Process Costing: FIFO Method

Overview

• What you’ll learn: The FIFO (First-In, First-Out) method of process costing — how it separates beginning WIP work from current period work, the modified equivalent unit calculation, cost per equivalent unit using only current costs, cost assignment, and when FIFO is preferred over weighted-average.
• Prerequisites: Lesson 5 — Weighted-Average Method. A thorough understanding of the four-step production cost report.
• Estimated reading time: 20 minutes

Introduction

The Grand Historian records: The Weighted-Average School, as we learned, blends the old with the new — mixing beginning WIP costs with current costs like a brewer pouring last season’s vintage into this season’s cask. The FIFO School finds this practice intellectually dishonest. “If you wish to evaluate this period’s performance,” the FIFO masters declare, “you must isolate this period’s costs from last period’s residue. Only then can you see clearly.”

The FIFO method computes cost per equivalent unit using only current period costs and only current period work. It treats beginning WIP as a separate batch that must be completed first (hence “first-in, first-out”), and it strips away the prior period’s costs from the calculation. The result is a purer measure of current period cost efficiency — at the price of greater computational complexity.

In an era of rising costs, inflationary pressures, or significant technological changes, FIFO provides managers with a more accurate picture of what production actually costs right now. The weighted-average method, by blending older (often cheaper) costs with current costs, can mask the true current cost of production.

FIFO vs. Weighted-Average: The Core Difference

The Four Steps: FIFO Method

We use the same data from Lesson 5 for direct comparison:

Given Data (Same as Lesson 5)

Cost Data

Step 1: Summarize Physical Unit Flow

This step is identical to weighted-average:

Units to account for:                  Units accounted for:
  Beginning WIP       8,000              Completed & transferred  40,000
  + Started          42,000              + Ending WIP             10,000
  = Total            50,000              = Total                  50,000  ✓

However, FIFO further divides the 40,000 completed units:

• From beginning WIP: 8,000 units (completed this period)
• Started and completed this period: 40,000 − 8,000 = 32,000 units

Step 2: Compute Equivalent Units (FIFO)

Under FIFO, we count only the work done during the current period:

FIFO Equivalent Units = Work to complete beginning WIP
                       + Started & completed units
                       + Work done on ending WIP

Compare to weighted-average: Materials EU was 50,000 (FIFO: 42,000); Conversion EU was 47,000 (FIFO: 43,800). The difference equals the equivalent units of work in beginning WIP that was done in the prior period:

• Materials: 50,000 − 42,000 = 8,000 (beginning WIP was 100% complete for materials)
• Conversion: 47,000 − 43,800 = 3,200 (beginning WIP was 40% complete = 8,000 × 40%)

Step 3: Compute Cost per Equivalent Unit (FIFO)

Under FIFO, we use only current period costs:

Materials cost per EU = Current materials ÷ FIFO Materials EU
                      = $126,000 ÷ 42,000 = $3.00 per EU

Conversion cost per EU = Current conversion ÷ FIFO Conversion EU
                       = $140,400 ÷ 43,800 = $3.2055 per EU (≈ $3.21)

Total FIFO cost per EU = $3.00 + $3.21 = $6.21 (rounded).

Compare to weighted-average’s $6.19 per EU. The FIFO figure better reflects current period costs, undiluted by the cheaper beginning WIP.

Step 4: Assign Costs (FIFO)

Cost of units completed and transferred out:

FIFO requires two sub-calculations for completed units:

A. Cost to complete beginning WIP:

Beginning WIP cost carried forward:   $33,600
+ Materials to complete: 0 EU × $3.00  =     $0
+ Conversion to complete: 4,800 EU × $3.21 = $15,386
= Total cost of beginning WIP units:  $48,986

B. Cost of units started and completed:

Materials: 32,000 EU × $3.00  = $96,000
Conversion: 32,000 EU × $3.21 = $102,576
= Total:                        $198,576

Total completed cost = $48,986 + $198,576 = $247,562

Cost of ending WIP:

Materials: 10,000 EU × $3.00  = $30,000
Conversion: 7,000 EU × $3.21  = $22,438
= Total ending WIP:             $52,438

Verification:

$247,562 + $52,438 = $300,000 ✓

When to Choose FIFO

FIFO is the superior choice when:

• Costs are changing significantly: Inflation, new supplier contracts, wage increases, or technology changes make current-period costs different from prior-period costs.
• Performance evaluation is critical: Management wants to evaluate current-period efficiency without contamination from prior-period costs.
• Cost control is a priority: FIFO reveals whether current production is becoming more or less expensive, enabling timely corrective action.
• Regulatory or contractual requirements: Some government contracts require FIFO-based cost data.

Comparing Results: Weighted-Average vs. FIFO

The total costs are identical — only the allocation between completed units and ending WIP differs. In this example the difference is small because costs did not change dramatically. In periods of significant cost change, the differences would be more pronounced.

Key Takeaways

• FIFO separates beginning WIP costs from current period costs, computing cost per EU using only current-period data.
• FIFO equivalent units = work to complete beginning WIP + started & completed + work on ending WIP (only current period work).
• FIFO cost per EU = current period costs ÷ FIFO equivalent units — a purer measure of current-period efficiency.
• Cost assignment under FIFO requires separately calculating the cost to complete beginning WIP and the cost of started-and-completed units.
• FIFO is preferred when costs change between periods, for performance evaluation, and when management needs current cost data.
• Both methods produce the same total cost; only the split between completed units and ending WIP differs.

What’s Next

In Lesson 7, we confront the darker side of production — spoilage, rework, and scrap. Not all units that enter the production process emerge as perfect finished goods. Some are ruined beyond repair (spoilage), some require additional work to fix (rework), and some produce residual materials of minor value (scrap). The accounting for these production casualties is one of cost accounting’s most nuanced topics.

FIFO 約當產量 = 完成期初在製品之工作 + 本期投入並完工 + 期末在製品之工作
材料：0 + 32,000 + 10,000 = 42,000
加工：4,800 + 32,000 + 7,000 = 43,800

材料：$126,000 ÷ 42,000 = $3.00
加工：$140,400 ÷ 43,800 ≈ $3.21

FIFO完成品換算量 = 期首仕掛品完成分 + 当期着手完成 + 期末仕掛品分
材料：0 + 32,000 + 10,000 = 42,000
加工：4,800 + 32,000 + 7,000 = 43,800

材料：$126,000 ÷ 42,000 = $3.00
加工：$140,400 ÷ 43,800 ≈ $3.21