Problem Ix Continuing With Just the Fifo Method Information Form the Previous Problem

FIFO Method of Process Costing

In this supplement to Managerial Accounting we will illustrate the first-in, first-out

(FIFO) method of process costing using the data for MVP Sports Equipment Company,

which was given in Exhibit 4–4 in Chapter 4 of the text. Unlike the weighted-average

method, the FIFO method does not commingle costs from two or more accounting

periods. As the illustration will show, the costs from each period are treated separately.

Step 1: Analysis of Physical Flow of Units The physical flow of units is unaffected by the

process-costing method used. Therefore, step 1 is identical under the weighted-average

and FIFO methods. See Exhibit 4–5 in the text.

Step 2: Calculation of Equivalent Units A table of equivalent units, under FIFO process

costing, is presented in Exhibit 4–A.* It is identical to the table prepared under the

weighted-average method except for one important difference. Under the FIFO

method, the equivalent units of direct material and conversion represented by the

March 1 work-in-process inventory are subtracted in the last row of the table. By sub-

tracting the equivalent units in the beginning work in process, we are able to determine

the new equivalent units of activity accomplished in March only. The 20,000 physical

units in the March 1 work in process have all of their materials, so they represent

20,000 equivalent units of direct material. However, these units are only 10 percent

complete with respect to conversion, so they represent only 2,000 equivalent units of

conversion activity (20,000 physical units ⫻10% complete).

Step 3: Computation of Unit Costs The calculation of unit costs is presented in Exhibit

4–B. The cost per equivalent unit for direct material is computed by dividing the direct-

material cost incurred during March only by the new equivalent units of direct material

added during March only. An analogous procedure is used for conversion costs. Note

that the costs for direct material and conversion assigned to the beginning inventory are

not added to the costs incurred during March for the purpose of calculating unit costs.

Step 4: Analysis of Total Costs To complete the process-costing procedure, we

determine the total cost to be transferred out of the Cutting Department's Work-in-

Process Inventory account and into the Stitching Department's Work-in-Process

Process Costing: The First-In, First-Out Method 1

*Numerically designated exhibits are in Chapter 4 of the text (e.g., Exhibit 4–4). Alphanumerically designated

exhibits are in this supplement (e.g., Exhibit 4–A).

Percentage

of Completion

with Equivalent Units

Physical Respect to Direct

Units Conversion Material Conversion

Work in process, March 1 . . . . . . . . . . . . . . . . . . . . . . 20,000 10%

Units started during March . . . . . . . . . . . . . . . . . . . . . 30,000

Total units to account for . . . . . . . . . . . . . . . . . . . . . . . 50,000

Units completed and transferred out during March . . . . 40,000 100% 40,000 40,000

Work in process, March 31 . . . . . . . . . . . . . . . . . . . . . 10,000 50% 10,000 5,000

Total units accounted for . . . . . . . . . . . . . . . . . . . . . . . 50,000

Total equivalent units . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 45,000

Less: equivalent units represented

in March 1 work in process . . . . . . . . . . . . . . . . . . . 20,000 2,000

New equivalent units accomplished in March only . . . . . 30,000 43,000

Exhibit 4–A

Step 2: Calculation of

Equivalent Units—Cutting

Department (FIFO method)