3.

5 Process Costing (FIFO Method)

Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method. 
Under the FIFO method, we assume any units that were not completed last period (beginning work in process) are finished
before anything else is started.  The following table shows the differences between the weighted average method and the
FIFO cost method:

Weighted Average FIFO

Total units finished from beginning work in

Units Completed and transferred process
Total units completed this period
out:
+ Units started and completed this period

Units from Beg. Work in Process

Units completed this period completed
Equivalent Units based on:
+ Units in Ending Work in Process + Units started and completed
+ Units in Ending Work in Process

Beg. Work in Process Costs

Cost per Equivalent Unit based on: Costs added this period only
+ Costs added this period

Beg. Work in Process Costs + Equivalent

Equivalent Units x Cost per
Units x cost per equivalent unit for units
Equivalent Units for Units
Assign costs using: finished from Beg. Work In Process, Units
completed and units in ending
started and completed and units in End. Work
Work in Process
In Process

We will look at each item individually as we discuss the steps of process costing.  Under either method, weighted average
or FIFO, process costing consists of 5 steps:
1. Physical Flow of Units
2. Equivalent Units
3. Cost per Equivalent Unit
4. Assign Costs to Units Completed and Ending Work in Process Inventory
5. Reconcile Costs

Physical Flow of Units

The physical flow of units is as follows under the weighted average method:
Units in Beg. WIP Units Completed and Transferred
+ Units Started this period + Units in End. WIP
= Total Units = Total Units

This is altered just slightly under the FIFO method as we must separate the items in units completed into Units Completed
from beginning work in process and Units started and completed this period since under FIFO, we must finish anything from

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beginning work in process before we start something new.  Under the FIFO, we the physical flow of units would be
documented as:
Units in Beg. WIP Units Completed and Transferred:
+ Units Started this period Beg. Work in Process Units Completed
= Total Units + Units started and Completed this period
= Units completed and transferred
+ Units in End. WIP
= Total Units

Equivalent Units of Production

Under the FIFO method, we will calculate equivalent units for 3 things:  Units completed from beginning work in process, units
started and completed this period and units remaining in ending work in process.  This video will discuss the differences between the
Weighted Average and FIFO methods for equivalent units (if you are comfortable with the weighted average method, skip to minute
4:06 to begin the discussion on the FIFO method).
Equivalent units for the period will be calculated as follows under FIFO (keep in mind, you may have different percent
complete for materials, labor and overhead):
Units from beginning work in process:  you want to complete this units, so how much MORE effort will be needed to finish
these units.  You will calculate this as beginning work in process units x (100% – given % complete) to calculate the
amount of additional work necessary to make the unit 100% complete.
Units started and completed this period:  take the units x 100% complete since they were started and completed they have
received all of their materials, labor and overhead and will not receive any more since they are finished.
Units in Ending work in process:  just like with the weighted average method, we will take the ending work in process units x a
given % complete.

To illustrate the computation of equivalent units under the FIFO method, assume the following facts (for simplicity we are using just one
percent complete for materials, labor and overhead):
Beginning work in process inventory 3,000 units, 40% complete
Units started this period 10,000 units
Ending work in process inventory 5,000 units, 20% complete

The physical flow of units would be (calculate units started and completed as units started 10,000 – units in ending work in process
5,000):
Units in Beg. WIP 3,000 Units Completed and Transferred:
Units Started this period 10,000 Units from Beg. WIP 3,000
Total Units 13,000 Units started and completed 5,000 (10,000 – 5,000)
Total Units completed and txfr 8,000
Units in End. WIP 5,000
Total Units 13,000

The equivalent production for the period would be:

Units from beginning WIP [3,000 units x (100% – 40% complete)] 1,800
Units started and completed 5,000 units x 100% complete     5,000
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 Units in ending WIP 5,000 units x 20% complete 1,000
Total Equivalent Units 7,800

Cost per Equivalent Unit

Under the weighted average method, we use beginning work in process costs AND costs added this period.  Under the
FIFO method, we will only use the costs added this period.  This video will explain the differences between the two
approaches.
The formula we will use for calculating cost per equivalent unit under the FIFO Method is:
Current Costs added this period
÷ Total Equivalent Units
= Cost per Equivalent Units

Assign Costs
When we assign costs to units completed and transferred and units remaining in ending work in process under the FIFO
method, we need the following items:
Costs from beginning work in process:  these were the costs we started the period with or the unfinished items from the
previous period (no calculation required — just bring over the costs from beginning work in process ).  Remember,
under FIFO, these are finished first so their costs must be passed along to completed units.
 Costs to complete beginning work in process:  you will take the Equivalent units calculated for completing beginning
work in process x the cost per equivalent unit.  You will do this for materials, labor and overhead (or for conversion
costs which is the both direct labor and overhead).
Costs of units started and completed:  you will take the equivalent units calculated for units started and completed x the
cost per equivalent unit for materials, labor and overhead (or conversion).
The sum of these 3 will be the cost of units completed and transferred which is also known as cost of goods
manufactured.  This amount is transferred to the next department or to finished goods and out of work in process for the
units completed this period.
Cost of units remaining in ending work in process:  you will take the ending work in process equivalent units x the cost
per equivalent unit for materials, labor and overhead (or conversion) just as we did under the weighed average method. 
This amount rolls over to be the next period’s beginning work in process inventory.

Reconcile Costs
Finally, something is the same under FIFO and Weighted Average.
We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this
period to units completed and transferred and ending work in process inventory.

First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process
costs to the costs incurred or added this period.  Then, we compare the total to the cost assignment in step 4 for units
completed and transferred and ending work in process to get total units accounted for.  Both totals should agree.
The cost reconciliation would be:
Beg. Work in Process Cost
+ Costs added this period
= Total costs to account for

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 Cost assigned to units completed and transferred
+ Cost assigned to ending work in process inventory
= Total costs accounted for
3.6 Process Cost Demonstration (FIFO Method)

To illustrate more completely the operation of the FIFO process cost method, we use an example of the month of June production
costs for a company’s Department B. Department B adds materials only at the beginning of processing.  The May 31 inventory in
Department B (June’s beginning work in process) consists of 2,000 units that are fully complete as to materials and 60% complete as to
conversion. Beginning work in process inventory has accumulated costs of $6,180.
The following costs were added in June: Direct materials issued $ 1,300;  direct labor $ 7,200; and  manufacturing overhead
applied $ 6,000.  The units for the period were:
Beginning work in process inventory 2,000 units
Units started this period 10,000 units
Ending work in process inventory 3,000 units
Ending work in process inventory was 1/3 complete as to conversion costs.

Step 1:  Physical Flow of Units

For the physical flow of units, we calculate units started AND completed this period as Units started 10,000 – units remaining in ending
work in process 3,000 = 7,000 units.
Units in Beg. WIP 2,000 Units Completed and Transferred:
Units Started this period 10,000 Units from Beg. WIP 2,000
Total Units 12,000 Units started and completed 7,000 (10,000 – 3,000)
Total Units completed and txfr 9,000
Units in End. WIP 3,000
Total Units 12,000

Step 2: Equivalent Units of Production

We are concerned with the right side of our physical flow of units.  We must first FINISH beginning work in process, add units started
and completed and units remaining in ending work in process.  Beginning work in process is fully complete for materials (or 100%
complete) and 60% complete for conversion so to complete these units we will need NO (or 0%) materials and 40% of conversion
(100% – 60%). Units started and completed are always 100% complete for materials, labor and overhead! Ending work in process is
1/3 complete for conversion costs, but what about materials?  The problem information reads “Department B adds materials only at the
beginning of processing”  which means we receive all (or 100%) of the materials at the beginning of the process and ending work in
process will be fully complete for materials.
Materials Conversion Costs
Units from beginning WIP 0 800
[ 2,000 units x (100% – 100% complete)] [ 2,000 units x (100% – 60% complete)]
Units started and completed 7,000 7,000
(7,000 units x 100% complete)
Units in ending WIP 3,000 1,000
(3,000 units x 100% complete) (3,000 units x 1/3 complete)   

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 Total Equivalent Units 10,000 8,800

Step 3:  Cost per Equivalent Units

Under FIFO, we are only interested in the current period costs which is June for this example.  Conversion costs are direct labor $7,200
+ overhead $6,000.
Materials   Conversion Costs  
Current Costs added this period $   1,300 $   13,200
÷ Total Equivalent Units     10,000         8,800 (7,200 + 6,000)
= Cost per Equivalent Unit $     0.13 $      1.50

Step 4:  Assign Costs to Units Completed and Ending Work in Process Inventory
Under FIFO, remember to bring over the costs of beginning work in process first, then multiply the individual equivalent units calculated
in step 2 (not the total equivalent units) by the cost per equivalent unit from step 3.

Cost assigned to units completed and transferred out: $ 6,180

Cost of beginning work in process inventory
Cost to complete beginning work in process inventory
Materials (0 equivalent units) $ 0
Conversion   (800 equiv units x $1.50) $ 1,200 $ 1,200
Cost of units started and completed
Materials (7,000 equiv units x $0.13) $ 910
Conversion   (7,000 equiv units x $1.50) $ 10,500 $ 11,410
Total cost of units completed and transferred $ 18,790

Step 5:  Reconcile Costs

Here is our chance to check our work.  Total costs to account for should always equal what was assigned in total costs accounted for.
Cost of beginning work in process $ 6,180
Costs added in June $ 14,500 (1,300 DM + 7,200 DL + 6,000 OH)
Total costs to account for $ 20,680

Costs assigned to units completed $ 18,790 (from step 4 above)

Costs assigned to ending work in process $ 1,890 (from step 4 above)
Total costs accounted for $ 20,680

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3.2 Equivalent Units (Weighted Average)
Essentially, the concept of equivalent units involves expressing a given number of partially completed units as a smaller number of
fully completed units.   We do this because it is easier to account for whole units then parts of a unit.  We are adding together partially
completed units to make a whole unit.  For example, if we have 3 units 1/3 of the way complete, we can add them together to make 1
equivalent unit (1/3 + 1/3 + 1/3).  We can make this calculation easier by multiplying the units by a percentage of complete.
For example, if we bring 1,000 units to a 40 % state of completion, this is equivalent to 400 units (1,000 x 40%) that are
100%  complete. Accountants base this concept on the supposition that a company must incur approximately the same amount of
costs to bring 1,000 units to a 40% level of completion as it would to complete 400 units.
Here is a diagram of the concept of equivalent units. As you examine the diagram, think of the amount of water in the glasses as
costs that the company has already incurred.

Units in Beg. Work in Process Units Completed and Transferred

+ Units Started this period + Units in End. Work in Process
= Total Units = Total Units

The total units in each column must agree with one another.  This formula explains how many units we had to work with (including
units in beginning work in process + units started this period) and what happened to those units (units completed or units remain in
work in process inventory since there are not complete).

Under the weighted average method, equivalent units are calculated based on 2 things:  units completed and transferred out and units
in ending work in process inventory.
Units completed and transferred are finished units and will always be 100% complete for equivalent unit calculations for direct
materials, direct labor and overhead.  For units in ending work in process, we would take the units unfinished x a percent complete. 
The percent complete can be different for direct materials, direct labor or overhead.

Example – Jax Company

Assume that Jax Company manufactures and sells a chemical product used to clean kitchen counters and sinks. The company
processes the product in two departments. Department A crushes powders and blends the basic materials. Department B packages the
product and transfers it to finished goods.  We will look at equivalent units for Department B.  The June production data for Department
B is:
Department B
Beginning work in process -0-
Units started this period 11,000
Units completed and transferred 9,000
Ending work in process units 2,000
Direct materials $ 1,100
Direct labor $ 2,880
Applied overhead $ 8,880

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The physical flow of units shows:
Units in Beg. WIP -0- Units Completed and Transferred 9,000
Units Started this period 11,000 Units in End. WIP 2,000
Total Units 11,000 Total Units 11,000

The beginning step in computing Department B’s equivalent units for Jax Company is determining the stage of completion of the
2,000 unfinished units (remember units completed and transferred are always 100% complete).  In Department B, the ending units may
be in different stages of completion regarding the materials, labor, and overhead costs. Assume that Department B adds all materials at
the beginning of the production process. Then ending inventory would be 100% complete as to materials since we received all
materials at the beginning of the process.
Accountants often assume that units are at the same stage of completion for both labor and overhead. Accountants call the
combined labor and overhead costs conversion costs. Conversion costs are those costs incurred to convert raw materials into the final
product (meaning, direct labor and overhead).
Let us assume that, on average, the 2,000 units in ending inventory are 40% complete as to conversion costs. This means that
Department B transferred out 9,000 units fully completed and brought 2,000 units to a 40% completion state. Department B now has an
equivalent of 800 fully completed units remaining in inventory (800 = 2,000 X 40 per cent).
The equivalent units for materials, labor and overhead would be calculated as:
Materials Conversion Costs
Units Completed and Transferred
9,000 9,000
(9,000 x 100% complete)
Units in Ending WIP
Materials   (2,000 x 100% complete) 2,000
Conversion Cost (2,000 x 40% complete) 800
Total Equivalent Units 11,000 9,800

Total equivalent units for each cost element (materials, conversion cost) is calculated as:
Equivalent units = Units completed + (Units in ending inventory X percent complete)

The key to equivalent units is determining the percent complete, especially for materials can be confusing.  Common terms you will see
when determine ending work in process percent complete:
Description % Complete
Materials added at the beginning of the process 100% complete for materials
Materials added evenly through out the process Use % complete for ending WIP
Materials added at the end of the process 0% complete for materials

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3.3 Process Costing (Weighted Average)
In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step
2) under the weighted average method.  We will continue the discussion under the weighted average method and calculate a cost per
equivalent unit.

Step 3: Cost per Equivalent Unit

The formula we will use is notice we are primarily using the dollar costs and not units for this section (except we will use TOTAL
equivalent units we calculated in the previous section):
Beg. Work in Process Costs
+ Costs added this period
= Total Costs
÷ Total Equivalent Units
= Cost per Equivalent Units
We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead).

Example – Jax Company

To continue with our previous example, we were given the following information:
The June production and cost data for Jax Company are:
Department B
Beginning work in process -0-
Units started this period 11,000
Units completed and transferred 9,000
Ending work in process units 2,000
Direct materials cost $ 1,100
Direct labor cost $ 2,880
Applied overhead cost $ 8,880
We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion.

To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and
divide by the total equivalent units.
Materials Conversion
Beg. Work in Process Costs -0- -0-
+ Costs added this period $   1,100 $   11,760
(Conv. Cost = DL $2,880 + OH $8,880)
= Total Costs $   1,100 $   11,760
÷ Total Equivalent Units 11,000 9,800
= Cost per Equivalent Units $  0.10 $    1.20
In this example, beginning work in process is zero.  This will not always be the case.  The problem will provide the information
related to beginning work in process inventory costs and units.

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Step 4:  Assign Costs
In this next section, we will combine the equivalent units (from step 2) and the cost per equivalent units (step 3) to assign costs to units
completed and transferred out (also called cost of goods manufactured) and costs of units remaining ending work in process inventory. 
The basic formula to assign costs is:
Equivalent Units per cost element x cost per equivalent unit for cost element
(direct materials, conversion) (direct materials, conversion)

Using the example company, Jax Company, we have the following information:
Materials Conversion Costs
Units Completed and Transferred 9,000 9,000
Units in Ending WIP 2,000 800
Total Equivalent Units 11,000 9,800

Cost per Equivalent Units $       0.10 $       1.20

We would assign costs as follows:

Cost assigned to units completed and transferred
Direct Materials (9,000 equiv units  x $0.10)  $ 900
Conversion (9,000 equiv units x $1.20) 10,800
Total cost assigned to units completed $ 11,700
Cost assigned to ending work in process
Direct Materials (2,000 equiv units x $0.10) $ 200
Conversion (800 equiv units x $1.20) 960
Total cost assigned to ending work in process inventory $ 1,160
For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit.  We do
the same of ending work in process but using the equivalent units for ending work in process.

Step 5:  Cost Reconciliation

Finally, we can check our work.  We want to make sure that we have assigned all the costs from beginning work in process and
costs incurred or added this period to units completed and transferred and ending work in process inventory.
First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the
costs incurred or added this period.  Then, we compare the total to the cost assignment in step 4 for units completed and transferred
and ending work in process to get total units accounted for.  Both totals should agree.
For Jax Company, the cost reconciliation would be:
Beg. Work in Process Cost -0-
+ Costs added this period $ 12,860
($1,100 DM + $2,880 DL + $8,880 OH) 
= Total costs to account for $ 12,860

Cost assigned to units completed and transferred (from step 4 above) $ 11,700
+ Cost assigned to ending work in process inventory (from step 4 above) 1,160
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= Total costs accounted for $ 12,860

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