Question

Transferred-in costs, FIFO method. Refer to the information in Problem 17-38. Suppose that Publish, Inc. uses the FIFO method instead of the weighted-average method in all of its departments. The only changes to Problem 17-38 under the FIFO method are that total transferred-in costs of beginning work in process on April 1 are $27,855 (instead of $32,775) and that total transferred-in costs added during April are $141,750 )instead ot$144,000).

1. Using the FIFO process-costing method, do Problem 17-38.

2. If you did Problem 17-38, explain any difference between the cost of work completed and transferred out and the cost of ending work in process in the Binding Department under the weighted-average method and the FIFO method.

Answer 1

Transferred-in costs, FIFO method (continuation of 17-38)

 

1.         

Solution Exhibit 17-39A calculates the equivalent units of work done in April 2009 in the Binding Department for transferred-in costs, direct materials, and conversion costs.

 

Solution Exhibit 17-39B summarizes total Binding Department costs for April 2009, calculates the cost per equivalent unit of work done in April 2009 in the Binding Department for transferred-in costs, direct materials, and conversion costs, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method.

 

            Journal entries:

a.   Work in Process–– Binding Department                         141,750

          Work in Process––Printing Department                                         141,750

Cost of goods completed and transferred out

 during April from the Printing Department to

 the Binding Department.

 

b.      Finished Goods                                                                240,525

          Work in Process–– Binding Department                                         240,525

Cost of goods completed and transferred out

during April from the Binding Department

to Finished Goods inventory.

 

2.         

The equivalent units of work done in beginning inventory is: Transferred-in costs, 900 × 100% = 900; direct materials, 900 × 0% = 0; and conversion costs, 900 × 40% = 360. The cost per equivalent unit of beginning inventory and of work done in the current period are:

 

	Beginning  Inventory	Work Done in  Current Period
Transferred-in costs (weighted average) Transferred-in costs (FIFO) Direct materials Conversion costs	$36.42 ($32,775 ÷ 900) $30.95 ($27,855 ÷ 900) x $41.67 ($15,000 ÷ 360)	$53.33 ($144,000 ÷ 2,700) $52.50 ($141,750 ÷ 2,700) $ 8.90 $23.00

 

The following table summarizes the costs assigned to units completed and those still in process under the weighted-average and FIFO process-costing methods for the Binding Department.

 

	Weighted Average (Solution Exhibit 17-38B)	FIFO (Solution Exhibit 17-39B)	Difference
Cost of units completed and transferred out Work in process, ending Total costs accounted for	$249,012 38,463 $287,475	$240,525 39,780 $280,305	–$8,487  +$1,317

 

The FIFO ending inventory is higher than the weighted-average ending inventory by $1,317. This is because FIFO assumes that all the lower-cost prior-period units in work in process (resulting from the lower transferred-in costs in beginning inventory) are the first to be completed and transferred out while ending work in process consists of only the higher-cost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some of the lower-cost units in beginning work in process are placed in ending work in process. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower ending work-in-process inventory relative to FIFO. Note that the difference in cost of units completed and transferred out (–$8,487) does not fully offset the difference in ending work-in-process inventory (+$1,317). This is because the FIFO and weighted-average methods result in different values for transferred-in costs with respect to both beginning inventory and costs transferred in during the period.

 

SOLUTION EXHIBIT 17-39A

Steps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units;

FIFO Method of Process Costing,

Binding Department of Publish, Inc. for April 2009.

a Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.

b 3,000 physical units completed and transferred out minus 900 physical units completed and transferred out from beginning

work-in-process inventory.

c Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%.

 

SOLUTION EXHIBIT 17-39B

Steps 3, 4, and 5: Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed and to Units in Ending Work in Process;

FIFO Method of Process Costing,

Binding Department of Publish, Inc. for April 2009.

Solution Exhibit 17-39A calculates the equivalent units of work done in April 2009 in the Binding Department for transferred-in costs, direct materials, and conversion costs.