Chapter 16, Problem 2PSA

2.

To determine

To compute: Cost per equivalent unit of production.

Explanation of Solution

For direct material:

Given,
Total direct material cost is $2,640,000.
Total EUP (Direct Material) is 880,000 units.

Formula for calculating cost per equivalent unit of production,

$\text{Cost}\text{per}\text{EUP}\text{(Direct}\text{Material)}=\frac{\text{Total}\text{Direct}\text{Material}\text{Cost}}{\text{Total}\text{EUP}\text{(Direct}\text{Material)}}$

Substitute $2,640,000 for total direct material cost and 880,000 units for total EUP (direct material).

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(Direct}\text{Material)}=\frac{\$2,640,000}{880,000}\\ =\$3\end{array}$

Hence, cost per EUP (direct material) is $3.

Working notes:

Calculation for total direct material cost,

$\begin{array}{c}\text{Total}\text{Direct}\text{Material}\text{Cost}=\left(\begin{array}{l}\text{Direct}\text{Material}\text{In}\text{the}\text{opening}\text{inventory}\\ +\text{Direct}\text{matrial}\text{used}\text{during}\text{the}\text{month}\end{array}\right)\\ =\$420,000+\$2,220,000\\ =\$2,640,000\end{array}$

For conversion:

Given,
Total conversion cost is $3,393,000.
Total EUP (Conversion) is 754,000 units.

Formula for calculating cost per equivalent unit of production,

$\text{Cost}\text{per}\text{EUP}\text{(Conversion)}=\frac{\text{Total}\text{Direct}\text{Material}\text{Cost}}{\text{Total}\text{EUP}\text{(Conversion)}}$

Substitute $3,393,000 for total conversion cost and 754,000 units for total EUP (conversion).

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(Conversion)}=\frac{\$3,393,000}{754,000}\\ =\$4.50\end{array}$

Hence, cost per EUP (conversion) is $4.50.

Working notes:

Calculation for total direct material cost,

$\begin{array}{c}\text{Total}\text{Conversion}\text{Cost}=\left(\begin{array}{l}\text{Conversion}\text{Cost}\text{In}\text{the}\text{opening}\text{inventory}\\ +\text{Conversion}\text{Cost}\text{used}\text{during}\text{the}\text{month}\end{array}\right)\\ =\$139,000+\$3,254,000\\ =\$3,393,000\end{array}$

3.

To determine

To compute: Cost assign to completed and work in process (ending).

Explanation of Solution

For completed goods:

Given,
Direct material cost for completed goods is $2,100,000.
Conversion cost for completed goods is $3,150,000.

Formula to calculate the cost of unit completed,

$\text{Cost}\text{of}\text{Units}\text{Completed}=\left(\begin{array}{l}\text{Direct}\text{Material}\text{Cost}\text{for}\text{Completed}\text{Goods}\\ +\text{Conversion}\text{Cost}\text{for}\text{Completed}\text{Goods}\end{array}\right)$

Substitute $2,100,000 for direct material cost for completed goods and $3,150,000 for conversion cost for completed goods.

$\begin{array}{c}\text{Cost}\text{of}\text{Units}\text{Completed}=\$2,100,000+\$3,150,000\\ =\$5,250,000\end{array}$

Hence, cost of unit completed is $5,250,000.

Working notes:

Calculation for direct material cost for completed goods,

$\begin{array}{c}\text{Direct}\text{Material}\text{Cost}\text{for}\text{Completed}\text{Goods}=\left(\begin{array}{l}\text{Completed}\text{Goods}\\ \times \text{Cost}\text{per}\text{EUP}\text{(Direct}\text{Material)}\end{array}\right)\\ =700,000\times \$3\\ =\$2,100,000\end{array}$

Calculation for conversion cost for completed goods,

$\begin{array}{c}\text{Conversion}\text{Cost}\text{for}\text{Completed}\text{Goods}=\left(\begin{array}{l}\text{Completed}\text{Goods}\\ \times \text{Cost}\text{per}\text{EUP}\text{(Conversion)}\end{array}\right)\\ =700,000\times \$4.50\\ =\$3,150,000\end{array}$

For work in process (end):

Given,
Direct material cost for work in process (end) is $540,000.
Conversion cost for work in process (end) is $243,000.

Formula for calculating the cost of work in process (end),

$\text{Cost}\text{of}\text{work in process }\left(\text{end}\right)=\left(\begin{array}{l}\text{Direct}\text{Material}\text{Cost}\text{for}\text{work}\text{in}\text{process}\text{(end)}\\ +\text{Conversion}\text{Cost}\text{for}\text{work}\text{in}\text{process}\text{(end)}\end{array}\right)$

Substitute $540,000 for direct material cost for work in process (end) and $243,000 for conversion cost for work in process (end).

$\begin{array}{c}\text{Cost}\text{of}\text{work in process }\left(\text{end}\right)=\$540,000+\$243,000\\ =\$783,000\end{array}$

Hence, cost of work in process (end) is $783,000.

Working notes:

Calculation for direct material cost for work in process (end),

$\begin{array}{c}\left[\begin{array}{l}\text{Direct}\text{Material}\text{Cost}\text{for}\\ \text{work in process}\left(\text{end}\right)\end{array}\right]=\left[\begin{array}{l}\text{EUP}\text{(Direct}\text{Material)}\text{for}\text{work in process }\left(\text{end}\right)\\ \times \text{Cost}\text{per}\text{EUP}\text{(Direct}\text{Material)}\end{array}\right]\\ =180,000\times \$3\\ =\$540,000\end{array}$

Calculation for conversion cost for work in process (end),

$\begin{array}{c}\left[\begin{array}{l}\text{Conversion}\text{Cost}\text{for}\\ \text{Completed}\text{Goods}\end{array}\right]=\left[\begin{array}{l}\text{EUP}\text{(Conversion)}\text{for}\text{work in process }\left(\text{end}\right)\\ \times \text{Cost}\text{per}\text{EUP}\text{(Conversion)}\end{array}\right]\\ =54,000\times \$4.50\\ =\$243,000\end{array}$

4.

To determine

To prepare: A memo.

Explanation of Solution

Memo:

From,
X

To,
Z

Date: March 6, 2018

Subject: Explaining concept of closing process.

Sir,

If the labor is actually 60% complete instead of 30% then it will increase the equivalent unit of production for conversion. It will also decrease the cost per unit of equivalent unit of production and increase the work in process ending inventory.

Since, the cost per equivalent unit of production is more than it should be. It increases the cost of goods sold. Hence, it decreases the income, reduces the retained earnings and reduces the balance of balance sheet.

Yours,
X