What are the similarities and differences of the weighted average method and the first in first out method used in process costing?
According to the Accounting for Management website, the main difference between the FIFO and weighted average method is in the treatment of beginning work-in-process or unfinished goods inventory. The weighted average method includes this inventory in computing process costs, while the FIFO method keeps it separate.
What is the weighted average method of process costing?
In the weighted average cost method, the cost of goods available for sale is divided by the number of units available for sale and is commonly used when inventory items are so melded or identical to each other that it is impossible to assign specific costs to single units.
Why is the weighted average method preferred?
The weighted average method works well if you are purchasing inventory stock on a regular basis. This method is commonly used when inventory items are so blended or identical to each other it is impossible to assign specific costs to individual units.
What are the advantages of weighted average method?
The main advantages of the weighted average costing method include:
- Minimizes the effect of unusually high and low material prices.
- Practical and suitable for charging the cost of materials used to production.
- Enables management to analyze operating results.
- Simple to apply when receipts for materials are not numerous.
When computing equivalent units using the weighted average method?
To calculate cost per equivalent unit using the weighted-average method, add the cost of (1) work in process inventory to costs added during the period and divide by equivalent units of production.
What is meant by the term equivalent unit of production when the weighted average method is used?
Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending work in process inventory. One Work in Process account is often used to accumulate costs for all jobs.
Is weighted average better than FIFO?
The inventory will be excluded from a business based on an average cost of all goods present in a business. FIFO method will report higher profits if inflation is rising and vice versa. Weighted average method will report higher profits if inflation is decreasing and vice versa.
What is the difference between weighted average cost and average cost?
The average is the sum of all individual observations divided by the number of observations. In contrast, the weighted average is observation multiplied by the weight and added to find a solution. The weighted average component is given the weight of value to arrive at a specific answer.
Why is weighted average better than FIFO?
Impact on financial figures: In a time of decreasing inflation, the profit margins for a company will be higher under weighted average method as compared to FIFO method because the cost of goods sold will be an average figure under weighted average method which will be lower if costs are recorded under FIFO method.