# The cost per equivalent unit of beginning inventory

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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 \$23,000 (\$460,000 ÷20 equiv. units) \$10,000 (\$120,000 ÷12 equiv. units) \$25,000 \$11,000 Direct Materials Conversion Costs Cost per equivalent unit (weighted-average) \$24,600* \$10,876.29*Cost per equivalent unit (FIFO) \$25,000** \$11,000***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 to calculate the numerator of the calculation. FIFO uses only the costs added during the period whereas weighted-average uses the costs from the beginning work-in-process as well as costs added during the 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) DifferenceCost of units completed and transferred outWork in process, ending Total costs accounted for \$3,192,866 322,134\$3,515,000\$3,188,000 327,000\$3,515,000–\$4,866 +\$4,866
The FIFO ending inventory is higher than the weighted-average ending inventory by \$4,866. 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. So, 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. SOLUTION EXHIBIT 17­32ASteps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units; FIFO Method of Process Costing, Assembly Department of Global Defense Inc. for October 2007. (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 20 80100(work done before current period) Completed and transferred out during current period: From beginning work in process§20 ×(100% 100%); 20 ×(100% 60%) 20 0 8 Started and completed 70 ×100%, 70 ×100% 7070 70 Work in process, ending* (given) 10 ×100%; 10 ×70% 10 10 7 Accounted for 100Work done in current period only 8085§Degree of completion in this department: direct materials, 100%; conversion costs, 60%. 90 physical units completed and transferred out minus 20 physical units completed and transferred out from beginning work-in-process inventory.
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