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 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%

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 4A-5

Step 1: Compute the Equivalent Units of

Production – FIFO Method – Part 2

Materials Conversion
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240

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 4A-6

Step 1: Compute the Equivalent Units of

Production – FIFO Method – Part 3

Materials Conversion
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100

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 4A-7

Step 1: Compute the Equivalent Units of

Production – FIFO Method – Part 4

Materials Conversion
Equivalent units needed to complete beginning WIP inventory
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Equivalent units in ending WIP inventory
Materials: 900 units × 60% complete 540
Conversion: 900 units × 30% complete 270
Equivalent units of in ending WIP Inventory 5,820 5,610

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 4A-8

Step 1: Compute the Equivalent Units of

Production – FIFO Method – Part 5
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
540 Equivalent Units 900 × 60%
5,820 Equivalent units
of production
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 4A-9

Step 1: Compute the Equivalent Units of

Production – FIFO Method – Part 6
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
270 Equivalent Units 900 × 30%
5,610 Equivalent units
of production
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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 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).
2.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).

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 4A-11

Learning Objective 7

Compute the cost per

equivalent unit using the
FIFO method.

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 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: 300 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

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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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Step 2: Compute the Cost per Equivalent

Unit (FIFO Method) – Part 3

Total
Cost Materials Conversion

Cost added in June $ 199,751 $ 118,621 $ 81,130

Equivalent units 5,820 5,610
Cost per equivalent unit $ 20.3816 $ 14.4617

$118,621 ÷ 5,820 $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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 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 Total

Equivalent Units in Ending WiP Inventory 540 270

900 units × 60% 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 Total

Equivalent Units in Ending WiP Inventory 540 270

Cost per equivalent unit $ 20.3816 $ 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 Total

Equivalent Units in Ending WiP Inventory 540 270

Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of Ending WIP inventory $ 11,006 $ 3,905 $ 14,911

540 × $20.3816 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 Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 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 Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
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 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 Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
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 7,140
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 $ 73,755 177,701

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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 Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
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 7,140
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 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880

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 4A-23

Learning Objective 9

Prepare a cost
Prepare a cost
reconciliation report
reconciliation report using
using the FIFO method.
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 $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 14,911
Cost of units transferred out 194,880
Total cost accounted for* $ 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 $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 14,911
Cost of units transferred out 194,880
Total cost accounted for* $ 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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