Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 38

FIFO Method

The following pertains to the Cereal Division of McKenzie Corporation. Conversion costs for this division were 80 percent complete as to beginning work-in-process inventory and 50 percent complete as to ending work-in-process inventory. Information about conversion costs for July is as follows:

		Conversion
	Units	Costs
WIP at July 1 (80% complete)	300,000	$ 387,000
Units started and costs incurred during July	1,620,000	2,178,000
Units completed and transferred to next department during July	1,200,000	?

The Cereal Division uses FIFO.

Required

a.What was the conversion cost of work-in-process inventory in the Cereal Division at July 31?

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b.What were the conversion costs per equivalent unit produced last period and this period, respectively?

Step 1 of 4

All units cannot be wholly completed at the end of a specific period. Some units may be partially complete. Expenses (Material cost and conversion costs) might have been incurred on such units to the extent of their completion.

Hence, in order to determine the actual production in a process, the concept of equivalent units is used. The partially completed units are multiplied with their percentage of completion and the resultant figure is considered as whole units produced.

If a company uses the First In First Out (FIFO) method in process costing, all the equivalent units that were manufactured in a particular period will get match with the units that were shown as opening work-in process as a percentage of work that is need to complete plus the number of units that were started and processed completely during that period and again add the number of units that were started in current period and those that were there in closing work-in process as percentage of work that was completed.

Calculation for M. Corporation:

Table showing calculation of physical units

Particulars	Number of units
Balance at the start of the period (a)	300,000
Add: Units input (b)	1,620,000
Less: Units transferred out (c)	1,200,000
Balance at the end of period (d) = (a) + (b) – (c)	720,000

Table showing calculation of equivalent units for conversion cost using FIFO method

Particulars	Units (a)	Conversion Cost
		% of completion in the period (b)	Equivalent Units (c)=(a) x (b)
Work in process in the beginning	300,000	100 – 80 = 20%	60,000
Work completed during the period	1200000 – 300000 = 900,000	100%	900,000
Work in process at the end	720,000	50%	360,000
Total	1,920,000		1,320,000