Process costing is an averaging method used to assign costs to output in manufacturing situations producing large quantities of homogeneous products. A process costing system may use either the weighted average or FIFO method to compute equivalent units of and assign costs to production.
The difference between the two methods lies solely in the treatment of the work performed in the prior period on the beginning work in process inventory.
Under the weighted average method, work performed in the prior period is combined with current period work and the total costs are averaged over all units.
Using the FIFO method, work performed in the last period on beginning work in process inventory is not commingled with current period work, nor are costs of beginning work in process added to current period costs to derive unit production cost.
With FIFO, current period costs are divided by current period production to generate a unit production cost related entirely to work actually performed in the current period.
Difference between FIFO and Average method in Process Costing
![Difference between FIFO and Average method in Process Costing]()
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