Question

Your manager is concerned that costs are being misappropriated due to large balances in ending work in process inventories while currently using the FIFO Method for accounting for beginning work in process inventories. Using examples from your own experience or from the book, explain to the manager which of the methods of process costing you believe should be used and why.

Answer 1

Answer:

The company should use the weighted average method of process costing.

Explanation:

FIFO and Weighted average cost method are the two methods of Process costing. The company is already using the FIFO method for accounting of inventory under which cost are misappropriated into closing WIP.

To solve such issue, the company can use the weighted average method under which cost is calculated by weighted average and then evenly distributed to the unit transferred to other department and the ending work in process.

Example: Suppose company purchased goods lying stock 20000 units at $5 each. Weighted average cost calculated per unit is $3 per unit. Calculate Closing work in process

==> FIFO = 20000*5 = $100,000

==> Weighted average cost = 20000 * 3 =  $60,000