Procedures of Process Costing under FIFO (First-In First-Out) Method

Process Costing under FIFO (First-In First-Out Costing). The preceding discussion describes the average costing method of accounting for opening work in process inventory costs in a process cost system. It is also possible to keep opening work in process costs separate rather than average them in with the additional new costs incurred in the next period. This procedure gives separate unit costs (1) for opening work in process units completed and (2) for units started and finished in the same period.

Some accountants believe the opening work in process cost should be kept intact, adding only that portion of additional costs required to complete units in the opening work in process. Under the first-in, first-out costing method, the cost of completing units in process at the beginning of the period is computed first, followed by the computation of the cost of units started and finished within the period. Use of this procedure leads to at least two different unit costs for work completed within a specific period. The averaging process produces only one completed unit cost. In order to permit the comparison of the two costing procedures, figures in the cost of production reports illustrated previously are used to explain the details of the FIFO method. The illustrations indicate that the two methods of costing do not result in significantly different unit costs; for, in general, manufacturing operations in process cost type industries are more or less uniform from period to period. Each firm will select that costing method which can be applied easily and conveniently and which, at the same time, offers reliable figures for management's guidance. Mixing Department. The cost of production report of the Mixing Department for the month of February, uses the FIFO method and should be compared with the cost of production report illustrates the average costing method. Four thousand units are in process at the beginning of operations which are 100 percent complete as to materials and 50 percent complete as to labor and factory overhead.

The cost report form remains the same, but the following differences exist in the methods of computing unit costs and of determining costs to be transferred

1. Opening work in process cost of $4,440 is kept separate and is not broken down into its component parts as in average costing.

2. The degree of completion of the opening work in process must be stated in order to compute completed unit costs; average costing does not require the degree of completion of the opening work in process. Under FIFO costing, the cost of completing the 4,000 units in process at the beginning must be computed first. No additional materials were needed ; but since the units in process at the beginning were only 50 percent complete as to labor and factory overhead, more labor and overhead cost must be added to complete these units. To determine costs expended in completing opening work in process units and to arrive at the cost of units started and finished within this period, unit costs for materials, labor, and factory overhead added during the period are computed. Materials added during February cost $19,840, sufficient to complete an equivalent production of 38,000 units (34,000 of the 38,000 units transferred were started and completed during the period, 3,000 units were in process at month-end with all the necessary materials, and 1,000 units were entirely complete but still on hand). Therefore, the unit cost for materials is $.522.

3. In average costing, the cost of the units transferred to the next department was computed by multiplying the number of units transferred by the final unit cost. This procedure cannot be followed under FIFO costing.

Units in process at the beginning must be completed first and will usually have a completed unit cost different from the unit cost for work started and finished during the period. In any event, two separate computations must be made to determine total cost transferred to the next department. The completed cost pertaining to units in the opening work in process is computed separately from the cost of the units started, finished, and transferred during the period.

To determine the cost of completing the opening work in process, the cost of labor and factory overhead used during the period in completing opening work in process units is added to the $4,440 already included as a cost of such units. Labor and overhead were added at unit costs of $.620