Question
Blueprint Problem II: Weighted Average, FIFO, Valuation, and Reconciliation The Effect of BWIP on Process Costing The presence of beginning work-in-process inventories makes process costing
Blueprint Problem II: Weighted Average, FIFO, Valuation, and Reconciliation
The Effect of BWIP on Process Costing
The presence of beginning work-in-process inventories makes process costing more complex. The work done on these partially completed units represents prior-period work and the production costs assigned to them are prior-period costs. In computing a current-period unit cost for a department, two approaches have evolved for dealing with the prior-period output and prior-period costs found in beginning work in process: the FIFO method and the weighted average method. Both methods follow the same five steps described for preparing a cost of production report:
Step 1: physical flow analysis
Step 2: equivalent units
Step 3: unit cost
Step 4: valuation
Step 5: reconciliation
The two methods, however, usually only produce the same result for physical flow analysis.
In both methods, the unit cost is defined as the production costs of the period (numerator) divided by the output of the period (denominator). However, how costs (the numerator) and output (the denominator) are defined differ for FIFO and Weighted Average. FIFO the prior-period costs of BWIP in the numerator and Weighted Average prior-period costs in the numerator. Thus, for FIFO the numerator for unit cost calculation is defined as and for Weighted Average the numerator is .
Similarly, to calculate output (equivalent units) for the period, FIFO prior-period work (equivalent units) in BWIP and Weighted Average prior-period work (equivalent units) in BWIP. Thus, the equivalent unit schedules for each method can be structured as follows, with the understanding that if production inputs are not applied uniformly, the equivalent unit calculation is done for each type of input:
OPTIONS
A. EXCLUDES. OR INCLUDES
B. EXCLUDES. OR INCLUDES
C . Costs in BWIP + Current Period Costs OR Current Period Costs
D . Costs in BWIP + Current Period Costs OR Current Period Costs
E. EXCLUDES. OR INCLUDES
F. EXCLUDES. OR INCLUDES
OPTIONS
G. adding units in BWIP fraction to complete OR Subtracting units in BWIP fraction to complete
H. adding units in BWIP fraction to complete OR Subtracting units in BWIP fraction to complete
I . Costs in BWIP + Current Period Costs OR Current Period Costs
J . Costs in BWIP + Current Period Costs OR Current Period Costs
Blueprint Problem II: Weighted Average, FIFO, Valuation, and Reconciliation The Effect of BWIP on Process Costing The presence of beginning work-in-process inventories makes process costing more complex. The work done on these partially completed units represents prior-period work and the production costs assigned to them are prior-period costs. In computing a current-period unit cost for a department, two approaches have evolved for dealing with the prior-period output an prior-period costs found in beginning work in process: the FIFO method and the weighted average method. Both methods follow the same five steps described for preparing a cost of production report: Step 1: physical flow analysis Step 2: equivalent units Step 3: unit cost Step 4: valuation Step 5: reconciliation The two methods, however, usually only produce the same result for physical flow analysis. In both methods, the unit cost is defined as the production costs of the period (numerator) divided by the output of the period (denominator). However, how costs (the numerator) and output (the denominator) are defined differ for FIFO and Weighted Average. FIFO the prior-period costs of BWIP in the numerator and Weighted Average prior-period costs in the numerator. Thus, for FIFO the numerator for unit cost calculation is defined as and for Weighted Average the numerator is Similarly, to calculate output (equivalent units) for the period, FIFO prior-period work (equivalent units) in BWIP and Weighted Average prior- period work (equivalent units) in BWIP. Thus, the equivalent unit schedules for each method can be structured as follows, with the understanding that if production inputs are not applied uniformly, the equivalent unit calculation is done for each type of input: FIFO Weighted Average FIFO Weighted Average Units Completed XXXXX Units Started and Completed xxxxx Units in BWIP x Fraction to complete xxxxx Units in EWIP x Fraction complete XXXXX xxxxx Equivalent Units xxxxx xxxxx . FIFO equivalent units can be converted to Weighted Average equivalent units by In the above calculation, Weighted Average equivalent units can be converted to FIFO equivalent units by Once equivalent units are computed, the unit cost is calculated as follows: FIFO: Unit cost = /Equivalent Units Weighted Average: Unit cost- Equivalent Units. If equivalent units are calculated for each type of input, then a unit cost is calculated for each input and the overall unit cost is the sum of the input unit costs. Once the unit cost is calculated under either method, it can be used to value both the units transferred out to the next process (or to finished goods) and EWIP. Under FIFO, the cost of units transferred out is the sum of three different items: (1) Costs incurred in the prior period found in BWIP, (2) Costs of completing the BWIP incurred this period, (3) Cost of the units started and completed this period (total unit cost multiplied by units started and completed). For Weighted Average, the cost of units transferred out is the total unit cost multiplied by units completed, Although unit costs differ for Weighted Average and FIFO, valuation of EWIP follows the same calculation: EWIP value-Unit cost x Equivalent units in EWIP Reconciliation is simply a check on the accuracy (necessary but not sufficient) of the cost assignments to goods transferred out and EWIP. It requires the following: Cost of EWIP + Cost of Goods Transferred out = Costs in BWIP + Current Period CostsStep by Step Solution
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