 units = 40,000 from beginning WIP inventory + 20,000 started and completed in March.

   b This column represents actual physical units accounted for before converting to equivalent units.

   c Equivalent units = number of physical units × percentage of completion. Units completed and transferred out are 100 percent complete. Thus equivalent units are the same as the physical units.

   d Equivalent units = number of physical units × percentage of completion. For direct materials, 45,000 equivalent units = 50,000 physical units × 90 percent complete; for direct labor, 35,000 equivalent units = 50,000 physical units × 70 percent complete; for overhead, 15,000 equivalent units = 50,000 physical units × 30 percent complete.

   Step 2. Summarize the costs to be accounted for (separated into direct materials, direct labor, and overhead).

   Step 3. Calculate the cost per equivalent unit.

   Step 4. Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory.

   

   f Total costs assigned to units transferred out equals the cost per equivalent unit times the number of equivalent units. For example, costs assigned for direct materials of $96,000 = 60,000 equivalents units (from step 1) × $1.60 per equivalent unit (from step 3).

   g Total costs assigned to ending WIP inventory equals the cost per equivalent unit times the number of equivalent units. For example, costs assigned for direct materials of $72,000 = 45,000 equivalent units (from step 1) × $1.60 per equivalent unit (from step 3).

   h This must match total costs to be accounted for in step 2, as shown in the following:

   Beginning balance + Transfers in=Transfers out + Ending balance (BB) + (TI) Costs to be accounted for (394,000 from step 2)= (TO) + (EB) Costs accounted for($394,000 from step 4)

2. As shown in step 4, $264,000 in total costs are assigned to units completed and transferred out. The entry to record this is as follows: