Question

Explain each of the four differences for the FIFO and Weighted-Average methods for the Process Cost system: Which method is more difficult to use?, What happens when there are similar results for both methods?, Which method is superior to use?, and Which method is more accurate?. Explain and compare each of the for differences for the FIFO and Weighted-Average methods of the Process Cost system.

Answer 1

• When it comes time for businesses to account for their inventory, they typically use one of three different primary accounting methodologies: the weighted average method, the first in, first out (FIFO) method, or the last in, first out (LIFO) method.
• The weighted average method is most commonly employed when inventory items are so intertwined that it becomes difficult to assign a specific cost to an individual unit.
• The first in, first out (FIFO) accounting method relies on a cost flow assumption that removes costs from the inventory account when an item in someone’s inventory has been purchased at varying costs, over time.
• The last in, first out (LIFO) accounting method assumes that the latest items bought are first to be sold.
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  3-8 Weighted Average vs. FIFO Process Costing Cost flow assumption Units Weighted Average FIFO Averages the cost of units in Assumes that the units In beginning inventory with the cost beginning inventory were of units that were started during completed before any new units the period were started Combines the units in beginning Separates the units in beginning inventory with the units that were inventory from those that were started during the period started during the current period Combines the cost of beginning Separates the costs of beginning inventory with the costs that were inventory from the costs that were incurred during the current period incurred during the current period Is simpler than FIFO and more More closely matches the actual frequently used in the real world. flow of costs in many process industries and therefore may be more accurate than weighted average Cost Advantages
  Generally speaking, FIFO is preferable in times of rising prices, so that the costs recorded are low, and income is higher. Contrarily, LIFO is preferable in economic climates when tax rates are high because the costs assigned will be higher and income will be lower.