Process Cost Calculation: FIFO vs. Average Method
Posted on Dec 12, 2024 in Mathematics
Problem of Process Costs
A company produces a product that passes through two processes. In the first, raw material alpha is introduced. Raw material beta is gradually added, between 40% and 80% completion. At 40% completion, quality control is carried out. Normal loss is accepted up to 1% of the units put into the process.
At the start of the second process, raw material gamma is incorporated at a ratio of 1/2 liter for each liter received from the previous process. At 90% completion, the production is packaged in pint bottles. At the end of the process, the bottles are covered, and a label is added, indicating the product name, ingredients, and instructions. There are no production losses in this process.
Production Data and Costs
| Process 1 | Process 2 |
|---|
| Unit of measure | Liters | Bottles |
| Initial inventory in-process | 400 (60% complete) | 2,000 (40% complete) |
| Initial inventory value | $428,000 | $2,500,000 |
| Units completed and transferred | 4,000 | 13,000 |
| Units lost | 100 | 0 |
| Ending inventory in process | 1,300 (70% complete) | 1,000 (60% complete) |
| Costs of the current period: | | |
| Raw alpha | $2,475,000 | |
| Raw beta | $1,432,500 | |
| Raw gamma | | $6,000,000 |
| Bottle | | $5,200,000 |
| Cover and label | | $130,000 |
| Cost of conversion | $3,283,000 | $12,800,000 |
Production Process Outline
(Diagram not included in this text-based representation)
Requirement
Prepare a Cost Report for the two processes using the FIFO method and the Average method.
Solution
Process 1: FIFO Method
| Ending inventory in process | 1,300 (70% complete) |
| Units completed and transferred | 4,000 |
| Initial inventory in-process | 400 (60% complete) |
| Normal loss | (0.01 x 5,000) = 50 |
| Abnormal loss | (100 – 50) = 50 |
| Units started in process | 5,000 |
| Units processed | 5,400 |
Equivalent Production
| Amount | Raw Alpha | Raw Beta | Conversion Cost |
|---|
| Complete initial inventory | 400 | 0 | 200 | 160 |
| Start and finish | 3,600 | 3,600 | 3,600 | 3,600 |
| Ending inventory | 1,300 | 1,300 | 975 | 910 |
| Normal loss | 50 | 0 | 0 | 0 |
| Abnormal loss | 50 | 50 | 0 | 20 |
| Units processed | 5,400 | 4,950 | 4,775 | 4,690 |
Cost Report (FIFO)
| Costs | Amount | Unit |
|---|
| Cost from the previous period | $428,000 | |
| Cost of the current period: |
| Raw alpha | $2,475,000 | 4,950 | $500 |
| Raw beta | $1,432,500 | 4,775 | $300 |
| Cost of conversion | $3,283,000 | 4,690 | $700 |
| Total costs | $7,618,500 | $1,500 |
Cost Distribution (FIFO)
| Ending Inventory | $1,579,500 |
| Raw alpha | $650,000 |
| Raw beta | $292,500 |
| Cost of conversion | $637,000 |
| Abnormal loss | $39,000 |
| Raw alpha | $25,000 |
| Cost of conversion | $14,000 |
| Units completed and transferred | $6,000,000 |
| Beginning Inventory Ending | $600,000 |
| Cost from the previous period | $428,000 |
| Added cost | $172,000 |
| Raw beta | $60,000 |
| Cost of conversion | $112,000 |
| Starting and Finishing | $5,400,000 |
| Total allocated cost | $7,618,500 |
Process 2: FIFO Method
| Initial inventory in-process | 2,000 (40% complete) |
| Ending inventory in process | 1,000 (60% complete) |
| Units started in process | 12,000 (6,000 liters x 2) |
| Units completed and transferred | 13,000 |
| Units processed | 14,000 |
Equivalent Production
| Amount | Transferred Cost | Raw Gamma | Conversion Cost | Bottle | Cover and Label |
|---|
| Complete initial inventory | 2,000 | 0 | 0 | 1,200 | 2,000 | 2,000 |
| Start and finish | 11,000 | 11,000 | 11,000 | 11,000 | 11,000 | 11,000 |
| Ending inventory | 1,000 | 1,000 | 1,000 | 600 | 0 | 0 |
| Units processed | 14,000 | 12,000 | 12,000 | 12,800 | 13,000 | 13,000 |
Cost Report (FIFO)
| Costs | Amount | Unit |
|---|
| Cost from the previous period | $2,500,000 | |
| Cost of the current period: |
| Transfer Cost | $6,000,000 | 12,000 | $500 |
| Raw gamma | $6,000,000 | 12,000 | $500 |
| Cost of conversion | $12,800,000 | 12,800 | $1,000 |
| Bottle | $5,200,000 | 13,000 | $400 |
| Cover and label | $130,000 | 13,000 | $10 |
| Total costs | $32,630,000 | $2,410 |
Cost Distribution (FIFO)
| Ending Inventory | $1,600,000 |
| Transfer Cost | $500,000 |
| Raw gamma | $500,000 |
| Cost of conversion | $600,000 |
| Units completed and transferred | $33,050,000 |
| Beginning Inventory Ending | $6,540,000 |
| Cost from the previous period | $2,500,000 |
| Added cost | $2,020,000 |
| Cost of conversion | $1,200,000 |
| Bottle | $800,000 |
| Cover and label | $20,000 |
| Starting and Finishing | $26,510,000 |
| Total allocated cost | $34,650,000 |
Process 1: Average Method
Equivalent Production
| Amount | Raw Alpha | Raw Beta | Conversion Cost |
|---|
| Units completed | 4,000 | 4,000 | 4,000 | 4,000 |
| Ending inventory | 1,300 | 1,300 | 975 | 910 |
| Normal loss | 50 | 0 | 0 | 0 |
| Abnormal loss | 50 | 50 | 0 | 20 |
| Units processed | 5,400 | 5,350 | 4,975 | 4,930 |
Cost Report (Average)
| Costs | Amount | Unit |
|---|
| Raw alpha: |
| Cost from the previous period | $200,000 | | |
| Cost of the current period | $2,475,000 | $2,675,000 | 5,350 | $500 |
| Raw beta: |
| Cost from the previous period | $60,000 | | |
| Cost of the current period | $1,432,500 | $1,492,500 | 4,975 | $300 |
| Cost of conversion: |
| Cost from the previous period | $168,000 | | |
| Cost of the current period | $3,283,000 | $3,451,000 | 4,930 | $700 |
| Total costs | $7,618,500 | $1,500 |
Cost Distribution (Average)
| Ending Inventory | $1,579,500 |
| Raw alpha | $650,000 |
| Raw beta | $292,500 |
| Cost of conversion | $637,000 |
| Abnormal loss | $39,000 |
| Raw alpha | $25,000 |
| Cost of conversion | $14,000 |
| Units completed and transferred | $6,000,000 |
| Total allocated cost | $7,618,500 |
