This article explains the computation of equivalent units of production under FIFO method. The concept of equivalent units has been explained in the previous article of this chapter — equivalent units of production – weighted average method. If you have come to this article directly, we suggest you go to previous article, read and understand the concept of equivalent units and then come back to this article to continue. Go to previous article.
The computation of equivalent units under FIFO method are a little bit complex than under weighted average method. The weighted average method blends the cost and work of the current period with the cost and work of the previous period. The FIFO method, on the other hand, clearly spares the work done in current period and the work done in prior period. The equivalent units of production under FIFO method include work done in the current period only.
Before we present the formula that is used in FIFO method and exemplify the procedure of computing equivalent units of production, you need to know the following two important characteristics of the FIFO method of process costing.
First, the FIFO method divides the units transferred out into two parts – the units completed and transferred out that belong to beginning inventory and the units completed and transferred out that belong to production started during the period.
Second, the FIFO method gives full consideration to the amount of processing done during the current period on the units in beginning inventory and on the units in ending inventory. In FIFO, both beginning and ending inventories are essentially converted to an equivalent units basis. The equivalent units belonging to beginning inventory represent the work done during the current period to complete the units that were not completed in the previous period. The equivalent units belonging to ending inventory represent the work done during the current period to bring the units to a stage of partial completion. These partially completed units at the end of the current period will become the beginning work in process inventory of the next period.
The formula to compute equivalent units of production under FIFO method is given below:
Equivalent units of production = *Units started and completed during current period + (Units in work in process beginning inventory × Percentage of work done during current period) + (Units in work in process ending inventory × Percentage of work done during current period)
*Units transferred out – Units in work in process beginning inventory
See the application of this formula in the following example
The Roberts company provides you the following data for department X:
Required: Compute the equivalent units of production of department X for the month of January using FIFO method.
In above solution, notice that the equivalent units of production is the sum of units started and completed during January, percentage of work done on beginning inventory and percentage of work done on ending inventory during January.
Units started and completed during January: The units started and completed during January has been obtained by deducting the beginning inventory from the total units completed during the month. These are the units on which 100% work with respect to materials and conversion cost has been done during January. In other words, we can say that these units do not require an computation of equivalent units. All the units that have been started and completed during current period must be included in the computation of equivalent units of production. In our example, the number of units started and completed during current period (i.e., January) is 9,200 (= 9600 – 400).
Beginning inventory — worked during January: Notice that only 45% (= 100% – 55%) units for materials and 70% (= 100% – 30%) units for conversion cost have been considered as the equivalent units. The reason is that 55% completion for materials and 30% completion for conversion had already been done in the previous period. As described earlier in this article, FIFO keeps separate the work done in prior period and the work done in the current period. The equivalent units of production under FIFO consist of work done during the current period only.
Ending inventory — worked during January: The computation of equivalent units in work in process ending inventory under FIFO is similar to weighted average method. Only the percentage of completion is included in the equivalent units of production. In above solution, this percentage is 40% for materials and 25% for conversion cost.