Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method. Under the FIFO method, we assume any units that were not completed last period (beginning work in process) are finished before anything else is started. The following table shows the differences between the weighted average method and the FIFO cost method: Show
We will look at each item individually as we discuss the steps of process costing. Under either method, weighted average or FIFO, process costing consists of 5 steps:
Physical Flow of Units The physical flow of units is as follows under the weighted average method:
This is altered just slightly under the FIFO method as we must separate the items in units completed into Units Completed from beginning work in process and Units started and completed this period since under FIFO, we must finish anything from beginning work in process before we start something new. Under the FIFO, we the physical flow of units would be documented as:
Just as in the weighted average method, the 2 Total Units figures must agree! Equivalent Units of Production Under the FIFO method, we will calculate equivalent units for 3 things: Units completed from beginning work in process, units started and completed this period and units remaining in ending work in process. This video will discuss the differences between the Weighted Average and FIFO methods for equivalent units (if you are comfortable with the weighted average method, skip to minute 4:06 to begin the discussion on the FIFO method). Equivalent units for the period will be calculated as follows under FIFO (keep in mind, you may have different percent complete for materials, labor and overhead):
To illustrate the computation of equivalent units under the FIFO method, assume the following facts (for simplicity we are using just one percent complete for materials, labor and overhead):
The physical flow of units would be (calculate units started and completed as units started 10,000 – units in ending work in process 5,000):
The equivalent production for the period would be:
Cost per Equivalent Unit Under the weighted average method, we use beginning work in process costs AND costs added this period. Under the FIFO method, we will only use the costs added this period. This video will explain the differences between the two approaches. The formula we will use for calculating cost per equivalent unit under the FIFO Method is:
Assign Costs When we assign costs to units completed and transferred and units remaining in ending work in process under the FIFO method, we need the following items:
This video will provide a demonstration of cost assignment under the FIFO method. Reconcile Costs Finally, something is the same under FIFO and Weighted Average. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. Both totals should agree. The cost reconciliation would be:
In the next page, we will do a demonstration problem of the FIFO method for process costing. What is the difference between FIFO method and weighted average method in process costing?The key difference between FIFO and weighted average is that FIFO is an inventory valuation method where the first purchased goods are sold first whereas weighted average method uses the average inventory levels to calculate inventory value.
What are the key differences between weighted average and FIFO methods for computing equivalent units?According to the Accounting for Management website, the main difference between the FIFO and weighted average method is in the treatment of beginning work-in-process or unfinished goods inventory. The weighted average method includes this inventory in computing process costs, while the FIFO method keeps it separate.
What are the two methods used in process costing?There are three different kinds of process costing: weighted average costs, standard costs, and First-in First-out (FIFO). There is no Last-in, Last-out (LIFO) method of process costing, as the basic principle of process costing is that the first unit produced is the first unit used.
Which of the following methods separates the beginning inventory work and costs and the current work and costs for the calculation of the current period's unit cost?The FIFO method separates beginning inventory and current production to compute cost per unit of production.
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