Question

How does the cost per equivalent unit of conversion cost in beginning Work-in process inventory compare to the cost per equivalent unit of conversion cost added for the month of October?

Answer 1

Solution:-

Under the FIFO method, we will calculate equivalent units for 3 things: Units completed from beginning work in process, units started and completed this period and units remaining in ending work in process. This video will discuss the differences between the Weighted Average and FIFO methods for equivalent units (if you are comfortable with the weighted average method, skip to minute 4:06 to begin the discussion on the FIFO method).

Equivalent units for the period will be calculated as follows under FIFO (keep in mind, you may have different percent complete for materials, labor and overhead):

1. Units from beginning work in process: you want to complete this units, so how much MORE effort will be needed to finish these units. You will calculate this as beginning work in process units x (100% – given % complete) to calculate the amount of additional work necessary to make the unit 100% complete.
2. Units started and completed this period: take the units x 100% complete since they were started and completed they have received all of their materials, labor and overhead and will not receive any more since they are finished.
3. Units in Ending work in process: just like with the weighted average method, we will take the ending work in process units x a given % complete.

Under the weighted average method, we use beginning work in process costs AND costs added this period. Under the FIFO method, we will only use the costs added this period. This video will explain the differences between the two approaches.

The formula we will use for calculating cost per equivalent unit under the FIFO Method is:

Current Costs added this period

÷ Total Equivalent Units

= Cost per Equivalent Units