Process Costing using FIFO or Weighted Average - Which is Better for Performance Evaluation?

Abstract

Process costing is used to derive costs of the products that are identical, mass produced and are amenable to broad averaging of costs. This is opposed to job costing, where each unit or service is unique from the other and uses different quantities of resources. Process costing absorbs costs using mainly two methods-FIFO and Weighted Average. These methods throw up different value of cost for the cost objects, depending on the cost variations across periods. This article tries to decipher the reasons for the differences in the levels of cost absorption and tries to link it to performance evaluation or measurement of the process or department. It finds that FIFO is inherently fairer and just from a performance measurement perspective.