Chapter 12, Problem 21PSA

a.

To determine

Prepare a cost of production report for the Conversion Department for July.

Explanation of Solution

Production Cost Report:

A report which gives information about the total units produced and total cost incurred during the production process is called production cost report. This report is useful for the management of the company to take decision regarding production and the measure for cost control.

Prepare a cost of production report for the Conversion Department for July as follows:

CORPORATION S
Cost of Production Report
Conversion Department
For the month  Ended July 31, 2014
Equivalent Units
Quantities:	Actual units
Beginning inventory	50,000
Units added to production	190,000
Total to be accounted for	240,000
Quantities:	Whole units (A)	Percent to Complete (B)	Total (A × B)
Transferred out	180,000	100%	180,000
Add: Ending inventory	60,000	20%	12,000
Total accounted for	240,000		192,000
Cost per unit
Particulars	Amount
Beginning inventory	$40,000
Add: Cost added to production	$200,000
Total cost to be accounted for (1)	$240,000
Equivalent units (2)	192,000
Cost per unit (1 ÷ 2)	$1.25
Cost allocation
Cost of finishing department	$225,000
Add: Ending inventory	$15,000
Total allocated cost	$240,000

Table (1)

Working notes:

Calculate transferred out.

$\begin{array}{c}\text{Transferred out (units)}\text{=}\text{Beginning inventory +Units added to production}-\text{Ending inventory}\\ \text{= 50,000}\text{units +190,000 units }-60,000\text{units}\\ \text{=}180\text{,000}\text{units}\end{array}$

…… (1)

Calculate total allocated cost.

$\begin{array}{c}\text{Total allocated cost =}\text{Finishing department cost + Ending inventory cost}\\ \text{= }\left[\left(180,000\text{units }\times \text{\$1}\text{.25}\right)+\left(12,000\text{units }\times \text{\$1}\text{.25}\right)\right]\\ =\$225,000+\$15,000\\ =\$240,000\end{array}$

…… (2)

b.

To determine

Prepare cost of production report for the Finishing Department for July.

Explanation of Solution

Prepare cost of production report for the Finishing Department for July.

CORPORATION S
Cost of Production Report
Finishing Department
For the month  Ended July 31, 2014
Equivalent Units
Quantities:	Actual units
Beginning inventory	10,000
Units added to production (from conversion)	180,000
Total to be accounted for	190,000
Quantities:	Whole units (A)	Percent to Complete (B)	Total (A × B)
Transferred out	120,000	100%	120,000
Add: Ending inventory	70,000	50%	35,000
Total accounted for	190,000		155,000
Cost per unit
Particulars	Amount
Beginning inventory	$25,000
Add: Cost transferred in	$225,000
Cost added to production	$60,000
Total cost to be accounted for (1)	$310,000
Equivalent units (2)	155,000
Cost per unit (1 ÷ 2)	$2.00
Cost allocation
Cost of finishing department	$240,000
Add: Ending inventory	$70,000
Total allocated cost	$310,000

Table (2)

Working notes:

Calculate transferred out.

$\begin{array}{c}\text{Transferred out (units)}\text{=}\text{Beginning inventory +Units added to production}-\text{Ending inventory}\\ \text{= 10,000}\text{units +180,000 units }-70,000\text{units}\\ \text{=}120\text{,000}\text{units}\end{array}$

…… (3)

Calculate total allocated cost.

$\begin{array}{c}\text{Total allocated cost =}\text{Finishing department cost + Ending inventory cost}\\ \text{= }\left[\left(120,000\text{units }\times \text{\$2}\right)+\left(35,000\text{units }\times \text{\$2}\right)\right]\\ =\$240,000+\$70,000\\ =\$310,000\end{array}$

…… (4)

c.

To determine

Calculate the company’s gross margin for July, if 100,000 units are sold for $380,000 in July.

Explanation of Solution

Calculate gross margin.

$\begin{array}{c}\text{Gross margin}\text{=}\text{Sales revenue }-\text{Cost of goods sold}\\ \text{=}\text{\$3800,000}-\left(100,000\text{units}\times \text{\$2}\text{per unit}\right)\\ =\$380,000-\$200,000\\ =\$180,000\end{array}$

If company Corporation T sold 100,000 units for $380,000 means, gross margin of the Corporation S is $180,000.