The Nature of the Cumulative Method with FIFO in a Process Cost Accounting System

Abstract

Applying the first-in first-out method (FIFO) to the cumulative method in a process cost accounting system is likely to mislead cost management activities. This is because the beginning work-in-process cost of the previous-process has an impact on the ending work-in-process cost of post-processes, despite the fact that in the cumulative method with FIFO the calculation method assumes that the beginning work-in-process will be completed first. In this paper, by modeling the calculation structure of the cumulative method with FIFO, we find out the degree of impact of the beginning work-in-process cost in the previous process on the ending work-in-process cost in the post-processes, f^(j→j). Furthermore, we clarify the problems inherent in the cumulative method with FIFO, and then we consider the possibility of misleading cost management activities. Our finding is that it is important to measure the degree of impact on the ending work-in-process cost in the post-processes from the beginning work-in-process cost in the previous process, and to share this information between managers of each process.