 Hello and welcome to the session. This is Professor Farhad and the session we're going to look at the FIFO method when it comes to process costing. FIFO method compute unit cost using only the cost and output from the current period. Simply put, the FIFO method ignores anything that's coming from the prior period. And we'll see an example how do we do so. Now we're going to be using the same example that we use it with the weighted average method. And to kind of recap, the steps are the same between the two methods. We're still going to have to compute the equivalent units of production. We're going to have to compute the cost per equivalent unit and assign the cost to unit. So the steps are the same. But the way we compute the cost of equivalent unit are a little bit different and we only use the current cost. So let's start by computing the equivalent unit. So this is the data that we are giving from Smith company, which is the same data that we work for in the prior example. So let's read this very carefully. At the beginning of the month, we have June 1st, the beginning of the month, we have work in process 300 units, 40% completed as far as the material, 20% completed as far as to conversion cost. This period in June happens to be the month of June. We start at 6,000 unit. Unit completed and transferred out were 5,400. Excellent. And work in process at the end of June, we still have 900 unit, 60% as far as completion, as far as material and 30% as far as conversion cost. So let's first highlight the first main difference between FIFO and the weighted average. When it comes to the FIFO, we are only going to count the work that we're going to be putting this period. So simply put, anything completed in the prior period is not counted. And what's completed in the prior period? What's completed? Well, from the prior period, let me use a different pen, this way I highlight where I need to highlight. This is what's completed in the prior period, 300 units. And those 300 units, as far as material, they are completed as far as 40%, right? 40%. What if they are 40% completed? What remained to be completed? What remained to be completed is 60% as far as material. So if we take 300 unit times 60, what's remained to be completed? And this is remain to be completed. Be careful. What we look for, we don't include anything from the prior period. We want to know what remained to be completed. This is as far as material. We'll do the same thing for the conversion cost. We have 300 units, and the conversion cost is 20. Therefore, what remained to be completed is 80% times 80%. What remained to be completed is 240 units. Remained to be completed. The equivalent of 240 units. So the first thing we do, and this is, the reason I took my time a little bit more time on the step, just to remind you, this is the main difference between the two. Okay? So notice we'll take 300 unit times 60% how 100 minus 40 equal to 60%. What does 60% represent? That represent the remaining unit to be completed. 300 times 80%, 100 minus 20 is 240. Now, units started and completed during June is 5400. Hold on a second. How did I come up with this figure? 5,000, I'm sorry, 5,100. Well, let's go back to the original data. We are told unit completed and transferred out was 5,400. Okay, that's fine. So how did I know? Well, it's actually, it's given to me, not given 5,400 units and completed during June. So during June, we completed and transferred out 5,400. So we're saying here unit completed during June only 5,100. Why? Because remember, we have 300 coming from the prior month. So the assumption is we're going to complete those first. Remember, the method is first in, first out. So if the total that we completed is 5,400, if the total is 5,400, if the total is 5,400. Well, guess what? We have to subtract from it the 300 that came in, therefore completed, started and completed this month 5,100. So this is how I came, how I find out units started and completed during June. Now I transferred 5,400. Why? Because I added the 300. I added those 300 that I completed first. That's 5,000, first in, first out. Then what do I have an ending inventory? Obviously I have to find out my whip inventory, my whip ending inventory. Whip ending inventory, I will take the units which is 900 completed times 60%. Not remain to be completed, what's actually completed. Be careful. When you are computing the beginning inventory, beginning whip, you multiply it by 100% minus the percentage, whatever is left. Here you multiply it by the percentage itself. Okay, be careful. For conversion, 900 unit obviously and 30% completed as far as conversion cost. That's 270 and that's given me for material 540. So basically what I find out now is one of the most important computation in process costing and that's equivalent unit, an ending inventory, equivalent unit, an ending work in process, 5,820 as far as material and 5,610 as far as conversion. Let's take a look at this computation from a different perspective, from a different perspective. Here we have 600 units started this period of the 600 unit, 5,100 units started and completed. Okay, and 300 units, okay, 5,100 units started and completed. And remember what we did is this, the 300 unit, what happened is we needed to complete 60% as far as material. Why 60% because they were 40% completed, which is equivalent to 180. Then we added to them the 900 unit times 60% the ending inventory. And this is how we find out equivalent units of production, which is the same thing as this number right here, just a different computation. Now we're going to do the same thing for the conversion cost. For the conversion cost, for the conversion cost, we started with 6, we started this period, 6,000 unit transferred out 5,100. So this is 5,100. Then from beginning inventory, we needed to complete 80%. We needed to complete 80%. Why 80% because they already started 20. We needed to complete 80%, which is 240 unit. Then we add to them the 900 times the conversion rate for the conversion, the conversion rate for the conversion cost, which is 30%, will give us 5,610. Again, this is the same thing as doing this computation, just showing you the picture in a different format. Now let's kind of make some general statement. The FIFO method, the method that we are using now, removes the equivalent unit that were already in beginning inventory. So we don't account for those. And this is one of the main differences. We don't account in the units in beginning inventory as we do when we use the weighted average. But that's very important. So when we compute the equivalent unit, we don't account for any unit we completed. That's why we're more completed in the prior period. Does the FIFO method isolate the equivalent unit due to work performed during the current period? So we only account for the unit worked for this period. So let me show you in a sense the formula what we did. The equivalent unit of production, let me just look at this, the equivalent units of production for material under the weighted average was 5940. So if you go back to the prior lesson and you would see that the equivalent unit was 5940, minus the equivalent unit of material already completed in beginning inventory, already completed in beginning inventory 120. So by taking, so basically in a sense it's a shortcut, if you take the weighted average number for material 5940, which computed in another session, then you subtract from it the units already completed 120. How do I know 120? Look, I had 300 unit in beginning inventory 40% completed. So 300 times 40% equal to 120. So all what I did is I took the average method and I subtracted from it any units completed and I figured out my FIFO. So this is how this is my FIFO equivalent unit and this is my weighted average equivalent unit. So basically if you find weighted average and subtract anything that was completed in the prior period, let's do the same thing for the conversion. The equivalent unit of production for conversion under the weighted average was 5670. 5670 under the weighted average and all we have to do is subtract any units that was already completed. Well, what was completed was 300 times 20% completed in the prior unit, so that's 60. So subtract from it 60 units, you'll come up with 5610, which is the FIFO weighted average. So simply put, notice you just have to take out from the weighted average any units completed from the prior period. And that's basically the basic concept of the FIFO. You isolate what you completed in the prior period, you don't count it in this period. And the only dollar amount you would use is the dollar amount that you spent this period and we'll look at it. Now compute the cost per equivalent unit. So notice here, this is what we spent already in the prior period. This is the prior period and this is this period. Okay, so notice what's going to happen. Notice what's going to happen. We're going to take, so again here how we compute the equivalent unit. Here how we compute the equivalent unit of production, we already figured it out. Unit equivalent and ending inventory plus unit started and completed plus unit to complete and beginning inventory. So unit to complete and beginning inventory is unit beginning inventory times 100 times the percentage of completion. We already computed this. Or you could take unit transferred out, which was in us 5100 plus the equivalent unit in work and process minus the equivalent unit and beginning inventory. We already did this computation. So this is how we assigned the cost. Notice 18621 divide them, divide them by the equivalent unit as far as material. And what we come up with $20 and 38 cent, the unit cost as far as material will do the same thing for conversion costs. 81,000 130 divide them by 5,610. So this is here's what I want you to notice. We did not use the prior period numbers. We did not use the prior period numbers because they were spent in the prior period. So we isolate the cost. We only accounted for this cost. Therefore the total cost per unit equivalent is $20 for the material, $14.46 for the conversion, a total of $34.84. Now what we do is we're going to assign that cost after we find the cost. We assign the cost to ending inventory. We still have 540 equivalent unit in ending inventory as far as material and 270 as far as conversion, which is 900 times 60 and 900 times 30. Remember, this is ending inventory. Then we assign the appropriate cost that we computed in the prior slide, $20.38 for the material and $14.46 for the conversion. Therefore, our ending inventory in total is $14,911, which is $11,006 for material, 540 units times $20.38. And for the conversion cost, the total ending inventory is $3,905, which is 270 equivalent unit times $14.46 the cost per equivalent unit. Then we were going to compute everything else. So this was from the prior period. This is from the prior period. Remember, this is from the prior period. This number, the 10,039, which consists of 6,119 plus 3,920 is from the prior period. Then what we do is we add, here's what we add, cost to complete beginning work and process. How much did it cost us to complete those additional units? How many additional equivalent units? 180 as far as to material and 240 as far as to conversion. Now we assign the dollar amount to them and we compute the total. So 180 equivalent unit that those are to be completed from beginning inventory times $20.38. Then for conversion cost, 240 units times $14.46 will give us $7,114. Now, unit started and completed is $5,100. How did I know this already? I did this computation multiplied by $20.38 and the $5,100 as far as conversion multiplied by $14.46. The material is 103,946 and for cost started and completed this unit and $73,755 for conversion together $177.701. So cost of unit transferred out altogether is $194,884. So this is what was transferred out and what's what's remaining an ending inventory is we're at the compute at $14,911. Now we need to kind of make sure that's the case. We need to prepare a reconciliation table. Let's make sure that's the case. The cost and beginning inventory, this is the cost of beginning work and process. This was from the prior period. Okay. Plus the cost added to production this period $199,751 equal to $209,790. Do we end up with $209,770? Yes. Cost of ending inventory, what we end up with is $14,911 and what we transferred out $194,880. Okay. So they do add up to $209,791. So basically we did reconcile, we did the proper reconciliation. Excellent. And in most situation, the weighted average and FIFO will produce very similar units, especially in lean production environment. And what is a lean production environment when there is no ending inventory? If there's no ending inventory, everything's going to be transferred out. So there's no ending inventory. If there's no ending inventory, guess what? There's no beginning inventory. Therefore, everything that you started, you moved out. So it doesn't matter which method you use, the weighted average or FIFO, you're going to yield similar results. If the ending and beginning is zero, you're going to yield exactly the same results. But if the beginning and ending are very small, they would yield the same results. Of course, because what makes the difference is the beginning and the ending inventory. Specifically the beginning, but the beginning of one period, I'm sorry, the beginning of one period was the ending of the prior. So it's the beginning and the ending. Now just keep in mind from a cost control standpoint, FIFO is superior. And as I told you from the beginning, why? Because FIFO only account does not mix the cost of two periods. Only account for the cost for this period. So if you want the cost of this period, FIFO is better. Now why is this important? This is important, especially when you have two periods and the cost of the two periods differs substantially. So for example, the cost was low here and suddenly we had a spike in the cost. Now if you add them together, you're going to have an average. But the average is not really representative of either period. If you are costing something, you want to properly cost something. Therefore, the FIFO is superior because it only gives you the cost that you spend during this period. And this is basically a summary of the FIFO method. Obviously, I will work a few examples just to show you how FIFO and the weighted average work. You're going to have to practice this. That's the only way to learn this. If you're studying for your CPA exam, obviously this is covered. It's also covered on the CMA and make sure you study for your courses. If you have any questions, any comments by all means, email me or see me in class. And good luck.