Post on 18-Dec-2014
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
FIFO MethodAppendix 4A
4A-2
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate than the weighted-average method) differs
from the weighted-average method in two ways:
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.
4A-3
Learning Objective 6
Compute the equivalent units of production
using the FIFO method.
4A-4
Equivalent Units – FIFO MethodLet’s revisit the Smith Company example. Here is information concerning the Assembly Department
for the month of June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 of Department A during June
Work in process, June 30 900 60% 30%
4A-5
Equivalent Units – FIFO MethodStep 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
4A-6
Equivalent Units – FIFO MethodStep 2: Determine units started and completed during
the period.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
4A-7
Equivalent Units – FIFO MethodStep 3: Add the equivalent units in ending Work in
Process Inventory.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Ending Work in Process
Materials: 900 units × 60% complete 540 Conversion: 900 units × 30% complete 270
Equivalent units of production 5,820 5,610
4A-8
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
MaterialsMaterialsMaterialsMaterials
5,100 Units Completed 540 Equivalent Units 900 × 60%
5,820 Equivalent units of production
180 Equivalent Units300 × 60%
4A-9
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
ConversionConversionConversionConversion
5,100 Units Completed 270 Equivalent Units 900 × 30%
5,610 Equivalent units of production
240 Equivalent Units300 × 80%
4A-10
Equivalent Units:Weighted-Average vs. FIFO
Materials ConversionEquivalent units - weighted-average method 5,940 5,670Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610
As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of
production under the FIFO method.
As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of
production under the FIFO method.
4A-11
Learning Objective 7
Compute the cost per equivalent unit using the
FIFO method.
4A-12
Beginning work in process: 400 units
Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.
4A-13
Cost per Equivalent Unit - FIFOThe formula for computing the cost per equivalent
unit under FIFO method is:
4A-14
Cost per Equivalent Unit - FIFO
TotalCost Materials Conversion
Cost added in June 199,751$ 118,621$ 81,130$
Equivalent units 5,820 5,610
Cost per equivalent unit 20.3816$ 14.4617$
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,621 ÷ 5,820$118,621 ÷ 5,820 $81,130 ÷ 5,610$81,130 ÷ 5,610
4A-15
Learning Objective 8
Assign costs to units using the FIFO method.
4A-16
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory
Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work
in Process Inventory.
900 units × 60%900 units × 60% 900 units × 30%900 units × 30%
4A-17
Applying Costs - FIFOStep 2: Record the cost per equivalent unit.
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$
Assembly DepartmentCost of Ending WIP Inventory
4A-18
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$ Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$
Assembly DepartmentCost of Ending WIP Inventory
Applying Costs - FIFOStep 3: Compute the cost of ending Work in Process Inventory.
540 × $20.3816540 × $20.3816 270 × 14.4617270 × 14.4617
4A-19
Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$
Assembly DepartmentCost of Units Transferred Out in June
4A-20
Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$
Assembly DepartmentCost of Units Transferred Out in June
4A-21
Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this
period.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$
Assembly DepartmentCost of Units Transferred Out in June
4A-22
Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.
Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$
Assembly DepartmentCost of Units Transferred Out in June
4A-23
Learning Objective 9
Prepare a cost reconciliation report
using the FIFO method..
Prepare a cost reconciliation report
using the FIFO method.
4A-24
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,880 Total cost accounted for* 209,791$
Assembly DepartmentCost Reconciliation for June
4A-25
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,880 Total cost accounted for* 209,791$
Assembly DepartmentCost Reconciliation for June
* $1 rounding error.
4A-26
A Comparison of Costing MethodsIn a lean production environment, FIFO and
weighted-average methods yield similar unit costs.
In a lean production environment, FIFO and weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior to weighted-average because it
does not mix costs of the current period with costs of the prior period.
When considering cost control, FIFO is superior to weighted-average because it
does not mix costs of the current period with costs of the prior period.
4A-27
End of Appendix 4A