Case 3: Process Costing With Some Beginning and Some Ending Work-in-Process Inventory

Learning Objective 4 Use the weighted-average method and the first-in, first-out (FIFO) method of process costing

At the beginning of March 2020, Pacific Electronics had 225 partially assembled SG-40 units in the assembly department. It started production of another 275 units in March. The data for the assembly department for March follow:

Spreadsheet screenshot shows the physical units, direct materials, conversion costs, and total costs of Pacific electronics.

Details of the spreadsheet are as follows:

  1. Physical units (SG-40s)

    • Work in process, beginning inventory (March 1): 225

    • Started during March: 275

    • Completed and transferred out during March: 400

    • Work in process, ending inventory (March 31): 100

  2. Direct materials

    • Work in process, beginning inventory (March 1): 18,000 (refer to note a)

    • Degree of completion of beginning work in process: 100%

    • Degree of completion of ending work in process: 100%

    • Total costs added during March: $19,800

  3. Conversion costs

    • Work in process, beginning inventory (March 1): $8,100 (refer to note b)

    • Degree of completion of beginning work in process: 60%

    • Degree of completion of ending work in process: 50%

    • Total costs added during March: $16,380

  4. Total costs (sum of direct materials and conversion costs)

    • Work in process, beginning inventory (March 1): $26,100

    • Total costs added during March: $36,180

  5. Note: Work in process, beginning inventory (equals work in process, ending inventory for February)

    • Note a: Direct materials: 225 physical units multiplied by 100% completed multiplied by $80 per unit equals $18,000

    • Note b: Conversion costs: 225 physical units multiplied by 60% completed multiplied by $60 per unit equals $8,100.

Pacific Electronics has incomplete units in both beginning work-in-process inventory and ending work-in-process inventory for March 2020. We use the five steps described earlier to assign costs to (1) the cost of units completed and transferred out and (2) the cost of ending work-in-process inventory. To do so, we first need to choose an inventory-valuation method. We describe the five-step approach for two key methods—the weighted-average method and the first-in, first-out method. The different valuation methods generally produce different costs for units completed and for ending work-in-process inventory.

Weighted-Average Method

The Weighted-average process-costing method calculates the cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done) and assigns this cost to equivalent units completed and transferred out of the process and to equivalent units in ending work-in-process inventory. The weighted-average cost is the total of all costs entering the Work in Process account (whether the costs are from beginning work in process or from work started during the current period) divided by total equivalent units of work done to date. We describe the weighted-average method using the five-step procedure from Case 2: Process Costing With Zero Beginning and Some Ending Work-in-Process Inventory.

  1. Step 1: SUMMARIZE THE FLOW OF PHYSICAL UNITS OF OUTPUT. The physical-units column in Exhibit 18-4 shows where the units came from—225 units from beginning inventory and 275 units started during the current period—and where the units went—400 units completed and transferred out and 100 units in ending inventory.

Exhibit 18-4

Summarize the Flow of Physical Units and Compute Output in Equivalent Units Using the Weighted-Average Method for the Assembly Department for March 2020

Spreadsheet screenshot shows the flow of production in physical units and equivalent units, of direct material and conversion costs, as step 1 and step 2 respectively.

Details of the flow of production are as follows:

  1. Work in process, beginning (given on page 718)

    • Physical units: 225

  2. Started during current period (given on page 718)

    • Physical units: 275

  3. To account for

    • Physical units: 500

  4. Completed and transferred out during current period

    • Physical units: 400

    • Direct materials: 400

    • Conversion costs: 400

  5. Work in process, ending (given on page 718)

    • Physical units: 100

    • Direct materials (100 multiplied by 100%): 100

    • Conversion costs (100 multiplied by 50%): 50

  6. Accounted for

    • Physical units: 500

  7. Equivalent units of work done to date

    • Direct materials: 500

    • Conversion costs: 450

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

  1. Step 2: COMPUTE OUTPUT IN TERMS OF EQUIVALENT UNITS. We use the relationship shown in the following equation:

Equivalent unitsin beginning workin process+Equivalent unitsof work done incurrent period=Equivalent unitscompleted and transferredout in current period+Equivalent unitsin ending workin process

  1. Although we are interested in calculating the left side of the preceding equation, it is easier to calculate this sum using the equation’s right side: (1) the equivalent units completed and transferred out in the current period plus (2) the equivalent units in ending work in process. Note that the stage of completion of the current-period beginning work in process is not used in this computation.
  2. The equivalent-units columns in Exhibit 18-4 show the equivalent units of work done to date: 500 equivalent units of direct materials and 450 equivalent units of conversion costs. All completed and transferred-out units are 100% complete with regard to both direct materials and conversion costs. Partially completed units in ending work in process are 100% complete with regard to direct materials costs (because direct materials are introduced at the beginning of the process) and 50% complete with regard to conversion costs, based on estimates from the assembly department manager.
  3. Step 3: SUMMARIZE TOTAL COSTS TO ACCOUNT FOR. Exhibit 18-5 presents Step 3. The total costs to account for in March 2020 are described in the example data above:
A table shows total costs to account for in March 2020

The table depicts total costs to account for in March 2020. The details of the table are as follows:

1. Beginning work in process, direct materials, 18,000 dollars, plus conversion costs, 8,100 dollars: 26,100 dollars

2. Costs added during March, direct materials, 19,800 dollars, plus conversion costs, 16,380 dollars: 36,180 dollars

3. Total costs to account for in March: 62,280 dollars

Exhibit 18-5

Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Costs to Units Completed and to Units in Ending Work-in-Process Inventory Using the Weighted-Average Method for the Assembly Department for March 2020

Spreadsheet screenshot shows the total costs to account for, cost per equivalent unit, and assignment of costs to the units completed and units in ending work-in-process inventory using the weighted-average method for the Assembly department for March 2020.

Details of the spreadsheet are divided into step 3, step 4, and step 5, which are as follows:

(A) Step 3

1. Work in process, beginning (given, page 718)

• Total production costs (sum of direct materials and conversion costs): $26,100

• Direct materials: $18,000

• Conversion cost: $8,100

2. Costs added in current period (given, page 718)

• Total production costs (sum of direct materials and conversion costs): $ 36,180

• Direct materials: $19,800

• Conversion cost: $16,380

3. Total costs to account for

• Total production costs (sum of direct materials and conversion costs): $62,280

• Direct materials: $37,800

• Conversion cost: $24,480

(B) Step 4

1. Costs incurred to date

• Direct materials: $37,800

• Conversion cost: $24,480

2. Divide by equivalent units of work done to date (Exhibit 18-4)

• Direct materials: 500

• Conversion cost: 450

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

• Direct materials: $ 75.60

• Conversion cost: $ 54.40

(C) Step 5: Assignment of costs

1. Completed and transferred out (400 units)

• Total production costs (sum of direct materials and conversion costs): $52,000

• Direct materials: the product of 400 and $75.60 (refer to note a)

• Conversion cost: product of 400 and $54.40 (refer to note a)

2. Work in process, ending (100 units)

• Total production costs (sum of direct materials and conversion costs): 10,280

• Direct materials: the product of 100 and $75.60 (refer to note b)

• Conversion cost: product of 50 and $54.40 (refer to note b)

3. Total costs accounted for

• Total production costs (sum of direct materials and conversion costs): $62,280

• Direct materials: $37,800

• Conversion cost: $24,480

(D) Note a: Equivalent units completed and transferred out from Exhibit 18-4, Step 2.

• Note b: Equivalent units in ending work in process from Exhibit 18-4, Step 2.

  1. Step 4: COMPUTE COST PER EQUIVALENT UNIT. Exhibit 18-5, Step 4, computes the weighted- average cost per equivalent unit for direct materials and conversion costs by dividing the sum of the costs for beginning work in process plus the costs for work done in the current period by the total equivalent units of work done to date. The weighted-average conversion cost per equivalent unit in Exhibit 18-5 follows:
A table shows weighted-average conversion cost per equivalent unit

The table depicts weighted-average conversion cost per equivalent unit. The details of the table are as follows:

1. Total conversion costs, beginning work in process, 8,100 dollars plus work done in current period, 16,380 dollars: 24,480 dollars

2. Divided by the total equivalent units of work done to date, equivalent units of conversion costs in beginning work in process and in work done in current period: 450

3. Weighted-average cost per equivalent unit: 54.40 dollars

  1. Step 5: ASSIGN COSTS TO UNITS COMPLETED AND TO UNITS IN ENDING WORK-IN-PROCESS INVENTORY. Step 5 in Exhibit 18-5 assigns dollar amounts to the equivalent units completed and transferred out and the equivalent units in ending work in process (calculated in Exhibit 18-4, Step 2) using the weighted-average cost per equivalent unit for direct materials and conversion costs calculated in Step 4. For example, total costs of the 100 physical units in ending work in process are shown below:
A table shows total costs of the 100 physical units in ending work in process

The table depicts total costs of the 100 physical units in ending work in process. The details of the table are as follows:

1. Direct materials, 100 equivalent units times weighted-average cost per equivalent unit of 75.60 dollars: 7,560 dollars

2. Conversion costs, 50 equivalent units times weighted-average cost per equivalent unit of $54.40 dollars: 2,720 dollars

3. Total costs of ending work in process: 10,280 dollars

  1. The following table summarizes total costs to account for ($62,280) and how they are accounted for in Exhibit 18-5. The arrows indicate that costs of units completed and transferred out and units in ending work in process are calculated using weighted-average total costs obtained after merging costs of beginning work in process and costs added in the current period.
A table shows costs to account for and how they are calculated on a weighted-average basis

The table depicts costs to account for and how they are calculated on a weighted-average basis. The details of the table are as follows:

1. Costs to account for

2. Costs accounted for calculated on a weighted-average basis

  1. Before proceeding, review Exhibits 18-4 and 18-5 to check your understanding of the weighted-average method. Note: Exhibit 18-4 deals with only physical and equivalent units, not costs. Exhibit 18-5 shows the cost amounts.
  1.  Summary journal entries under the weighted-average method for March 2020 (see Exhibit 18-5) are shown below: 
A table shows summary journal entries under the weighted-average method for March 2020

The table summary journal entries under the weighted-average method for March 2020. The details of the table are as follows:

1. Work in process, assembly: 19,800

2. Work in process, assembly: 16,380

3. Work in process, testing: 52,000

  1. The T-account Work in Process—Assembly, under the weighted-average method, is:
A table shows the T-account for work in process: assembly under the weighted-average method

The table depicts T-account for work in process: assembly under the weighted-average method. The details of the table are as follows:

1. Beginning inventory, March 1: 26,100

2. Ending inventory, March 31: 10,280

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