weighted average method in cost accounting

weighted average method in cost accounting

Application of Weighted Average Method in Cost Accounting

1. Introduction to Cost Accounting

Since the early period of cost accounting, a variety of single equation methods have been used to estimate cost functions. This paper summarizes both the form of testing procedures and results that have emerged. The major theme of the paper is experimental. Recent attempts have been made to eschew some of the treatment that earlier experimental designs received to do so. Since these models are re-estimated with Microsoft Office, the weighted average method for parsing is available if the data were designed to maximize the probability of estimating cost functions. The idea behind weighting estimation is implicit and assumes that explanatory variables are not just arbitrarily determined, external impediments prevent us from determining costs at the same sample size.

Weighted average methods must satisfy criteria, which are taken as evidence of validity. This study investigates the utility of the weighted average methodology. If these methods are employed to assess general cost relationships, what do we learn? If weighting is of interest, and single equation methods are widely applied, why is this so? There are no simple answers to these questions. At the same time, it may appear worth addressing the series of long-standing issues in methods. More than eight authors assert that these issues are valid and important.

Whether weighted average methods are employed, the analysis remains largely theoretical, involving questions and a cornucopia of propositions. Most of the conclusions that can be drawn from the text are, therefore, indicative of directions for future research. The paper is a part of efforts to extend weighted average cost principles by constructing a bridge between the theoretical and real research. It gives examples and observations from empirical research to real as well as theoretical thought. The study shows increased patterns in the use of the weighted average methodology, even where it is believed that this was not the case. This might duplicate efforts, give the impression that results are more general than they really are, or that standard error estimates are smaller than they really are, or create other problems. Despite these drawbacks, the weighted average methodology often reigns because it solves certain basic problems.

This paper seeks to take a closer look at how the weighted average method can be used and applied in cost determination, especially how it is deployed in the controllership function in companies. The aim is to open up exploration of some of the issues involved in cost determination using this system, which is utilized and often perceived as an effective and efficient way of minimizing costs, and to understand the method or methods employed.

Cost accounting signifies the analysis and ascertainment of the revenue and costs. Cost accounting data are used for exercising control and decision-making. The data are used for the purpose of control and fixing prices, which aim at maximization of profit. Cost accounting provides information to management for formulation of policies, planning, decision-making, etc. It provides necessary feedback from various departments to time the diversification of multiplex activities of an enterprise along with information required by regulatory bodies.

1. Introduction to Cost Accounting

Application of Weighted Average Method in C Iterative Process in Cost Accounting

2. Understanding the Weighted Average Method

In conclusion, the weighted average method can be an efficacious tool used when inventory levels are unpredictable and both irregular and regular units. It evenly distributes costs and facilitates tracking the costs during the transfer of goods as well. It can optimize both the ending work in process and cost accounting.

A distinction is made between the Partial or Normal Weighted Average Cost Calculation, which involves substituting a new weighted average unit cost after the purchase of goods, and the Total or Periodic Weighted Average Cost Calculation, which involves recapitulating the average weighted unit cost only at the end of the month.

Step one: Summarize the quantity and cost for each inventory account. Step two: Add the quantity and total cost for all acquisition schedules together. Step three: Allocate cost to goods transferred by adding the quantity while subtracting it from the total acquisition cost. Step four: Allocate cost to both the ending inventory and the ending work in process, which both keeps track of the quantity and totals acquisition cost.

The weighted average method is used by businesses to evenly spread the cost of producing an item among all units. It is based on the principle that the costs incurred during the production and completion of the item should be evenly distributed among the units produced during that time. Thus, the weighted average method assigns the average cost of the various acquisitions the company makes to the number of units on hand at the end of the company’s accounting period. Usually, this consists of three to four steps.

3. Calculation and Application of Weighted Average Method

The weighted average cost equivalent units for completing all and ending products may differ because the specific costs of work-in-process goods are determined at different dates and the units identified may vary depending on when they are completed. Cost accounting objectives require that work-in-process units be transferred to finished goods and that items are sold as soon as possible. To accomplish these requirements, the cost of finished units is based on the costs of work-in-process units. The most significant decisions related to the weighted average method boundary occur in setting equivalent unit average costs and selecting how to combine direct material with conversion costs in the first step of drawing goods and assigning costs to physical units.

Calculation of weighted average cost per end of period approximately. Use weighted average cost to determine the cost of completing products from the number of beginning work-in-process units and the number of units started and completed during the period, including rework and end of period units. The weighted average method is used to determine inventory and cost of goods sold. The units and equivalent units in the physical flow of goods must be aligned with a weighted average of costs.

4. Advantages and Limitations of Using Weighted Average Method

(ii) The method has the small advantage of requiring no re-examination of the actual movement of costs in or out of the entity during the period, but it cannot be applied when replacement cost risks are considered. Ideal customers demand units covering more than one receipt and expect to be issued stock in rotation. If units purchased at different prices exist in stock, then expecting to use an average replacement cost as a valuation base is unrealistic and no advantage over FIFO can be enjoyed as there will be no movement-scheduling benefits for costing purposes. Therefore, no managerial benefits would be available for selection of the weighted average rule.

(iii) FIFO Perpetual Inventory – This system not only gives the benefits of accurate physical unit control but also provides the benefits of smooth financial reporting.

(ii) Weighted Average Method – Under this method, the replacement unit is valued at a fixed average value. Units in stock at the closing date are assumed indifferently to be those derived from stock held at different value dates. Prompt financial results are used. The movement between actual replacement costs in issuing units is smoothed out, and the needs of non-accounting areas are met. The situation in pricing decisions for control purposes is brought closer. It is more suitable when there are frequent social changes.

(i) FIFO Process Method – The FIFO assumes that physical inventories are consumed and replenished on the basis of the order of their receipt. It does not give credence to the concept that inventories are used and resupplied at exactly constant cost.

4.2 Differences in Methods:

(iii) It eliminates the possibility of accumulation of large blocks of effectively overvalued expensive or undervalued cheaper stocks, which could occur if transaction prices, which were not in line with current costs, were used to value closing stock.

(ii) Averages are more reliable/realistic than the individual costs. As the computation is based on an average of the available costs, it is assumed that the closing stock consists of units drawn indifferently from the quantities purchased at both prices. This approximates to a maximum extent normal sale conditions where units in stock are used as and when they are needed. The loss in physical inventories is averaged. Transactions can be recorded before or after several consecutive sales of stock items.

(i) This method smoothens out the process of price changes. During a period of rapid price fluctuations, this method is more suitable because, by keeping prices at an even level, it minimizes the effects of price changes. When price increases or decreases are gradual, results obtained by weighted average and FIFO methods are the same.

4.1 Advantages of using Weighted Average Method:

5. Comparison of Weighted Average Method with Other Costing Methods

Requirement of the Weighted Average Method The management depends on the Cost Accountant to prepare statements which clearly identify the nature of the raw materials used, the stages at which processing has been done, and the various elements of manufacturing cost incurred. With this information, the management can take up real control activities with the clear objective of improving the future position. The good Financial Accounting record alone is not sufficient for cost analysis for a number of reasons. It groups all materials under the heading of raw materials, Plant Exercise cost details of machine repairs, Maintenance with general Factory Costs like rent, power, lighting, Insurance, and inspection. These data can be reconciled to show the elements of the manufacturing costs, only by using a Cost Accounting System. With the help of the Wage, Earn and Exercise Factory records, the productive labor cost can be distinguished from idle time and other Factory costs. These studies are also essential in providing the management with data concerning plant capacity and utilization. If the report is to show periodic profits or loss, the costs should obviously relate to units to both completed and to the work in progress at a period-end. The use of variable unit costs for period charge in loss or accruals for profit ensures that profit figures will be understated or overstated. An accurate valuation of the closing stocks at the period-end is, therefore, critical in providing a true trading account.

Introduction The usefulness of the weighted average method as a meaningful management tool in today’s fast-growing complex environment is beyond doubt. When this method is used to value units completed and unit cost, it shows only modified costs without reference to the actual date of acquisition and selling price of materials. Profits or losses, therefore, depend on the degree of optimality at which the opening and closing balances of stocks are valued. In the hope of improving our understanding of this assumption, this study seeks to highlight the advantages of the weighted average method and to explain its logical implications.