Process Costing: FIFO and Weighted Average Method

This business analysis report discusses the importance of process costing and highlights the use of FIFO and weighted average method for costing. The report includes calculations of units, equivalent unit cost, and total production cost for both methods. It is recommended that the company should use FIFO method for process costing. The report also includes references and an appendix for comparison of formulas.

Assessment 2 Business
Analysis Business Report

EXECUTIVE SUMMARY
The process costing is being referred to as the method through which companies decide for the
total production cost. There are many different types of the cost being levied by business and it is
necessary for them to distinguish between production and other cost. The current study
highlighted the use of FIFO and weighted average method for the costing.

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................4
FIFO............................................................................................................................................4
Weighted average cost method...................................................................................................5
CONCLUSION AND RECOMMEDAITON..................................................................................6
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8

MAIN BODY
FIFO
Calculation of units on basis of FIFO
Flow of Production Physical Units
(Car Seats)
Direct material
(Equivalent
Units)
Conversation
(Equivalent
Units)
Units to account for :
WIP, 1 July 2021(*) 2,500
+ Units started during
Current Period
18,500
= Units to account for (total) 21,000
Units completed and
transferred out
18,000
- From WIP, 1 July (*) 2,500 0 750
- Started and completed in
current Period
15,500 15,500 15,500
+ WIP, 31 July 2021 (**) 3000 3,000 1,200
= Units of work done in the
current period
21,000 18,500 17,450
While calculating the units produced the beginning work in process was considered and
this included the units started and completed and the units of the ending work in process. This is
total of 21500 units. This implies the total units being produced by the company is 21500 units.
Total
production
cost ($) Direct materials ($)
Conversion
costs($)
Costs to account for :
WIP, 1 July 2021 $727,750 $225,000 $502,750

+ Costs added during current
period $7,857,500 $3,500,000 $4,357,500
= Total costs to account for $3,725,000 $4,860,250
Equivalent unit of work done in the
current period $185,000 $17,450
Equivalent unit cost (FIFO) $438.90 $189.19 $249.71
With the help of the above calculation it is clear that on the basis of FIFO method it is
clear that the per unit cost for direct material is $189.19 and the conversion cost is $249.71.
Moreover, the total production cost was $438.90. Also, with the help of the above calculation of
the equivalent unit it was identified that the total units in process were 21000 and the working is
being done with help of it only (Koizumi, 2021). Also by using FIFO method it is assumed that
the units that are not completed last year will be finished before anything else is being started.
Hence, this method involves all the units that have been completed and not any other units.
Weighted average cost method
Flow of Production Physical Units
(Car Seats)
Direct material
(Equivalent
Units)
Conversation
(Equivalent
Units)
Units to account for :
WIP, 1 July 2021(*) 2,500
+ Units started during
Current Period
18,500
= Units to account for (total) 21,000
Units completed and
transferred out during the
current period
18,000 18,000 18,000
+ WIP 31, July 2021 (**) 3,000 3,000 1,200
= Units of work done to date 21,000 21,000 19,200
Total production Direct Conversion

cost ($) materials ($) costs($)
Costs to account for :
WIP, 1 July 2021 $727,750 $225,000 $502,750
+ Costs added during current
period
$7,857,500 $3,500,000 $4,357,500
= Total costs to account for $3,725,000 $4,860,250
Equivalent unit of work done
in the current period
$21,000 $19,200
Equivalent unit cost (FIFO) $430.52 $177.38 $253.14
With the help of this method that is weighted average method it is clear that the cost per
equivalent unit cost for material is 177.38 and for the conversion cost it is $253.14. This simply
implies that the conversion cost is more as compared to the FIFO method. On the other hand, the
per unit material cost is same as calculated in case of FIFO. Along with this the total cost as per
this method is less that is $430.52. In the case of FIFO calculation, it was more and in case of
weighted average method it is less (Vartiainen and et.al., 2020). Hence, it can be stated the
weighted average method is much better in case of process costing. This is particularly because
of the reason that when the effective costing need to be done then the method of weighted
average is better as the cost of the company is less in comparison to the FIFO method.
CONCLUSION AND RECOMMEDAITON
With the above analysis it is inferred that use of process costing is very important and in
case it will not be appropriately used then it will be affecting the working efficiency of the
business. this is necessary because proper costing assist the business in setting up correct cost
and earn good amount of profit.
It is recommended to the company that they must effectively undertake the use of FIFO
method as it is more appropriate and provides proper cost base for the company to take decision.

REFERENCES
Books and Journals
Koizumi, Y., 2021. Cost Accounting Assumptions for Waste Revisited-In Readiness for the 60th
Anniversary of the Cost Accounting Standards. Kyorits Business & Economics
Review. 1(1). pp.1-15.
Vartiainen, E. and et.al., 2020. Impact of weighted average cost of capital, capital expenditure,
and other parameters on future utility‐scale PV levelised cost of electricity. Progress in
photovoltaics: research and applications. 28(6). pp.439-453.

APPENDIX
Comparison of formulas of weighted average and FIFO