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Understanding Process Costing in Manufacturing: FIFO Method and Equivalent Units

This chapter focuses on process costing, essential for businesses producing large quantities of identical products. It explains the FIFO method, where costs are assigned based on the order of production. The concept of equivalent units of production (EUP) is introduced, helping to assess partially completed goods at the period's end. With practical examples, it illustrates how to calculate unit costs for materials and conversion, providing a comprehensive guide for understanding work-in-process accounts and efficient cost assignment throughout production stages.

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Understanding Process Costing in Manufacturing: FIFO Method and Equivalent Units

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  1. Process Cost System Chapter M2

  2. Process Cost • Used by business that produce large amounts of the same product • Work in process accounts exist for each process or department • Costs are transferred from work in process account to the next work in process as products are processed from one department to another

  3. First –In, First Out Method • Assume that the product moves in order throughout the production process • Determine units to be assigned costs • Units in beginning work in process • Units started and completed during period • Units in ending work in process

  4. FIFO Method • Calculate Equivalent Units of Production • Process manufacturers often have some partially processed materials remaining at the end of the period • EUP • Number of units that could have been completed within a given accounting period

  5. Example 1 • A company processes their production in two departments. Beg inventory was 500 units 70% completed, 1,100 units transferred out to the next department and ending inventory of 400 units 25% completed

  6. Example 1

  7. Example 2

  8. Example 3 • A company process their production in two departments. The beginning inventory was 4,000 units 50% completed, transferred into the department 5,000 units and an ending inventory of 2,000 units 40% completed.

  9. Example 3

  10. Determine cost per equivalent unit • Material cost = based on actual units transferred into the department • Conversion costs • Direct labor + Factory overhead • Based on EUP

  11. Example 4 • Using the information in Example 1 • Calculate the costs for the period • Materials transferred in $50,000 • Direct labor $6,690 • Factory overhead $3,000 • Beg WIP $28150

  12. Example 4 • Direct materials per actual unit • $50,000/1000 = $50 per unit • 1000 units = S&C + End Inv • Conversion costs = DL + FO • Conversion costs = 6690 + 3000 = 9690 • CC per EUP = 9690/850 = $11.40

  13. Example 4

  14. Example 5 • Example 2 • Materials transferred in $30,600 • Direct labor 19800 • Factory overhead 9240 • Beg WIP $35,000

  15. Example 5

  16. Example 6

  17. Questions • What is the total cost of units completed this period? • How many actual units are in ending inventory this period? • How many actual units are in next month’s beginning inventory?

  18. Questions • What is conversion costs per unit? • What is the amount of work done on this month’s beginning inventory? • What is the amount of work to be done next month on beginning inventory?

  19. Homework • Ex 2-6, ex2-7, ex 2-8, ex2-9

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