The weighted average method, also known as the weighted average cost allocation method, is a cost allocation method used to allocate joint costs among the joint products based on their relative weights. It calculates the average cost per unit by dividing the total joint costs by the total number of units produced, and then applies this average cost per unit to each product based on its individual production quantity.
Here’s how the weighted average method of allocating joint costs works:
- Determine the Total Joint Costs: Calculate the total joint costs incurred up to the split-off point in the joint manufacturing process. These costs include expenses such as direct materials, direct labor, and factory overhead that are collectively incurred for all the joint products.
- Calculate the Total Production Quantity: Determine the total number of units produced for all the joint products during the production process.
- Calculate the Average Cost per Unit: Divide the total joint costs by the total production quantity to calculate the average cost per unit. This average cost represents the cost per unit that will be used for allocating joint costs to each product.
- Allocate Joint Costs: Multiply the average cost per unit by the individual production quantity of each joint product to determine the allocated joint costs for each product. The allocated costs represent the portion of the total joint costs assigned to each product based on its production quantity.
- Cost Assignment: Allocate the allocated joint costs to the respective joint products for proper cost assignment. These allocated costs will be used for inventory valuation, cost determination, pricing decisions, and performance evaluation of the individual products.
The weighted average method considers the production quantity of each joint product as the basis for allocation. It assumes that the production quantity reflects the relative importance or usage of each product in the joint manufacturing process. However, it’s important to note that this method assumes equal costs per unit for all the joint products, which may not be accurate if there are significant differences in the cost structures or production complexities among the products.
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