Question

In process costing, when manager is preparing a Cost of production report, when will the manager choose to use Weighted average method and when will the manager use FIFO method? What are the differences between the two methods?

Answer 1

Materials issued from the stores are debited to the jobs or work orders which received them and credited to the materials account.

There are many methods of pricing material issues, the most important being : Cost price methods, Market price methods, Standard price methods etc. FIFO & Weighted average methods are comes under cost price methods.

A good method of valuing material issues should satisfy the following conditions:

1. The issue price should cover the cost price of the materials
2. The issue price must be near the market price
3. The issue price should not lead to any significant variation in cost of similar jobs from period to period
4. The issue price should not necessitate heavy adjustments in values of stock of materials in the stores etc

FIFO – In this method materials received first are issued first.

Weighted average method – A price which is calculated by dividing the total cost of materials in the stock from which the materials to be priced could be drawn by the total quantity of materials in that stock.

Choosing the valuation method

In order to use the weighted average or FIFO methods to account for opening work-in-process different information is needed, as follows:

For weighted average- An analysis of the opening work-in-process value into cost elements (i.e. materials, labor)

For FIFO     - The degree of completion of the opening work in process for each cost element.

If all of the information is available so that either method may be used, the question will specify the required method.

Where there is opening work-in-process, two methods of cost allocation can be used which make different assumptions and produce different stock valuations. They are FIFO and weighted average.