In: Statistics and Probability
FIFO method (continuation of 17-35). Do Problem 17-35 using the FIFO method of process costing. If you did Problem 17-35, explain any difference between the cost of work completed and transferred out and the cost of ending work in process in the Assembly Department under the weighted-average method and the FIF0 method.
FIFO method (continuation of 17-35).
The equivalent units of work done in April 2009 in the Assembly Department for direct materials and conversion costs are shown in Solution Exhibit 17-37A.
Solution Exhibit 17-37B summarizes the total Assembly Department costs for April 2009, calculates the cost per equivalent unit of work done in April 2009 in the Assembly Department for direct materials and conversion costs, and assigns these costs to units completed (and transferred out) and to units in ending work in process under the FIFO method.
The equivalent units of work done in beginning inventory is: direct materials, 75 × 100% = 75; and conversion costs 75 × 40% = 30. The cost per equivalent unit of beginning inventory and of work done in the current period are:
|
Beginning Inventory |
Work Done in Current Period (Calculated Under FIFO Method) |
Direct materials Conversion costs |
$23.67 ($1,775 ÷ 75) $4.50 ($135 ÷ 30) |
$32 $22 |
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 our example.
|
Weighted Average (Solution Exhibit 17-35B) |
FIFO (Solution Exhibit 17-37B) |
Difference |
Cost of units completed and transferred out Work in process, ending Total costs accounted for |
$26,000 4,400 $30,400 |
$25,850 4,550 $30,400 |
–$150 +$150 |
The FIFO ending inventory is higher than the weighted-average ending inventory by $150. This is because FIFO assumes that all the lower-cost prior-period units in work in process 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 the FIFO method.
SOLUTION EXHIBIT 17-37A
Steps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units;
FIFO Method of Process Costing, Assembly Department of Porter Handcraft for April 2009.
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(Step 1) |
(Step 2) Equivalent Units |
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Flow of Production |
Physical Units |
Direct Materials |
Conversion Costs |
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Work in process, beginning (given) Started during current period (given) To account for |
75 550 625 |
(work done before current period) |
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Completed and transferred out during current period: From beginning work in process· 75 × (100% - 100%); 75 × (100% - 40%) |
75 |
0 |
45 |
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Started and completed
425 × 100%; 425 × 100% |
425† |
425 |
425 |
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Work in process, ending* (given) 125 × 100%; 125 × 20% |
125
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125 |
25 |
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Accounted for |
625 |
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Work done in current period only |
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550 |
495 |
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·Degree of completion in this department: direct materials, 100%; conversion costs, 40%.
†500 physical units completed and transferred out minus 75 physical units completed and transferred out from beginning work-in-process inventory.
*Degree of completion in this department: direct materials, 100%; conversion costs, 20%.
SOLUTION EXHIBIT 17-37B
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, Assembly Department of Porter Handcraft for April 2009.
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Total Production Costs |
Direct Materials |
Conversion Costs |
(Step 3) Work in process, beginning (given) |
$ 1,910 |
$ 1,775 |
$ 135 |
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Costs added in current period (given) |
28,490 |
17,600 |
10,890 |
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Total costs to account for |
$30,400 |
$19,375 |
$11,025 |
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(Step 4) Costs added in current period |
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$17,600 |
$10,890 |
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Divide by equivalent units of work done in current period (Exhibit 17-37A) |
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÷ 550 |
÷ 495 |
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Cost per equivalent unit of work done in current period |
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$ 32 |
$ 22 |
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(Step 5) Assignment of costs: Completed and transferred out (500 units): |
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Work in process, beginning (75 units) Costs added to begin. work in process in current period |
$ 1,910
990 |
$1,775 + $135
(0* × $32) + (45* × $22) |
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Total from beginning inventory Started and completed (425 units) Total costs of units completed & tsfd. out Work in process, ending (125 units) Total costs accounted for |
2,900 22,950 25,850 4,550 $30,400 |
(425† × $32) + (425† × $22)
(125# × $32) + (25# × $22) $19,375 + $11,025 |
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*Equivalent units used to complete beginning work in process from Solution Exhibit 17-37A, Step 2.
†Equivalent units started and completed from Solution Exhibit 17-37A, Step 2.
#Equivalent units in ending work in process from Solution Exhibit 17-37A, Step 2.
Total costs accounted for |
2,900 22,950 25,850 4,550 $30,400 |
(425† × $32) + (425† × $22)
(125# × $32) + (25# × $22) $19,375 + $11,025 |