Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 59

FIFO Method and Rising Prices Healthy Selections Cereals Inc. (HSC) is a large food-processing company specializing in whole-grain, high-energy, low-calorie and low-fat cereals that appeal to the health-conscious consumer. HSC has a premium image in the market and most of its customers are loyal and willing to pay a bit extra to get the healthy choice that HSC offers. HSC’s cereals are made in a series of processes which begin with sorting, cleaning, preparing, and inspecting the raw materials (grains, nuts, and other ingredients). The materials are then mixed and processed for consistency, cooked, given a final inspection, and packaged. Raw materials are added only at the beginning of the first process. The inspections in the first and final processes are made at the end of those respective processes, so all materials and conversion costs are lost for waste detected at the inspection point. The company uses weighted-average process costing and accounts for all waste as normal spoilage.

Currently commodity prices are rising sharply, affecting the costs of many of the ingredients in HSC’s products. The CFO, noting the sharp rise in the cost of the company’s raw materials (the ingredients for its products), has considered using the FIFO method.

The following data is for the first process for the current month. All output is measured in pounds.

Beginning work-in-process:	14,000 pounds, 25% complete for conversion
Ending work-in-process:	12,000 pounds, 40% complete for conversion
Spoilage:	1,000 pounds
Pounds added this month	33,000 pounds

The cost information for the first process is as follows:

	Materials	Conversion	Total
Beginning WIP	$ 3,500	$ 3,400	$ 6,900
Current costs	66,000	104,000	170,000

Required

1. Calculate a process cost report for the first process using the weighted-average method.

2. Calculate a process cost report for the first process using the FIFO method.

3. Explain which of the two methods you would recommend to the CFO, considering the firm’s competitive environment.

Step 1 of 11

There are two methods to make production cost report of the process i.e. FIFO Method and weighted average method. Both the methods produce the same total costs. But the main difference between both the methods is the treatment of beginning work in process inventory units. The FIFO method separates the units in the beginning inventory from the units started and completed during the period. On the other hand, the weighted average method makes no separation of the units in the beginning inventory. But it is required in the weighted average method that the cost break up of beginning inventory must given in the problem itself.