Discussion Questions and Answers:

Learning Objectives:

1. Find answers of the general questions about Fist in First Out and Average Method of process costing system.

Questions:

1. How does the FIFO method differ from the average costing method of process costing system? See answer.
   
2. Why are units completed and on hand in a processing department included in the department’s work in process? See answer.
   
3. How are equivalent production figure computed when FIFO costing is used? See answer.
   
4. A certain factory transferred out 8,800 completed units during its second period of operation. The period was begun with 400 units 75% completed and ended with 800 units 50% completed. Assuming that the FIFO method is used, what was the equivalent production for the period? See answer.
   
5. In another factory, the equivalent production (using the FIFO method) was 7,000 units during a period in which 500 units, 75% complete, were on hand at the start and 600 units,75% complete, were on hand at the end of the period. How many units were full completed? See answer.
   
6. What are disadvantages of FIFO Costing method? See answer.
   
7. Enumerate several of the basic difficulties frequently encountered in process costing.
   
8. Express on opinion as to the usefulness of data, derived from process costing for the control of cost.
   
9. Select the answer which best complete the statement:

Answers:

1. The primary difference between the FIFO method and the average method of process costing lies in the treatment of the cost of beginning work in process inventory. In the FIFO method, the cost of the beginning work in process inventory is kept separate from the cost of production of the current period.

   When determining the FIFO cost of unit completed and transferred to next department (process) or to finished goods, the cost of the beginning work in process inventory and the cost necessary to complete the beginning work in process units are added together. The sum of these two costs is the cost assigned to the units in the beginning work in process inventory that are transferred out. Units started and completed during the period are assigned a cost on the basis of costs incurred during the period for the equivalent units produced during the period.

   In the FIFO method each department is regarded as a separate accounting unit. Thus, the application of the FIFO method in practice is modified to the extent that subsequent departments usually combine all transferred-in costs into one amount, even though they could identify and separately account for the costs relating preceding department’s beginning inventory ant those relating to the preceding department’s units started and completed during the period.

   The average method of process costing may be simpler to use than the FIFO method, primarily because the beginning work in process inventory is averaged in as a part of the current production. In the average method, the beginning work in process inventory costs are combined with current production costs even though some of the production was begun prior to the current period. When equivalent units are determined, work done on the beginning inventory in a preceding period is regarded as if it were done in the current period. Unit costs are determined by dividing the sum of the beginning work in process and the cost of current production costs by the equivalent units produced, including the units in the department’s beginning work in process inventory. The cost of all units transferred out of a department during a period is the product of the number of units completed multiplied by the average cost.
   

2. Units completed and on hand in a department must be considered as work in process of that department, because as far as total company inventory is concerned, the units have not been transferred out of the department and therefore, are still work in process. They are still the responsibility of the supervisor of that department.
   
3. When FIFO costing is used, equivalent production figures are determined by totaling the number of beginning work in process units restated in terms of units completed during the current period, units started and finished during the period, and ending units in process restated in terms of units completed during the current period.
   
4. Transferred out ———————————————8,800
   Less beginning inventory all units ——————————400
   Started and finished this period ————–(8,800 – 400) = 8,400
   Add beginning inventory work this period ——–(400 × 25%) = 100
   Add ending inventory  ————————–(800 × 50%) = 400
   Equivalent production ————————————-= 8,900
   
5. Equivalent production———————————-7,000
   Less:
   Ending inventory (800 × 75%)———————-450
   Beginning inventory (work this period) (800 × 75%)   200
   650
   Started and finished this period————————–6,350
   Add beginning inventory (all units) ———————–500
   Transferred out——————————————6,850
   
6. This disadvantages of using the FIFO method in processing costing are those associated with this type of costing in general, and concern the fact that several costs used at the same time require additional computations which can lead involved procedures and often inaccurate calculations.
   
7. The basic difficulties encountered in process costing include (a) the determination of production quantities and their stages of completion, (b) materials cost computations frequently requiring considerable analysis, (c) the calculation lost unit costs because units are lost due to many factors and all stages of production, and (d) the fact that many process cost type industries are multiple product operations which necessitate the allocation of cost to various products using different bases, some of which are considered quite unscientific.
   
8. Costs computed in a cost of production report are useful in determining inventory costs and in computing the cost of goods sold. However, for cost control purposes, much more information is required than is reported in the cost of production report. Unit costs should be compared with standard unit costs or previous data top determine whether they represent efficient operations. Also, materials, labor, and factory overhead must be reported by item of material used, type of labor operations involved, and overhead in a manner meaningful for cost control purposes. Actual total and unit costs reported in a cost of production report are necessary, but reports must also be designed to assist control of costs.
   
9. (a) 3
   

   Units completed	14,000
   Less beginning inventory (all units)	4.000
   	——
   Started and finished during this period	10,000
   Add beginning inventory (work this period) – (4,000 × 1/2)	2,000
   Add ending inventory (work this period) – (6,000 × 1/2)	3,000
   	——
   Equivalent production	15,000
   	======
   $180,000 manufacturing cost / 15,000 equivalent production = $12 per unit
   (b) 2
   (c) 2

You may also be interested in other useful articles from “process costing system – addition of materials and beginning inventory” chapter:

1. Increase in Unit Cost Due to Addition of Materials
2. Addition of Materials – Increase in units and Change is Unit Cost
3. Beginning Work in Process Inventories – Average Costing Method
4. Cost of Production Report FIFO
5. Average Costing Method Versus FIFO Costing Method – Process Costing
6. Difficulties Encountered in Process Costing Procedure
7. Discussion Questions and Answers

8. Similarities and Differences between Job Order and Process Costing System

9. Operation Costing /Hybrid Costing System