PROCESS COSTING

First-in, First-out
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. The computation of equivalent units.

2. The way in which the costs of beginning inventory
are treated.
Illustration 1

Smith Company reported the following activity in 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%

Illustration 1

Step 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
Illustration 1

Step 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
Illustration 1

Step 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
 Cost per Equivalent Unit - FIFO

Beginning Work in Process Inventory: 300 units

Materials: 40% complete P 6,119
Conversion: 20% complete P 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost P 118,621
Conversion cost P 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent

unit under FIFO method is:

Cost per Cost added during the period

equivalent =
unit Equivalent units of production
Cost per Equivalent Unit - FIFO
Applying Costs - FIFO

Step 1: Record the equivalent units of production in

ending Work in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270

900 units × 60% 900 units × 30%

Applying Costs - FIFO

Step 2: Record the cost per equivalent unit.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱20.38 ₱14.46
Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process

Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit ₱20 ₱14
Cost of Ending WIP inventory ₱11,006 ₱3,905 ₱14,911

540 × P20.3816 270 × P14.4617

Cost of Units Transferred Out

Step 1: Assembly Department

Cost of Units Transferred Out in June
Record the Materials Conversion Total

cost in Cost of Units Transferred Out:

Cost in beginning WIP inventory ₱6,119 ₱3,920 ₱10,039
beginning Cost to complete beginning WIP

Work in
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Process Cost to complete beginning WIP
Cost of units started and completed:
$ 3,669 $ 3,471 7,140

Inventory. 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
Cost of Units Transferred Out

Assembly Department
Step 2: Cost of Units Transferred Out in June

Compute Cost of Units Transferred Out:

Materials Conversion Total

the cost to Cost in beginning WIP inventory ₱6,119 ₱3,920 ₱10,039

complete Cost to complete beginning WIP

Equivalent units to complete 180 240
the units in Cost per equivalent unit ₱20 ₱14
beginning Cost to complete beginning WIP
Cost of units started and completed:
₱3,669 ₱3,471 ₱7,140

Work in Units started and completed 5,100 5,100

Process Cost per equivalent unit $ 20.3816
Cost of units started and completed $ 103,946
$ 14.4617
$ 73,755 177,701
Inventory. Cost of Units Transferred Out $ 194,880
Cost of Units Transferred Out
Assembly Department
Step 3: Cost of Units Transferred Out in June
Materials Conversion Total
Compute Cost of Units Transferred Out:
the cost of Cost in beginning WIP inventory ₱6,119 ₱3,920 ₱10,039
Cost to complete beginning WIP
units Equivalent units to complete 180 240
started and Cost per equivalent unit ₱20.38 ₱14.46
₱3,669 ₱3,471 ₱7,140
completed
Cost to complete beginning WIP
Cost of units started and completed:
this period. Units started and completed 5,100 5,100
Cost per equivalent unit ₱20 ₱14
Cost of units started and completed ₱103,946 ₱73,755 ₱177,701
Cost of Units Transferred Out $ 194,880
Cost of Units Transferred Out
Assembly Department
Step 4: Cost of Units Transferred Out in June
Materials Conversion Total
Compute Cost of Units Transferred Out:
the total Cost in beginning WIP inventory
Cost to complete beginning WIP
₱6,119 ₱3,920 ₱10,039

cost of Equivalent units to complete 180 240

units Cost per equivalent unit ₱20 ₱14
₱3,669 ₱3,471 ₱7,140
transferred
Cost to complete beginning WIP
Cost of units started and completed:
out. Units started and completed 5,100 5,100
Cost per equivalent unit ₱20 ₱14
Cost of units started and completed ₱103,946 ₱73,755 ₱177,701
Cost of Units Transferred Out ₱194,880
Reconciling Costs

Assembly Department
Cost Reconciliation for June
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
Reconciling Costs

Assembly Department
Cost Reconciliation for June
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

* P1 rounding error.
End
On April 1, Histron Corporation had 10,000 units of
work in process in Department A that were 100%
complete with respect to material costs and 20%
complete with respect to conversion costs. During April,
80,000 units were started in Department A and 85,000
units were completed and transferred to Department B.
The work in process at the end of April was 100%
complete with respect to materials costs and 40%
complete with respect to conversion costs. By what
amount would the equivalent units for conversion costs
for April differ if the FIFO method were used instead of
the weighted-average method?
Cost per EUP for conversion cost

Edward Company uses the FIFO method in its process costing

system. The first processing department, the Welding
Department, started the month with 10,000 units in its beginning
work in process inventory that were 40% complete with respect
to conversion costs. The conversion cost in this beginning work
in process inventory was $12,800. An additional 94,000 units
were started into production during the month. There were
14,000 units in the ending work in process inventory of the
Welding Department that were 80% complete with respect to
conversion costs. A total of $286,740 in conversion costs were
incurred in the department during the month.