Question

Process Costing:

2. The following data are available for materials costs at ZETA Company.
Equivalent units transferred out…20000
Equivalent units produced this period using FIFO…33000
Equivalent units in beginning inventory…7000
Materials costs in beginning work in process inventory…$20000
Current period costs for materials…$80,000

Which method has the lowest unit cost?
A. Weighted average
B. Fifo
C. Both methods give the same unit cost
D. Unit costs do not depend on the method used

I know the answer is B but don't understand why or how to calculate. Please show all work and explain the steps

Answer 1

Working notes

1- 20000 units transferred out means completed

2- 7000 units opening stock Add production 33000 = 40000 units

3 - Out of 40000 , 20000 transferred out means completed

4 - WIP Cost of Opening stock - $ 20000

5 - Period cost - $ 80000

6 - Total Cost of Production $ 100000 for 20000 units completed

7 - Per unit cost of Production comes to be $ 5 per unit

8 - Opening equivalent WIP is 7000 units

9 - Cost of opening WIP is $ 20000

10 - Which comes to be $ 2.85 approx / unit as per FIFO

11- As per Weighted average - the cost comes to be $ 5 per unit

12 - As per the given information ,we can conclude that if we follow FIFO method i.e First In First Out method then the the per unit cost is cheaper than Weighted Average Method.

13 - It is upto the Management to decide which method to use.

Answer 2

FIFO Method:-

• Unit Cost = Current Costs / FIFO Equivalent Units

  $$\frac{\mathrm{\$}80,000}{33,000}=\mathrm{\$}2.42\text{ per unit}$$

Weighted Average Method:-

• Total Costs = Beginning WIP + Current Costs

  $$\mathrm{\$}20,000+\mathrm{\$}80,000=\mathrm{\$}100,000$$

• Total Equivalent Units = Beginning WIP + Units Completed

  $$7,000+20,000=27,000$$

• Unit Cost = Total Costs / Total Equivalent Units

  $$\frac{\mathrm{\$}100,000}{27,000}=\mathrm{\$}3.70\text{ per unit}$$

Result:

• FIFO Cost ($2.42) < Weighted Avg ($3.70)

• Answer: B. FIFO