FIFO Method and Spoilage

Exhibit 19-3, Panel A, presents Steps 1 and 2 using the FIFO method, which focuses on equivalent units of work done in the current period. Exhibit 19-3, Panel B, presents Steps 3, 4, and 5. When assigning costs, the FIFO method keeps costs of beginning work in process separate and distinct from costs of work done in the current period. All spoilage costs are assumed to be related to units completed during the period, using unit costs of the current period.*

Exhibit 19-3

First-In, First-Out (FIFO) Method of Process Costing With Spoilage for the Forming Department for July 2020

Spreadsheet screenshot shows the five steps depicting FIFO method of process costing with spoilage for the forming department for July 2020

Panel A shows the flow of physical units which is step 1, and the output in equivalent units, in terms of direct materials and conversion costs, which is step 2.

  1. Work in process, beginning (given, page 755)

    • Physical units: 1,500

  2. Started during current period (given, page 755)

    • Physical units: 8,500

  3. To account for

    • Physical units: 10,000

  4. Good units completed and transferred out during current period

    From beginning work in process (refer to note a)

    • Physical units: 1,500

    • Direct material (product of 1,500 and the difference of 100% and 100%): 0

    • Conversion costs (product of 1,500 and the difference of 100% and 60%): 600

    Started and completed

    • Physical units: 5,500 (refer to note b)

    • Direct material (product of 5,500 and 100%): 5,500

    • Conversion costs (product of 5,500 and 100%): 5,500

  5. Normal Spoilage (refer to note c)

    • Physical units: 700

    • Direct material (700 times 100%): 700

    • Conversion costs (700 times 100%): 700

  6. Abnormal spoilage (refer to note d)

    • Physical units: 300

    • Direct material (300 times 100%): 300

    • Conversion costs (300 times 100%): 300

  7. Work in process, ending (given, p. 755) (also refer to note e)

    • Physical units: 2,000

    • Direct material (2,000 times 100%): 2,000

    • Conversion costs (2,000 times 50%): 1,000

  8. Accounted for

    • Physical units: 10,000

  9. Equivalent units of work in current period

    • Direct material: 8,500

    • Conversion costs: 8,100

  10. Note a: Degree of completion in this department: direct materials, 100%; conversion costs, 60%.

    • Note b: 7,000 physical units completed and transferred out minus 1,500 physical units completed and transferred out from beginning work-in-process inventory.

    • Note c: Normal spoilage is 10% of good units transferred out; 10% of 7,000 which equals 700 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.

    • Noted: Abnormal spoilage equals Total spoilage minus Normal spoilage which equals 1,000 minus 700 which equals 300 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.

    • Note e: Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

Spreadsheet screenshot shows the five steps depicting FIFO method of process costing with spoilage for the forming department for July 2020

Panel B shows the total costs to account for, computation of cost per equivalent unit, and assignment of costs to the units completed, spoiled units, and the units in ending work-in-process inventory. The processes are divided into three parts Step 3, Step 4, and Step 5. Details of the steps are as follows:

Step 3

  1. Work in process, beginning (given, page 755)

    • Total cost of production (sum of direct and conversion costs): $21,000

    • Direct materials: $12,000

    • Conversion costs: $9,000

  2. Costs added in current period (given, page 755)

    • Total cost of production (sum of direct and conversion costs): 165,600

    • Direct materials: 76,500

    • Conversion costs: 89,100

  3. Total costs to account for

    • Total cost of production (sum of direct and conversion costs): $186,600

    • Direct materials: $88,500

    • Conversion costs: $98,100

Step 4

  1. Costs added in current period

    • Direct materials: $76,500

    • Conversion costs: $89,100

  2. Divide by equivalent units of work done in current period (Panel A)

    • Direct materials: $8,500

    • Conversion costs: $8,100

  3. Cost per equivalent unit (quotient of respective costs incurred to date and equivalent units of work done)

    • Direct materials: $9

    • Conversion costs: $11

Step 5: Assignment of costs

Good units completed and transferred out (7,000 units)

  1. Work in process, beginning (1,500 units)

    • Total cost of production (sum of direct and conversion costs): $21,000

    • Direct materials: $12,000

    • Conversion costs: $9,000

  2. Costs added to beginning work in process in current period

    • Total cost of production (sum of direct and conversion costs): 6,600

    • Direct materials: (product of 0 and $9) (refer to note f)

    • Conversion costs: (product of 600 and $11) (refer to note f)

  3. Total from beginning inventory before normal spoilage

    • Total cost of production (sum of direct and conversion costs): 27,600

  4. Started and completed before normal spoilage (5,500 units)

    • Total cost of production (sum of direct and conversion costs): $110,000

    • Direct materials: (product of 5,500 and $9) (refer to note f)

    • Conversion costs: (product of 5,500 and $11) (refer to note f)

  5. Normal spoilage (700 units)

    • Total cost of production (sum of direct and conversion costs): 14,000

    • Direct materials: (product of 700 and $9) (refer to note f)

    • Conversion costs: (product of 700 and $11) (refer to note f)

  1. Total costs of good units completed and transferred out

    • Total cost of production: 151,600

  2. Abnormal spoilage (300 units)

    • Total cost of production (sum of direct and conversion costs): 6,000

    • Direct materials: (product of 300 and $9) (refer to note f)

    • Conversion costs: (product of 300 and $11) (refer to note f)

  3. Work in process, ending (2,000 units)

    • Total cost of production (sum of direct and conversion costs): 29,000

    • Direct materials: (product of 2,000 and $9) (refer to note f)

    • Conversion costs: (product of 1,000 and $11) (refer to note f)

  1. Total costs accounted for (sum of the above A, B, and C)

    • Total cost of production (sum of direct and conversion costs): $186,600

    • Direct materials: $88,500

    • Conversion costs: $98,100

  2. Note f: Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

Watch Try It Video

Chapter 18 highlighted taxes, performance evaluation, and information for making decisions as some of the factors influencing the choice between the FIFO and weighted-average methods. It also stressed the importance of carefully estimating degrees of completion to avoid misstating operating income. These same considerations apply when there is spoilage. In addition, the normal spoilage percentage must be estimated in an unbiased manner. Categorizing more spoilage as normal leads to higher income by reducing the amount written off as loss from abnormal spoilage. Senior managers must stress the importance of consistent and unbiased estimates of completion and normal spoilage percentages and the need for ethical actions when reporting income.