Chapter 12, Problem 3PA

Lean accounting

Dashboard Inc. manufactures and assembles automobile instrument panels for both eCar Motors and Greenville Motors. The process consists of a lean product cell for each customer’s instrument assembly. The data that follow concern only the eCar lean cell.

For the year, Dashboard Inc. budgeted the following costs for the eCar production cell:

Dashboard Inc. plans 2,000 hours of production for the eCar cell for the year. The materials cost is $240 per instrument assembly. Each assembly requires 24 minutes of cell assembly time. There was no April 1 inventory for either Raw and In Process Inventory or Finished Goods Inventory. The following summary events took place in the eCar cell during April:

1. A. Electronic parts and wiring were purchased to produce 450 instrument assemblies in April.
2. B. Conversion costs were applied for the production of 400 units in April.
3. C. 380 units were started, completed, and transferred to finished goods in April.
4. D. 350 units were shipped to customers at a price of $800 per unit.

Instructions

1. 1. Determine the budgeted cell conversion cost per hour.
2. 2. Determine the budgeted cell conversion cost per unit.
3. 3. Journalize the summary transactions (a) through (d).
4. 4. Determine the ending balance in Raw and In Process Inventory and Finished Goods Inventory.
5. 5. How does the accounting in a lean environment differ from traditional accounting?

To determine

Calculate the conversion cost per hour for the budgeted cell.

Explanation of Solution

Lean Manufacturing: Lean manufacturing aims at reducing the cost and minimizing the waste involved in the production, in order to optimize the value for the product or the service.

Lean Accounting: Lean accounting refers to the accounting standards that support the concepts of lean manufacturing. They record and reflect the transactions done to assist lean manufacturing.

Conversion Cost: The cost involved in the conversion of the raw material into the processed product is known as the conversion cost.

Calculate the conversion cost per hour for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per hour = }\frac{\text{Total Conversion Cost}}{\text{Total Time Taken}}\\ \text{= }\frac{\text{\$1,400,000}}{\text{2,000 hours}}\\ \text{= \$700 per hour}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $700 per hour.

To determine

Calculate the conversion cost per unit for the budgeted cell.

Explanation of Solution

Calculate the conversion cost per unit for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per unit = }\frac{\text{Time Taken per unit }}{\text{Minutes per hour}}\times \text{ Conversion cost per hour}\\ \text{= }\frac{\text{24 minutes}}{\text{60 minutes}}\times \text{ \$700}\\ \text{= \$280 per unit}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $280 per unit.

To determine

Journalize the given transactions.

Explanation of Solution

1. A.    Materials purchased to produce 450 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (1)	$108,000
	Accounts payable		$108,000
	(Purchase of goods on account)

Table (1)

• • Raw materials are an asset, which is increased. Hence debit the raw and in-process inventory with $108,000.
• • Accounts payable is a liability, which is increased; hence credit the accounts payable account with $108,000.

Working Note:

(1) Calculate the amount of goods purchased.

$\begin{array}{c}\text{Raw and In-Process Inventory = Cost per unit }\times \text{ Number of units}\\ \text{= \$240 }\times \text{ 450 units}\\ \text{= }\$108,000\end{array}$

The cost of raw and in-process inventory is $108,000.

1. B.     Conversion cost applied to 400 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (2)	$112,000
	Conversion Costs		$112,000
	(The conversion costs involved in the production)

Table (2)

• • Value is added to the raw materials, increases the asset. Hence debit the raw and in-process inventory with $112,000.
• • Conversion cost is an expense which reduces the stockholder's equity; hence credit the conversion cost account with $112,000.

Working Note:

(2) Calculate the amount value added.

$\begin{array}{c}\text{Raw and In-Process Inventory= Conversion Cost per unit}\times \text{Number of units}\\ \text{= }\$280\times \text{400 units}\\ \text{= \$11}2,000\end{array}$

The cost of conversion for 400 units is $112,000.

1. C.     Completed the production of 380 units.

Date	Account Title	Debit ($)	Credit ($)
June	Finished Goods Inventory  (3)	$197,600
	Raw and In-Process Inventory		$197,600
	(The completion of 380 units placed in finished goods)

Table (3)

• • Value is added to the finished goods, increases the asset. Hence debit the finished goods inventory with $197,600.
• • Raw materials are an asset, which is decreased. Hence credit the raw and in-process inventory with $197,600.

Working Note:

(3) Calculate the amount value added.

$\begin{array}{c}\text{Finished Goods Inventory= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$240+\$280\right)\times \text{380 units}\\ \text{= \$520}\times \text{380 units}\\ \text{= \$197,600}\end{array}$

The cost of conversion for 380 units is $197,600.

1. D.    Sold 350 units.

Date	Account Title	Debit ($)	Credit ($)
June	Accounts receivable	$280,000
	Sales   (4)		$280,000
	(Sold 350 units)

Table (4)

• • Accounts receivable, which is an asset, is increased. Hence debit the accounts receivable account with $280,000.
• • Sales are revenue generated, which increases stockholder's equity. Hence credit the sales with $280,000.

Working Note:

(4) Calculate the amount value added.

$\begin{array}{c}\text{Sales = Price per unit}\times \text{Number of units}\\ \text{= \$800}\times 3\text{50 units}\\ \text{= \$280,000}\end{array}$

The sales price for 350 units is $280,000.

1. E.     Record the cost of goods sold.

Date	Account Title	Debit ($)	Credit ($)
June	Cost of Goods sold  (5)	$182,000
	Finished Goods Inventory		$182,000
	(The cost of goods sold is recorded)

Table (5)

• • Cost of goods sold is an asset, which is decreased. Hence debit the cost of goods sold with $182,000.
• • Finished goods inventory is an asset, which is decreased. Hence credit the finished goods inventory with $182,000.

Working Note:

(5) Calculate the amount value added.

$\begin{array}{c}\text{Cost of Goods sold } \text{= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$240+\$280\right)\times 3\text{50 units}\\ \text{= \$520}\times 35\text{0 units}\\ \text{= \$182,000}\end{array}$

The cost of goods sold for 350 units is $182,000.

To determine

Calculate the closing balance for Raw in Process Inventory and Finished Goods inventory.

Explanation of Solution

1. 1. Calculate the closing balance for Raw in Process Inventory.

$\begin{array}{c}\text{Raw in Process Inventory = Purchase Cost + Conversion Cost}-\text{Finished goods }\\ \text{=}\left(\text{\$108,000 + \$112,000}\right)-\$197,600\\ =\$220,000-\$197,600\\ =\$22,400\end{array}$

Hence, the closing balance for Raw in Process Inventory is $22,400.

1. 2. Calculate the closing balance for finished goods inventory.

$\begin{array}{c}\text{Finished goods inventory = Finished goods inventory}-\text{Cost of goods sold}\\ \text{= \$197,600 }-\text{ \$182,000}\\ \text{= \$15,600}\end{array}$

Hence, the closing balance for finished goods inventory is $15,600.

To determine

Explain the difference between the lean accounting and traditional accounting.

Explanation of Solution

The lean accounting is created to support the lean philosophy; hence it is obviously different from the traditional accounting in the ways mentioned below.

• • There are very few work in-process control points in lean accounting, whereas there are many control points in the traditional accounting. This reduces the number of transactions involved in the Lean accounting.
  • ■ In Lean accounting the raw materials and work in progress are shown together as raw and in process inventory, hence unlike traditional accounting there are very few transactions shown.
  • ■ In lean manufacturing, the direct labor cost is a part of the indirect labor cost. Hence, the direct labor cost and indirect labor cost are shown together in lean manufacturing whereas in traditional accounting they are shown separately under various heads.

These are some of the differences between the lean accounting and traditional accounting.