I would like to ask you for help. I have troubles to understand how fifo works in the context of work in process.
I think I understand fifo in general.
1st May-bought 10 units, 5 pounds each
2nd May-bought 10 units, 6 pounds each
3rd May- sold 12 units
Your cost of goods sold is : 10 *5 (from first buy) plus 2*6 (from second buy) equals to 62 pounds.
I don't know how this concept applies to work in process unfortunately. My problem is that I know how they calculate everything. I can calculate cost per equivalent unit , cost of units transferred etc but I don't know what they do it for . I don't know how company benefits from valuing work in process using fifo. |I don't know why it is important to divide costs incurred in current period by work done this period (expressed in equivalent units) in order to arrive at cost per equivalent unit. Can you guy help me to understand reason why fifo is applied to work in process ? What do they want to achieve by applying fifo to value work in process. As I said before I know how they calculate everything. My problem is that I don't understand why .
Probably it is important to remember that in fifo they want to achieve two things:
1. They want to know how much it costed them to finish opening work in process plus how much it costed them to start and finish some units plus how much it costed them to start closing work in process.
2. They want to know the value of units completely finished and taken to warehouse.
It sounds like you are on the way to answering your own question (which is always good when you are studying!).
The work in progress needs to be valued for the financial statements at year end. There are finished goods, raw materials and the work in progress (WIP) that's on the manufacturing floor, all three have a value that should be included in the balance sheet.
WIP is not finished goods and can't be sold yet - more work might be needed, or more parts to be added - so its value at year end also needs to be deducted from the cost of sales when calculating the profit/loss in the Statement of Financial Performance. The WIP value would be included in the cost of sales in the next accounting year, when the goods have been finished and are ready for sale.
Its also useful for management accounting - regular reports and stock valuations help a business check whether its meeting production targets and staying within budget.
