WMA in industrial operations

The Weighted Moving Average (WMA) in industrial operations involves the formula for calculating inventory costs, which is as follows:

Costs or previous periods’ figures are carried forward from the previous period.

The cost or quantity of goods entering the current inventory period includes the following details:

• Increase: Purchase of goods into inventory
• Decrease: Removal of goods from inventory for returns or discounts received from purchases
   
• Increase: Production into inventory
• Decrease: Withdrawal of raw materials
   
• Increase: Customer returns (if the cost of the returned goods was recorded in the corresponding period, the cost must be recorded in the Weighted Monthly Average)
• Other adjustments: Such as exchanges of goods (either in full or in part), return of raw materials withdrawn by various departments, custom cost adjustments, and inventory quantity adjustments.

Production into Inventory: In addition to raw material costs, production also includes labor and other expenses proportional to the amount produced.

Labor costs are derived from labor invoices, delay charges, depreciation, employee salaries, and withdrawals from various departments, among others. These expenses are considered direct or indirect costs of the relevant departments, depending on cost allocation. This is why most industrial operations prefer using the Weighted Monthly Average Cost.

At the end of each month, raw material costs are calculated once. The Weighted Moving Average (WMA) method is not used because labor and other expenses are typically known only at month-end. Additionally, the weight share allocated to different work orders is considered part of the cost.

The Weighted Moving Average (WMA) calculates the quantity and cost of remaining inventory each time there is a withdrawal or addition to inventory. It determines a new average cost per unit, which serves as the basis for subsequent inventory withdrawals. Each time an inventory receipt is issued, and labor costs or other expenses are not recorded in time, the WMA calculation will result in inaccurate production cost data. Therefore, when calculating the WMA, it is essential to ensure that all inventory receipts are processed correctly, and labor costs and other expenses are factored into the moving cost. This will enable accurate cost data and avoid discrepancies in production cost information.

Thus, when using the Weighted Moving Average (WMA) as the basis for calculation, consider the nature of the industry. Gather actual historical expenses and work hour data as a standard template for calculating labor and other expenses. Every time inventory is received, record the transaction immediately, and use the work hour data and standard calculation to determine labor costs for the received quantity. Include the raw material costs in the WMA calculation.

At the end of the month, compare the estimated labor costs with the actual labor costs incurred during that month, and record any differences for future adjustments. Simultaneously, record the actual expenses and withdrawals from inventory and allocate the differences to the cost of goods sold under other categories proportionally.

This process not only resolves the issue of receiving labor cost and other expense data in a timely manner when using the Weighted Moving Cost method but also addresses the discrepancies between actual and estimated costs. It ensures consistency across cost analysis tables, such as inventory stock tables and operational cost tables.

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