Process costing - case study

Process costing – opening and closing work-in-progress

Weighted Average Method

Case Study

At the beginning of December, there were 15,000 units of work-in-progress valued as follows: Materials (100% complete) $9,000 and Conversion costs (40% complete) $1,250. During December, the following costs were incurred: Materials (30,000 units) $24,900 and Conversion costs $20,075. At the end of July, there were 5,000 units of work-in-progress. They were: 100% complete for materials and 50% complete for labour and overheads. We need to value the finished items and the closing work-in-progress.

Solution - 1 step

We should find the total material costs and the total conversion costs. We sum the material costs of opening work in progress and the materials costs incurred in the current period: Material costs: 9000+24000=$33900 On the other hand, we sum the conversion costs of opening work in progress and the conversional costs incurred in the current period: Conversion costs: 1250+20075=$21325

Solution - 2 step

2. Second we need to calculate equivalent units of each cost component for opening work-in-progress (WIP) started and completed units and closing WIP. Opening WIP consist of 15000 units. Under Weighted Average method the equivelent units (UE) for opening WIP of each cost component are equal to the units on hand. Under this approach it does not matter the degree of completion of the opening WIP. This is important difference with FIFO method.

Solution - 2 step

Started and finished in December units are 25 000 units and they have 100% completion of materials and conversion costs. That’s why the EU of materials and conversion costs are 25 000 EU. Closing WIP consist of 5000units and 100% completion of materials and 50% completion of conversion costs. EU of materials are 5000 and EU of conversion costs are equal to 5000units multiplied by 50%. This makes 2 500 EU.

Solution - 3 step

Now we should calculate the total EU of the both costs components: Total EU of materials =15000+25000+5000=45000 Total EU of conversion=15000+25000+2500=42500

Solution - 4 step

Now we found the cost per EU of each cost component. We make this as we divide the total material costs by the total EU of materials and the total conversion costs by the total EU of conversion: Cost per EU of materials=33900/45000=$0.75 Cost per EU of conversion=21325/42500=$0.50

Solution - 5 step

Next we can see what the total cost per EU is: 0.75+0.50=$1.25

Solution - 6 step

To find the cost of the finished units we need to multiply the total units of completed units by the total cost per EU. The total cost of finished goods are equal to the sum of opening WIP units and the finished units during the current period: 15000+25000=40000. We multiply 40 000 units by 1.25=$50 000;

Solution - 7 step

At the end we need to calculate the cost of closing WIP. We calculate the total cost of EU of materials and the total cost of EU of conversion costs and we sum them. For this purpose, e multiply the EU of materials by cost per EU of materials, after that we multiply the EU of conversion costs by cost per EU of conversion costs and sum: 5000x0.75+2500x0.55=3750+1250=$5000;