First-In, First-Out Method

The first-in, first-out (FIFO) process-costing method (1) assigns the cost of the previous accounting period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process and (2) assigns the cost of equivalent units worked on during the current period first to complete the beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. The FIFO method assumes that the earliest equivalent units in work in process are completed first.

A distinctive feature of the FIFO process-costing method is that work done on the beginning inventory before the current period is kept separate from work done in the current period. The costs incurred and units produced in the current period are used to calculate the cost per equivalent unit of work done in the current period. In contrast, the equivalent-unit and cost-per-equivalent-unit calculations under the weighted-average method merge the units and costs in beginning inventory with the units and costs of work done in the current period.

We now describe the FIFO method using the five-step procedure from Case 2: Process Costing With Zero Beginning and Some Ending Work-in-Process Inventory.

1. Step 1: SUMMARIZE THE FLOW OF PHYSICAL UNITS OF OUTPUT. Exhibit 18-6, Step 1, traces the flow of physical units of production and explains how they are calculated under the FIFO method.
   1. • The first physical units assumed to be completed and transferred out during the period are 225 units from beginning work-in-process inventory.
   2. • There are 400 physical units completed during March (see Case 3: Process Costing With Some Beginning and Some Ending Work-in-Process Inventory). The FIFO method assumes that of these 400 units, 175 units ( $400\text{\hspace{0.17em}units}-225\text{\hspace{0.17em}units}$ from beginning work-in-process inventory) were started and completed during March.
   3. • The ending work-in-process inventory consists of 100 physical units—the 275 physical units started minus the 175 units that were started and completed.
   4. • The physical units “to account for” equal the physical units “accounted for” (500 units).

1. Step 2: COMPUTE OUTPUT IN TERMS OF EQUIVALENT UNITS. Exhibit 18-6 also presents the computations for Step 2 under the FIFO method. The equivalent-unit calculations for each cost category focus on equivalent units of work done in the current period (March) only.
2. Under the FIFO method, equivalent units of work done in March on beginning work-in-process inventory equal 225 physical units times the remaining percentage of work done in March to complete these units: 0% for direct materials, because beginning work in process is 100% complete for direct materials, and 40% for conversion costs, because beginning work in process is 60% complete for conversion costs. The results are 0 $(0\%\times 225)$ equivalent units of work done in March for direct materials and 90 $(40\%\times 225)$ equivalent units of work done in March for conversion costs.
3. The equivalent units of work done in March on the 175 physical units started and completed equals 175 units times 100% for both direct materials and conversion costs because all work on these units is done in the current period.
4. The equivalent units of work done in March on the 100 units of ending work in process equal 100 physical units times 100% for direct materials (because all direct materials for these units are added in the current period) and 50% for conversion costs (because 50% of the conversion- costs work on these units is done in the current period).
5. Step 3: SUMMARIZE TOTAL COSTS TO ACCOUNT FOR. Exhibit 18-7 presents Step 3 and summarizes the $62,280 in total costs to account for in March 2020 (the costs of beginning work in process, $26,100, and costs added in the current period, $36,180).

1. Step 4: COMPUTE COST PER EQUIVALENT UNIT. Exhibit 18-7 shows the Step 4 computation of the cost per equivalent unit of work done in the current period only for direct materials and conversion costs. For example, the conversion cost per equivalent unit of $52 is obtained by dividing current-period conversion costs of $16,380 by current-period conversion-costs equivalent units of 315.
2. Step 5: ASSIGN COSTS TO UNITS COMPLETED AND TO UNITS IN ENDING WORK-IN-PROCESS INVENTORY. Exhibit 18-7 shows the assignment of costs under the FIFO method. The costs of work done in the current period are assigned (1) first to the additional work done to complete beginning work-in-process inventory, then (2) to work done on units started and completed during the current period, and finally (3) to ending work-in-process inventory. Step 5 takes each quantity of equivalent units calculated in Exhibit 18-6, Step 2, and assigns dollar amounts to them (using the cost-per-equivalent-unit calculations in Step 4).

Of the 400 completed units, 225 units are from beginning inventory and 175 units are started and completed during March. The FIFO method first assigns costs of beginning work-in-process inventory of $26,100 to the first units completed and transferred out. As we saw in Step 2, an additional 90 equivalent units of conversion costs are needed to complete these units in the current period. The current-period conversion cost per equivalent unit is $52, so $4,680 (90 equivalent $\text{units}\times \mathrm{\$}52 \text{per}$ equivalent unit) of additional costs are incurred to complete the beginning inventory. The total production costs for units in beginning inventory are therefore $\$\text{26,100\hspace{0.05em}\hspace{0.05em}}+ \$\text{4,680}= \$\text{30,780}$. The 175 units started and completed in the current period consist of 175 equivalent units of direct materials and 175 equivalent units of conversion costs. These units are costed at the cost per equivalent unit in the current period (direct materials, $72, and conversion costs, $52) for a total production cost of $21,700 $[175 \times (\$72 + \$52)]$.

Under FIFO, the ending work-in-process inventory comes from units that were started but not fully completed during the current period. The total costs of the 100 partially assembled physical units in ending work in process are shown below:

The following table summarizes the total costs to account for ($62,280) and how they are accounted for under FIFO in Exhibit 18-7. Notice how the FIFO method keeps separate the layers of the beginning work-in-process costs and the costs added in the current period. The arrows indicate where the costs in each layer go—that is, to units completed and transferred out or to ending work in process. Be sure to include the costs of beginning work-in-process inventory ($26,100) when calculating costs of units completed.

Before proceeding, review Exhibits 18-6 and 18-7 to check your understanding of the FIFO method. Note: Exhibit 18-6 deals with only physical and equivalent units, not costs. Exhibit 18-7 shows the cost amounts.

The journal entries under the FIFO method are identical to the journal entries under the weighted-average method except for one difference. The entry to record the cost of goods completed and transferred out is $52,480 under the FIFO method instead of $52,000 under the weighted-average method.

Using a strict FIFO assumption, the 225 units completed from beginning inventory would be transferred to the testing department at a cost of $136.80 per unit ($\$\text{30,780}÷225 \text{units}$). The 175 units started and completed during March would be transferred at a cost of $124 per unit ($\$\text{21,700}÷175 \text{units}$). As a practical matter, however, units transferred in during a given period usually are carried at a single average unit cost. The testing department would carry all the units transferred in during March (which consist of costs incurred in both February and March) in one layer at a single average unit cost of $131.20 ($\$\text{52,480}÷400 \text{units}$). If this averaging were not done, the attempt to track costs on a pure FIFO basis throughout a series of processes would be cumbersome. As a result, the FIFO method should really be called a modified or department FIFO method.