weighted-average process method

Suppose a department began the month with some half-finished toys carried over from last month, worth 3,000 dollars, and then spent another 47,000 dollars this month finishing those and starting new ones. When it comes time to figure cost per unit, you face a choice: do you keep last month's costs and this month's costs separate, or do you just pool them and take one big average? The weighted-average method takes the simple road: throw the beginning inventory's cost in with the current period's cost, blend them, and compute a single average cost per unit.

Under the weighted-average process method, equivalent units include all units completed during the period plus the equivalent units in ending work in process — and it does not subtract out the work that was already done on beginning inventory last period. Likewise the cost per equivalent unit uses total cost (beginning work-in-process cost plus current-period cost) divided by those equivalent units. So if 105,000 equivalent units carry 3,000 dollars of beginning cost plus 47,000 dollars of current cost (50,000 total), the average is about 0.476 dollars each. Because it mixes two periods' costs into one average, the unit cost it reports is a blend of old and new rates.

The weighted-average method is the more common choice in practice because it is simpler to compute and the numbers it needs are easier to gather; it is fully acceptable under both US GAAP and IFRS. Its honest trade-off is that by blending last period's costs into this period's average, it slightly blurs current-period performance — if input prices jumped this month, the average partly hides it. When managers need a cleaner read on current-period cost (for example to monitor cost control), the FIFO method is preferred precisely because it keeps the two periods separate.