{"id":294,"date":"2015-09-22T23:04:28","date_gmt":"2015-09-22T23:04:28","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=294"},"modified":"2015-12-27T15:12:20","modified_gmt":"2015-12-27T15:12:20","slug":"process-cost-fifo-method","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/process-cost-fifo-method\/","title":{"raw":"3.6 Process Cost Demonstration (FIFO Method)","rendered":"3.6 Process Cost Demonstration (FIFO Method)"},"content":{"raw":"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.\u00a0 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.\r\n\r\nThe following costs were added in June: Direct materials issued $ 1,300;\u00a0 direct labor $ 7,200; and\u00a0 manufacturing overhead applied $ 6,000.\u00a0 The units for the period were:\r\n\r\n\r\n\r\n\r\n\r\n
Beginning work in process inventory<\/td>\r\n2,000 units<\/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\n3,000 units<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nEnding work in process inventory was 1\/3 complete as to conversion costs.\r\n\r\nStep 1:\u00a0 Physical Flow of Units<\/strong>\r\n\r\nFor 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.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Units in Beg. WIP<\/td>\r\n2,000<\/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\n\u00a02,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Total Units<\/strong><\/td>\r\n12,000<\/strong><\/td>\r\n\u00a0\u00a0 Units started and completed<\/td>\r\n\u00a07,000<\/span><\/td>\r\n(10,000 - 3,000)<\/em><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nTotal Units completed and txfr<\/td>\r\n<\/td>\r\n9,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nUnits in End. WIP<\/td>\r\n<\/td>\r\n3,000<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nTotal Units<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n12,000<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nStep 2: Equivalent Units of Production<\/strong>\r\n\r\nWe are concerned with the right side of our physical flow of units.\u00a0 We must first FINISH beginning work in process, add units started and completed and units remaining in ending work in process.\u00a0 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?\u00a0 The problem information reads \"Department B adds materials only at the beginning of processing\"\u00a0 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.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\nMaterials<\/strong><\/td>\r\nConversion Costs<\/strong><\/td>\r\n<\/tr>\r\n
Units from beginning WIP<\/td>\r\n0<\/td>\r\n\u00a0\u00a0 \u00a0 800<\/td>\r\n<\/tr>\r\n
<\/td>\r\n[ 2,000 units x (100% - 100% complete)]<\/em><\/td>\r\n[ 2,000 units x (100% - 60% complete)]<\/em><\/td>\r\n<\/tr>\r\n
Units started and completed<\/td>\r\n\u00a0 \u00a0 7,000<\/td>\r\n\u00a0 \u00a0 7,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n(7,000 units x 100% complete)<\/em><\/td>\r\n<\/tr>\r\n
Units in ending WIP<\/td>\r\n3,000<\/span><\/td>\r\n\u00a0 \u00a0 1,000<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n(3,000 units x 100% complete)<\/em><\/td>\r\n(3,000 units x 1\/3 complete)\u00a0\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n
\u00a0\u00a0\u00a0\u00a0 Total Equivalent Units<\/strong><\/td>\r\n\u00a0 10,000<\/strong><\/td>\r\n\u00a0 \u00a0 8,800<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nStep 3:\u00a0 Cost per Equivalent Units<\/strong>\r\n\r\nUnder FIFO, we are only interested in the current period costs which is June for this example.\u00a0 Conversion costs are direct labor $7,200 + overhead $6,000.\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n\u00a0Materials\u00a0\u00a0 <\/strong><\/td>\r\n\u00a0 Conversion Costs\u00a0\u00a0 <\/strong><\/td>\r\n<\/td>\r\n<\/tr>\r\n
Current Costs added this period<\/td>\r\n$\u00a0\u00a0 1,300<\/td>\r\n$\u00a0\u00a0 13,200<\/td>\r\n\u00a0\u00a0 (7,200 + 6,000)<\/td>\r\n<\/tr>\r\n
\u00f7 Total Equivalent Units<\/td>\r\n\u00a0\u00a0\u00a0 10,000<\/span><\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0 8,800<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
= Cost per Equivalent Unit<\/td>\r\n$\u00a0\u00a0\u00a0\u00a0 0.13<\/td>\r\n$\u00a0\u00a0\u00a0\u00a0\u00a0 1.50<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nStep 4:\u00a0 Assign Costs to Units Completed and Ending Work in Process Inventory<\/strong>\r\n\r\nUnder 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.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Cost assigned to units completed and transferred out:<\/strong><\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Cost of beginning work in process inventory<\/td>\r\n<\/td>\r\n$6,180<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Cost to complete beginning work in process inventory<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Materials (0 equivalent units)<\/td>\r\n$0<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (800 equiv units x $1.50)<\/td>\r\n$1,200<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n$1,200<\/td>\r\n<\/tr>\r\n
Cost of units started and completed<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Materials (7,000 equiv units x $0.13)<\/td>\r\n$910<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (7,000 equiv units x $1.50)<\/td>\r\n$10,500<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n$11,410<\/span><\/td>\r\n<\/tr>\r\n
Total cost of units completed and transferred<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n$18,790<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Cost assigned to ending work in process inventory:<\/strong><\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Materials (3,000 equiv units x $0.13)<\/td>\r\n$390<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (1,000 equiv units x $1.50)<\/td>\r\n$1,500<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
Total cost of units remaining in ending work in process inventory<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n$1,890<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nStep 5:\u00a0 Reconcile Costs<\/strong>\r\n\r\nHere is our chance to check our work.\u00a0 Total costs to account for should always equal what was assigned in total costs accounted for.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Cost of beginning work in process<\/td>\r\n$6,180<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Costs added in June<\/td>\r\n$14,500<\/span><\/td>\r\n(1,300 DM + 7,200 DL + 6,000 OH)<\/td>\r\n<\/tr>\r\n
Total costs to account for<\/strong><\/td>\r\n$20,680<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Costs assigned to units completed<\/td>\r\n$18,790<\/td>\r\n(from step 4 above)<\/td>\r\n<\/tr>\r\n
Costs assigned to ending work in process<\/td>\r\n$1,890<\/span><\/td>\r\n(from step 4 above)<\/td>\r\n<\/tr>\r\n
Total costs accounted for<\/strong><\/td>\r\n$20,680<\/strong><\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n ","rendered":"

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.\u00a0 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.<\/p>\n

The following costs were added in June: Direct materials issued $ 1,300;\u00a0 direct labor $ 7,200; and\u00a0 manufacturing overhead applied $ 6,000.\u00a0 The units for the period were:<\/p>\n\n\n\n\n\n
Beginning work in process inventory<\/td>\n2,000 units<\/td>\n<\/tr>\n
Units started this period<\/td>\n10,000 units<\/td>\n<\/tr>\n
Ending work in process inventory<\/td>\n3,000 units<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Ending work in process inventory was 1\/3 complete as to conversion costs.<\/p>\n

Step 1:\u00a0 Physical Flow of Units<\/strong><\/p>\n

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.<\/p>\n\n\n\n\n\n\n\n\n
Units in Beg. WIP<\/td>\n2,000<\/td>\nUnits Completed and Transferred:<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Units Started this period<\/td>\n10,000<\/span><\/td>\n\u00a0\u00a0 Units from Beg. WIP<\/td>\n\u00a02,000<\/td>\n<\/td>\n<\/tr>\n
Total Units<\/strong><\/td>\n12,000<\/strong><\/td>\n\u00a0\u00a0 Units started and completed<\/td>\n\u00a07,000<\/span><\/td>\n(10,000 – 3,000)<\/em><\/td>\n<\/tr>\n
<\/td>\n<\/td>\nTotal Units completed and txfr<\/td>\n<\/td>\n9,000<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nUnits in End. WIP<\/td>\n<\/td>\n3,000<\/span><\/td>\n<\/tr>\n
<\/td>\n<\/td>\nTotal Units<\/strong><\/td>\n\u00a0<\/strong><\/td>\n12,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Step 2: Equivalent Units of Production<\/strong><\/p>\n

We are concerned with the right side of our physical flow of units.\u00a0 We must first FINISH beginning work in process, add units started and completed and units remaining in ending work in process.\u00a0 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?\u00a0 The problem information reads “Department B adds materials only at the beginning of processing”\u00a0 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.<\/p>\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nMaterials<\/strong><\/td>\nConversion Costs<\/strong><\/td>\n<\/tr>\n
Units from beginning WIP<\/td>\n0<\/td>\n\u00a0\u00a0 \u00a0 800<\/td>\n<\/tr>\n
<\/td>\n[ 2,000 units x (100% – 100% complete)]<\/em><\/td>\n[ 2,000 units x (100% – 60% complete)]<\/em><\/td>\n<\/tr>\n
Units started and completed<\/td>\n\u00a0 \u00a0 7,000<\/td>\n\u00a0 \u00a0 7,000<\/td>\n<\/tr>\n
<\/td>\n(7,000 units x 100% complete)<\/em><\/td>\n<\/tr>\n
Units in ending WIP<\/td>\n3,000<\/span><\/td>\n\u00a0 \u00a0 1,000<\/span><\/td>\n<\/tr>\n
<\/td>\n(3,000 units x 100% complete)<\/em><\/td>\n(3,000 units x 1\/3 complete)\u00a0\u00a0\u00a0<\/em><\/td>\n<\/tr>\n
\u00a0\u00a0\u00a0\u00a0 Total Equivalent Units<\/strong><\/td>\n\u00a0 10,000<\/strong><\/td>\n\u00a0 \u00a0 8,800<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Step 3:\u00a0 Cost per Equivalent Units<\/strong><\/p>\n

Under FIFO, we are only interested in the current period costs which is June for this example.\u00a0 Conversion costs are direct labor $7,200 + overhead $6,000.<\/p>\n\n\n\n\n\n\n
<\/td>\n\u00a0Materials\u00a0\u00a0 <\/strong><\/td>\n\u00a0 Conversion Costs\u00a0\u00a0 <\/strong><\/td>\n<\/td>\n<\/tr>\n
Current Costs added this period<\/td>\n$\u00a0\u00a0 1,300<\/td>\n$\u00a0\u00a0 13,200<\/td>\n\u00a0\u00a0 (7,200 + 6,000)<\/td>\n<\/tr>\n
\u00f7 Total Equivalent Units<\/td>\n\u00a0\u00a0\u00a0 10,000<\/span><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0 8,800<\/span><\/td>\n<\/td>\n<\/tr>\n
= Cost per Equivalent Unit<\/td>\n$\u00a0\u00a0\u00a0\u00a0 0.13<\/td>\n$\u00a0\u00a0\u00a0\u00a0\u00a0 1.50<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Step 4:\u00a0 Assign Costs to Units Completed and Ending Work in Process Inventory<\/strong><\/p>\n

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.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Cost assigned to units completed and transferred out:<\/strong><\/em><\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Cost of beginning work in process inventory<\/td>\n<\/td>\n$6,180<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Cost to complete beginning work in process inventory<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Materials (0 equivalent units)<\/td>\n$0<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (800 equiv units x $1.50)<\/td>\n$1,200<\/span><\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n$1,200<\/td>\n<\/tr>\n
Cost of units started and completed<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Materials (7,000 equiv units x $0.13)<\/td>\n$910<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (7,000 equiv units x $1.50)<\/td>\n$10,500<\/span><\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/td>\n$11,410<\/span><\/td>\n<\/tr>\n
Total cost of units completed and transferred<\/strong><\/td>\n\u00a0<\/strong><\/td>\n$18,790<\/strong><\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Cost assigned to ending work in process inventory:<\/strong><\/em><\/td>\n<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Materials (3,000 equiv units x $0.13)<\/td>\n$390<\/td>\n<\/td>\n<\/tr>\n
\u00a0 \u00a0 Conversion\u00a0\u00a0 (1,000 equiv units x $1.50)<\/td>\n$1,500<\/span><\/td>\n<\/td>\n<\/tr>\n
Total cost of units remaining in ending work in process inventory<\/strong><\/td>\n\u00a0<\/strong><\/td>\n$1,890<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Step 5:\u00a0 Reconcile Costs<\/strong><\/p>\n

Here is our chance to check our work.\u00a0 Total costs to account for should always equal what was assigned in total costs accounted for.<\/p>\n\n\n\n\n\n\n\n\n\n
Cost of beginning work in process<\/td>\n$6,180<\/td>\n<\/td>\n<\/tr>\n
Costs added in June<\/td>\n$14,500<\/span><\/td>\n(1,300 DM + 7,200 DL + 6,000 OH)<\/td>\n<\/tr>\n
Total costs to account for<\/strong><\/td>\n$20,680<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n
<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Costs assigned to units completed<\/td>\n$18,790<\/td>\n(from step 4 above)<\/td>\n<\/tr>\n
Costs assigned to ending work in process<\/td>\n$1,890<\/span><\/td>\n(from step 4 above)<\/td>\n<\/tr>\n
Total costs accounted for<\/strong><\/td>\n$20,680<\/strong><\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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