Processing Costing FIFO Method

Process costing has separated into a few methods such as FIFO, Weight Average. So what are the differences between the two of them? The basic concept of process costing is we assume all products consume similar overhead which we need to share the same overhead cost to all of them. What if there are some products are still in progress at the month end? They also consume some overhead too, so it comes to these two methods above which we can use to allocate the manufacturing overhead.

The materials need to move from one process to another and end up as the finished product. The costs of WIP also need to move along the material as well. In this concept, the costs that entering first will be transferred out first too. FIFO method assumes the working in progress from the previous month will be completed first and then the new products will be finished later. Like the words said, “First In, First Out”.

Formula

Equivalent unit = Unit complete during period + WIP at the end

Example

Company A is a manufacturer that uses a processing cost FIFO method for the packaging department. During January 2020, we have the following information:  (we use the same example with the Weight Average method).

  • 01 January, 5,000 units of working in progress which consist of $ 5,000 direct material and $ 7,000 conversion cost. These 300 units has completed around 50% of conversion and 100% of the material.
  • During the month, 20,000 units are transferred to the department. $ 20,000 is a direct material cost and $25,000 of conversion cost.
  • During the same month, the packaging department has completed 15,000 units and they are transferred to the next department.
  • 10,000 units are still in process at the end of the period. 100% of direct material already includes 80% of conversion cost.

Calculate the total cost

Direct material Conversion cost Total
Beginning $ 5,000 $ 7,000 $ 12,000
Addition $ 20,000 $ 25,000 $ 45,000
Total $ 25,000 $ 32,000 $ 57,000

Calculate the equivalent units

Direct material Conversion Cost
Beginning (5,000 units) 5,000 units 2,500 units (5,000*50%)
During the period 15,000 units 15,000 units
Ending WIP 10,000 units 10,000 units
% of completion 100% 80%
Ending Equivalent units 10,000 units 8,000 units
Total equivalent units 30,000 units 25,500 units

Calculate cost per equivalent units

Direct Material Conversion cost
Total cost $ 25,000 $ 32,000
Total equivalent units 30,000 units 25,500 units
Cost per EU $ 0.83 $ 2.06

Cost of ending working in progress

Ending WIP cost = (10,000 * $1) + (8,000 units * 1.4) = $ 24,780