FIFO Method
APPENDIX 4A
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
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4A-2
The FIFO Method
The FIFO method is generally considered more accurate
than the weighted-average method.
1. FIFO calculates unit costs using only the
costs and outputs from the current period.
2. We will organize our explanation using the
same four-step process that we used for the
weighted-average method.
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4A-3
Learning Objective 6
Compute the equivalent units
of production using the FIFO
method.
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4A-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.
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out
of Department A during June
5,400
Work in process, June 30
900
Materials Conversion
40%
20%
60%
30%
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4A-5
Step 1: Compute the Equivalent Units of
Production – FIFO Method – Part 2
Materials
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%)
Conversion: 300 units × (100% - 20%)
Conversion
180
240
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4A-6
Step 1: Compute the Equivalent Units of
Production – FIFO Method – Part 3
Materials
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%)
180
Conversion: 300 units × (100% - 20%)
Units started and completed during June
Conversion
240
5,100
5,100
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4A-7
Step 1: Compute the Equivalent Units of
Production – FIFO Method – Part 4
Materials
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%)
180
Conversion: 300 units × (100% - 20%)
Units started and completed during June
Conversion
240
5,100
5,100
Equivalent units in ending WIP inventory
Materials: 900 units × 60% complete
Conversion: 900 units × 30% complete
Equivalent units of in ending WIP Inventory
540
270
5,820
5,610
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4A-8
Step 1: Compute the Equivalent Units of
Production – FIFO Method – Part 5
Materials
Beginning
Work in Process
300 Units
40% Complete
300 ×
60%
6,000 Units Started
5,100 Units Started
and Completed
180 Equivalent Units
5,100 Units Completed
540 Equivalent Units
5,820 Equivalent units
of production
Ending
Work in Process
900 Units
60% Complete
900 ×
60%
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4A-9
Step 1: Compute the Equivalent Units of
Production – FIFO Method – Part 6
Conversion
Beginning
Work in Process
300 Units
20% Complete
300 ×
80%
6,000 Units Started
5,100 Units Started
and Completed
240 Equivalent Units
5,100 Units Completed
270 Equivalent Units
5,610 Equivalent units
of production
Ending
Work in Process
900 Units
30% Complete
900 ×
30%
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4A-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:
1.The equivalent units of production for materials under the weightedaverage 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).
2.The equivalent units of production for conversion under the weightedaverage 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).
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4A-11
Learning Objective 7
Compute the cost per
equivalent unit using the FIFO
method.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
4A-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:
Materials: 40% complete
Conversion: 20% complete
300 units
$
6,119
$
3,920
Production started during June
Production completed during June
6,000 units
5,400 units
Costs added to production in June
Materials cost
Conversion cost
$ 118,621
$ 81,130
Ending work in process
Materials:
60% complete
Conversion:
30% complete
900 units
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4A-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:
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4A-14
Step 2: Compute the Cost per Equivalent
Unit (FIFO Method) – Part 3
Total
Cost
Cost added in June
Equivalent units
$ 199,751
Cost per equivalent unit
$118,621 ÷ 5,820
Materials
Conversion
$ 118,621
5,820
$
$ 20.3816
$ 14.4617
81,130
5,610
$81,130 ÷ 5,610
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
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4A-15
Learning Objective 8
Assign costs to units using the
FIFO method.
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further distribution permitted without the prior written consent of McGraw-Hill Education.
4A-16
Step 3: Assign Costs to Units (FIFO
Method) – Part 1
Record the equivalent units of production in ending Work in
Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials
Conversion
Equivalent Units in Ending WiP Inventory
900 units × 60%
540
Total
270
900 units × 30%
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4A-17
Step 3: Assign Costs to Units (FIFO
Method) – Part 2
Record the cost per equivalent unit.
Assembly Department
Cost of Ending WIP Inventory
Materials
Conversion
Equivalent Units in Ending WiP Inventory
Cost per equivalent unit
$
540
20.3816
$
Total
270
14.4617
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4A-18
Step 3: Assign Costs to Units (FIFO
Method) – Part 3
Compute the cost of ending Work in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials
Conversion
Equivalent Units in Ending WiP Inventory
Cost per equivalent unit
Cost of Ending WIP inventory
$
$
540 × $20.3816
540
20.3816
11,006
$
$
270
14.4617
3,905
Total
$
14,911
270 × 14.4617
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4A-19
Computing the Cost of Units
Transferred Out – Part 1
Record the cost in beginning Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials
Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Total
$
10,039
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4A-20
Computing the Cost of Units
Transferred Out – Part 2
Compute the cost to complete the units in beginning
Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials
Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units needed to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,669
$
3,471
Total
$
10,039
7,140
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4A-21
Computing the Cost of Units
Transferred Out – Part 3
Compute the cost of units started and completed this period.
Assembly Department
Cost of Units Transferred Out in June
Materials
Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units needed to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,669
$
3,471
Cost of units started and completed:
Units started and completed
5,100
5,100
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost of units started and completed
$ 103,946
$
73,755
Total
$
10,039
7,140
177,701
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4A-22
Computing the Cost of Units
Transferred Out – Part 4
Compute the total cost of units transferred out.
Assembly Department
Cost of Units Transferred Out in June
Materials
Conversion
Cost of Units Transferred Out:
Cost in beginning WIP inventory
$
6,119
$
3,920
Cost to complete beginning WIP
Equivalent units needed to complete
180
240
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost to complete beginning WIP
$
3,669
$
3,471
Cost of units started and completed:
Units started and completed
5,100
5,100
Cost per equivalent unit
$ 20.3816
$ 14.4617
Cost of units started and completed
$ 103,946
$
73,755
Cost of Units Transferred Out
Total
$
10,039
7,140
$
177,701
194,880
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4A-23
Learning Objective 9
Prepare a cost
Prepare a cost reconciliation
reconciliation report
report using the FIFO method.
using the FIFO method.
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4A-24
Step 4: Prepare a Cost Reconciliation
Report (FIFO Method) – Part 1
Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending Work in Process Inventory
Cost of units transferred out
Total cost accounted for*
$
$
$
$
10,039
199,751
209,790
14,911
194,880
209,791
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4A-25
Step 4: Prepare a Cost Reconciliation
Report (FIFO Method) – Part 2
Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending Work in Process Inventory
Cost of units transferred out
Total cost accounted for*
$
$
$
$
10,039
199,751
209,790
14,911
194,880
209,791
* $1 rounding error.
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4A-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.
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4A-27
End of Chapter 4A
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