FIFO process method

Return to the department that started the month with half-finished toys carried over from last month. The weighted-average method blends last month's costs into this month's average. But suppose you want to know what it cost to make units this month, using only this month's effort and prices. To do that, you must mentally finish the carried-over units first (counting only the work added this period), then make the new units, and keep last period's costs from contaminating the answer. That careful separation is the FIFO process method.

Under FIFO, equivalent units count only the work done this period: the effort needed to complete beginning work in process (just the unfinished portion), plus units started and finished this period, plus the equivalent units in ending work in process. Cost per equivalent unit uses only current-period cost — the beginning inventory's own cost is not averaged in; it stays attached to the units it belongs to and is layered out first. So if 102,000 equivalent units of current work cost 47,000 dollars, the current-period cost per equivalent unit is about 0.461 dollars, a 'cleaner' figure that reflects this month alone. The completed-and-transferred units then carry a mix of last period's leftover cost and this period's rate.

FIFO matters when managers want an accurate measure of current-period cost and efficiency, because it does not let stale prior-period costs muddy the current rate — making it better for cost control and performance evaluation. It is also closer to the real physical flow in many continuous processes, where older units genuinely move through first. The honest catch: FIFO is more complex to compute, requires tracking the completion status of beginning inventory, and in steady conditions gives almost the same answer as weighted-average — so many firms judge the extra precision not worth the extra effort and use weighted-average instead.