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PROCESS COSTING

FIFO Method: Steps in Preparing Production Report

The FIFO method keeps track of the units and costs in beginning WIP completely separate from
the units and costs for production started this period. Only costs incurred in the current period are
included in the cost per EU. Costs in WIP beginning are excluded since they were incurred in a
previous period.

1. Prepare a quantity schedule showing Units to Account For (i.e, units from WIP,
beginning, and units started/added this period. This schedule is identical to the schedule
under the Weighted Average method.

2. Prepare a quantity schedule showing what happens to the units in 1 called a Units
Accounted for As Follows schedule. Include separate columns for DM, DL, and MO
(DL and MO may be combined and transferred out, or they are still in ending WIP. The
total units must be balanced to schedule 1.
The Units completed and transferred out come from two sources that must be kept track
of separately:

- units completed from WIP beginning (same figure as in item 1.). For purposes of
EUs, we indicate the # EUs for DM, DL, and MO that are required to complete
these units (e.g., if begin WIP was 60% complete, then it would take 40% worth or
EUs to complete)

- units started and completed this period. This group will always be 100% complete.

The units in ending WIP will only have been partially worked on this period. Therefore, calculate
the EUs for each of DM, DL, and MO using the % completed this period times the total number
of units in ending WIP.

3. Prepare a schedule of Costs to Account For with separate columns for DM, DL, and MO
(or DL and MO may be combined as CC). This schedule should have similar line
headings to the first quantity schedule (see item 1. above) and the costs for each category
should be given in the question.

While the costs in WIP beginning will appear in the total column, they will not appear in the
DM, DL, and MO columns. This is because only costs incurred in the current period should be
included under these column headings and the costs in WIP beginning were incurred in a previous
period. Therefore, the amounts should be entered as 0 under these columns. This is because the
cost per EU calculation under the FIFO method only includes costs from the current period.

The costs for Added this period will be as given for all cost categories since all units started and
completed this period are 100% complete.

4. Calculate the cost per E.U. Under the FIFO method, this cost per unit relates only to work
done this period. Unlike the Wtd. Avg. method, the cost per EU it ignores work done in a
previous period.

1
The calculation is done by dividing the cost totals from the schedule in item 3. for DM, DL, and
MO respectively, by the EUs calculated for these cost categories in the schedule for item 2.
Hence, you determine a cost per EU for DM, DL, and MO respectively. Then add these together
to get the combine cost per EU for one completed unit (Same procedure as with weighted avg.
method).

5. Prepare the schedule of Costs Accounted for As Follows:


This schedule follows the same line headings as the second quantity schedule (see item 2
above). We use the quantities from the second quantity schedule along with the costs per
EU from part 4., to complete this schedule.

For costs relating to goods completed and transferred out, there are three costs to deal with:
- re costs in beginning WIP (from a previous period) ----from schedule 3.
- re costs added this period to complete units in beginning WIP;
- use the EUs for each of DM, DL, and MO from schedule 2. and multiply by the
cost for EU for DM, DL, and MO.
- re costs from units added and completed this period, take the # of such units
from Schedule 2. and multiply by the full cost per E.U. from item 4.

For costs added this period relating to units in ending WIP, take the EUs in Schedule 2 for
each of DM, DL, and MO (based on the % complete), and multiply these quantities by the cost
per EU for DM, DL, and MO.

The total should agree (or at least be close) to the total from Schedule 3. Any small difference
would be due to rounding.

PROCESS COSTING PRODUCTION REPORTS FOR A SUBSEQUENT PROCESSING


DEPARTMENT

When the Production Report is for a processing department that is not the first department in the
process, there is a separate cost category and unit category called Transferred-in Costs.

This category is treated this same as the other categories (DM, DL, and MO) with a separate
column in the EU calculations.

Transferred in costs are always 100% complete when they are transferred in. Hence, when using
the FIFO method, EUs required to complete the transferred-in costs in WIM beginning will
always be zero. Likewise, the WIP ending inventory for transferred in costs will always be 100%.

In the third schedule, Costs to Account For, the second line becomes Cost Transferred in or
Added this period with the transferred in- costs being in a separate Transferred-in column and the
costs added this period being in the DM, DL, and MO columns.

The transferred in costs and related EUs become part of the cost per EU calculation.

When preparing the Cost Reconciliation (Costs Accounted for as Follows Schedule), one
additional line and calculation under the WIP ending heading will be Transferred in costs, which
will be equal to the number of transferred in EUs in ending WIP from Schedule 2, times the cost
per EU for transferred in costs (the others being the DM, DL, and MO components of ending
WIP).

2
ACCOUNTING FOR SHRINKAGE AND LOST UNITS

Units in process can disappear due to evaporation, losses due to machine breakdowns, or rejected
units.

Such missing units can be regarded as normal or abnormal and can be charged to MO as just
another overhead cost, or treated as a separate abnormal unusual loss, or absorbed by the cost
of the good output. Normal losses are anything up to a stated allowable percentage which is
stated as a % of good output completed and transferred out (e.g. 5% of good output). Any
spoiled units exceeding this amount would be treated as abnormal spoilage.

We will consider the treatment of lost units for each of the three options using the Weighted
Average Method only.

A. Charge the Normal Loss for lost units to MO


Steps: 1. Include the lost units as a separate line in the second schedule, Units Accounted
for As Follows, and include them in the EU columns according to the stage of
completion. They will then be included in the cost per EU calculation.
2.In the Costs Accounted for As Follows Schedule, add a section for the cost of Normal
Lost Units (based on the units lost line in Schedule 2) and multiply the EUs from
schedule 2 for each of DM, DL, and MO times the cost per EU for each cost category.
This amount in total then becomes the amount charged to MO-control and taken out of
WIP.

B. Charge the Abnormal Loss for the lost units to Unusual Loss
Steps: Proceed the same as under option A. but record the cost as Unusual Loss lost
units (rather than as part of MO).

C. Have the Good Output Absorb the Cost of Lost Units


Steps: Include the lost units in the total column of the second schedule, Units
Accounted for As Follows, so that you can balance in total with the first schedule. Often,
the units lost may be a plug figure.

However, ignore these units in the EU columns (i.e., leave the amount blank or enter
zero under the EU headings for DM, DL, and MO). This will have the effect of reducing
the # of EUs and hence making the cost per EU higher than it would otherwise be. This
has the effect of causing the good units to absorb the cost of the lost units.

When you come to the 4th schedule, Costs Accounted for as Follows, ignore the lost units
completely. The cost of the lost units will be in fact included in the cost of the units
transferred out and the units in ending inventory.

No entry is required to deal specifically with the cost of the lost units. The cost will be
included in the normal entries to record DM, DL, and MO added this period.