Second Department-FIFO MethodRefer to the data for Durall Company in Case 4–20. Assume tha...

Second Department-FIFO Method

Refer to the data for Durall Company in Case 4–20. Assume that the company uses the FIFO method in its process costing system.

Required:

1. Prepare a report for the Forming Department for October showing how much cost should have been assigned to the units completed and transferred to the Stamping Department and to the ending work in process inventory.

2. Assume that in order to remain competitive, the company undertook a major cost-cutting program during October. Would the effects of this cost-cutting program tend to show up more under the weighted-average method or under the FIFO method? Explain your answer.

Most large organizations have both operating departments-and senice departments. The central purposes of the organization are carried out in the operating departments. In contrast, service departments do not directly engage in operating activities. Instead, they provide services or assistance to the operating departments. Examples of operating departments include the Surgery Department at Mt. Sinai Hospital, the Geography Department at the University of Washington, the Marketing Department at Allstate Insurance Company, and production departments at manufacturers such as Mitsubishi, Hewlett-Packard, and Michelin. In process costing, the processing departments are all operating departments. Examples of service departments include Cafeteria, Internal Auditing, Human Resources, Cost Accounting, and Purchasing.

The overhead costs of operating departments commonly include allocations of costs from the service departments. To the extent that service department costs are classified as production costs, they should he included in unit product costs and thus, must be allocated to operating departments in a process costing system.

Three approaches are used to allocate the costs of serv ice departments to other departments: the direct method, the step-down method, and the reciprocal method. These three methods are discussed in the following sections. However, before getting into the details of these methods, we will discuss interdepartmental senices.