Process Costing FIFO vs. AVCO

BU982T

Hi everyone,

I am currently doing some reviewing before starting Level 4 next month, but I find myself confused. In the BPP text for Basic Costing, when discussing process costing with the FIFO method, the texts says on pg. 153 :

(A) Assumes that OWIP is completed first.
(B) Spreads costs incurred in the period over work done in the period;

i.e. (i) Finished goods/output (started and finished), (ii) OWIP (finished), (iii) CWIP (started)

and then add on the OWIP costs to the sum of (i) and (ii) to give the total costs of finished output.

It's the last sentence that doesn't seem right to me as I have always understood FIFO to be different from the AVCO method precisely for the reason that FIFO only includes costs incurred in the current period. Also, what happens to the costs of starting products? Shouldn't I be determining the costs for that based on equivalent units?

The example that follows says there is OWIP of 50 units with a value (is value even the right word? I would imagine it should really be something like costs incurred already) of £610 and then says its 100% materials complete, 60% labour complete and 30% overhead complete.

Again, when finding the value (right word?) of good output it adds on Costs b/f in OWIP of £610. But surely those costs brought forward weren't incurred in the current period and therefore, should not be included? Rather shouldn't I instead be calculating the cost of completing those units and then adding this along with the equivalent units of CWIP?

This doesn't make sense to me as those £610 wouldn't have been incurred in the current period but in the previous period.

Can someone help me out?

Thanks

BU982T

I've completely misread the entire section.

SandyHood

Dear BU982T

I don't know whether your reply means you don't need help anymore.

Just in case. Here is a narrative attempt to address the original question.

The type of question you were looking at is one where there is opening work in progress.
Imagine the factory makes baked beans and that the opening inventory includes a vat of baked beans, some cans and some labels.

If we are looking at the current accounting period, we will have placed the baked beans that were in OWIP into the cans, sealed them, labelled them, placed them in boxes and moved them to the finished goods store.

We will have also brought in new ingredients and made more cans of baked beans.
In all probability there will be some closing work in progress at the end of the accounting period.

Under FIFO the value of the costs incurred converting the opening WIP into finished goods are added to the value of the opening WIP.
The other costs incurred in the period are then split between the baked beans started and completed in the period and the closing work in progress and the equivalent units approach is used.

AVCO is different (slightly easier)
The total number of units completed during the period are included together. All the costs in the opening work in progress and all the costs incurred in the period are added together. The cost per completed unit is then calculated and the closing WIP valued. This also uses the equivalent units approach.


In terms of your point about the £610.00 You are right. It was incurred in the previous period. But it is still in the department. Unlike the completed goods from that period which were transferred to finished goods.
£610.00 of inputs are in the department before the period started. They are then added to so that the WIP becomes finished goods. Then when they are transferred, the value credited to WIP (and debited to finished goods) is the total costs incurred getting them there. These are the £610 spent in the previous period plus the subsequent conversion costs incurred.

Sorry - a bit longer than I'd thought it would be

Sandy
I recommend:
http://www.amazon.co.uk/Management-Cost-Accounting-For-Dummies/dp/1118650492
www.sandyhood.com
sandy@sandyhood.com

BU982T

Hi Sandy, thank you for your explanation. In the end I understood it all, but your explanation is certainly still appreciated and has only cemented my understanding even more. Thank you.