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	$5,566	4,600	70%
+ Cost of units					Units transferred out	$87,837	63,600	100%
transferred in	$64,978	61,300
+ Direct Labor	$11,200
+ Factory Overhead	$6,720
applied
End Inventory:	$627	2,300	20%

Inventory in process, July 1, 4,600 units (70% complete)	$	5,566
Direct materials cost incurred in July, 61,300 units		64,978
Direct labor cost incurred in the period		11,200
Factory overhead applied in the period		6,720
Total production costs to account for	$	88,464

63,600 units were completed and transferred out

2,300 units remain in WIP, 20% complete

Total whole units to account for:
Beginning WIP		4,600
Started & completed		59,000
Ending WIP		2,300
		65,900

Beginning inventory		4,600
Units transferred in		61,300
		65,900

	Equivalent units:	Cost of WIP:
Beginning WIP x 30%	1,380	$	1,880		$	1,880
Started & completed	59,000		80,391	+ $5,566 =		85,957
Ending WIP x 20%	460		627			627
	60,840	$	82,898		$	88,464

Cost per equivalent unit:

Current period costs / equivalent units

($88,464 - $5,566) / 60,840 = 1.36256

Equivalent Units Current Period Cost Beginning WIP Started & completed Units Ending WIP Total Cost per unitMaterials$64,9780 $ Conversion costs$17,9201,380 $ $82,898$1.3545

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	$	5,690	$	28,942
Conversion costs		21,300		70,440
Total costs	$	26,990	$	99,382

Gallons of ketchup in process on August 1 (30% complete)*	12,200
Gallons of Ketchup completed and transferred out during August	48,000
Gallons of Ketchup in process on August 31 (25% complete)*	14,100
*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	$28,942					$
Conversion costs	70,440					$
	$99,382					$

Calculate the cost of:

Completed units: - Select your answer -$90037$99382$113022$126389Correct 12 of Item 2

Ending WIP: - Select your answer -$8102$8102$13367$30461Correct 13 of Item 2