Which of the following is are the same between the weighted average and FIFO method?
Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method. Under the FIFO method, we assume any units that were not completed last period (beginning work in process) are finished before anything else is started. The following table shows the differences between the weighted average method and the FIFO cost method: Show
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We will look at each item individually as we discuss the steps of process costing. Under either method, weighted average or FIFO, process costing consists of 5 steps:
Physical Flow of Units The physical flow of units is as follows under the weighted average method:
This is altered just slightly under the FIFO method as we must separate the items in units completed into Units Completed from beginning work in process and Units started and completed this period since under FIFO, we must finish anything from beginning work in process before we start something new. Under the FIFO, we the physical flow of units would be documented as:
Just as in the weighted average method, the 2 Total Units figures must agree! Equivalent Units of Production 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):
To illustrate the computation of equivalent units under the FIFO method, assume the following facts (for simplicity we are using just one percent complete for materials, labor and overhead):
The physical flow of units would be (calculate units started and completed as units started 10,000 – units in ending work in process 5,000):
The equivalent production for the period would be:
Cost per Equivalent Unit 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:
Assign Costs When we assign costs to units completed and transferred and units remaining in ending work in process under the FIFO method, we need the following items:
This video will provide a demonstration of cost assignment under the FIFO method. Reconcile Costs Finally, something is the same under FIFO and Weighted Average. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. Both totals should agree. The cost reconciliation would be:
In the next page, we will do a demonstration problem of the FIFO method for process costing. What are the basic difference between weighted average method and FIFO method in process costing?The key difference between FIFO and weighted average is that FIFO is an inventory valuation method where the first purchased goods are sold first whereas weighted average method uses the average inventory levels to calculate inventory value. Which is better FIFO or weighted average?The inventory will be excluded from a business based on an average cost of all goods present in a business. FIFO method will report higher profits if inflation is rising and vice versa. Weighted average method will report higher profits if inflation is decreasing and vice versa. What is the difference between FIFO and moving average costing methods?That's why using FIFO, valuation rate generally shows higher value compared to moving average, and hence higher gross profit and net income. On the other hand, since it increases gross profit and income, it also increases tax liabilities to the company. Why is the FIFO method superior to the weighted average method?Because it does not combine the costs of the current period with the prior period, the FIFO method is, therefore, more suited. The Weighted Average Method, however, incorporates costs from both the current and prior periods. Thus, the price indicated is inappropriate. Is FIFO and weighted average the same?The key difference between FIFO and weighted average is that FIFO is an inventory valuation method where the first purchased goods are sold first whereas weighted average method uses the average inventory levels to calculate inventory value.
Which method is best and correct to use FIFO LIFO weighted average simple average?While there may be uses for each of these inventory management methods, the reality is that most businesses will use FIFO. It's the easiest calculation and the most logical approach, so unless there is a strong reason for using LIFO or weighted average, FIFO is the default.
Is average cost method the same as weighted average?The average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. The average cost method is also known as the weighted-average method.
What are the key differences between weighted average and FIFO methods for computing equivalent units?According to the Accounting for Management website, the main difference between the FIFO and weighted average method is in the treatment of beginning work-in-process or unfinished goods inventory. The weighted average method includes this inventory in computing process costs, while the FIFO method keeps it separate.
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