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FIFO Method

FIFO Method. Appendix 4A. 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:. The computation of equivalent units.

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FIFO Method

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  1. FIFO Method Appendix 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: • The computation of equivalent units. • The way in which the costs of beginning inventory are treated.

  3. Learning Objective 6 Compute the equivalent units of production using the FIFO method.

  4. Equivalent Units – FIFO Method Let’s revisit the Smith Company example. Here is information concerning the Assembly Department for the month of June.

  5. Equivalent Units – FIFO Method Step 1: Determine equivalent units needed to completebeginning Work in Process Inventory.

  6. Equivalent Units – FIFO Method Step 2: Determine units started and completed during the period.

  7. Equivalent Units – FIFO Method Step 3: Add the equivalent units in ending Work in Process Inventory.

  8. FIFO Example Materials 6,000 Units Started EndingWork in Process900 Units60% Complete BeginningWork in Process300 Units40% Complete 5,100 Units Startedand Completed 300 × 60% 180 Equivalent Units 5,100 Units Completed 900 × 60% 540 Equivalent Units 5,820 Equivalent units of production

  9. FIFO Example Conversion 6,000 Units Started EndingWork in Process900 Units30% Complete BeginningWork in Process300 Units20% Complete 5,100 Units Startedand Completed 300 × 80% 240 Equivalent Units 5,100 Units Completed 900 × 30% 270 Equivalent Units 5,610 Equivalent units of production

  10. Equivalent Units:Weighted-Average vs. FIFO 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.

  11. Learning Objective 7 Compute the cost per equivalent unit using the FIFO method.

  12. Cost per Equivalent Unit - FIFO Let’s revisit the Smith Company Assembly Department for the month of June to prepare our production report. Beginning work in process: 400 units Materials: 40% complete $ 6,119 Conversion: 20% complete $3,920 Production started during June6,000 units Production completed during June5,400 units Costs added to production in June Materials cost $ 118,621 Conversion cost $ 81,130 Ending work in process 900 units Materials: 60% complete Conversion: 30% complete

  13. Cost perequivalent unit Cost added during the period = Equivalent units of production Cost per Equivalent Unit - FIFO The formula for computing the cost per equivalent unit under FIFO method is:

  14. Cost per Equivalent Unit - FIFO $118,621 ÷ 5,820 $81,130 ÷ 5,610 Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

  15. Learning Objective 8 Assign costs to units using the FIFO method.

  16. Applying Costs - FIFO Step 1: Record the equivalent units of production in ending Work in Process Inventory. 900 units × 60% 900 units × 30%

  17. Applying Costs - FIFO Step 2: Record the cost per equivalent unit.

  18. Applying Costs - FIFO Step 3: Compute the cost of ending Work in Process Inventory. 540 × $20.3816 270 × 14.4617

  19. Cost of Units Transferred Out Step 1: Record the cost in beginning Work in Process Inventory.

  20. Cost of Units Transferred Out Step 2: Compute the cost to complete the units in beginningWork in Process Inventory.

  21. Cost of Units Transferred Out Step 3: Compute the cost of units started and completed this period.

  22. Cost of Units Transferred Out Step 4: Compute the total cost of units transferred out.

  23. Learning Objective 9 Prepare a cost reconciliation report using the FIFO method. Prepare a cost reconciliation report using the FIFO method.

  24. Reconciling Costs

  25. Reconciling Costs * $1 rounding error.

  26. A Comparison of Costing Methods 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.

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