Weighted Average Method(Part 3 of 3)

July 23rd, 2006 Comments off
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WEIGHTED AVERAGE method uses the weighted average value for all issues. This is done by dividing the total cost of materials by their quantities. A new issue price is calculated each time new material is received.

Illustration:

In March 2006, assuming that there is no opening stock and the following reflects the stock movement:

Mar 2 Receipt 100 units @ $1.00 = $100.00

Mar 3 Receipt 150 units @$1.20 = $180.00

Mar 20 Receipt 200 units @$1.50 = $300.00

Mar 29 Issues 400 units

Compute the cost of material using Weighted Average method to charge to production and show the closing stock valuation in the Balance sheet?

Using the Weighted Average method:

(a) Cost assigned to the 400 units issued/charged to production is $516.00

(100x$1 + 150x$1.20 + 200x$1.50)/450units=$1.29 per unit

Hence, 400 units costs 400 x $1.29 =$516.00

(b) the closing stock of 50 units( total receipt(450) minus total issue(400)) under Weighted Average method will be valued at the price which is :

50 units @$1.29 =$64.50

The following are the advantages and disadvantage of Weighted Average method:

Advantages:

Smoothen out fluctuations in purchase price.

Compared to FIFO or LIFO, this method is less cumbersome.

Seems a logical method as it assumes the values of identical items will be equal

Disadvantages:

Issues may not be at current economic value

As it based on average method, the issue price may run to a number of decimal places

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Financial Accounting

 
 

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