FIFO and Weighted Average Equivalent Units

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  • #183865
    Anonymous
    Inactive

    A process costing system was used for a department that began operations in January 2012. Approximately the same number of physical units, at the same degree of completion, were in work in process at the end of both January and February. Monthly conversion costs are allocated between FIFO method, would the weighted-average method use the same or a greater number of equivalent units to calculate the monthly allocations?

    Equivalent units for weighted average compared to FIFO

    January February

    a. Same Same

    b. Greater number Greater number

    c. Greater number Same

    d. Same Greater number

    Answer: 27. (d) The requirement is to compare the number of equivalent units of production (EUP) computed using the weighted-average method to the EUP computed using the FIFO method for two months. The weighted-average method determines EUP based on the work done on the units in all periods, while the FIFO method uses only the work done in the current period. Because the system began in January, there was no beginning inventory for the fi rst month of the comparison. Both methods would compute the same number of EUP for January because the only work done on these units was done in the period under consideration. Because there was ending inventory in January, however, February would have a beginning inventory. The weighted-average method would therefore compute a greater number of EUP than FIFO for February because it would include the work done in January while FIFO would not.


    The explanation says Weighted average method includes work done in January while FIFO would not. Doesn’t that contradict the Wiley textbook, where it says that FIFO includes beginning inventory but Weighted average does not?

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  • #517713
    Anonymous
    Inactive

    You subtract Beginning Inventory for FIFO when calculating EUP. Since production began in January, there was no Beginning Inventory to subtract for FIFO, therefore, FIFO = W/A. In February, there WAS a beginning inventory for FIFO to subtract for EUP, thus FIFO < W/A.

    #517744
    Anonymous
    Inactive

    You subtract Beginning Inventory for FIFO when calculating EUP. Since production began in January, there was no Beginning Inventory to subtract for FIFO, therefore, FIFO = W/A. In February, there WAS a beginning inventory for FIFO to subtract for EUP, thus FIFO < W/A.

    #517715
    Anonymous
    Inactive

    @CMaxwell

    Ah gotcha. I completely forgot about that part, that you subtract Beginning equivalent units. I knew that you included them in the calculation for FIFO, but forgot that you subtract them, not add them.

    #517746
    Anonymous
    Inactive

    @CMaxwell

    Ah gotcha. I completely forgot about that part, that you subtract Beginning equivalent units. I knew that you included them in the calculation for FIFO, but forgot that you subtract them, not add them.

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