All production costs have been steadily rising in the Donner Company for several
ID: 2435205 • Letter: A
Question
All production costs have been steadily rising in the Donner Company for several periods. The company maintains large work in process inventories. Donner Company's cost per equivalent unit computed using the FIFO method would be:
A) the same as that computed under the weighted-average method.
B) higher than that computed under the weighted-average method.
C) lower than that computed under the weighted-average method.
D) could be lower than, the same as, or higher than that computed under the weighted-average method.
the answer is B, but I don't know why.
the cost per equilavalent for the weighted-average method, it's [(cost of beginning work in process inventory) + (cost added during the period)] / equivalent units of production
whereas FIFO method only includes 'cost added during the period' on the numerator. So in my opinion, if costs have been rising for several months, doesn't that make cost per equivalent unit for weighted-average method bigger than FIFO because it includes beginning balance?? (bigger numerator)
Please elaborate for me and tell me what I am misunderstanding. Thank you.
Explanation / Answer
Please elaborate for me and tell me what I am misunderstanding. Thank you. The cost per equivalent unit can be higher if the number of Units purchase are more in the beginning and less after-words. The cost per equivalent unit can be lower if the number of Units purchase are less in the beginning and more after-words. Hence the correct answer should be (D). Suppose you take the following figures Opening stock 10 units @ $10 Purchased 50 units @ $18 Units produced 30 Cost of equivalent production FIFO Opening 10 @ $10 = 100 Purchase 20 @ $18 = 360 Total $460 Weighted average Opening stock 10 units @ $10 $100 Purchased 50 units @ $18 $900 Total 60 units $1,000 Per unit cost $16.67 Cost of equivalent production 30 units @ $16.67 $500 You may change the opening stock as 25 units @ $10 and purchase 35 units @ $18, the difference will be as follows: Cost of equivalent production FIFO Opening 25 @ $10 = 250 Purchase 5 @ $18 = 90 Total $340 Weighted average Opening stock 25 units @ $10 $250 Purchased 35 units @ $18 $630 Total 60 units $880 Per unit cost $14.67 Cost of equivalent production 30 units @ $14.67 $440 I hope with the above example, your doubts are clear.