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# Managerial Accounting ed 15 Chapter 4A

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Managerial Accounting ed 15 Chapter 4A

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### Managerial Accounting ed 15 Chapter 4A

1. 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. FIFO Method Appendix 4A
2. 2. 4A-2 FIFO vs. Weighted-Average Method The FIFO method (generally considered more accurate than the weighted-average method) differs from the weighted-average method in two ways: 1.1. The computation of equivalent units.The computation of equivalent units. 2.2. The way in which the costs of beginningThe way in which the costs of beginning inventory are treated.inventory are treated. 1.1. The computation of equivalent units.The computation of equivalent units. 2.2. The way in which the costs of beginningThe way in which the costs of beginning inventory are treated.inventory are treated.
3. 3. 4A-3 Learning Objective 6 Compute the equivalent units of production using the FIFO method.
4. 4. 4A-4 Equivalent Units – FIFO Method Let’s revisit the Smith Company example. Here is information concerning the Assembly Department for the month of June. Percent Completed Units Materials Conversion Work in process, June 1 300 40% 20% Units started into production in June 6,000 Units completed and transferred out 5,400 of Department A during June Work in process, June 30 900 60% 30%
5. 5. 4A-5 Equivalent Units – FIFO Method Step 1: Determine equivalent units needed to complete beginning Work in Process Inventory. Materials Conversion To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240
6. 6. 4A-6 Equivalent Units – FIFO Method Step 2: Determine units started and completed during the period. Materials Conversion To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240 Units started and completed during June 5,100 5,100
7. 7. 4A-7 Equivalent Units – FIFO Method Step 3: Add the equivalent units in ending Work in Process Inventory. Materials Conversion To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240 Units started and completed during June 5,100 5,100 Ending Work in Process Materials: 900 units × 60% complete 540 Conversion: 900 units × 30% complete 270 Equivalent units of production 5,820 5,610
8. 8. 4A-8 Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 6,000 Units Started 5,100 Units Started and Completed FIFO Example MaterialsMaterialsMaterialsMaterials 5,100 Units Completed 540 Equivalent Units 900 × 60% 5,820 Equivalent units of production 180 Equivalent Units300 × 60%
9. 9. 4A-9 Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete 6,000 Units Started 5,100 Units Started and Completed FIFO Example ConversionConversionConversionConversion 5,100 Units Completed 270 Equivalent Units 900 × 30% 5,610 Equivalent units of production 240 Equivalent Units300 × 80%
10. 10. 4A-10 Equivalent Units: Weighted-Average vs. FIFO Materials Conversion Equivalent units - weighted-average method 5,940 5,670 Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610 As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under the FIFO method. As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under the FIFO method.
11. 11. 4A-11 Learning Objective 7 Compute the cost per equivalent unit using the FIFO method.
12. 12. 4A-12 Beginning work in process: 400 units Materials: 40% complete \$ 6,119 Conversion: 20% complete \$ 3,920 Production started during June 6,000 units Production completed during June 5,400 units Costs added to production in June Materials cost \$ 118,621 Conversion cost \$ 81,130 Ending work in process 900 units Materials: 60% complete Conversion: 30% complete Cost per Equivalent Unit - FIFO Let’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.
13. 13. 4A-13 Cost per Equivalent Unit - FIFO The formula for computing the cost per equivalent unit under FIFO method is:
14. 14. 4A-14 Cost per Equivalent Unit - FIFO Total Cost Materials Conversion Cost added in June 199,751\$ 118,621\$ 81,130\$ Equivalent units 5,820 5,610 Cost per equivalent unit 20.3816\$ 14.4617\$ Total cost per equivalent unit = \$20.3816 + \$14.4617 = \$34.8433Total cost per equivalent unit = \$20.3816 + \$14.4617 = \$34.8433 \$118,621 ÷ 5,820\$118,621 ÷ 5,820 \$81,130 ÷ 5,610\$81,130 ÷ 5,610
15. 15. 4A-15 Learning Objective 8 Assign costs to units using the FIFO method.
16. 16. 4A-16 Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Assembly Department Cost of Ending WIP Inventory Applying Costs - FIFO Step 1: Record the equivalent units of production in ending Work in Process Inventory. 900 units × 60%900 units × 60% 900 units × 30%900 units × 30%
17. 17. 4A-17 Applying Costs - FIFO Step 2: Record the cost per equivalent unit. Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit 20.3816\$ 14.4617\$ Assembly Department Cost of Ending WIP Inventory
18. 18. 4A-18 Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost of Ending WIP inventory 11,006\$ 3,905\$ 14,911\$ Assembly Department Cost of Ending WIP Inventory Applying Costs - FIFO Step 3: Compute the cost of ending Work in Process Inventory. 540 × \$20.3816540 × \$20.3816 270 × 14.4617270 × 14.4617
19. 19. 4A-19 Cost of Units Transferred Out Step 1: Record the cost in beginning Work in Process Inventory. Materials Conversion Total Cost of Units Transferred Out: Cost in beginning WIP inventory 6,119\$ 3,920\$ 10,039\$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost to complete beginning WIP 3,669\$ 3,471\$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost of units started and completed 103,946\$ 73,755\$ 177,701 Cost of Units Transferred Out 194,880\$ Assembly Department Cost of Units Transferred Out in June
20. 20. 4A-20 Cost of Units Transferred Out Step 2: Compute the cost to complete the units in beginning Work in Process Inventory. Materials Conversion Total Cost of Units Transferred Out: Cost in beginning WIP inventory 6,119\$ 3,920\$ 10,039\$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost to complete beginning WIP 3,669\$ 3,471\$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost of units started and completed 103,946\$ 73,755\$ 177,701 Cost of Units Transferred Out 194,880\$ Assembly Department Cost of Units Transferred Out in June
21. 21. 4A-21 Cost of Units Transferred Out Step 3: Compute the cost of units started and completed this period. Materials Conversion Total Cost of Units Transferred Out: Cost in beginning WIP inventory 6,119\$ 3,920\$ 10,039\$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost to complete beginning WIP 3,669\$ 3,471\$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost of units started and completed 103,946\$ 73,755\$ 177,701 Cost of Units Transferred Out 194,880\$ Assembly Department Cost of Units Transferred Out in June
22. 22. 4A-22 Cost of Units Transferred Out Step 4: Compute the total cost of units transferred out. Materials Conversion Total Cost of Units Transferred Out: Cost in beginning WIP inventory 6,119\$ 3,920\$ 10,039\$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost to complete beginning WIP 3,669\$ 3,471\$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816\$ 14.4617\$ Cost of units started and completed 103,946\$ 73,755\$ 177,701 Cost of Units Transferred Out 194,880\$ Assembly Department Cost of Units Transferred Out in June
23. 23. 4A-23 Learning Objective 9 Prepare a cost reconciliation report using the FIFO method.. Prepare a cost reconciliation report using the FIFO method.
24. 24. 4A-24 Reconciling Costs Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039\$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790\$ Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911\$ Cost of units transferred out 194,880 Total cost accounted for* 209,791\$ Assembly Department Cost Reconciliation for June
25. 25. 4A-25 Reconciling Costs Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039\$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790\$ Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911\$ Cost of units transferred out 194,880 Total cost accounted for* 209,791\$ Assembly Department Cost Reconciliation for June * \$1 rounding error.
26. 26. 4A-26 A Comparison of Costing Methods In a lean production environment, FIFO and weighted-average methods yield similar unit costs. In a lean production environment, FIFO and weighted-average methods yield similar unit costs. When considering cost control, FIFO is superior to weighted-average because it does not mix costs of the current period with costs of the prior period. When considering cost control, FIFO is superior to weighted-average because it does not mix costs of the current period with costs of the prior period.
27. 27. 4A-27 End of Appendix 4A