Question

FIFO method (continuation of 17-30). Do Problem 17-30 using the FIFO method of process costing. Explain any difference between the cost per equivalent unit in the Assembly Department under the weighted-average method and the FIFO method.

Answer 1

FIFO method (continuation of 17-30).

1.         

The equivalent units of work done in the current period in the Assembly Department in October 2009 for direct materials and conversion costs are shown in Solution Exhibit 17-32A.

 

2.         

The cost per equivalent unit of work done in the current period in the Assembly Department in October 2009 for direct materials and conversion costs is calculated in Solution Exhibit 17-32B.

3.         

Solution Exhibit 17-32B summarizes the total Assembly Department costs for October 2009, and assigns these costs to units completed (and transferred out) and units in ending work in process under the FIFO method.

 

The cost per equivalent unit of beginning inventory and of work done in the current period differ:

 

	Beginning  Inventory	Work Done in  Current Period
Direct materials Conversion costs Total cost per unit	$250.00 ($1,250,000 ÷ 5,000 equiv. units)  134.25 ($ 402,750 ÷ 3,000 equiv. units) $384.25	$225.00  110.00 $335.00

	Direct Materials	Conversion Costs
Cost per equivalent unit (weighted-average)	$230*	$113*
Cost per equivalent unit (FIFO)	$225**	$110**

*from Solution Exhibit 17-30B

**from Solution Exhibit 17-32B

 

The cost per equivalent unit differs between the two methods because each method uses different costs as the numerator of the calculation. FIFO uses only the costs added during the current period whereas weighted-average uses the costs from the beginning work-in-process as well as costs added during the current period. Both methods also use different equivalent units in the denominator.

            

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 17-30B)	FIFO (Solution Exhibit 17-32B)	Difference
Cost of units completed and transferred out Work in process, ending Total costs accounted for	$7,717,500 772,750 $8,490,250	$7,735,250 755,000 $8,490,250	+ $17,750 - $17,750

                  

The FIFO ending inventory is lower than the weighted-average ending inventory by $17,750. This is because FIFO assumes that all the higher-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 lower-cost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the lower-cost units are completed and transferred out, while some of the higher-cost units in beginning work in process are placed in ending work in process. So, in this case, the weighted-average method results in a lower cost of units completed and transferred out and a higher ending work-in-process inventory relative to the FIFO method.

SOLUTION EXHIBIT 17-32A

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

FIFO Method of Process Costing, 

Assembly Department of Larsen Company for October 2009.

		(Step 1)	(Step 2) Equivalent Units
Flow of Production		Physical Units	Direct Materials	Conversion Costs
	Work in process, beginning (given) Started during current period (given) To account for	5,000 20,000  25,000	(work done before current period)
Completed and transferred out during current period:  From beginning work in process·  5,000 × (100% - 100%); 5,000 × (100% - 60%)		5,000	0	2,000
Started and completed  17,500 ×100%, 17,500 × 100%		17,000†	17,500	17,500
Work in process, ending* (given) 2,500 × 100%; 2,500 × 70%		2,500  _____	2,500	1,750
Accounted for		25,000		______
Work done in current period only			20,000	21,250

·Degree of completion in this department: direct materials, 100%; conversion costs, 60%.

†22,500 physical units completed and transferred out minus 5,000 physical units completed and transferred out from beginning work-in-process inventory.

*Degree of completion in this department: direct materials, 100%; conversion costs, 70%. 

SOLUTION EXHIBIT 17-32B

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 Larsen Company for October 2009.

		Total Production Costs	Direct Materials	Conversion Costs
(Step 3) Work in process, beginning (given)		$1,652,750	$1,250,000	$ 402,750
Costs added in current period (given)		6,837,500	4,500,000	2,337,500
Total costs to account for		$8,490,250	$5,750,000	$2,740,250
(Step 4) Costs added in current period			$4,500,000	$2,337,500
Divide by equivalent units of work done in              current period (Solution Exhibit 17-32A)			÷20,000	÷21,250
	Cost per equivalent unit of work done in current period		$ 225	$  110
(Step 5) Assignment of costs:              Completed and transferred out (22,500 units):
Work in process, beginning (5,000 units)  Costs added to beg. work in process in current period		$1,652,750 220,000	$1,250,000 + $ 402,750  (0* × $225) + (2,000* × $110)
	Total from beginning inventory                   Started and completed (17,500 units)                          Total costs of units completed & transferred out              Work in process, ending (2,500 units)              Total costs accounted for	1,872,750 5,862,500 7,735,250 755,000  $8,490,250	(17,500† × $225) + (17,500† × $110)            (2,500# . $225) + (1,750# . $110) $5,750,000 + $2,740,250

 

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-32A, Step 2.

†Equivalent units started and completed from Solution Exhibit 17-32A, Step 2.

#Equivalent units in ending work in process from Solution Exhibit 17-32A, Step 2. 

The equivalent units of work done in the current period in the Assembly Department in October 2009 for direct materials and conversion costs are shown in Solution Exhibit 17-32A.