Process Costing FIFO Method
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- Опубліковано 22 сер 2024
- In this video, I cover process costing FIFO method.
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Process costing is an accounting methodology used in manufacturing where the costs of producing products are allocated to processes or departments. It's most suitable for industries where the products are homogeneous and produced on a continuous basis, like in chemical manufacturing or food processing. The FIFO (First-In, First-Out) method is one approach within process costing, where it is assumed that the first units produced are the first ones to be completed and moved out of a process.
Process Costing with FIFO Method:
In FIFO process costing, costs are tracked for each process the product goes through. The key steps include:
Separate Costs into Cost Pools: Costs are divided into different pools for each process or department.
Assign Costs to Units: Direct materials, labor, and overhead costs are assigned to units as they pass through each process.
Calculate Equivalent Units: Since not all units may be completed by the end of a reporting period, it's necessary to calculate equivalent units of production (EUP). This represents a combination of fully completed units and partially completed units expressed in terms of fully completed units.
Account for Beginning Inventory: Under FIFO, the costs associated with the beginning inventory are kept separate from the costs of the units started and completed during the current period. This ensures that only the costs incurred during the current period are considered when calculating the cost per equivalent unit.
Compute the Cost per Equivalent Unit: The total costs for each process (excluding the cost of beginning inventory) are divided by the equivalent units of production for that process, resulting in the cost per equivalent unit for the current period.
Assign Costs to Completed Units and Ending Inventory: Costs are then assigned to units. For units in beginning inventory, only the costs needed to complete those units are added. For new units started and completed within the period, the full cost per equivalent unit is applied.
Beginning Inventory: 100 units (50% complete), previous costs: $1,000 (we will not add more costs to these units under FIFO).
Units Started: 400 units.
Units Completed: 450 units (this includes the 100 units from beginning inventory and 350 of the units started this month).
Ending Inventory: 50 units (all started this month), 40% complete.
Costs Added During the Month: $8,000.
Steps and Calculations:
Step 1: Calculate Equivalent Units for Work Done This Month
Completed Units (from this month): 350 units.
Work on Ending Inventory: 50 units * 40% = 20 equivalent units.
Total Equivalent Units for the Month: 350 + 20 = 370 units.
Step 2: Compute the Cost per Equivalent Unit for Current Period Costs
Total Costs Added During the Month: $8,000.
Cost per Equivalent Unit: $8,000 / 370 = $21.62/unit.
Step 3: Assign Costs
Completed Units (Including Beginning Inventory):
Beginning Inventory: No additional costs are added under FIFO; they retain their previous cost of $1,000.
Units Completed from This Month: 350 units * $21.62/unit = $7,567.
Ending Inventory (Work in Progress):
50 units * 40% completion * $21.62/unit = $432.
Summary of Costs:
Beginning Inventory: Retains its previous cost of $1,000.
Costs for Units Completed This Month: $7,567.
Costs Allocated to Ending Inventory: $432.
Total Costs Accounted For: $1,000 (beginning inventory) + $7,567 (completed this month) + $432 (ending inventory) = $8,999.
This simplified example breaks down the costs associated with the units at different stages of completion using the FIFO method in process costing.
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Hi Farhat. I have one doubt in process costing. while we are calculating process costing under FIFO or weighted average, if transferred in cost also given. Then how to take transferred in cost like it is only for material or for both?