FIFO costing

This understanding is fundamental for managing costs, forecasting profits, and developing budgets.

In this problem you were responsible for actually calculating the carry over costs of the units which equate to the cost of those units that left the prior department. What becomes important is that you can not combine the costs of the different batches of product as they flow through the manufacturing process.

SO…Lets say you have the following situation manufacturing process:

MIXING → MOLDING→PAINTING→PACKAGING→FINISHED GOODS→COGS

We are going to follow one batch of units all the way through the process…the A units from the mixing department. Amix

Amix when these units move into the Molding department they become part of the units that are entering the molding department.

If we look at the Molding department we will see that it has A units too (the left overs from the prior period) Those will be identified as Amold

SO…during the current production period the WIP units for the Molding department will have the following unit identities.

Amold

Amix,,, The units that were completed and moved out of mixing

Bmix The units that were started AND completed and moved out of mixing

Remember that the Amix + Bmix comprise the Bmold + Cmold units for the molding department.

If we continue the FIFO process, the first units leaving the molding department and moving into the Painting department will be Amold units.

The next units leaving the molding department will be the Bmold units…which must be identified and maintain their unique batch so….the first units of Bmold units that are completed will be the Amix units….

· if all of the Amix units are completed, then the next units of Bmold will include the Bmix units that have been completed and the remaining units in the molding department at the end of the production period are the unfinished Bmix units which are now the Cmold units

· if not all of the Amix units are completed, then the remaining units at the end of the production period which are now the Cmold units will consist of some Amix units plus all of the Bmix units.

OK…so now lets look at the Painting department…what have we got?

Well the painting department will have A units left over from the prior period: Apaint

There will be the units that leave the molding department and move into the Painting department….the Bpaint+Cpaint units.

WELL what are those units??

The Bpaint units will include all the units that have been started AND finished…

The Cpaint units will be those that were started BUT not finished…

USING FIFO….

the first units to move out of Painting into Packaging will be the Apaint Units.

the next units to move out of Painting into Packaging will be the Bpaint Units

The Amold units will be the first units to be part of Bpaint

· If all the Amold units are completed, then the Amix units that are completed will become part of Bpaint

· If all of the Amix units are completed, then Bmix units that are completed will become part of Bpaint and the remaining Bmix units will become Cpaint

· If not all of the Amix units are completed, then some Amix and all of the Bmix units will become Cpaint

· If not all of the Amold units are completed, then the unfinished Amold units and all of the Amix units and all of the Bmix units will become Cpaint

Are you seeing how important it is that we do not combine the various batches of product as they move through the process? The Amix units will have a totally different per unit cost than the Amold units. The Amold units will have a totally different per unit cost than the Apaint Units…and can you imagine the differences that will exist between Apaint units and Cmix units???

As you review the actual solution, you should be able to trace the costs of the various units to see how the COGS is calculated and Gross Profit is determined.

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