Process Costing (Weighted Average Method) Example

Summary

The video tutorial illustrates process costing, specifically the weighted average method, using Fitz's Rootbeer as an example. It explains how to assign costs to 2,000 completed units and 500 in-process units in the bottling department. The direct materials are 100% complete for the in-process units, while conversion costs are only 80% complete. The video demonstrates calculating cost per equivalent unit for direct materials (49 cents) and conversion costs (60 cents), then assigning these costs to completed and in-process units, resulting in $1,180 for completed units and $485 for those still in the department.

Takeaways

• 🍻 The video discusses process costing, specifically the weighted average method, for a company named Fitz's Rootbeer.
• 🔄 Fitz's Rootbeer uses process costing for its bottling department, focusing on how to assign costs to units.
• 📊 The company bottled 2,000 units of root beer during the period, with 500 units still in process at the end of the period.
• 📈 All 500 in-process units are 100% complete in direct materials but only 80% complete in conversion costs.
• 💼 Conversion costs include direct labor and manufacturing overhead, which are not fully completed for the in-process units.
• 📝 The video explains how to calculate the cost per equivalent unit for direct materials and conversion costs.
• 💡 The cost per equivalent unit is used to assign costs to completed units and those still in process.
• 📉 For the 2,000 completed units, $980 is assigned for direct materials and $1,200 for conversion costs.
• 📋 For the 500 in-process units, $245 is assigned for direct materials and $240 for conversion costs, considering their completion percentage.
• 🔢 The total cost assigned to the completed and transferred units is $2,180, while the in-process units have $485 assigned to them.

Q & A

What is process costing?

Process costing is a method of assigning costs to products when the production process is continuous, and it's particularly useful for companies that produce items in a flow, such as in a manufacturing setting.

What is the weighted average method in process costing?

The weighted average method in process costing is a technique used to calculate the cost per equivalent unit by taking into account both the beginning work in process inventory and the costs added during the period.

Which company is used as an example in the video?

The company used as an example in the video is Fitz's Rootbeer, a manufacturer that uses process costing for their bottling department.

How many units of root beer did Fitz's Rootbeer bottle during the period mentioned in the video?

Fitz's Rootbeer bottled 2,000 units of root beer during the period.

What is the status of the 500 units still being processed at the end of the period?

At the end of the period, the 500 units still being processed are 100% complete with respect to direct materials but only 80% complete with respect to conversion costs.

What are conversion costs in the context of the video?

Conversion costs in the video refer to the combination of direct labor and manufacturing overhead costs that are used to convert direct materials into finished goods.

How is the cost per equivalent unit calculated for direct materials and conversion costs?

The cost per equivalent unit is calculated by dividing the total costs of direct materials and conversion costs by the number of equivalent units produced, which in the video is 49 cents per unit for direct materials and 60 cents per unit for conversion costs.

How are costs assigned to the completed units in the bottling department?

Costs are assigned to the completed units by multiplying the number of units completed (2,000) by the cost per equivalent unit for direct materials (49 cents) and conversion costs (60 cents), then summing these amounts.

What is the total cost assigned to the bottles that were completely finished during the period?

The total cost assigned to the bottles that were completely finished during the period is $2,180, which is the sum of the direct materials cost ($980) and the conversion cost ($1,200).

How are costs assigned to the units still in process in the bottling department?

For the units still in process, the direct materials cost is assigned at 100% (500 units * $0.49), while the conversion cost is assigned at 80% completion (400 equivalent units * $0.60).

What is the total cost assigned to the units still in the bottling department at the end of the period?

The total cost assigned to the units still in the bottling department at the end of the period is $485, which includes $245 for direct materials and $240 for conversion costs.

Outlines

00:00

🍺 Process Costing at Fitz's Root Beer Bottling Department

This paragraph explains the concept of process costing, specifically the weighted average method, using Fitz's Root Beer as an example. The company's bottling department is highlighted, where they produced 2,000 units of root beer during a certain period. However, at the end of this period, 500 units remained in process. These 500 units are 100% complete in terms of direct materials but only 80% complete concerning conversion costs, which include direct labor and manufacturing overhead. The paragraph discusses the challenge of assigning costs to units that are completed and those still in process, introducing the concept of cost per equivalent unit. The cost per equivalent unit is calculated as 49 cents for direct materials and 60 cents for conversion costs. The paragraph concludes with an explanation of how these costs are assigned to the completed and in-process units.

05:02

📊 Assigning Costs to Completed and In-Process Units

The second paragraph delves into the process of assigning costs to the completed and in-process units at Fitz's Root Beer. For the 2,000 completed units, the direct material cost is calculated as $980 (2,000 units * $0.49 per unit), and the conversion cost is $1,200 (2,000 units * $0.60 per unit). The total cost assigned to these completed units is $2,180. For the 500 in-process units, the direct material cost is straightforward at $245 (500 units * $0.49 per unit) since they are 100% complete in this aspect. However, for conversion costs, only 80% of the work is done, so the equivalent units are 400 (500 units * 80%), leading to a cost of $240 (400 units * $0.60 per unit). The total cost assigned to the in-process units is $485. The paragraph concludes by summarizing the total costs assigned to both the completed units and those still in the bottling department.

Keywords

💡Process Costing

Process costing is a method of assigning costs to products when the production process is continuous and the products are indistinguishable in nature. In the video, Fitz's root beer company uses process costing for their bottling department, which is indicative of a manufacturing environment where products are produced in batches and the focus is on the cost per unit of output rather than individual units.

💡Weighted Average Method

The weighted average method is a technique used in process costing to calculate the average cost per unit by considering both the beginning work in process inventory and the costs incurred during the current period. The video explains how Fitz's root beer company applies this method to determine the cost of units completed and those still in process.

💡Direct Materials

Direct materials refer to the tangible materials that are directly and physically incorporated into the product during the manufacturing process. In the context of the video, the root beer itself is considered a direct material, and the script discusses how the cost of these materials is assigned to the units that are 100% complete and those still in process.

💡Conversion Costs

Conversion costs encompass the costs of direct labor and manufacturing overhead associated with the transformation of raw materials into finished products. The video script mentions that the 500 units still in process are 100% complete in terms of direct materials but only 80% complete regarding conversion costs, highlighting the need to calculate the cost of conversion separately.

💡Equivalent Units

Equivalent units are a measure used in process costing to determine the number of fully completed units that could be produced based on the resources used. The video explains how Fitz's root beer calculates equivalent units for both direct materials and conversion costs to assign costs accurately to the units completed and those in process.

💡Work in Process (WIP)

Work in process (WIP) refers to the costs associated with the partially completed units of production. The script describes a scenario where Fitz's root beer has 500 units still being processed, which are part of the WIP, and the video aims to show how to assign costs to these units.

💡Cost per Equivalent Unit

Cost per equivalent unit is the cost assigned to each fully completed unit of production. The video script provides calculations for the cost per equivalent unit for both direct materials and conversion costs, which are then used to assign costs to the units completed and in process.

💡Direct Labor

Direct labor is the labor cost that can be directly traced to the production of specific products. In the video, direct labor is a component of conversion costs, and the script explains that the 500 units still in process are only 80% complete in terms of direct labor, which is part of the reason for the weighted average calculation.

💡Manufacturing Overhead

Manufacturing overhead includes all indirect manufacturing costs that are not directly tied to the production of specific units, such as factory rent, utilities, and depreciation. The video discusses how manufacturing overhead is considered when calculating conversion costs for the units in process.

💡Finished Goods Inventory

Finished goods inventory represents the completed products that are ready for sale but have not yet been sold. The video script mentions that if the bottling department is the final step in production, the completed units would be transferred to finished goods inventory.

💡Cost Assignment

Cost assignment is the process of allocating costs to specific cost objects, such as products or services. The video's main theme revolves around cost assignment, particularly how Fitz's root beer assigns costs to units completed and transferred out versus those still in process using the weighted average method.

Highlights

Introduction to process costing and the weighted average method.

Case study of Fitz's Rootbeer's bottling department.

2,000 units of root beer were bottled during the period.

500 units remain in process at the end of the period.

Direct materials for the in-process units are 100% complete.

Conversion costs for the in-process units are only 80% complete.

Explanation of cost assignment for completed and in-process units.

Calculation of cost per equivalent unit for direct materials and conversion costs.

Cost calculation for completed units: $0.49 per unit for direct materials.

Cost calculation for completed units: $0.60 per unit for conversion costs.

Total cost assigned to completed units: $2,180.

Cost calculation for in-process units: 100% complete direct materials.

Cost calculation for in-process units: 80% complete conversion costs.

Total cost assigned to in-process units: $2,185.

How to determine equivalent units for direct materials and conversion costs.

Final assignment of costs to units transferred out and still in process.

Transcripts

in this video I want to show you an

example of how to assign cost to units

for a company that uses process costing

specifically the weighted average method

so let's take a company called Fitz's

rootbeer and they're a manufacturer and

they use process costing for their

bottling department okay so they might

have other departments but let's just

focus on the bottling department so they

bottled 2,000 units of root beer during

the period and then at the end of the

period they still have 500 units that

are still being processed yeah

now the 500 units that are still being

processed are a hundred percent complete

with respect to direct materials but

with respect to conversion costs which

are direct labor plus manufacturing

overhead it's only eighty percent

complete okay so think about it like

this they poured all the root beer in

the bottle so it's a hundred percent

complete those five hundred units that

are still left but there's other work

that needs to be done some direct labor

some overhead so the question is how do

we assign costs because we're gonna have

costs that we're already in work in

process at the beginning of the period

and then we have costs that are incurred

during the period how do we assign those

costs because if you think about there

are some units that were completed and

we bottled it and we did all the labor

all the conversion caused everything and

those two thousand have been transferred

out of the department okay they either

went to the next department or if this

was the final department then they're in

finished goods inventory okay so those

two thousand are done but there's the

five hundred that are still in process

and how do we assign these costs how do

we split the costs up among those

different units okay the ones that are

still in in process and the ones that

have been transferred out so to do that

we need something called the cost per

equivalent unit and I showed you how to

calculate that in the last video but

it's basically 49 cents a unit for

direct material sixty cents a unit for

conversion costs and in case you didn't

see that video or you need a refresher

here's how those calculations were made

okay so I've got the conversion costs

over here and then over here at the

direct materials okay so we've got our

cost per equivalent unit and what we're

gonna do is we're gonna multiply that so

we're gonna go so the I'm gonna try to

make a table McGee simple for you to

follow so cost is lying to the units

that are complete

and transferred out of the department

during the period that's the two

thousand where we said look they've been

bottled we've done all the labor and we

need to do we did everything they're out

of this department okay so the units

that are completed and then the units

that are still in process okay so let's

start assigning these costs so the units

that are completed

we'll start with direct materials so two

thousand times forty nine cents okay so

that's gonna be nine hundred and eighty

nine hundred and eighty okay and then

with the cost per equivalent unit for

conversion costs for the ones that were

completed we have two thousand two

thousand times sixty cents okay so

that's gonna be twelve hundred dollars

that's gonna be twelve hundred dollars

so then if you were to say so this is

basically saying look the ones that were

completed nine hundred eighty dollars of

the direct materials cost should go to

that should be assigned to those units

that were completed and twelve hundred

dollars of the conversion cost should be

assigned to those they were completed so

if we were to add up and say what is the

total amount that should be assigned to

the bottles that were completely

finished during the period two thousand

one hundred and eighty dollars okay we

just add the cost that were from Dark

Materials the cost that were from

conversion costs okay so now bear in

mind what the only the only thing that's

really tricky here is we use the cost

per equivalent unit for direct materials

and the cost per equivalent unit for

conversion costs we don't use the same

cost per equivalent you know for each

one now the units that are still in

process so there's five hundred that are

still in process or direct materials and

there are a hundred percent complete

with respect to direct materials so we

don't have to do any adjustment to get

two equivalent units because there are

five hundred equivalent units so five

hundred times 0.49 okay that's gonna be

200 hundred forty five dollars okay

maybe I should write this out so that's

five hundred times 0.49 okay and this up

here was two thousand times 0.49 and

this here was two thousand

time's point six oh okay so you can so

you can see what the numbers came from

and then of course this was just these

two things added together all right now

the unit's tone process for conversion

costs 500 but here's the thing it's 500

but they were only 80% complete with the

respective conversion cost so the

equivalent units is really four hundred

and that's just five hundred times

eighty percent okay so we're gonna take

four hundred and we're gonna multiply it

so let me sit here 400 times point six

so the cost per equivalent unit okay and

so that's going to be two hundred and

forty dollars of the conversion costs

are assigned to the unit's still in

process now let's say we're gonna add

this together because we want to say

well what's the total what's the total

amount of costs of whether it be direct

materials or conversion costs that are

assigned to the units that are still in

the bottling department still they

haven't been transferred to the next

apartment because they're not completely

been finished by this department yet the

cost of sign to them would be four

hundred and eighty five dollars and then

the costs assign to the bottles that

were done with this depart like they've

been moved on to the next apartment or

if this was the final Department it goes

to finish goods inventory those costs

the ones that were completed and

transferred out was two thousand one

hundred and eighty