{"id":292,"date":"2015-09-22T23:04:06","date_gmt":"2015-09-22T23:04:06","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=292"},"modified":"2015-12-27T15:12:08","modified_gmt":"2015-12-27T15:12:08","slug":"equivalent-units-and-cost-per-equivalent-units-fifo-method","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/equivalent-units-and-cost-per-equivalent-units-fifo-method\/","title":{"raw":"3.5 Process Costing (FIFO Method)","rendered":"3.5 Process Costing (FIFO Method)"},"content":{"raw":"Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method.\u00a0 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.\u00a0 The following table shows the differences between the weighted average method and the FIFO cost method:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\nWeighted Average<\/strong><\/td>\r\nFIFO<\/strong><\/td>\r\n<\/tr>\r\n
Units Completed and transferred out:<\/strong><\/td>\r\nTotal units completed this period<\/td>\r\nTotal units finished from beginning work in process + units started and completed this period<\/td>\r\n<\/tr>\r\n
Equivalent Units based on:<\/strong><\/td>\r\nUnits completed this period + Units in Ending Work in Process<\/td>\r\nUnits from Beg. Work in Process completed + units started and completed + units in Ending Work in Process<\/td>\r\n<\/tr>\r\n
Cost per Equivalent Unit based on:<\/strong><\/td>\r\nBeg. Work in Process Costs + Costs added this period<\/td>\r\nCosts added this period only<\/td>\r\n<\/tr>\r\n
Assign costs using:<\/strong><\/td>\r\nEquivalent Units x Cost per Equivalent Units for Units completed and units in ending Work in Process<\/td>\r\nBeg. Work in Process Costs + Equivalent Units x cost per equivalent unit for units finished from Beg. Work In Process, Units started and completed and units in End. Work In Process<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe will look at each item individually as we discuss the steps of process costing.\u00a0 Under either method, weighted average or FIFO, process costing consists of 5 steps:\r\n
    \r\n\t
  1. \u00a0Physical Flow of Units<\/li>\r\n\t
  2. \u00a0Equivalent Units<\/li>\r\n\t
  3. \u00a0Cost per Equivalent Unit<\/li>\r\n\t
  4. \u00a0Assign Costs to Units Completed and Ending Work in Process Inventory<\/li>\r\n\t
  5. \u00a0Reconcile Costs<\/li>\r\n<\/ol>\r\nPhysical Flow of Units<\/strong>\r\n\r\nThe physical flow of units is as follows under the weighted average method:\r\n\r\n\r\n\r\n\r\n\r\n
    Units in Beg. WIP<\/td>\r\n<\/td>\r\nUnits Completed and Transferred<\/td>\r\n<\/tr>\r\n
    + Units Started this period<\/span><\/td>\r\n<\/td>\r\n+ Units in End. WIP<\/span><\/td>\r\n<\/tr>\r\n
    = Total Units<\/td>\r\n<\/td>\r\n\u00a0= Total Units<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThis 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.\u00a0 Under the FIFO, we the physical flow of units would be documented as:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Units in Beg. WIP<\/td>\r\n<\/td>\r\nUnits Completed and Transferred:<\/td>\r\n<\/tr>\r\n
    + Units Started this period<\/span><\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Beg. Work in Process Units Completed<\/td>\r\n<\/tr>\r\n
    = Total Units<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 + Units started and Completed this period<\/span><\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n= Units completed and transferred<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n+ Units in End. WIP<\/span><\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n\u00a0= Total Units<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nJust as in the weighted average method, the 2 Total Units figures must agree!\r\n\r\nEquivalent Units of Production<\/strong>\r\n\r\nUnder the FIFO method, we will calculate equivalent units for 3 things:\u00a0 Units completed from beginning work in process, units started and completed this period and units remaining in ending work in process.\u00a0 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).\r\n\r\nhttps:\/\/youtu.be\/nETeUa0Bts4\r\n\r\nEquivalent 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<\/em>):\r\n
      \r\n\t
    1. \u00a0Units from beginning work in process:\u00a0 you want to complete this units, so how much MORE effort will be needed to finish these units.\u00a0 You will calculate this as beginning work in process units x (100% - given % complete) to calculate the amount of additional work necessary to make the unit 100% complete.<\/li>\r\n\t
    2. Units started and completed this period:\u00a0 take the units x 100% complete since they were started and completed they have received all of their materials, labor and overhead and will not receive any more since they are finished.<\/li>\r\n\t
    3. Units in Ending work in process:\u00a0 just like with the weighted average method, we will take the ending work in process units x a given % complete.<\/li>\r\n<\/ol>\r\nTo 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):\r\n\r\n\r\n\r\n\r\n\r\n
      Beginning work in process inventory<\/td>\r\n3,000 units, 40% complete<\/td>\r\n<\/tr>\r\n
      Units started this period<\/td>\r\n10,000 units<\/td>\r\n<\/tr>\r\n
      Ending work in process inventory<\/td>\r\n5,000 units, 20% complete<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe physical flow of units would be (calculate units started and completed as units started 10,000 - units in ending work in process 5,000):\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Units in Beg. WIP<\/td>\r\n3,000<\/td>\r\nUnits Completed and Transferred:<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Units Started this period<\/td>\r\n10,000<\/span><\/td>\r\n\u00a0\u00a0 Units from Beg. WIP<\/td>\r\n3,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Total Units<\/strong><\/td>\r\n13,000<\/strong><\/td>\r\n\u00a0\u00a0 Units started and completed<\/td>\r\n5,000<\/span><\/td>\r\n(10,000 - 5,000)<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\nTotal Units completed and txfr<\/td>\r\n<\/td>\r\n8,000<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\nUnits in End. WIP<\/td>\r\n<\/td>\r\n5,000<\/span><\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\nTotal Units<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n13,000<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe equivalent production for the period would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Units from beginning WIP<\/td>\r\n\u00a0\u00a0 [3,000 units x (100% - 40% complete)]<\/td>\r\n\u00a0\u00a0 1,800<\/td>\r\n<\/tr>\r\n
      Units started and completed<\/td>\r\n\u00a0\u00a0 5,000 units x 100% complete<\/td>\r\n\u00a0\u00a0\u00a0 5,000<\/td>\r\n<\/tr>\r\n
      Units in ending WIP<\/td>\r\n\u00a0\u00a0 5,000 units x 20% complete<\/td>\r\n\u00a0\u00a0 1,000<\/span><\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0\u00a0\u00a0 Total Equivalent Units<\/td>\r\n\u00a0\u00a0 \u00a0 7,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n Cost per Equivalent Unit<\/strong>\r\n\r\nUnder the weighted average method, we use beginning work in process costs AND costs added this period.\u00a0 Under the FIFO method, we will only use the costs added this period.\u00a0 This video will explain the differences between the two approaches.\r\n\r\nhttps:\/\/youtu.be\/P_Nwchc_pcs\r\n\r\nThe formula we will use for calculating cost per equivalent unit under the FIFO Method is:\r\n\r\n\r\n\r\n\r\n\r\n
      Current Costs added this period<\/td>\r\n<\/tr>\r\n
      \u00f7 Total Equivalent Units<\/span><\/td>\r\n<\/tr>\r\n
      = Cost per Equivalent Units<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAssign Costs<\/strong>\r\n\r\nWhen 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:\r\n
        \r\n\t
      1. \u00a0Costs from beginning work in process:\u00a0 these were the costs we started the period with or the unfinished items from the previous period (no calculation required -- just bring over the costs from beginning work in process<\/em>).\u00a0 Remember, under FIFO, these are finished first so their costs must be passed along to completed units.<\/li>\r\n\t
      2. \u00a0Costs to complete beginning work in process:\u00a0 you will take the Equivalent units calculated for completing beginning work in process x the cost per equivalent unit.\u00a0 You will do this for materials, labor and overhead (or for conversion costs which is the both direct labor and overhead).<\/li>\r\n\t
      3. Costs of units started and completed:\u00a0 you will take the equivalent units calculated for units started and completed x the cost per equivalent unit for materials, labor and overhead (or conversion).<\/li>\r\n\t
      4. The sum of these 3 will be the cost of units completed and transferred which is also known as cost of goods manufactured.\u00a0 This amount is transferred to the next department or to finished goods and out of work in process for the units completed this period.<\/li>\r\n\t
      5. Cost of units remaining in ending work in process:\u00a0 you will take the ending work in process equivalent units x the cost per equivalent unit for materials, labor and overhead (or conversion) just as we did under the weighed average method.\u00a0 This amount rolls over to be the next period's beginning work in process inventory.<\/li>\r\n<\/ol>\r\nThis video will provide a demonstration of cost assignment under the FIFO method.\r\n\r\nhttps:\/\/youtu.be\/y1TLRSL9Yjo\r\n\r\nReconcile Costs<\/strong>\r\n\r\nFinally, something is the same under FIFO and Weighted Average.\r\n\r\nWe 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.\r\n\r\nFirst, we need to know our total costs for the period (or total costs to account for)\u00a0by adding\u00a0beginning work in process costs to the costs incurred or added this period.\u00a0 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.\u00a0 Both totals should agree.\r\n\r\nThe cost reconciliation would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Beg. Work in Process Cost<\/td>\r\n<\/tr>\r\n
        + Costs added this period<\/span><\/td>\r\n<\/tr>\r\n
        = Total costs to account for<\/strong><\/td>\r\n<\/tr>\r\n
        <\/td>\r\n<\/tr>\r\n
        Cost assigned to units completed and transferred<\/td>\r\n<\/tr>\r\n
        + Cost assigned to ending work in process inventory<\/span><\/td>\r\n<\/tr>\r\n
        = Total costs accounted for<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn the next page, we will do a demonstration problem of the FIFO method for process costing.","rendered":"

        Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method.\u00a0 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.\u00a0 The following table shows the differences between the weighted average method and the FIFO cost method:<\/p>\n\n\n\n\n\n\n\n
        <\/td>\nWeighted Average<\/strong><\/td>\nFIFO<\/strong><\/td>\n<\/tr>\n
        Units Completed and transferred out:<\/strong><\/td>\nTotal units completed this period<\/td>\nTotal units finished from beginning work in process + units started and completed this period<\/td>\n<\/tr>\n
        Equivalent Units based on:<\/strong><\/td>\nUnits completed this period + Units in Ending Work in Process<\/td>\nUnits from Beg. Work in Process completed + units started and completed + units in Ending Work in Process<\/td>\n<\/tr>\n
        Cost per Equivalent Unit based on:<\/strong><\/td>\nBeg. Work in Process Costs + Costs added this period<\/td>\nCosts added this period only<\/td>\n<\/tr>\n
        Assign costs using:<\/strong><\/td>\nEquivalent Units x Cost per Equivalent Units for Units completed and units in ending Work in Process<\/td>\nBeg. Work in Process Costs + Equivalent Units x cost per equivalent unit for units finished from Beg. Work In Process, Units started and completed and units in End. Work In Process<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        We will look at each item individually as we discuss the steps of process costing.\u00a0 Under either method, weighted average or FIFO, process costing consists of 5 steps:<\/p>\n

          \n
        1. \u00a0Physical Flow of Units<\/li>\n
        2. \u00a0Equivalent Units<\/li>\n
        3. \u00a0Cost per Equivalent Unit<\/li>\n
        4. \u00a0Assign Costs to Units Completed and Ending Work in Process Inventory<\/li>\n
        5. \u00a0Reconcile Costs<\/li>\n<\/ol>\n

          Physical Flow of Units<\/strong><\/p>\n

          The physical flow of units is as follows under the weighted average method:<\/p>\n\n\n\n\n\n
          Units in Beg. WIP<\/td>\n<\/td>\nUnits Completed and Transferred<\/td>\n<\/tr>\n
          + Units Started this period<\/span><\/td>\n<\/td>\n+ Units in End. WIP<\/span><\/td>\n<\/tr>\n
          = Total Units<\/td>\n<\/td>\n\u00a0= Total Units<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

          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.\u00a0 Under the FIFO, we the physical flow of units would be documented as:<\/p>\n\n\n\n\n\n\n\n\n
          Units in Beg. WIP<\/td>\n<\/td>\nUnits Completed and Transferred:<\/td>\n<\/tr>\n
          + Units Started this period<\/span><\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0 Beg. Work in Process Units Completed<\/td>\n<\/tr>\n
          = Total Units<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0 + Units started and Completed this period<\/span><\/td>\n<\/tr>\n
          <\/td>\n<\/td>\n= Units completed and transferred<\/td>\n<\/tr>\n
          <\/td>\n<\/td>\n+ Units in End. WIP<\/span><\/td>\n<\/tr>\n
          <\/td>\n<\/td>\n\u00a0= Total Units<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

          Just as in the weighted average method, the 2 Total Units figures must agree!<\/p>\n

          Equivalent Units of Production<\/strong><\/p>\n

          Under the FIFO method, we will calculate equivalent units for 3 things:\u00a0 Units completed from beginning work in process, units started and completed this period and units remaining in ending work in process.\u00a0 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).<\/p>\n