Exercise 7: Quantity schedule, cost per equivalent units – FIFO method

The Hotex Company produces a chemical to be used in the production of pesticides. The company is currently using weighted average method to prepare production reports for all of its departments. The company’s CEO is interested to know how converting from the weighted average method to FIFO method would impact the preparation of quantity schedule, determination of equivalent units and computation of cost per equivalent unit.

The quantity schedule and the number of equivalent units determined using weighted average method for July for the first department are given below:

Quantity schedule and equivalent units – weighted average method:

The selected cost data related to first department is given below:

Cost in work in process (WIP) inventory on July 1:

• Materials cost: $113,200
• Conversion cost: $29,800

Cost added by the first department during July:

• Materials cost: $770,000
• Conversion cost: $429,000

Required:

1. Prepare a quantity schedule and determine the equivalent units of production using FIFO method.
2. Compute cost per equivalent unit for July for the first department using FIFO method.

Solution

1. Quantity schedule and equivalent units – FIFO method

*Work done in July: 25% (= 100% – 75%) with respect to materials and 60% (= 100% – 40%) with respect to conversion.

**Units started – Work in process ending inventory
70,000 – 10,000 = 60,000
Or
Units transferred out – Work in process beginning inventory
75,000 – 15,000 = 60,000

2. Cost per equivalent unit – FIFO method