# Process Costing – FIFO Method

Under the FIFO method of process costing, costs are transferred to next department and ultimately to finished goods in the order in which they entered the current department i.e. costs entering first are transferred first and hence the name FIFO–first-in-first-out.

Unlike the weighted average method, the FIFO method does not involve any averaging out of the total costs incurred during a period. It moves the cost of beginning work in process (including the costs incurred in current period) straight to cost of units transferred out and distributes the costs added during the period first to the cost of units transferred out and the rest to the cost of units in the ending work in process.

FIFO method involves following steps, majority of which are the same as in weighted average method:

• Preparing the quantity schedule: i.e. reconciling units in the beginning work in process, units added/started during the period, units transferred out and units in ending WIP.
• Bringing forward the cost of ending WIP of last period as cost of beginning work in process of the current period.
• Bringing forward the percentage of completion of the ending WIP of last period.
• Finding the costs brought forward from previous department and cost added in the current department under different heads: direct materials and conversion costs.
• Finding units started/added and completed during the current period.
• Finding total equivalent units.
• Finding cost per equivalent unit for each cost component.
• Allocating the cost between units transferred out and ending WIP.

## Example

Let us use the same example as in the article on process costing under weighted average method.

Prepare a cost of production report for the packaging department of Company ABC for the month of December 2013 under FIFO method of process costing. Important information is reproduced here.

• 20,000 units in work in process as at 1 December: \$20,000 of direct materials and \$40,000 of conversion costs (i.e. \$10,000 direct labor and \$30,000 manufacturing overheads). 100% of the direct materials cost and 40% of the conversion cost have been incurred in last period on these units.
• 200,000 units transferred in from production department during the month: at a total cost of \$555,000.
• Costs added included: direct materials of \$22,000 and conversion costs of \$20,000.
• 180,000 units transferred to finished goods.
• 40,000 units in work in process as at 31 December: 100% complete as to costs transferred-in, 80% complete as to materials and 50% complete as to conversion costs.

Solution

The first step is the preparation of quantity schedule.

 As at 1 December 20,000 Transferred in 200,000 Units to be accounted for 220,000 Transferred out from units from 1 December 20,000 Units both started and completed during the current period 160,000 Units transferred out 180,000 As at 31 December 40,000 Units accounted for 220,000

Now, calculate the equivalent units:

Transferred-
in
Direct
Materials
Conversion
Costs
Units in beginning WIP (A)020,00020,000
% of completion of beginning WIP in previous period (B)0%100%40%
% of beginning WIP completed this period [C=100%-B]100%0%60%
Equivalent units in beginning WIP [D=A×C]--12,000
Units both started and completed in current period (E)160,000160,000160,000
Units of ending WIP (F)40,00040,00040,000
Percentage of completion of ending WIP (G)100%80%50%
Equivalent units in ending WIP (H=F×G)40,00032,00020,000
Total equivalent units (D+E+H)200,000192,000192,000

Next, find cost per equivalent unit.

Transferred-
in
Direct
Materials
Conversion
Costs
Total
Costs (I)\$555,000\$22,000\$20,000\$597,000
Total equivalent units (J)200,000192,000192,000
Cost per equivalent unit (I/J)\$2.775\$0.1146\$0.1042\$2.993

We need to find the cost of units transferred out. Since we are using FIFO method, we first include the entire beginning WIP in the cost of units transferred out and then include units started/added during the period.

 Cost of beginning WIP brought forward from last period (K) \$60,000 Transferred-in costs [(100%-100%)*20,000*2.775] (L) \$- Direct materials [(100%-100%)*20,000*0.1146] (M) \$- Conversion costs [(100%-40%)*20,000*0.1042] (N) \$1,250 Cost incurred on beginning WIP in current period (O=L+M+N) \$1,250 Beginning WIP (P=K+O) \$61,250 Cost of units started and completed in current period (2.993*160,000) (Q) \$479,000 Cost of units transferred out (P+Q) \$540,250

Cost of units in ending work in process comes from units added during the period:

Transferred-
in
Direct
Materials
Conversion
Costs
Total
Units as at 31 December (R)40,00040,00040,00040,000
Cost per equivalent unit (S)\$2.775\$0.1146\$0.1042\$2.993
Percentage of completion (T)100%80%50%
Total cost (R×S×T)\$111,000\$3,667\$2,083\$116,750

It can also be calculated using the short-cut formula given below

Cost of ending WIP =
Cost of Beginning WIP + Costs Transferred-in + Costs Added in Current Department − Costs Transferred-out

Value of ending WIP based on this formula is:

Cost of ending WIP = \$60,000 + \$555,0000 + \$42,000 − \$540, 250 = 116,750

We can summarize the cost movement using the cost schedule given below:

 Cost to be accounted for Accounted for as Beginning WIP 60000 Transferred out 540,250 Cost transferred in 555000 Closing WIP 116,750 Cost added Materials 22000 Conversion 20000 42000 Total 657000 Total 657,000