Process Costing – FIFO Method

Under the FIFO method of process costing, costs are transferred to next department and ultimately to finished goods in the order in which they entered the current department i.e. costs entering first are transferred first and hence the name FIFO–first-in-first-out.

Unlike the weighted average method, the FIFO method does not involve any averaging out of the total costs incurred during a period. It moves the cost of beginning work in process (including the costs incurred in current period) straight to cost of units transferred out and distributes the costs added during the period first to the cost of units transferred out and the rest to the cost of units in the ending work in process.

FIFO method involves following steps, majority of which are the same as in weighted average method:

Example

Let us use the same example as in the article on process costing under weighted average method.

Prepare a cost of production report for the packaging department of Company ABC for the month of December 2013 under FIFO method of process costing. Important information is reproduced here.

Solution

The first step is the preparation of quantity schedule.

As at 1 December20,000
Transferred in200,000
Units to be accounted for220,000
Transferred out from units from 1 December20,000
Units both started and completed during the current period160,000
Units transferred out180,000
As at 31 December40,000
Units accounted for220,000

Now, calculate the equivalent units:

Transferred-
in
Direct
Materials
Conversion
Costs
Units in beginning WIP (A)020,00020,000
% of completion of beginning WIP in previous period (B)0%100%40%
% of beginning WIP completed this period [C=100%-B]100%0%60%
Equivalent units in beginning WIP [D=A×C]--12,000
Units both started and completed in current period (E)160,000160,000160,000
Units of ending WIP (F)40,00040,00040,000
Percentage of completion of ending WIP (G)100%80%50%
Equivalent units in ending WIP (H=F×G)40,00032,00020,000
Total equivalent units (D+E+H)200,000192,000192,000

Next, find cost per equivalent unit.

Transferred-
in
Direct
Materials
Conversion
Costs
Total
Costs (I)$555,000$22,000$20,000$597,000
Total equivalent units (J)200,000192,000192,000
Cost per equivalent unit (I/J)$2.775$0.1146$0.1042$2.993

We need to find the cost of units transferred out. Since we are using FIFO method, we first include the entire beginning WIP in the cost of units transferred out and then include units started/added during the period.

Cost of beginning WIP brought forward from last period (K)$60,000
Transferred-in costs [(100%-100%)*20,000*2.775] (L)$-
Direct materials [(100%-100%)*20,000*0.1146] (M)$-
Conversion costs [(100%-40%)*20,000*0.1042] (N)$1,250
Cost incurred on beginning WIP in current period (O=L+M+N)$1,250
Beginning WIP (P=K+O)$61,250
Cost of units started and completed in current period (2.993*160,000) (Q)$479,000
Cost of units transferred out (P+Q)$540,250

Cost of units in ending work in process comes from units added during the period:

Transferred-
in
Direct
Materials
Conversion
Costs
Total
Units as at 31 December (R)40,00040,00040,00040,000
Cost per equivalent unit (S)$2.775$0.1146$0.1042$2.993
Percentage of completion (T)100%80%50%
Total cost (R×S×T)$111,000$3,667$2,083$116,750

It can also be calculated using the short-cut formula given below

Cost of ending WIP =
Cost of Beginning WIP + Costs Transferred-in + Costs Added in Current Department − Costs Transferred-out

Value of ending WIP based on this formula is:

Cost of ending WIP = $60,000 + $555,0000 + $42,000 − $540, 250 = 116,750

We can summarize the cost movement using the cost schedule given below:

Cost to be accounted forAccounted for as
Beginning WIP60000Transferred out540,250
Cost transferred in555000Closing WIP116,750
Cost added
Materials22000
Conversion20000
42000
Total657000Total657,000

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork