Comparing FIFO and Weighted Average in Process Costing - Auto Ltd

This presentation delves into financial management, focusing on process costing and comparing the FIFO (First-In, First-Out) and weighted average methods. It begins by defining financial management and process costing, then outlines the advantages and disadvantages of each costing method. A detailed scenario involving Automobiles Manufacturer Ltd is used to calculate the cost per equivalent unit using both FIFO and weighted average methods, demonstrating the practical application of each. The presentation concludes by summarizing the key aspects of financial management and process costing, highlighting the usefulness of these methods in enterprise financial analysis. References to relevant books and journals are also included to support the analysis and provide further reading.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
Introduction
Process costing
FIFO method
Determining the cost per equivalent unit for the automobiles
manufacturer ltd. By FIFO method
Weighted average method
Determining the cost per equivalent unit for the automobiles
manufacturer ltd. By weighted average method
Conclusion
References

INTRODUCTION
 Financial management is concerned with management of
financial activities of the organization.
 The presentation will explain the meaning of process costing.
 The FIFO and weighted average methods are highlighted in the
report.
 This presentation will calculate the cost per equivalent unit for
Automobiles Manufacturer Ltd using the FIFO and weighted
average profit methods.

PROCESS COSTING
 Accounting methodology used by the mass-producing
manufacturing firms whose products are highly identical.
 Process costing serves the manufacturing firms whose expenses
incurred are similar for each of the production units and there is
not requirement for tracking the costs of individual units
undergoing production processes.

FIFO METHOD
Advantages Disadvantages
The concept is simple and easily
understandable.
Though easy of understand this
method gets complicated as it
requires high amount of data
that increases the possibilities
regarding clerical errors.
A practical method that eases the
process to identification of cost at
the time sales being made.
Unsuitable method in the
situation of hyper inflation in the
economy.

DETERMINING THE COST PER EQUIVALENT
UNIT FOR THE AUTOMOBILES
MANUFACTURER LTD. BY FIFO METHOD

Scenario 3
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
• Organization: Automobiles Manufacturer Ltd
• Industry Type : Manufacturer
• Topic of Area : Process Costing
0% left 30%
left
100
%
40
%
(*) Degree of completion : 100% for direct materials and 70% for conversion cost
(**) Degree of completion : 100% for direct materials and 40% for conversion cost
a) FIFO

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
Scenario 3
a) FIFO

WEIGHTED AVERAGE METHOD
Advantages Disadvantages
Unusual pricing of materials effect
gets minimized.
Possibility of materials not charged
at current price.
Practical and appropriate technique
of charging cost of raw materials
used by producing unit.
For accurate results average price
is to be calculated upto five
decimal places.
Helps in analysing operational
results for management.
Production cost being charged are
not at actual cost.
Easy application in case material
related receipts are less.
Calculations required when receipts
are numerous.

Scenario 3
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
• Organization: Automobiles Manufacturer Ltd
• Industry Type : Manufacturer
• Topic of Area : Process Costing
100
% 40
%
(*) Degree of completion : 100% for direct materials and 70% for conversion cost
(**) Degree of completion : 100% for direct materials and 40% for conversion cost
b) Weighted – average

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 $21,000 $19,200
Equivalent unit cost (FIFO) $430.52 $177.38 $253.14
Scenario 3
a) Weighted – average

CONCLUSION
The presentation has explained the meaning and requirement of financial management
for an enterprise.
The presentation has outlined process accounting meaning and needs.
The various advantages and disadvantages associated with the FIFO method has been
discussed.