Process Costing FIFO vs. AVCO

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

Best Answers

Answers

  • BU982TBU982T Posts: 40Registered
    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.
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