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Fifo Method of Process Costing

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Process Costing: The First-In, First-Out Method

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FIFO Method of Process Costing
In this supplement to Managerial Accounting we will illustrate the first-in, first-out (FIFO) method of process costing using the data for MVP Sports Equipment Company, which was given in Exhibit 4–4 in Chapter 4 of the text. Unlike the weighted-average method, the FIFO method does not commingle costs from two or more accounting periods. As the illustration will show, the costs from each period are treated separately.
Step 1: Analysis of Physical Flow of Units

The physical flow of units is unaffected by the process-costing method used. Therefore, step 1 is identical under the weighted-average and FIFO methods. See Exhibit 4–5 in the text.

Step 2: Calculation of Equivalent Units A table of equivalent units, under FIFO process costing, is presented in Exhibit 4–A.* It is identical to the table prepared under the weighted-average method except for one important difference. Under the FIFO method, the equivalent units of direct material and conversion represented by the March 1 work-in-process inventory are subtracted in the last row of the table. By subtracting the equivalent units in the beginning work in process, we are able to determine the new equivalent units of activity accomplished in March only. The 20,000 physical units in the March 1 work in process have all of their materials, so they represent 20,000 equivalent units of direct material. However, these units are only 10 percent complete with respect to conversion, so they represent only 2,000 equivalent units of conversion activity (20,000 physical units 10% complete). Step 3: Computation of Unit Costs The calculation of unit costs is presented in Exhibit 4–B. The cost per equivalent unit for direct material is computed by dividing the directmaterial cost incurred during March only by the new equivalent units of...

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