FIFO Method

Appendix 4A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
 4A-2

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:

1.
1. The
The computation
computation of
of equivalent
equivalent units.
units.
2.
2. The
The way
way in
in which
which the
the costs
costs of
of beginning
beginning
inventory
inventory are
are treated.
treated.
 4A-3

Learning Objective 6

Compute the equivalent

units of production using
the FIFO method.
 4A-4

Equivalent Units FIFO Method

Lets revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 4A-5

Equivalent Units FIFO Method

Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.
 4A-6

Equivalent Units FIFO Method

Step 2: Determine units started and completed during
the period.
 4A-7

Equivalent Units FIFO Method

Step 3: Add the equivalent units in ending Work in
Process Inventory.
 4A-8

FIFO Example
Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 60%
180 Equivalent Units
5,100 Units Completed 900 60%
540 Equivalent Units
5,820 Equivalent units
of production
 4A-9

FIFO Example
Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

300 80%
240 Equivalent Units
5,100 Units Completed 900 30%
270 Equivalent Units
5,610 Equivalent units
of production
 4A-10

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.
 4A-11

Learning Objective 7

Compute the cost per

equivalent unit using the
FIFO method.
 4A-12

Cost per Equivalent Unit - FIFO

Lets revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process: 400 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
 4A-13

Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent
unit under FIFO method is:
 4A-14

Cost per Equivalent Unit - FIFO

$118,621 5,820 $81,130 5,610

Total cost
cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$34.8433
 4A-15

Learning Objective 8

Assign costs to units

using the FIFO method.
 4A-16

Applying Costs - FIFO

Step 1: Record the equivalent units of production in ending Work
in Process Inventory.

900
900 units
units 60%
60% 900
900 units
units 30%
30%
 4A-17

Applying Costs - FIFO

Step 2: Record the cost per equivalent unit.
 4A-18

Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process Inventory.

540
540 $20.3816
$20.3816 270
270 14.4617
14.4617
 4A-19

Cost of Units Transferred Out

Step 1: Record the cost in beginning Work in Process Inventory.
 4A-20

Cost of Units Transferred Out

Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
 4A-21

Cost of Units Transferred Out

Step 3: Compute the cost of units started and completed this
period.
 4A-22

Cost of Units Transferred Out

Step 4: Compute the total cost of units transferred out.
 4A-23

Learning Objective 9

Prepare a cost
Prepare a cost
reconciliation report
reconciliation report
using the FIFO method.
using the FIFO method.
 4A-24

Reconciling Costs
 4A-25

Reconciling Costs

* $1 rounding error.
 4A-26

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.