Chapter 20, Problem 20.20EX

Process costing for a service company

Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. the facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:

Conversion costs	$40,500,000
Fuel	10,800,000
Total	$51,300,000

Madison also has a wind farm that can generate 100 megawatts per hour. the wind farm receives sufficient wind to run 300 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:

Conversion costs

$2,700,000

a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March,

b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?

c. What advantage does the fossil fuel plant have over the wind farm?