Discussion Forum: FIFO - Personal Statement Example

FIFO Vs Average Costing method The FIFO method of calculating costs works on the premise that those inventories which are purchased first are also sold out first (First In First Out). An example of this would be a restaurant chain like KFC which would try to sell out its older stock first because of its perishable nature. Thus, it excludes the units completed in the beginning work in process (BWIP) for the cost calculations of the current period but includes the units that are “started and completed during the current period” (Hansen and Mowen 2010, p-251).

The Weighted Average method takes both the BWIP and current period costs to calculate the total cost based on the weighted average of the output (Hansen and Mowen 2010, p-258). Let us look at a simple example to understand this concept: Assumptions: Units completed in the BWIP are 60% and Units completed in EWIP are 25%. Total units in BWIP are 400, units produced in the current month are 2600 and those transferred out after completion are 2000. Costs: BWIP inventory - $10,000 and Current Production Cost – $215,500 Following are the calculations:   Units BWIP Inventory 400 Units started and completed in current month 2600 Total units to account for 3000 Equivalent unit calculations as per FIFO method   Units Direct material Conversion cost Units transferred out 2000 2000 2000 EWIP 1000 1000 750 Total units accounted for 3000     Less BWIP Inventory -400 -160 Equivalent Units 2600 2590 Cost Calculations as per FIFO   Direct material Conversion cost BWIP 6,000 4,000 Current Production Cost 1,15,000 1,00,500 Total cost 1,21,000 1,04,500 Less BWIP cost 6,000 4,000 1,15,000 1,00,500 Equivalent Units 2600 2590 Per unit cost (final cost/equivalent units) 44.23 38.80 Total per unit cost: $83.

03 Equivalent unit calculations as per Wt.Average method   Units Direct material Conversion cost Units transferred out 2000 2000 2000 EWIP 1000 1000 750 Total units accounted for 3000     Equivalent Units   3000 2750 Cost Calculations as per Wt.Average method   Direct material Conversion cost BWIP 6,000 4,000 Current Production Cost 1,15,000 1,00,500 Total cost 1,21,000 1,04,500 Equivalent Units 3000 2750 Per unit cost (final cost/equivalent units) 40.33 38.00 Total per unit cost: $78.33 References Hansen, Don.

R and Mowen, Maryanne M. (2010). Cornerstones of Cost Accounting. Cengage Learning.