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
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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)