Question

Which of the following is true of the first-in, first-out (FIFO) costing method?

a. It includes only prior-period work in determining the completed units of output.
b. It calculates the equivalent units of output at the beginning of a reporting period.
c. It treats the work in beginning work-in-process as belonging to the current period.
d. It uses only current output to calculate the current-period unit cost.

Answer 1

The true statement regarding the FIFO costing method is that it treats the work in the beginning work-in-process as belonging to the current period, as FIFO assumes that the oldest items are processed first. Option c is true.

Step-by-step explanation:

Regarding the first-in, first-out (FIFO) costing method, it treats the work in the beginning work-in-process as belonging to the current period. FIFO assumes that the oldest inventory items are the first to be sold or used in production. Under this method, the cost of the earliest goods purchased or manufactured are the first to be expensed. Therefore, the current period's unit cost is based on the costs of items that were first in line to be sold or used in production. This approach can have implications on a firm's profitability and tax liabilities, especially in times of inflation where older costs may be lower than those incurred more recently. In contrast, the last-in, first-out (LIFO) method assumes that the most recent costs are the first to be recognized in determining cost of goods sold.