Definition of Weighted average method of material costing
In weighted average cost method, average cost of materials purchased is charged to job or process rather than the actual cost. In other words, it is assumed that where a material is purchased at different prices the cost of a unit of such material will be the average, of the cost of all units purchased during a particular period.
Weighted average cost method follows the concept of “total stock and total valuation”. The weighted average method of material costing is used for costing materials requisition and charging cost of materials to production. The balance on hand is also composed of units valued at the weighted average cost.
For example, if 50 units of materials x are purchased at $10 per unit and another 50 units of the same materials are purchased at $12 per unit the cost to be charged to job or process or department for materials -x be $11 per unit (the average cost).
In order to find the average price the total cost of all materials of a particular, class is divided by the number of units in hand.
When new materials are purchased the avörage price is, computed by taking the following steps.
- Quantity or units purchased are added .to the quantity or number of units of materials on hand.
- Cost of materials newly purchased .is added to the cost of materials on hand.
- Total cost computed in step-ii is divided by the total quantity calculated in step-I, the resulting figure will be the average cost per unit.
Formula of calculation of weighted average cost
Materials are issued from the store at the established’ average cost until a new purchase is recorded: Although a new average price may be computed when materials are returned to sellers and when excess issues are returned to the store but for practical purpose it seems sufficient to reduce or increase the total quantity and cost, allowing the unit price to remain unchanged. It means that materials returned to sellers and to the store is recorded at present average, cost.
Note: Students, are advised to compute average price rounded to five decimal places.
Advantage of weighted average method
Advantage of weighted average costing method are as under:
- The weighted average method minimizes the effect of unusual high and-low material prices.
- The weighted average method is practical and suitable for charging cost of material used to production.
- It is useful for management in analyzing of operating results.
- This method is simp!e to apply if receipts of material are not numerous.
Disadvantages of weighted Average Method
The main disadvantages of weighted average costing method are as under:
- Materials used may not be charged to production at the current price.
- The cost charged to production are not the actual prices.
- If the receipts are numerous, many calculations are required.
April 01: Inventories on hand: 50 units at the rate of $2 and 100 units at the rate of $4.50
April 05: Purchased 100 units at a rate of $1.80
April 06: 10 units of the inventories purchased on 5th April at the rate of $1.80 are returned to supplier
April 10: 80 units were issued to factory
April 15: 50 units were issued to factory
April 20: 20 units were purchased at the rate of $1.50
April 25: 70 units were issued to factory
April 30: 50 units purchased at $1.70
Determine the cost of inventory on 30th April, under weighted average method of costing.