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Unformatted text preview: 1 CHAPTER FOUR Supplement: Process Costing Using the FIFO Method SUPPLEMENT OUTLINE ■ Equivalent Units—FIFO Method ■ Comparison of Equivalent Units of Production Under the Weighted-Average and FIFO Methods ■ Cost per Equivalent Unit—FIFO Method ■ Applying Costs—FIFO Method ■ A Comparison of Costing Methods LEARNING OBJECTIVES After studying this Supplement to Chapter 4, you should be able to: LO5 Compute the equiva- lent units of production using the FIFO method. LO6 Compute the cost per equivalent unit using the FIFO method. LO7 Assign costs to units using the FIFO method. T he FIFO method of process costing differs from the weighted-average method in two ways: (1) the computation of equivalent units and (2) the way in which costs of beginning inventory are treated. The FIFO method is generally considered more accurate than the weighted-average method, but it is more complex. The complexity is not a problem for computers, but the FIFO method is a little more diffi cult to under- stand and to learn than the weighted-average method. Equivalent Units—FIFO Method The computation of equivalent units under the FIFO method differs from the computation under the weighted-average method in two ways. First, the “units transferred out” is divided into two parts. One part consists of the units from the beginning inventory that were completed and transferred out, and the other part consists of the units that were both started and completed during the current period. Second, full consideration is given to the amount of work expended during the cur- rent period on units in the beginning work in process inventory as well as on units in the ending work in process inventory. Thus, under the FIFO method, both beginning and end- ing inventories are converted to an equivalent units basis. For the beginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory, the equivalent units represent the work done to bring the units to a stage of partial com- pletion at the end of the period (the same as with the weighted-average method): The formula for computing the equivalent units of production under the FIFO method is more complex than under the weighted-average method: LEARNING OBJECTIVE 5 Compute the equivalent units of production using the FIFO method. To illustrate the FIFO method, refer to the data for the Shaping and Milling Depart- ment at Double Diamond Skis in Chapter 4 of the text. The department completed and transferred 4,800 units to the Graphics Application Department during May. Since 200 of these units came from the beginning inventory, the Shaping and Milling Department must have started and completed 4,600 units during May. The 200 units in the begin- ning inventory were 55% complete with respect to materials and only 30% complete with respect to conversion costs when the month started. Thus, to complete these units the department must have added another 45% of materials costs (100% - 55% = 45%)...
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This note was uploaded on 06/21/2011 for the course MGMT 202 taught by Professor Yan during the Spring '11 term at Nanjing University.
- Spring '11