1. Chapter Three
Process Costing

2. Weighted Average Process Costing
Goal is to figure a cost per unit for inventory by dividing total costs by total units
Problem is that there are different numbers of units for different inputs as materials are added at different points than labor and OH
Solution is to figure “equivalent units” for each input

3. Example
Assume that Feelwell Drug Company has 1000 units of beginning WIP that is 60% complete with respect to conversion cost (direct labor and overhead); all material is added at the beginning of the process
The cost of material in the beginning inventory was $300 and the conversion cost was $420

4. Example - Continued
During the month 10,000 units were put into process.
At the end of the month there were 700 units of WIP, 80% complete
Material cost incurred in the month was $3,110, and conversion cost was $7,725

5. Cost of Production Report - Units

6. Calculating Total Cost
You now need to get the cost number that represents the costs incurred during the month.
To do this, take, for each factor of production the cost in the beginning WIP and add the current cost.

7. Total Cost Calculation

8. Calculating Equivalent Units
First take the units complete for each factor of production
Then take the ending WIP units times the % complete for that factor of production
Remember - in our example all material was added at the beginning so all ending WIP units are 100% complete with respect to material
These units will match the cost from above

9. Equivalent Units

10. Calculation of Cost per Unit
Take the total costs from the total cost calculation and divide by the total units from the units calculation

11. Calculation of Cost per Unit

12. Cost Reconciliation
To compute cost to transfer take units completed times total cost per unit
To calculate ending WIP, take cost for each production factor times ending equivalent units for that factor
Purpose of this is to
determine the cost to be transferred to the next stage (finished goods if a one step process)
verify mathematical accuracy of calculations

13. Cost Reconciliation

14. Complete Cost of Production Report for this example appears on the next slide!