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FIFO Method APPENDIX 4A.

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Presentation on theme: "FIFO Method APPENDIX 4A."— Presentation transcript:

1 FIFO Method APPENDIX 4A

2 The FIFO Method The FIFO method is generally considered more accurate than the weighted-average method. FIFO calculates unit costs using only the costs and outputs from the current period. We will organize our explanation using the same four-step process that we used for the weighted-average method.

3 Compute the equivalent units of production using the FIFO method.
Learning Objective 6 Compute the equivalent units of production using the FIFO method.

4 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 1
Let’s revisit the Smith Company example from the Chapter 4 PowerPoint. Here is information concerning the Assembly Department for the month of June.

5 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 2

6 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 3

7 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 4

8 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 5
Materials 6,000 Units Started Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 5,100 Units Started and Completed 300 × 60% 180 Equivalent Units 5,100 Units Completed 900 × 60% 540 Equivalent Units 5,820 Equivalent units of production

9 Step 1: Compute the Equivalent Units of Production – FIFO Method – Part 6
Conversion 6,000 Units Started Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete 5,100 Units Started and Completed 300 × 80% 240 Equivalent Units 5,100 Units Completed 900 × 30% 270 Equivalent Units 5,610 Equivalent units of production

10 Comparing Equivalent Units: Weighted-Average and FIFO Methods
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: The equivalent units of production for materials under the weighted-average method (5,940 units) minus the equivalent units of material already complete in beginning inventory (120 units) equals the equivalent units of production under the FIFO method (5,820). The equivalent units of production for conversion under the weighted-average method (5,670 units) minus the equivalent units of conversion already complete in beginning inventory (60 units) equals the equivalent units of production under the FIFO method (5,610 units).

11 Compute the cost per equivalent unit using the FIFO method.
Learning Objective 7 Compute the cost per equivalent unit using the FIFO method.

12 Step 2: Compute the Cost per Equivalent Unit (FIFO Method) – Part 1
Let’s revisit the Smith Company Assembly Department for the month of June to prepare our cost per equivalent unit. Beginning work in process: units Materials: % 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 units Materials: 60% complete Conversion: 30% complete

13 Step 2: Compute the Cost per Equivalent Unit (FIFO Method) – Part 2
Or the equivalent units of production can also be determined as follows:

14 Step 2: Compute the Cost per Equivalent Unit (FIFO Method) – Part 3
$118,621 ÷ 5,820 $81,130 ÷ 5,610 Total cost per equivalent unit = $ $ = $

15 Assign costs to units using the FIFO method.
Learning Objective 8 Assign costs to units using the FIFO method.

16 Step 3: Assign Costs to Units (FIFO Method) – Part 1
Record the equivalent units of production in ending Work in Process Inventory. 900 units × 60% 900 units × 30%

17 Step 3: Assign Costs to Units (FIFO Method) – Part 2
Record the cost per equivalent unit.

18 Step 3: Assign Costs to Units (FIFO Method) – Part 3
Compute the cost of ending Work in Process Inventory. 540 × $ 270 ×

19 Computing the Cost of Units Transferred Out – Part 1
Record the cost in beginning Work in Process Inventory.

20 Computing the Cost of Units Transferred Out – Part 2
Compute the cost to complete the units in beginning Work in Process Inventory.

21 Computing the Cost of Units Transferred Out – Part 3
Compute the cost of units started and completed this period.

22 Computing the Cost of Units Transferred Out – Part 4
Compute the total cost of units transferred out.

23 Prepare a cost reconciliation report using the FIFO method.
Learning Objective 9 Prepare a cost reconciliation report using the FIFO method. Prepare a cost reconciliation report using the FIFO method.

24 Step 4: Prepare a Cost Reconciliation Report (FIFO Method) – Part 1

25 Step 4: Prepare a Cost Reconciliation Report (FIFO Method) – Part 2
* $1 rounding error.

26 A Comparison of Costing Methods
In most situations, the weighted-average and FIFO methods will produce very similar unit costs, particularly in a lean production environment. 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.

27 End of Chapter 4A


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