Weighted-Average Method and Spoilage

Exhibit 19-2, Panel A, presents Steps 1 and 2 to calculate equivalent units of work done to date, including equivalent units of normal and abnormal spoilage. Exhibit 19-2, Panel B, presents Steps 3, 4, and 5 (together called the production-cost worksheet).

Exhibit 19-2

Weighted-Average Method of Process Costing With Spoilage for the Forming Department for July 2020

Spreadsheet screenshot shows the five steps depicting the weighted-average method of process costing with spoilage for the forming department for July 2020.

Panel A shows the flow of physical units which is step 1, and the output in equivalent units, in terms of direct materials and conversion costs, which is step 2.

  1. Work in process, beginning (given, p. 755)

    • Physical units: 1,500

  2. Started during current period (given, p. 755)

    • Physical units: 8,500

  3. To account for

    • Physical units: 10,000

  4. Good units completed and transferred out during current period

    • Physical units: 7,000

    • Direct material: 7,000

    • Conversion costs: 7,000

  5. Normal Spoilage (refer to note a)

    • Physical units: 700

    • Direct material (700 times 100%): 700

    • Conversion costs (700 times 100%): 700

  6. Abnormal spoilage (refer to note b)

    • Physical units: 300

    • Direct material (300 times 100%): 300

    • Conversion costs (300 times 100%): 300

  7. Work in process, ending (given, p. 755) (also refer to note c)

    • Physical units: 2,000

    • Direct material (2,000 times 100%): 2,000

    • Conversion costs (2,000 times 50%): 1,000

  8. Accounted for

    • Physical units: 10,000

  9. Equivalent units of work done to date

    • Direct material: 10,000

    • Conversion costs: 9,000

  10. Note a: Normal spoilage is 10% of good units transferred out; 10% of 7,000 equals 700 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.

    • Note b: Abnormal spoilage equals Total spoilage minus Normal spoilage which equals 1,000 minus 700 which equals 300 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.

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

Spreadsheet screenshot shows the five steps depicting the weighted-average method of process costing with spoilage for the forming department for July 2020.

Panel B shows the total costs to account for, computation of cost per equivalent unit, and assignment of costs to the units completed, spoiled units, and the units in ending work-in-process inventory. The processes are divided into three parts: Step 3, Step 4, and Step 5. Details of the steps are as follows:

Step 3

  1. Work in process, beginning (given, page 755)

    • Total cost of production (sum of direct and conversion costs): $21,000

    • Direct materials: $12,000

    • Conversion costs: $9,000

  2. Costs added in current period (given, page 755)

    • Total cost of production (sum of direct and conversion costs): 165,600

    • Direct materials: 76,500

    • Conversion costs: 89,100

  3. Total costs to account for

    • Total cost of production (sum of direct and conversion costs): $186,600

    • Direct materials: $88,500

    • Conversion costs: $98,100

Step 4

  1. Costs incurred to date

    • Direct materials: $88,500

    • Conversion costs: $98,100

  2. Divide by equivalent units of work done to date (Panel A)

    • Direct materials: 10,000

    • Conversion costs: 9,000

  3. Cost per equivalent unit (quotient of respective costs incurred to date and equivalent units of work done)

    • Direct materials: $8.85

    • Conversion costs: $10.90

Step 5: Assignment of costs

Good units completed and transferred out (7,000 units)

  1. Costs before adding normal spoilage

    • Total cost of production (sum of direct and conversion costs): $138,250

    • Direct materials: (product of 7,000 and $8.85) (refer to note d)

    • Conversion costs: (product of 7,000 and $10.90) (refer to note d)

  2. Normal spoilage (700 units)

    • Total cost of production (sum of direct and conversion costs): 13,825

    • Direct materials: (product of 700 and $8.85) (refer to note d)

    • Conversion costs: (product of 700 and $10.90) (refer to note d)

      1. Total costs of good units completed and transferred out

        • Total cost of production: 152,075

      2. Abnormal spoilage (300 units)

        • Total cost of production (sum of direct and conversion costs): 5,925

        • Direct materials: (product of 300 and $8.85) (refer to note d)

        • Conversion costs: (product of 300 and $10.90) (refer to note d)

      3. Work in process, ending (2,000 units)

        • Total cost of production (sum of direct and conversion costs): 28,600

        • Direct materials: (product of 2,000 and $8.85) (refer to note d)

        • Conversion costs: (product of 1,000 and $10.90) (refer to note d)

  3. Total costs accounted for (sum of the above A, B, and C)

    • Total cost of production (sum of direct and conversion costs): $186,600

    • Direct materials: $88,500

    • Conversion costs: $98,100

  4. Note d: Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

In Step 3, managers summarize total costs to account for. In Step 4, they calculate cost per equivalent unit using the weighted-average method. Note how, for each cost category, the costs of beginning work in process and the costs of work done in the current period are totaled and divided by equivalent units of all work done to date to calculate the weighted-average cost per equivalent unit. In the final step, managers assign total costs to completed units, normal and abnormal spoiled units, and ending inventory by multiplying the equivalent units calculated in Step 2 by the cost per equivalent unit calculated in Step 4. The $13,825 costs of normal spoilage are added to the costs of good units completed and transferred out.

Cost per good unitcompleted and transferredout of the process      =    Total costs transferred out (including normal spoilage)Number of good units produced      =    $152,075  ÷ 7,000  good units = $21.725  per good unit

This amount is not equal to $19.75 per good unit ($8.85 cost per equivalent unit of direct materials plus $10.90 cost per equivalent unit of conversion costs). That’s because the cost per good unit equals $1.975, plus a charge for normal spoilage cost per good unit, $1.975 ($13,825 ÷ 7,000  good units), equal to $21.725 per good unit. The $5,925 costs of abnormal spoilage are charged to Loss from Abnormal Spoilage account and are not part of the costs of good units.*

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