Chapter 5

Process Costing: Average & FIFO Costing

Discussion Questions

1) The primary difference between the FIFO and average method of process costing lies in the treatment of the cost of the beginning work in process inventory. In the FIFO method, the cost of beginning work in process inventory is kept separate from the cost of production of the current period. Whereas in FIFO method, each department is regarded as a separate accounting unit. Thus the application of the FIFO method in practice is modified to the extent that subsequent departments usually combine all transferred costs into one amount, even though they could identify and separately account for the costs relating to the preceding department’s beginning inventory and those relating to the preceding

department’s units started and completed during the period.

2) Units completed and on hand in a department must be considered as work in process of that department, because as far as total company inventory is concerned, the units have not been transferred out of the department and, therefore, are still work in process. They are still the responsibility of supervisor of that department.

3) When FIFO costing is used, equivalent production figures are determined by totaling the number of beginning work in process unites restated in terms of units completed during the current period, units started and finished during the period and ending units in process restated in terms of units completed during the current period.

4) Material Conversion

Units Units

Transferred out 105,000 105,000

Ending inventory -0- 16,000

Equivalent units of production 105,000 121,000

5) Material Conversion

Units Units

Transferred out 40,000 40,000

Less: opening inventory 10,000 10,000

Started and finished in current period 30,000 30,000

Add: opening Inventory current period -0- 2,000

Add: Ending Inventory current period 8,000 4,800

Equivalent units of production 38,000 36,800

6) The disadvantage of using FIFO is method is process costing are those associated with this type of costing in general and concern the fact that several unit costs used at the same time require additional computations which can lead to involved procedures and often inaccurate calculations.

7) Basic difficulties encountered in the process costing include: (a) the determination of the production quantities and their stages of completion (b) materials cost computations frequently requiring considerable analysis (c) the calculation of lost units

cost because units are lost due to many factors and at all stages of production.

8) Cost computed in a cost of production report are useful in determining inventory costs and in computing the cost of goods sold. However, for cost control purposes, much more information is required than is reported in the cost of production reports. Unit costs should be compared with standard unit costs or previous data to determine whether they represent efficient operations.

Exercises

E-1

Average costing

Dep#1

Material = 2160 + (300×100/100)

= 2160 + 300

= 2460 units

Conversion cost = 2160 + (300×60/100)

=2160 + 180

= 2340 units

Dep#2

Material = 2000 + (240×100/100)

= 2240 units

Conversion cost = 2000 + (240×80/100)

=2192 units

Note:

E-P = units transfer + (ending units in process × S.O.C)

(avg)

E-1

Fifo Costing

Dep#1

Material = 2100 -- 200 + (200×0/100) + (300×100/100)

= 2260 units

Conversion cost = 2160 -- 200 + (200 ×75/100) + (300×60/100)

=2290 units.

Dep#2

Material = 2000 -- 80 + (80×0/100) + (240×100/100)

= 2160 units

Conversion cost = 2000 -- 80 + (80×40/100) + (240×80/100)

= 2144 units

Note:

E-P = units transferred -- units in beginning WIP + (units beg wip × 1-- s.o.c) + (units in end WIP × S.O.C)

E-2

Average costing

(a)

Material = 12000 + (4800×1/2)

= 14400 units

Labour and

F-O-H = 12000 + (4800×1/4)

=13200 units

(b)

Material = 7500 + 700 + (1000×100/100)

=9200 units

Lab & FOH = 7500 + 700 + (1000×4/10)

= 8600 units

Note:

Units in hand should be added in E-P

(c)

Material = 20,000 + (2500×100/100)

= 22500 units

Lab & FOH = 20000 + (2500×1/2)

= 21250 units

E-2

Fifo Costing

(a)

Material = 12000 -- 6600 + (6600×3/3) + (4800×1/2)

=12200 units

Lab & FOH = 12000 -- 6600 + (6600×2/3) + (4800×1/4)

= 11,000 units

(b)

Material = 7500 -- (0) + 700 + (1000×100/100)

=9200 units

Lab & FOH = 7500 -- (0) + 700 + (1000+4/10)

=8600 units

Note:

Normal loss should not be added in E-P

(c)

Material = 20000 -- 2000 + (2000×1/2) + (2500×100/100)

= 21500 units

Lab & FOH = 20000 -- 2000 + (2000×4/5) + (2500×1/2)

= 20,850 units

E-3

Average Costing

(a)

Material = 12000 + 1500 + (6200×1/8)

= 14275 units

Conversion cost = 12000 + 1500 + (6200×1/4)

= 15050 units

Note:

Units lost at end should be added in E-P

(c)

Note:

Quantity schedule have to be prepare for units transfer

Units in beg WIP 4500

+ Units started 12500

17000

Units in process (2100+1700) 3800

Units lost during process 1100

Units transferred 12100 17000

E-3

(C)

Avg costing (cont)

Material = 12100 + (2100+1700 × 1/2)

Conversion

= 12100 + (2100 + 1700 × 1/4)

= 13225 units

E-3

Fifo Costing

(a)

Material = 12000 -- (0) + (0) + (6000 × 100/100)

= 18000 units

Conversion

= 12000 -- (0) + (0) + (6000×1/2)

=15000 units

E-3

(b)

Fifo costing (cont)

Material = 12000 -- 11000 + (11000×3/4) + (6200×1/8) + 1500

= 11525 units

Conversion = 12000 -- 11000 + (11000×7/8) + (6200×1/4) + 1500

= 13675 units

(c)

Material = 12100 -- 4500 + (4500×0/100) + (2100×100/1000+1700×1/4)

= 12100 units

E-4

Quantity Schedule

Dep#A

Units in process Beginning 8000

+Units started 50000

58000

Units Transferred 46500

Units still in process 9000

Units lost (5000×5/100) 2500 58000

Dep#B

Units in process beginning 10000

Units received 46500

Additional units started 44500

101,000

Units transferred 89000

Units still in process 12000 101000

E-4

Equivalent Production

Dep#A

Material = 46500 -- 8000 + 0 + 9000

= 475000 units

Conversion = 46500 -- 8000 + 2000 + 3000

= 43500 units

Dep#B

Material = 89000 -- 10000 + 7000 + 2400

= 89000 units

Conversion = 89000 -- 10000 + 7000 + 2400

=88400 units

E-5

Equivalent Production

(1)

Conversion = 37000 + (3000×40/100)

= 38200 units

Units cost

Conversion = 18400/38200

= $ 0.48

(2)

T.C of end Inv. Attributable to transferred in:

20400/40000

= 0.51 /- units

3000 × 0.51

= $ 1530

E-6

(1)

Monk Co.

Cost of production report (Avg)

For the month of Jan:

Quantity Schedule

Units in process beginning 25000

Units started 135,000

160,000

Units transferred 100,000

Units in process end 60,000 160,000

Cost charged to department

TC UC

$ $

Cost added by dep. W-I-P beginning

Conversion cost 22000 _

Cost added during period

Conversion cost 143000 1.269

165,000 1.269

Cost accounted for as follows $

Cost of units transferred

(100,000 × 1.269) 126,900

Cost of W-I-P ending

Conversion cost

(60000 × 50/100 × 1.269) 38100

165000

Additional calculation

Equivalent production

Conversion cost = 100,000 + (60000 × 50/100)

= 130,000 units

Unit cost

Conversion cost = (143,000 + 22000)/130,000

= $ 1.269 /- units

E-6

(2)

Monk co.

Cost of production report

Cutting department

For the month of Jan

Quantity schedule:

Units in process beginning 25000

Units started 135,000

160,000

Units transferred 100,000

Units in process end 60,000 160,000

Cost charged to department

$ $

W-I-P beginning (inventory cost) 22,000 _

Cost added by dep

Conversion cost 143,000 1.3

165000 1.3

Cost accounted for as follows $

Cost of units transferred from beginning inventory

Inventory cost 22000

Conversion cost

(25000×20/100×1.3) 6500 28500

From current production

Units started and finished

(100,000 -- 25000) × 1.3 97500

126,000

Cost of W-I-P ending

Conversion cost

(60000×50/100 1.3) 39000

165000

Additional calculation

Equivalent production

Conversion cost

= 100,000 -- 25000 + (25000×20/100) + (6000×50/100)

= 75000 + 5000 +30000

= 110,000 units

Unit cost

Conversion cost

=143000/110,000

= $ 1.3 / units

E-7

Escot Corporation

Coast of production report

(Average method)

Assembling department

For the month of June

Quantity schedule

Units in process beginning 2,000

Units received 10,000

12,000

Units transferred 8000

Units still in process 4000 12000

Cost charged to department

$ $

Cost for proceeding dep

W-I-P beginning (2000) 32,000 16

Units received (10000) 160,000 16

(12000) 192000 16

Cost added by this dep W-I-P beginning

Material 20,000

Labour 1,200

FOH 5,500

Cost added during period

Material 96000 10

Labor 36000 4

FOH 18000 2.5

374700 32.5

Cost accounted for as follows

$

Cost of units transferred 260,000

(8000×32.5)

Coat of W-I-P ending

From previous dep

(4000×16) 64000

From this dep

Material = (4000×90/100×10) 36000

Labour = (4000×70/100×4) 11200

FOH = (4000×35/100×2.5) 3.500

374700

Additional calculation

Equivalent Units

Material = 8000 + (4000×90/100) = 11600

Labour = 8000 + (4000×70/100) = 10800

FOH = 8000 + (4000×35/100) = 9400

Unit cost

Material = (20000 + 96000)/11600 = $ 10

Labour = (7200 + 36000)/10800 = $ 4

FOH = (5500 + 18000)/9400 = $ 2.5

E-8

Greek Corp.

Cost of production report

For the month of November

Quantity schedule

Units in process beginning 4000

Units started 16000

20000

Units transferred 15000

Units still in process 3000

Units lost 2000 2000

Cost charged to department

TC UC

$ $

Cost added by dept W-I-P beginning Inv.

Material 22800 _

Labour 24650 _

FOH 21860 _

Cost added during period

Material (10000 + 51000 + 51500) 112500 7.52

Labour 103350 8

FOH 93340 7.2

378500 22.72

Cost accounted for as follows $

Cost for units transferred

(15000×22.72) 340800

Cost for W-I-P ending

Material (3000×100/100×7.52) 22500

Labour (3000×33.3333/100×8) 8000

FOH (3000×33.3333/100×7.2) 7200

378500

Additional calculation

Equivalent production

Material = 15000 + (3000×100/100)

= 18000 units

Labour & FOH = 15000 + (3000 ×33.3333/100)

= 16000 units

Unit cost

Material = (22800 + 112500)/18000

= $ 7.52 /- units

Labour = (24650 + 103350)/16000

= $ 8 /- units

FOH = (21860 + 93340)/16000

= $ 7.2 /- units

E-9

Carmel Corp.

Cost of production report

(Average method)

Department # 2

For the month of August

Quantity schedule

Units in beginning W-I-P 1200

Units received 8000

9200

Units transferred 7800

Units in ending W-I-P 1000

Units lost 400 9200

Cost charged to department TC UC

$ $

Cost from proceeding department

W-I-P beginning (1200) 12000 10

Units received (8000) 89200 11.15

9200 101200 11

Adj unit cost from proceeding dept

(101200/8800) 11.5

Cost added by this dep W-I-P beginning

Conversion cost 6000 _

Cost added during period

Conversion cost 60400 8

167600 19.5

Cost accounted for as follows $

Cost of units transferred

(7800×19.5) 152100

W-I-P ending

Adj cost from prev dep

(1000×11.5) 11500

From this Department

Conversion cost

(1000×1/2×8) 4000

167600

Additional calculation

Equivalent production

Conversion = 7800 + (1000×1/2)

= 8300 units

Unit cost

Conversion = (6000 + 60400) / 8300

= $ 8 /- units

E-10

Working

Quantity scheduled

Units in beginning WIP 2500

Units started 4000

6500

Units transferred 5500

Units in process end 1000 6500

Equivalent production (overall)

= 5500 _ 2500 + (2500×20/100) + (1000×50/100)

= 5500 _ 2500 + 500 + 500

= 4000 units

Unit cost (overall)

= 66000/4000

= $ 16.50 /- units

(1) Cost of ending WIP (Units × S.O.S × Unit cost)

(1000 × 50/100 × 16.50) = $ 8250

(2) Cost of ending finished goods (Units × Unit cost) = 1400 × 16.50 = $ 23,100

(3)

Working(1) No of units sold

Finished goods beg units 1200+ Units completed 5500 6700_ Finished goods end units 1400 No of units sold 5300

(2) Cost transferred to finished goods: From beginning Inv. $Inventory cost 32000+ Cost added (2500×20/100×16.50) 8250

40250

Unit cost transferred from beginning Inv.

= 40250/2500

= $ 16.10

Cost of goods sold

$ Units

Beginning finished goods

(1200×16) 19200 1200

+ WIP beginning completed

(2500×16.1) 40250 2500

+ Units from current production

(1600×16.50) 26400 1600

85850 5300

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