Question

Pacific Ink had beginning work-in-process inventory of $750,960 on October 1. Of this amount, $307,920 was the cost of direct materials and $443,040 was the cost of conversion. The 51,000 units in the beginning inventory were 25 percent complete with respect to both direct materials and conversion costs. During October, 108,000 units were transferred out and 33,000 remained in ending inventory. The units in ending inventory were 75 percent complete with respect to direct materials and 35 percent complete with respect to conversion costs. Costs incurred during the period amounted to $2,556,000 for direct materials and $3,278,760 for conversion.

Required: a. Compute the equivalent units for the materials and conversion cost calculations. b. Compute the cost per equivalent unit for direct materials and for conversion costs using the FIFO method.

Answer 1

Ans.

FIFO Method:-

"The First-In First-Out" is known as FIFO Method. In this method the inventory valuation is a cost flow assumption that the goods or material which first come in stock is sold first.

a. Compute the equivalent units for the materials and conversion cost calculations.

	Whole Units	Equivalent Units
		Direct Material		Conversion Cost
		%Completed	Equivalent Units	%Completed	Equivalent Units
	[A]	[B]	[AxB]	[C]	[AxC]
Units in beginning work in process inventory	51,000	75%	38,250	75%	38,250
Add:- Units started and completed during the period	57,000	100%	57,000	100%	57,000
Add:- Units in ending work in process inventory	33,000	75%	24,750	35%	11,550
Equivalent units	141,000		120,000		106,800

Working Notes:-

Units transferred out	108,000
Less:- Units in beginning work in process inventory	51,000
Units started and completed during the period	57,000

Equivalent unit of direct material=(51,000 x 75% + 57,000 x 100% + 33,000 x 75%)=38,250 + 57,000 + 24,750=120,000

Equivalent unit of conversion costs=(51,000 x 75% + 57,000 x 100% + 33,000 x 35%)=38,250 + 57,000 + 11,550=106,800

b. Compute the cost per equivalent unit for direct materials and for conversion costs using the FIFO method.

	Direct Material	Conversion Cost
Total cost incurred during the period (a)	$2,556,000	$3,278,760
Total equivalent units (b)	120,000	106,800
Cost per Equivalent Units (a / b)	$21.30	$30.70

Working Notes:-

Cost per equivalent unit in direct material=$2,556,000 / 120,000=$21.30

Cost per equivalent unit in conversion costs=$3,278,760 / 106,800=$30.70