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Process-costing technique requires that the costs of the period be divided by the output of the period. Thus, theoretically, only current-period costs and current-period output should be used to compute current-period unit costs. The first-in, first-out (FIFO) costing method attempts to follow this theoretical guideline. Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, the FIFO method recognizes that the work and costs carried over from the prior period legitimately belong to that prior period.
As because FIFO excludes prior-period work and costs, we need to create two categories of completed units. FIFO assumes that units in beginning work in process are completed first, before any new units are started. Thus, one category of completed units is that of beginning work-in-process units. The second category is for those units started and completed during the current period.
As because FIFO excludes prior-period work and costs, we need to create two categories of completed units. FIFO assumes that units in beginning work in process are completed first, before any new units are started. Thus, one category of completed units is that of beginning work-in-process units. The second category is for those units started and completed during the current period.
These two categories of completed units are needed in the FIFO method so that each category can be costed correctly. For the units started and completed, the unit cost is obtained by dividing total current manufacturing costs by the current-period equivalent output. However, for the beginning work-in-process units, the total associated manufacturing costs are the sum of the prior-period costs plus the costs incurred in the current period to finish the units. Thus, the unit cost is this total cost divided by the units in beginning work in process.
