managerial accounting ed 15 chapter 4a

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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.




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.




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


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


EndingWork in Process


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


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


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$


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$


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.



4A-21

Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this

period.



4A-22

Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.



4A-23


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