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Business Definition for: average cost flow assumption
Dictionary of Accounting Terms
average cost flow assumption

one of the two cost flow assumptions used under process costing , more often called weighted average costing flow assumption. The other is the First-In, First-Out (FIFO) cost flow assumption.

See also weighted average costing
Related Terms:
weighted average costing

procedure for computing the unit cost of a process. Beginning work-in-process inventory costs are added to the costs of the current period, then a weighted average is obtained by dividing the combined costs by equivalent units. Thus there is only one average cost for goods completed. Equivalent units under weighted average costing may be computed as follows:
Units completed + (ending work-in-process ¥ degree of completion (%)). To illustrate, the following data relate to the activities of Department A during the month of January:

Units
Beginning work-in-process (100% completeas to materials; 2/3 complete as to conversion) 1500
Started this period 5000
Completed and transferred 5500
Ending work in process (100% complete asto materials; 6/10 complete as to conversion) 1000

Equivalent production in Department A for the month is computed,using weighted average costing, as follows:

Materials Conversion Costs
Units completed and transferred 5500 5500
Ending work in process
Materials (100%) 1000
Conversion costs (60%) 600
Equivalent production
6500 6100
Referring Terms:
specific identification
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