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: 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). A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/ma/?p=78 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. A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/ma/?p=78 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. A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/ma/?p=78 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. Contributors and AttributionsAll rights reserved content
What types of costs are normally found in a process costing system?There are three types of process costing, which are as follows:. Weighted average costs. This version assumes that all costs, whether from a preceding period or the current one, are lumped together and assigned to produced units. ... . Standard costs. This version is based on standard costs. ... . First-in first-out costing (FIFO).. Which of the following businesses is most likely to use a process costing?The correct answer is option C.
an accounting firm, B. a law firm, and D. a construction company are all incorrect. Service firms, in general, use a job order cost system rather than a process cost system.
How are prior period costs and output treated under the FIFO method?FIFO costing excludes the equivalent units and costs in beginning work in process (prior-period costs) from the current-period unit cost calculations. Only current-period work and current-period costs are used to compute FIFO unit costs.
What are the two methods developed for process costing calculations?In process costing there are three different ways to calculate costs: weighted average, standard costing and first-in first-out (FIFO).
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