FIFO Inventory Method of Finding Equivalent Units

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  • 0:02 FIFO Inventory Method
  • 0:34 Finding Equivalent Units
  • 2:26 Production Cost Report
  • 3:41 Lesson Summary
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Lesson Transcript
Instructor: Tonya Brewer

Tonya has a Master of Science degree in Accounting.

In this lesson, you will be learning about the FIFO inventory method of finding equivalent units. You will learn how to find equivalent units using the FIFO inventory method and be able to use this measure to create a production cost report.

FIFO Inventory Method

Shirts R Us is a company that specializes in making shirts. The CFO for this company must decide which inventory method will work best for them. After much consideration, he decides on the FIFO (First in First Out) inventory method. As the new accountant, he assigns you the task of finding the equivalent units and creating a production cost report.

Finding Equivalent Units

The FIFO cost method assumes that the cost that enters the department first will exit the department first, just like the name: first in will be first out. Equivalent units are the units that are currently in production, multiplied by the percentage of those units that are complete or those that are in progress.

You can calculate equivalent units by using the formula that's shown in this example:

Say you've cut enough material to make 600,000 units of shirts. Assume that ending work in process is 25 percent complete for all components of production (material, labor, and overhead), you have a beginning inventory cost of $48,000, and production costs of $53,800 were also incurred during the month. The table shows the computation of equivalent units.

Equivalent Units of Production Units Complete Equivalent Units
Completed and transferred 600,000 100 percent 600,000
Work in process, ending 600,000 25 percent 150,000

Equivalent units equals 750,000. Although 25 percent of the units are unfinished, you can treat them as 150,000 completed units. You then add them to the already completed units to get 750,000. This gives you the number of equivalent whole units you have produced.

The next step is to compute the cost per equivalent unit. Take your total costs of $101,800 and divide it by the number of units. Remember that the total costs are the sum of the beginning inventory cost ($48,000) and the costs added during production ($53,800):

Cost per equivalent unit = total costs ÷ number of units

Cost per equivalent unit = $101,800 ÷ 750,000

Cost per equivalent unit = $0.1357

Now assign the cost per equivalent unit to the completed work and the work in process. The table shows the calculation (costs are rounded).

Assignment of Costs Units Cost/Unit Cost Assigned
Completed and transferred 600,000 $0.1357 $81,440
Work in process, ending 150,000 $0.1357 $20,360

Equivalent units = $101,800

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