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Appendix 04A - Lecture Notes
4A-1
I. Appendix 4A: FIFO method (slide 1: title slide)
A. FIFO vs. weighted-average method
i. The FIFO method (generally considered more accurate
than the weighted-average method) differs from the
weighted-average method in two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated.
B. Equivalent units − FIFO method
Learning Objective 6: Compute the equivalent units of
production using the FIFO method.
i. Let’s revisit the Smith Company example that was used
to illustrate the weighted-average method.
1. Assume the following activity, as shown on the
slide, is reported in the Assembly Department for
the month of June.
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2. The first step is to determine the equivalent units
needed to complete beginning work in process
inventory (180 units for materials and 240 units
for conversion).
3. The second step is to add the units started and
completed during the period (5,100 units for
materials and conversion).
4. The third step is to add the equivalent units in
ending work in process inventory (540 units for
materials and 270 units for conversion).
a. This calculation results in 5,820 and 5,610
equivalent units of materials and
conversion, respectively.
5. A different visual depiction of the calculation of
equivalent units with respect to materials is as
follows.
6. A different visual depiction of the calculation of
equivalent units with respect to conversion is as
follows.
C. Comparing equivalent units of production under the
weighted-average and FIFO methods
i. The FIFO method removes the equivalent units that
were already in beginning inventory from the
equivalent units as defined using the weighted-average
method. Thus, the FIFO method isolates the equivalent
units due to work performed during the current period.
This can be illustrated using the Smith Company
example as follows:
1. The equivalent units of material produced per the
weighted-average method (5,940 units) minus the
equivalent units of material in beginning
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inventory (120 units) equals the equivalent units
of production per the FIFO method (5,820 units).
2. The equivalent units of conversion per the
weighted-average method (5,670 units) minus the
equivalent units of conversion in beginning
inventory (60 units) equals the equivalent units of
production per the FIFO method (5,610 units).
Helpful Hint: The only difference in the equivalent unit
calculations between the weighted-average and FIFO
methods is that the equivalent units in beginning inventory
are included in the weighted-average method. Emphasize
again that under the weighted-average method, the costs
already in beginning inventory will be added to the costs
incurred during the period to arrive at unit costs. To be
consistent, equivalent units already in beginning inventory
must be added to the equivalent units for work performed
during the period.
D. Cost per equivalent unit − FIFO method
Learning Objective 7: Compute the cost per equivalent unit
using the FIFO method.
i. Recall the following facts with respect to Smith
Company’s Assembly Department.
ii. The formula for computing the cost per equivalent units
is as shown.
1. The cost per equivalent unit for materials
($20.3816) and conversion ($14.4617) is
computed as shown.
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E. Applying Costs—FIFO Method
Learning Objective 8: Assign costs to units using the FIFO
method.
i. Computing the cost of ending work in process
inventory.
1. The first step is to record the equivalent units of
production in ending work in process inventory
(540 units for materials and 270 units for
conversion).
2. The second step is to record the cost per
equivalent unit ($20.3816 for materials and
$14.4617 for conversion).
3. The third step is to compute the cost of ending
work in process inventory ($11,006 for
materials, $3,905 for conversion, and $14,911
in total).
ii. Computing the cost of units transferred out
1. The first component of the computation is to
record the cost in beginning work in process
inventory ($6,119 for materials, $3,920 for
conversion, and $10,039 in total)
2. The second component of the computation is to
compute the cost to complete the units in
beginning work in process inventory.
a. The first step is to record the equivalent
units of production required to complete
the units in beginning inventory (180 units
for materials and 240 units for
conversion).
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b. The second step is to record the cost per
equivalent unit ($20.3816 for materials
and $14.4617 for conversion).
c. The third step is to compute the cost to
complete the units in beginning work in
process inventory ($3,669 for materials,
$3,471 for conversion, and a total of
$7,140).
3. The third component of the computation is to
compute the cost of units started and completed
this period.
a. The first step is to record the units started
and completed this period (5,100 units for
materials and conversion).
b. The second step is to record the cost per
equivalent unit ($20.3816 for materials
and $14.4617 for conversion).
c. The third step is to compute the cost of
units started and completed during this
period ($103,946 for materials, $73,755
for conversion, and $177,701 in total).
4. The final computation is to compute the total cost
of units transferred out ($194,880).
Learning Objective 9: Prepare a cost reconciliation report
using the FIFO method.
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iii. Reconciling costs
1. Computing the costs to be accounted for:
a. The first step is to record the cost of
beginning work in process as shown earlier
($10,039).
b. The second step is to record the costs
added to production during the period as
shown earlier ($199,751).
c. The third step is to sum these two costs
($209,790).
2. Computing the costs accounted for:
a. The first step is to record the cost of ending
work in process inventory ($14,911).
b. The second step is to record the cost of
units transferred out ($194,880).
c. The third step is to sum these two costs
($209,791).
3. Notice the two totals agree indicating that all costs
have been accounted for ($1 rounding error).
iv. A comparison of costing methods
1. In most situations, the weighted-average and
FIFO methods will produce very similar unit
costs, particularly in a lean production
environment.
2. From a cost control standpoint, the FIFO method
is superior to the weighted-average method
because it does not mix costs of the current period
with costs of the prior period.
Helpful Hint: Remind students that the only difference
between the FIFO and weighted-average approaches is the
treatment of units in beginning inventory and the costs of
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beginning inventory. In essence, the weighted-average
approach simply combines the units in beginning inventory
and the costs of beginning inventory with all other units and
all costs incurred during the period. The FIFO method
segregates the beginning inventory. Providing that the
number of units transferred out is at least as large as the
number of units in beginning inventory, the costs already in
beginning inventory are simply transferred out under the
FIFO method.
