Process Costing using the FIFO Method

A process cost system is used when a company produces a product that is homogeneous-that is, individual units are indistinguishable from each other.

Costs flow from one production department to the next and materials, labor and overhead are added until the final product is moved to finished goods inventory ready to be sold. The flowchart illustrates the flow of costs into Work in Process and Finished Goods in a process costing system.

Cost Flows in Process Cost System

Materials

Work in Process-Mixing Dept

Work in Process-Bottling Dept

Finished Goods

Beg Inventory
+ Purchases		Direct Materials
End Inventory

Beg Inventory		Cost of Units
+ Direct Materials		transferred out
+ Direct Labor
+ Factory Overhead
applied
End Inventory

Beg Inventory		Cost of Units
+ Cost of units		transferred out
transferred in
+ Direct Labor
+ Factory Overhead
applied
End Inventory

Beg Inventory
+ Cost of units		Cost of Goods
transferred in		Sold
End Inventory

Factory Overhead

Actual Factory Overhead:
+ utilities expense		Factory overhead
+ depreciation of machinery		applied
+ supplies

Production costs are assigned to the units transferred out of WIP and to the units in ending WIP by multiplying the equivalent units by the per-unit cost. The following steps are involved:

1. Compute the equivalent units of production

2. Determine the cost per equivalent unit

3. Assign costs to ending WIP and cost of goods transferred out

Consider the T account showing the detail costs and units in the Mixing Dept using the FIFO costing method.

Work in Process-Mixing Dept
	$Amt	#units	%completed			$Amt	#units	%completed
Beg Inventory	$5,580	4,500	60%
+ Cost of units					Units transferred out	$86,899	61,000	100%
transferred in	$66,528	59,400
+ Direct Labor	$10,400
+ Factory Overhead	$5,200
applied
End Inventory:	$809	2,900	20%

Inventory in process, July 1, 4,500 units (60% complete)	$	5,580
Direct materials cost incurred in July, 59,400 units		66,528
Direct labor cost incurred in the period		10,400
Factory overhead applied in the period		5,200
Total production costs to account for	$	87,708

61,000 units were completed and transferred out

2,900 units remain in WIP, 20% complete

Total whole units to account for:
Beginning WIP		4,500
Started & completed		56,500
Ending WIP		2,900
		63,900

Beginning inventory		4,500
Units transferred in		59,400
		63,900

	Equivalent units:	Cost of WIP:
Beginning WIP x 40%	1,800	$	2,511		$	2,511
Started & completed	56,500		78,808	+ $5,580 =		84,388
Ending WIP x 20%	580		809			809
	58,880	$	82,128		$	87,708

Cost per equivalent unit:

Current period costs / equivalent units

($87,708 - $5,580) / 58,880 = 1.39484

Note that the number of whole units used to calculate equivalent units (beginning WIP + started and completed units + ending WIP) agrees with the number of whole units in

. Another important point is that

costs incurred are used to calculate the cost per equivalent unit when the FIFO costing method is used.

Fill in the formula for calculating cost per unit using the FIFO method:

Cost per unit formula =

Because the FIFO method assumes that the first units put into production are the first units transferred out, the cost of beginning WIP is included in the cost of

.

What if ending WIP is 40% complete and production costs are the same? Select if the below statements are True or False.

The value of ending WIP would increase and the cost of goods transferred out would decrease by the same amount.

The cost per equivalent unit would decrease because the same cost is spread over more units.

The value of ending WIP and the value of the cost of goods transferred out will stay the same.

This example assumes that materials and conversion costs are added to the process evenly. When materials and conversion costs are added at different times in a process, the equivalent units for materials may be different than the equivalent units for conversion costs. For example, if materials are added at the beginning of a process, the materials may be 100% complete but unfinished for labor and overhead.

Fill in the schedule to show how the calculation changes when materials are added at the beginning of the Mixing Dept in the above example. Round cost per unit to four decimal places.

		Equivalent Units
	Current Period Cost	Beginning WIP	Started & completed Units	Ending WIP	Total	Cost per unit
Materials	$66,528	0				$
Conversion costs	$15,600	1,800				$
	$82,128					$1.3849

Ivy Manufacturing produces ketchup in a production process whereby units are indistinguishable from one another. The company uses process costing to calculate the cost of its products and also employs the FIFO method in its calculations.

The following information is available for August:

	Beginning work in process		Current period
Materials	$	5,880	$	25,333
Conversion costs		19,860		72,420
Total costs	$	25,740	$	97,753

Gallons of ketchup in process on August 1 (30% complete)*	11,800
Gallons of Ketchup completed and transferred out during August	49,600
Gallons of Ketchup in process on August 31 (10% complete)*	13,900
*All materials are added at the beginning of the process.

Fill in the calculation of cost per unit and the following proof using the first in, first out method. Round cost per unit to three decimal places.

Calculation of cost per unit
Cost element	Current period cost	Beginning WIP equiv. units (to be completed)	Started & completed equivalent units	Ending WIP equivalent Units	Current total equivalent units	Cost per unit
Materials	$25,333					$
Conversion costs	72,420					$
	$97,753					$

Calculate the cost of:

Completed units:

Ending WIP: