PROCESS COSTING UNDER AVERAGE METHOD
LO1: Prepare a departmental production report using Average Method
Average Method
In this method, there is no assumed sequence of production. The costs of
beginning work in process are combined with the costs incurred during the current
period, and then a uniform average cost per unit is computed. This is done by
dividing the total costs by the equivalent units of production, which include both
the beginning inventory and the units started during the period.
Key Characteristic:
When computing equivalent units, the degree of completion of beginning
inventory is disregarded. All units finished and transferred out are treated as
100% complete.
Weighted Average Costing Method
Treats beginning inventory costs and accompanying equivalent output as if the
belong to the current period.
Merges prior period output and manufacturing costs found in beginning work in
process with the current output and manufacturing costs.
Physical Flow Analysis and Calculation of Equivalent Units: weighted average
method
FORMULAS:
1. Physical Flow Analysis
o Beginning WIP + Units Started = Completed Units + Ending WIP
2. Equivalent Units of Production (EUP)
Because some units are still partly finished, we convert them into “full units
equivalent.”
Materials: If added at start → Ending WIP % is based on material completion.
Conversion (labor + overhead): Based on how complete the units are.
o EUP = Completed Units + (Ending WIP × %Completion)
3. Compute Cost per Equivalent Unit
Add together all costs (Beginning WIP + Costs added this period), then divide by
total EUP.
To compute for the Unit Cost:
o Unit Cost = Unit Materials Cost + Unit Conversion Cost
4. Assign Costs
o Completed Units Cost = Units completed × (Cost per EUP – Materials +
Conversion)
o Ending WIP Cost = EUP of WIP × Cost per EUP
Check: Total assigned cost = Total available costs.
Steps outlined:
1. Track units (beginning WIP, units started, units completed, ending WIP)
2. Account for beginning WIP costs per component (materials & conversion), and
current period costs
3. Compute equivalent units (materials and conversion)
4. Compute cost per equivalent unit for each component
5. Allocate costs between transferred-out and ending WIP using those per-unit costs
6. Reconcile total costs to ensure they match
Example:
Jax Company (via LibreTexts)
Given:
Beginning WIP: 0 units
Units started: 11,000
Completed & transferred: 9,000
Ending WIP: 2,000 (materials 100% complete, conversion 40% complete)
Costs added: Materials ₱1,100; Conversion (DL ₱2,880 + OH ₱8,880) = ₱11,760
Equivalent Units of Production (EUP)
Units % Complete Equivalent Units
Materials 9,000 (completed) 100% 9,000
2,000 (ending, WIP) 100% 2,000
Total EUP 11,000
(Materials)
Conversion 9,000 (completed) 100% 9,000
9,000 (ending, WIP) 40% 800
Total EUP 9,800
(Conversion)
Cost per Equivalent Unit
Cost Elements Total Cost Equivalent Units Cost per EU
Materials Php 1,100 11,000 Php 0.10
Conversion Php 11,760 9,800 Php 1.20
Cost Allocation
Output Units Materials Units Conversion Total Cost
(Php 0.10) (Php 1.20)
Completed &
Transferred 9,000 Php 900 9,000 Php 10,800 Php 11,700
Ending WIP 2,000 Php 200 800 Php 960 Php 1,160
Total Costs
Accounted Php 12,860
Cost Reconciliation
Costs to be Amount Cost Accounted Amount
Accounted for
Materials Php 1,100 Completed & Php 11,700
Transferred
Conversion Php 11,760 Ending WIP Php 1,160
Total Costs Php 12,860 Total Php 12, 860
A. Physical Flow of Units
Beginning WIP 0
Started during the period
11,000
To account for
11,000
Completed & transferred out 9,000
Ending WIP 2,000
Accounted for
11,000
B. Equivalent Units of Production (EUP)
Materials
Conversion
Completed & transferred (9,000 × 100%) 9,000
9,000
Ending WIP (2,000 × % complete) 2,000
800
Total EUP 11,000
9,800
C. Costs and Cost per Equivalent Unit
Materials Conversion
Total
Costs added this period ₱1,100 ₱11,760 ₱12,860
Equivalent units 11,000 9,800
—
Cost per EUP ₱0.10 ₱1.20 —
D. Cost Assignment
Materials Conversion
Total
Completed & transferred (9,000 units) (9,000 × ₱0.10) ₱900 (9,000 × ₱1.20) ₱10,800
₱11,700
Ending WIP (2,000 × ₱0.10) ₱200 [(2,000 × 40%) × ₱1.20] ₱960 ₱1,160
Total cost accounted for ₱1,100 ₱11,760
₱12,860