To illustrate more completely the operation of the FIFO process cost method, we use an example of the month of June production costs for a company’s Department B. Department B adds materials only at the beginning of processing. The May 31 inventory in Department B (June’s beginning work in process) consists of 2,000 units that are fully complete as to materials and 60% complete as to conversion. Beginning work in process inventory has accumulated costs of $6,180.
The following costs were added in June: Direct materials issued $ 1,300; direct labor $ 7,200; and manufacturing overhead applied $ 6,000. The units for the period were:
| Beginning work in process inventory | 2,000 units |
| Units started this period | 10,000 units |
| Ending work in process inventory | 3,000 units |
Ending work in process inventory was 1/3 complete as to conversion costs.
Step 1: Physical Flow of Units
For the physical flow of units, we calculate units started AND completed this period as Units started 10,000 – units remaining in ending work in process 3,000 = 7,000 units.
| Units in Beg. WIP | 2,000 | Units Completed and Transferred: | ||
| Units Started this period | 10,000 | Units from Beg. WIP | 2,000 | |
| Total Units | 12,000 | Units started and completed | 7,000 | (10,000 – 3,000) |
| Total Units completed and txfr | 9,000 | |||
| Units in End. WIP | 3,000 | |||
| Total Units | 12,000 |
Step 2: Equivalent Units of Production
We are concerned with the right side of our physical flow of units. We must first FINISH beginning work in process, add units started and completed and units remaining in ending work in process. Beginning work in process is fully complete for materials (or 100% complete) and 60% complete for conversion so to complete these units we will need NO (or 0%) materials and 40% of conversion (100% – 60%). Units started and completed are always 100% complete for materials, labor and overhead! Ending work in process is 1/3 complete for conversion costs, but what about materials? The problem information reads “Department B adds materials only at the beginning of processing” which means we receive all (or 100%) of the materials at the beginning of the process and ending work in process will be fully complete for materials.
| Materials | Conversion Costs | |
| Units from beginning WIP | 0 | 800 |
| [ 2,000 units x (100% – 100% complete)] | [ 2,000 units x (100% – 60% complete)] | |
| Units started and completed | 7,000 | 7,000 |
| (7,000 units x 100% complete) | ||
| Units in ending WIP | 3,000 | 1,000 |
| (3,000 units x 100% complete) | (3,000 units x 1/3 complete) | |
| Total Equivalent Units | 10,000 | 8,800 |
Step 3: Cost per Equivalent Units
Under FIFO, we are only interested in the current period costs which is June for this example. Conversion costs are direct labor $7,200 + overhead $6,000.
| Materials | Conversion Costs | ||
| Current Costs added this period | $ 1,300 | $ 13,200 | (7,200 + 6,000) |
| ÷ Total Equivalent Units | 10,000 | 8,800 | |
| = Cost per Equivalent Unit | $ 0.13 | $ 1.50 |
Step 4: Assign Costs to Units Completed and Ending Work in Process Inventory
Under FIFO, remember to bring over the costs of beginning work in process first, then multiply the individual equivalent units calculated in step 2 (not the total equivalent units) by the cost per equivalent unit from step 3.
| Cost assigned to units completed and transferred out: | ||
| Cost of beginning work in process inventory | $6,180 | |
| Cost to complete beginning work in process inventory | ||
| Materials (0 equivalent units) | $0 | |
| Conversion (800 equiv units x $1.50) | $1,200 | |
| $1,200 | ||
| Cost of units started and completed | ||
| Materials (7,000 equiv units x $0.13) | $910 | |
| Conversion (7,000 equiv units x $1.50) | $10,500 | |
| $11,410 | ||
| Total cost of units completed and transferred | $18,790 | |
| Cost assigned to ending work in process inventory: | ||
| Materials (3,000 equiv units x $0.13) | $390 | |
| Conversion (1,000 equiv units x $1.50) | $1,500 | |
| Total cost of units remaining in ending work in process inventory | $1,890 |
Step 5: Reconcile Costs
Here is our chance to check our work. Total costs to account for should always equal what was assigned in total costs accounted for.
| Cost of beginning work in process | $6,180 | |
| Costs added in June | $14,500 | (1,300 DM + 7,200 DL + 6,000 OH) |
| Total costs to account for | $20,680 | |
| Costs assigned to units completed | $18,790 | (from step 4 above) |
| Costs assigned to ending work in process | $1,890 | (from step 4 above) |
| Total costs accounted for | $20,680 |