tailieunhanh - Lecture Managerial accounting (15/e): Chapter 4A - Garrison, Noreen, Brewer
Appendix 4A: FIFO method. After studying this chapter, you should be able to: Compute the equivalent units of production using the FIFO method, compute the cost per equivalent unit using the FIFO method, Assign costs to units using the FIFO method, Prepare a cost reconciliation report using the FIFO method. | FIFO Method Appendix 4A FIFO vs. Weighted-Average Method The FIFO method (generally considered more accurate than the weighted-average method) differs from the weighted-average method in two ways: The computation of equivalent units. The way in which the costs of beginning inventory are treated. Equivalent Units – FIFO Method Let’s revisit the Smith Company example. Here is information concerning the Assembly Department for the month of June. Equivalent Units – FIFO Method Step 1: Determine equivalent units needed to complete beginning Work in Process Inventory. Equivalent Units – FIFO Method Step 2: Determine units started and completed during the period. Equivalent Units – FIFO Method Step 3: Add the equivalent units in ending Work in Process Inventory. Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 6,000 Units Started 5,100 Units Started and Completed FIFO Example Materials 5,100 Units Completed 540 Equivalent Units 900 × 60% 5,820 Equivalent units of production 180 Equivalent Units 300 × 60% Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete 6,000 Units Started 5,100 Units Started and Completed FIFO Example Conversion 5,100 Units Completed 270 Equivalent Units 900 × 30% 5,610 Equivalent units of production 240 Equivalent Units 300 × 80% Equivalent Units: Weighted-Average vs. FIFO As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under the FIFO method. Beginning work in process: 300 units Materials: 40% complete $ 6,119 Conversion: 20% complete $ 3,920 Production started during June 6,000 units Production completed during June 5,400 units Costs added to production in June Materials cost $ 118,621 Conversion cost $ 81,130 Ending work in process 900 units Materials: 60% complete Conversion: 30% complete Cost per Equivalent Unit - FIFO Let’s revisit the Smith Company Assembly Department for the month of June to prepare our production report. Cost per Equivalent Unit - FIFO The formula for computing the cost per equivalent unit under FIFO method is: Cost per equivalent unit = Cost added during the period Equivalent units of production Cost per Equivalent Unit - FIFO Total cost per equivalent unit = $ + $ = $ $118,621 ÷ 5,820 $81,130 ÷ 5,610 Applying Costs - FIFO Step 1: Record the equivalent units of production in ending Work in Process Inventory. 900 units × 60% 900 units × 30% Applying Costs - FIFO Step 2: Record the cost per equivalent unit. Applying Costs - FIFO Step 3: Compute the cost of ending Work in Process Inventory. 540 × $ 270 × Cost of Units Transferred Out Step 1: Record the cost in beginning Work in Process Inventory. Cost of Units Transferred Out Step 2: Compute the cost to complete the units in beginning Work in Process Inventory. Cost of Units Transferred Out Step 3: Compute the cost of units started and completed this period. Cost of Units Transferred Out Step 4: Compute the total cost of units transferred out. A Comparison of Costing Methods In a lean production environment, FIFO and weighted-average methods yield similar unit costs. When considering cost control, FIFO is superior to weighted-average because it does not mix costs of the current period with costs of the prior period. End of Appendix 4A
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