List and explain the six steps of cost assignment when using process costing. How does cost assignment differ between the weighted average and FIFO methods?
Step 1--Determine the total physical units to account for by adding beginning work in process inventory in physical units and the physical units started. The result of this step should be identical for both weighted average and FIFO methods.
Step 2--Determine the total physical units accounted for. The units will either be transferred out, spoiled (normal or abnormal) or remain in ending work in process inventory. The result of this step is identical for both weighted average and FIFO methods.
It is also possible to compute Units started and completed by subtracting units in beginning inventory from units transferred out.
At this point the results from Step 1 should equal the result from Step 2.
Step 3--Calculate equivalent units of production (EUP):
Weighted Average: Beginning WIP Inventory in physical units + Units Started and Completed + (Units in Ending WIP Inventory x Percentage of Completion)
FIFO: Beginning WIP inventory in physical units x Percentage of work done in CURRENT period) + Units Started and Completed + (Units in Ending WIP Inventory x Percentage of Completion)
Note that the only difference between the weighted average and FIFO methods is the computation of the beginning inventory.
Step 4--Calculate total costs to account for. This equals the total costs in beginning WIP inventory and the costs incurred during the current period. These costs are the same for both weighted average and FIFO. These costs will be separated into materials costs and conversion costs.
Step 5--Calculate cost per equivalent unit for each cost component (materials and conversion).
Weighted Average: (Costs in beginning inventory + Current period costs)/EUP (computed in step 3)--Note that all costs in beginning WIP inventory are included in this computation)
FIFO: Current period inventory costs/EUP (computed in step 3). Do not include beginning inventory costs in computation of EUP.
The sum of the individual components equal the total cost per completed EU.
Step 6--Assign the costs (from Step 4) to goods transferred out, abnormal spoilage (if any), and ending WIP. The total costs assigned must equal the costs computed in Step 4.
Weighted Average
Transferred Out--Units Transferred Out x Total Cost per EUP
Ending WIP Inventory--Sum of (EUP per component x Cost per EUP)
FIFO
Transferred Out--Beginning WIP Costs + (Units in BI x % completed during current period x Cost per EU Component) + Units Started and Completed during period x Total Cost per EUP)
Ending WIP Inventory--Sum of (EUP per component x Cost per EUP)--The EUPs
for each component are the same under the FIFO method and the weighted average
method; however, the cost per EUP differs under weighted average. Therefore, the
total ending WIP inventory will differ between FIFO and weighted average.
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