Question

What are the two main inventory methods used in process costing? What are the differences between these methods?

Short answer

Two main inventory methods used in process costing are:

1. Weighted average method.
2. First in, first out method.

The difference between these two methods is that FIFO uses current period cost and the weighted average method uses cost incurred over two periods.

Step-by-step solution

Definition of Process Costing

The costing method used by the business entity to allocate operational costs to the goods produced in mass is known as process costing. It is used by the business entity whose product passes through different processes.

Two inventory methods used in process costing

Weighted average method: A method of inventory valuation in which the business entity uses the weighted average cost to determine the cost of goods sold and the cost of inventory.

FIFO (First in, first out): A method used in the valuation of inventory where the business entity allocates the cost of the oldest inventory to the cost of goods sold and the cost of the latest inventory to the ending inventory.

Difference between the inventory methods used in process costing

The difference exists in the method of calculating the equivalent units:

1. Under the weighted average method, the business entity combines the units produced and the cost incurred over two periods for calculating the equivalent units of production.
2. Under the FIFO method, the business entity uses the cost incurred and units produced in the current period for calculating the equivalent units of production.