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Understanding FIFO Costing in Work-in-Process Analysis

Learn about the First In, First Out (FIFO) method in the costing of work in process. Compare it with the average costing method, and discover how to choose the right costing method for your operations. Dive into the computation under FIFO and average cost methods, identify key differences, and understand why FIFO is ideal for high work-in-process inventories. Explore sample cost data and computations to grasp the intricacies of FIFO costing.

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Understanding FIFO Costing in Work-in-Process Analysis

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Presentation Transcript

  1. Chapter 14 First In, First Out (FIFO) Costing of Work in Process

  2. Introduction • First in, first out (FIFO) method • Comparison with average costing method • Choosing a costing method • Computation under FIFO

  3. Average Cost Method and FIFO -Differences • Average cost method • No distinction between units from beginning inventory and units totally produced • First in, first out (FIFO) method • Cost of beginning work in process are kept separate and assigned to the beginning work in process units only • Units that are started in the current month are assigned the current months cost

  4. Choosing a Costing Method • FIFO method • Unit costs are more accurate • Unit costs reflect current conditions clearly • Major changes in costs can be identified more easily • Suited for high work in process inventories and highly volatile costs • Average method • Ending process inventory is small • Rate of production is stable • Simple to use

  5. Sample Cost Data: -FIFO Pressing and Cutting Department

  6. Monthly Production Report

  7. Equivalent Production Computations - FIFO

  8. Computation Under FIFO • Monthly production report • Shows number of units from beginning work in process that were transferred out • Shows number of units transferred out that were started and completed during the period • Shows the stage of completion of both beginning and ending inventory • Work done in the current period is used to compute equivalent production

  9. Computation Under FIFO (cont’d) • Costs to be accounted for section • All cost category in the beginning inventory of work in process are combined into a single figure. • Costs accounted for section • Transferred out to next department subsection separates cost relating to units started and finished in the current month

  10. Computation Under FIFO (cont’d) • Total cost is derived by adding • Cost applicable to units complete in from beginning inventory • Cost applicable to units started and finished in the current month • Average cost of goods transferred out of the department is determined by: • Dividing total costs by the number of units transferred out

  11. FIFO Method – Lost Units • Normal loss are not counted as part of equivalent units. • The cost of lost units are absorbed by good units

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