Weighted-average method. (25 min)

1 Solution Exhibit 4.20A shows equivalent units of work done in the current period of

Direct materials 80 equivalent units

Conversion costs 85 equivalent units

2 Solution Exhibit 4.20B calculates cost per equivalent unit of opening work in progress and of work done in the current period for direct materials and conversion costs.

3 Solution Exhibit 4.20C summarises the total Assembly Department costs for October 2010, and assigns these costs to units completed (and transferred out) and to units in closing work in progress using the weighted-average method.

Steps 1 and 2: Summarise output in physical units and calculate equivalent units Assembly Department of Euro-Défense for October 2010.

(Step 2)

(Step 1) Equivalent units Flow of production

Physical units

Direct materials

Conversion Costs Completed and transferred out

during current period 90 90 90 Add work in progress, closing^* 10

10 × 100%^†; 10 × 70% __ 10 7 Total accounted for 100 100 97 Deduct work in progress, opening^§ 20

20 ×100%^†; 20 × 60% __ 20 12 Started during current period 80 __ __

Work done in current period only 80 85

* Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

† Direct materials are 100% complete in work-in-progress stock since all direct materials are introduced at the beginning of the assembly process.

§ Degree of completion in this department: direct materials, 100%; conversion costs, 60%.

Solution Exhibit 4.20B

Step 3: Calculate equivalent unit costs, Assembly Department of Euro-Défense for October 2010.

Direct materials

Conversion costs Equivalent unit costs of opening work in progress

Work in progress, opening (given) €460,000 €120,000 Divide by equivalent units of opening work in progress

(from Solution Exhibit 4.20A) ÷ 20 ÷ 12 Cost per equivalent unit of opening work in progress €23,000 €10,000 Equivalent unit costs of work done in current period only

Costs added in current period (given) €2,000,000 €935,000 Divide by equivalent units of work done in current period

(from Solution Exhibit 4.20A) ÷ 80 ÷ 85 Cost per equivalent unit of work done in current period only €25,000 €11,000

Step 4: Summarise total costs to account for and assign these costs to units completed and units in closing work in progress using the weighted-average method, Assembly Department of Euro-Défense for October 2010 (in €).

Total

production

Direct materials Conversion costs costs

Cost per Cost per

Equivalent equivalent Total Equivalent equivalent Total

units unit costs units unit costs

(1) (2) (3)=(1)×(2) (4) (5) (6)=(4)×(5) (7)=(3)+(6)

Panel A:

Total costs to account for Work in progress, opening

(from Solution Exhibit 4.20B) 20 23,000 2,460,000 12 10,000.00 1,120,000 2,580,000 Work done in current period only

(from Solution Exhibit 4.20B) 80 25,000 2,000,000 85 11,000.00 935,000 2,935,000

To account for 100 24,600^* 2,460,000 97 10,876.29^† 1,055,000 3,515,000

Panel B:

Assignment of costs Completed and transferred out:

(90 physical units) 90^‡ 24,600 2,214,000 90^‡ 10,876.29 1,978,866 3,192,866

Work in progress, closing

(10 physical units) 10^‡ 24,600 246,000 7^‡ 10,876.29 76,134 322,134

Accounted for 100 2,460,000 97 1,055,000 3,515,000

* Weighted-average cost per equivalent unit of direct materials = Total direct materials costs divided by total equivalent units of direct materials

= €2,460,000 ÷ 100 = €24,600.

† Weighted-average costs per equivalent unit of direct materials = Total conversion costs divided by total equivalent units of conversion costs

= €1,055,000 ÷ 97 = €10,876.29.

‡ From Solution Exhibit 4.20A.

1 The equivalent units of work done in the Assembly Department in October 2010 for direct materials and conversion costs are the same as in problem 4.20 and are shown in Solution Exhibit 4.20A.

2 The cost per equivalent unit of work done in the Assembly Department in October 2010 for direct materials and conversion costs are calculated in problem 4.20 in Solution Exhibit 4.20B.

3 Solution Exhibit 4.21 summarises the total Assembly Department costs for October 2010, and assigns these costs to units completed (and transferred out) and units in closing work in progress under the FIFO method.

The cost per equivalent unit of opening stock and of work done in the current period differ:

The following table summarises the costs assigned to units completed and those still in progress under the weighted-average and FIFO process-costing methods for our example.

Weighted

Exhibit 4.21) Difference Cost of units completed and transferred out

Work in progress, closing Total costs accounted for

€3,192,866

The FIFO closing stock is higher than the weighted-average closing stock by €4,866. This is because FIFO assumes that all the lower-cost prior-period units in work in progress are the first to be completed and transferred out while closing work in progress consists of only the higher-cost current-period units. However, the weighted-average method smoothes out higher-cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out while some of the lower-cost units in opening work in progress are placed in closing work in progress. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower closing work-in-progress stock relative to FIFO.

Step 4: Summarise total costs to account for and assign these costs to units completed and units in closing work in progress using the FIFO method, Assembly Department of Euro-Défense for October 2010 (in €).

Total

production

Direct materials Conversion costs costs

Cost per Cost per

Equivalent equivalent Total Equivalent equivalent Total

units unit costs units unit costs

(1) (2) (3)=(1)×(2) (4) (5) (6)=(4)×(5) (7)=(3)+(6)

Panel A:

Total costs to account for Work in progress, opening

(from Solution Exhibit 4.20B) 20 23,000 2,460,000 12 10,000 120,000 ,580,000

Work done in current period only

(from Solution Exhibit 4.20B) 80 25,000 2,000,000 85 11,000 935,000 2,935,000

To account for 100 2,460,000 97 1,055,000 3,515,000

Panel B:

Assignment of costs Completed and transferred out:

(90 physical units)

Work in progress, opening

(20 physical units) ^‡20 23,000 2,460,000 12 10,000 1,120,000 3,580,000

Work done in current period to

complete opening work in progress 0^* 25,000 0 ^‡ 8^† 11,000 88,000 88,000

Total from opening stock 20 2,460,000 20 1, 208,000 2,668,000

Started and completed

(70 physical units) ^† 70^‡ 25,000 1,750,000 ^‡70^‡ 11,000 770,000 2,520,000

Total completed and transferred out

(90 physical units) 90 2,210,000 90 978,000 3,188,000

Work in progress, closing^§

(10 physical units) 10^§ 25,000 2,250,000^§ 7^§ 11,000 77,000 3,327,000

Accounted for 100 2,460,000 97 1,055,000 3,515,000

* Opening work in progress is 100% complete as to direct materials so zero equivalent units of direct materials need to be added to complete opening work in progress.

† Opening work in progress is 60% complete as to conversion costs, which equals 12 equivalent units of conversion costs. To complete the 20 physical units of opening work in progress, 8 (20 − 12) equivalent units of conversion costs need to be added.

‡ 90 total equivalent units completed and transferred out (Solution Exhibit 4.20A) minus 20 equivalent units completed and transferred from opening stock equals 70 equivalent units.

§ From Solution Exhibit 4.20A.