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