Reviewer Average Fifo Finals.docx

COST OF PRODUCTION REPORT AVERAGE COSTING Accounting for beginning work in process Questions that must be considered in the preparation of cost of production report. In the preparation of a cost of production report, the existence of beginning work in process inventories poses a problem because of the following questions that must be considered: 1. Should distinction be made between completed units from the beginning work in process inventory and completed units from the current period? 2. Should the equivalent production of all the units completed during the current period be considered as 100% complete regardless of the stage of completion (work done) of the beginning work in process inventory? 3. Should the costs of beginning work in process inventory be included to costs that have been added to production during the current period to arrive at the equivalent unit costs? Average Costing The average cost method combines rather than separates completed units from beginning work in process and from new production. • All the completed units are given 100% equivalent production regardless of the stage of completion of the beginning work in process inventory. • The average unit cost is computed by adding the cost of each category (materials, labor, overhead, and transferred in cost) to the cost incurred for that category in the current month and dividing the resulting total by the equivalent units of production. • Both completed units and ending work in process inventory are valued using the same average unit cost. COMPREHENSIVE ILLUSTRATION Star Paper Company CUTTING DEPARTMENT Before recording the costs of the units transferred out to the Assembly Department, the Work in Process – Cutting Department in the general ledger shows a balance of P351,294 on February 28, 2018 as shown below:

Cost data

Production Report Note: Stage of completion of the beginning work in process is not necessary in the average method.

Equivalent Units of Production

On February 28 the Work in Process – Assembly Department account shows a balance of P469,391. This amount is composed of the following.

PACKAGING DEPARTMENT

Recording Sales and Cost of Goods Sold Assume that Star Paper Company sold 6,300 units in February at P80 per unit or at a selling price of P504,000. The entries to record sales and cost of goods sold during February are Accounts Receivable Sales

504,000 504,000

Cost of Goods Sold Finished Goods

327,978 327,978

 Units that were in the beginning work in process inventory are presented separately from the units that are started and completed in the current month in Section (d) Costs Accounted For on the cost of production report.  The units transferred out to the department during the month are composed of first the beginning work in process and the units started and finished in the current month. COMPREHENSIVE ILLUSTRATION Star Paper Company CUTTING DEPARTMENT

COST OF PRODUCTION REPORT FIFO METHOD First In, First Out Costing Under the first in, first out (FIFO) method, the units in the beginning work in process inventory are presented separately from the units started in the current month. • The units in process at the beginning are assumed to have been completed first. • The work done on the beginning WIP last month is kept separate from the work done during the current month. • Two equivalent units of production for completed units are computed, (1) units in process beginning completed this month and (2) units started in process completed this month. • Costs incurred in the current month and units produced in the current month are used to compute equivalent unit cost. This method is discussed in detail in Chapter 12. Advantages of using FIFO method 1. The unit costs are more accurate because they relate more directly to the units in the beginning inventory and the units started and completed during the period. 2. The unit costs reflect current conditions more clearly, because the cost of completed units that were in process at the beginning of the period and the cost of started during the period are computed separately. 3. Major changes in cost can be monitored easily for control purposes. APPLICATION  the costs of the beginning work in process inventory are kept separate and assigned only to the units in the beginning work in process.  Costs incurred during the current month are considered to be used first to complete the beginning work in process inventory and are added to the beginning costs balance.

ASSEMBLY DEPARTMENT

ASSEMBLY DEPARTMENT

PACKAGING DEPARTMENT