Chapter 12, Problem 21PSB

a.

To determine

Prepare a cost of production report for the Compression Department for June.

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 Compression Department for June as follows:

PG
Cost of Production Report
Compression Department
For the month  Ended June 30, 2014
Equivalent Units
Quantities:	Actual units
Beginning inventory	10,000
Units added to production	52,000
Total to be accounted for	62,000
Quantities:	Whole units (A)	Percent to Complete (B)	Total (A × B)
Transferred out	46,000	100%	46,000
Add: Ending inventory	16,000	25%	4,000
Total accounted for	62,000		50,000
Cost per unit
Particulars	Amount
Beginning inventory	$3,000
Add: Cost added to production	$152,000
Total cost to be accounted for (1)	$155,000
Equivalent units (2)	50,000
Cost per unit (1 ÷ 2)	$3.10
Cost allocation
Cost of finishing department	$142,600
Add: Ending inventory	$12,400
Total allocated cost	$155,000

Table (1)

Working notes:

Calculate transferred out.

$\begin{array}{c}\text{Transferred out (units)}\text{=}\text{Beginning inventory +Units added to production}-\text{Ending inventory}\\ \text{= 10,000}\text{units +52,000 units }-16,000\text{units}\\ \text{=}\text{46,000}\text{units}\end{array}$

…… (1)

Calculate cost added to production.

$\begin{array}{c}\text{Cost added to production =}\text{Materials + Labor}\text{+}\text{Overhead}\\ \text{=}42\text{,000}\text{+\$20,000}\text{+\$90,000}\\ \text{= \$152,000}\end{array}$

…… (2)

Calculate total allocated cost.

$\begin{array}{c}\text{Total allocated cost =}\text{Finishing department cost + Ending inventory cost}\\ \text{= }\left[\left(46,000\text{units }\times \text{\$3}\text{.10}\right)+\left(4,000\text{units }\times \text{\$3}\text{.10}\right)\right]\\ =\$142,600+\$12,400\\ =\$155,000\end{array}$

…… (3)

b.

To determine

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

Explanation of Solution

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

PG
Cost of Production Report
Finishing Department
For the month  Ended June 30, 2014
Equivalent Units
Quantities:	Actual units
Beginning inventory	3,600
Units added to production (from conversion)	46,000
Total to be accounted for	49,600
Quantities:	Whole units (A)	Percent to Complete (B)	Total (A × B)
Transferred out	40,000	100%	40,000
Add: Ending inventory	9,600	80%	7,680
Total accounted for	49,600		47,680
Cost per unit
Particulars	Amount
Beginning inventory	$14,400
Add: Cost transferred in	$142,600
Cost added to production	$93,320
Total cost to be accounted for (1)	$250,320
Equivalent units (2)	47,680
Cost per unit (1 ÷ 2)	$5.25
Cost allocation
Cost of finishing department	$210,000
Add: Ending inventory	$40,320
Total allocated cost	$250,320

Table (2)

Working notes:

Calculate transferred out.

$\begin{array}{c}\text{Transferred out (units)}\text{=}\text{Beginning inventory +Units added to production}-\text{Ending inventory}\\ \text{= 3,600}\text{units +46,000 units }-9,600\text{units}\\ \text{=}\text{40,000}\text{units}\end{array}$

…… (4)

Calculate cost added to production.

$\begin{array}{c}\text{Cost added to production =}\text{Materials + Labor}\text{+}\text{Overhead}\\ \text{=}18\text{,120}\text{+\$13,200}\text{+\$62,000}\\ \text{= \$93,320}\end{array}$

…… (5)

Calculate total allocated cost.

$\begin{array}{c}\text{Total allocated cost =}\text{Finishing department cost + Ending inventory cost}\\ \text{= }\left[\left(40,000\text{units }\times \text{\$5}\text{.25}\right)+\left(7,680\text{units }\times \text{\$5}\text{.25}\right)\right]\\ =\$210,000+\$40,320\\ =\$250,320\end{array}$

…… (6)

c.

To determine

Calculate the company’s gross margin for June, if 24,000 units are sold for $160,000 in June.

Explanation of Solution

Calculate gross margin.

$\begin{array}{c}\text{Gross margin}\text{=}\text{Sales revenue }-\text{Cost of goods sold}\\ \text{=}\text{\$160,000}-\left(24,000\text{units}\times \text{\$5}\text{.25}\text{per unit}\right)\\ =\$160,000-\$126,000\\ =\$34,000\end{array}$

If company PG sold 24,000 units for $160,000 means, gross margin of the company PG is $34,000.