7.5: Cost Reconciliation
Learning Outcomes
- Prepare sample cost reconciliation journals for both the weighted average and FIFO methods
The costs per equivalent unit are used to value the units in the ending inventory and the ones that have been moved to the next process. When calculating the equivalent units with the weighted average method and the FIFO method we will end up with a different quantity, using the same data.
Let’s first look at the equivalent units of production using the weighted average method.
| The Ultimate Planner: Weighted Average Method | ||
|---|---|---|
| Qty | % Complete | |
| Beginning WIP Inventory | 500 | 30% |
| Units started and completed | 4300 | 100% |
| Units started and NOT completed | 500 | 25% |
| Units completed and moved to process 2 | 4800 | |
| Ending WIP x % complete | 125 | |
| Equivalent units of production | 4925 |
Now, let’s look at the same information using the FIFO method:
| The Ultimate Planner: FIFO Method | ||
|---|---|---|
| Qty | % Complete | |
| Beginning WIP Inventory | 500 | 30% |
| Units started and completed | 4300 | 100% |
| Units started and NOT completed | 500 | 25% |
| Beginning WIP 500x 70% yet to complete | 350 | |
| Units completed and moved to process 2 | 4300 | |
| Ending WIP x % complete | 125 | |
| Equivalent Units of Production | 4775 |
Remember, in the weighted average method, we add the beginning WIP and the product started and finished in the period, adding the units started, but not completed based on the percentage completed.
With the FIFO method, we need to adjust the beginning WIP by the amount that was needed to complete yet to get that beginning WIP finished and moved on.
Figuring the costs per unit is our next task. Now that we have figured out how many equivalent units of production via each method, let’s apply the costs. Costs consist of raw materials, direct labor and overhead for each item produced. Sometimes, a great deal of the raw materials have already been put into a product, but it still needs a chunk of labor to move it to the next department. In this case, we may have a different percentage of completion for the raw materials and the conversion costs. Conversion costs are defined as direct labor plus manufacturing costs needed to finish a product.
Note : For the purposes of this course, we will assume one percentage of completion that is both the materials and conversion costs. Just a reminder, that these may be different in a real world application.So let’s look at a cost computation using the two methods:
Using the Weighted Average Method
Cost per equivalent unit = Cost of beginning WIP inventory + Cost added during the period
Equivalent units of production
So from our example above, we have 4925 equivalent units of production using the weighted average method. If our total cost of our beginning WIP inventory was $1,000 and we added $10,000 during the period.
$1,000 + $10,000 = $2.2335/ unit
4925 units
A reconciliation of the initial costs, plus costs added using the weighted average method:
| Costs to be accounted for: | |
|---|---|
| Cost of beginning WIP inventory | $1,000 |
| Costs added during the period | $10,000 |
| Total costs to be accounted for | $11,000 |
| Costs accounted for: | |
| Cost of ending WIP inventory | $279 |
| Cost of units transferred out | $10,721 |
| Total cost accounted for | $11,000 |
Using the FIFO Method
We only use the costs incurred during the current period. So in our example, we incurred $10,000 in the current period and our equivalent units of production from our example above is 4775, so
$10,000 =
$2.0942/ unit
4775 units
So to reconcile the costs using the FIFO method:
| Costs to be accounted for: | |
|---|---|
| Cost of beginning WIP inventory | $1,000 |
| Costs added during the period | $10,000 |
| Total costs to be accounted for | $11,000 |
| Costs accounted for: | |
| Cost of ending WIP inventory | $262 |
| Cost of units transferred out | $10,738 |
| Total cost accounted for | $11,000 |
(note: you need to not round intermediate calculations to get here!)
The cost of the ending WIP inventory is 125 units × $2.0942
The cost of the units transferred out is calculated:
4800 units × $2.09 plus the $658 of costs incurred for the beginning inventory that was transferred out.
The cost of the products initially in the beginning WIP need to be added in since in the FIFO method, we had not yet accounted for those costs.
The take-away here is that either method will end up with the same costs being moved forward with the completed units to the next process. These costs will be added to additional costs as the product moves through each of the processes until it arrives in the finished goods inventory.
Practice Questions