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Chapter 14

Chapter 14. First In, First Out (FIFO) Costing of Work in Process. Introduction. First in, first out (FIFO) method Comparison with average costing method Choosing a costing method Computation under FIFO. Average Cost Method and FIFO -Differences. Average cost method

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Chapter 14

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  1. Chapter 14 First In, First Out (FIFO) Costing of Work in Process

  2. Introduction • First in, first out (FIFO) method • Comparison with average costing method • Choosing a costing method • Computation under FIFO

  3. Average Cost Method and FIFO -Differences • Average cost method • No distinction between units from beginning inventory and units totally produced • First in, first out (FIFO) method • Cost of beginning work in process are kept separate and assigned to the beginning work in process units only • Units that are started in the current month are assigned the current months cost

  4. Choosing a Costing Method • FIFO method • Unit costs are more accurate • Unit costs reflect current conditions clearly • Major changes in costs can be identified more easily • Suited for high work in process inventories and highly volatile costs • Average method • Ending process inventory is small • Rate of production is stable • Simple to use

  5. Sample Cost Data: -FIFO Pressing and Cutting Department

  6. Monthly Production Report

  7. Equivalent Production Computations - FIFO

  8. Computation Under FIFO • Monthly production report • Shows number of units from beginning work in process that were transferred out • Shows number of units transferred out that were started and completed during the period • Shows the stage of completion of both beginning and ending inventory • Work done in the current period is used to compute equivalent production

  9. Computation Under FIFO (cont’d) • Costs to be accounted for section • All cost category in the beginning inventory of work in process are combined into a single figure. • Costs accounted for section • Transferred out to next department subsection separates cost relating to units started and finished in the current month

  10. Computation Under FIFO (cont’d) • Total cost is derived by adding • Cost applicable to units complete in from beginning inventory • Cost applicable to units started and finished in the current month • Average cost of goods transferred out of the department is determined by: • Dividing total costs by the number of units transferred out

  11. FIFO Method – Lost Units • Normal loss are not counted as part of equivalent units. • The cost of lost units are absorbed by good units

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