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1. (a)
Calculate the equivalent units of production with respect to direct materials.
1. (a)
Explanation of Solution
Equivalents units for production: The activity of a processing department in terms of fully completed units is known as equivalent units. It includes the completed units of direct materials and conversion cost of beginning work in process, units completed and transferred out, and ending work in process.
Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.
Compute equivalent units of production with respect to direct materials.
Given, work in process inventory at the end of November is 180000 units and are 100% complete with respect to conversion.
| Equivalent units of production | Direct Materials (EUP) |
| Units completed and transferred out | 700,000 |
| Ending work in process | 180,000 |
| Equivalent units of production | 880,000 |
Table (1)
Therefore, the equivalent units of production with respect to direct materials are 880,000 EUP.
1. (b)
Calculate the equivalent units of production with respect to conversion.
1. (b)
Explanation of Solution
Equivalents units for production: The activity of a processing department in terms of fully completed units is known as equivalent units. It includes the completed units of direct materials and conversion cost of beginning work in process, units completed and transferred out, and ending work in process.
Conversion cost: Cost of changing the materials into a finished product. It includes direct labour
Compute equivalent units of production with respect to conversion.
Given, work in process inventory at the end of November is 180,000 units and are 30% complete with respect to conversion.
| Equivalent units of production | Conversion (EUP) |
| Units completed and transferred out | 700,000 |
| Ending work in process | 54,000 |
| Equivalent units of production | 754,000 |
Table (2)
Therefore, the equivalent units of production with respect to conversion are 754, 000 EUP..
2.
Compute the conversion cost and the direct materials cost per equivalent unit.
2.
Explanation of Solution
Cost per equivalents units of production: Cost per equivalents units of production refers to the costs incurred for each equivalent unit produced. The cost per equivalents units for production (EUP) is computed as follows:
Compute the conversion cost and the direct materials cost per equivalent unit.
| Cost per EUP | Direct Materials | Conversion |
| Cost of beginning work in process | $420,000 | $139,000 |
| Cost incurred during this period | $2,220,000 | $3,254,000 |
| Total costs (A) | $2,640,000 | $3,393,000 |
| Equivalent units of production (B) | 880,000 EUP | 754,000 EUP |
| Cost per EUP | $3.00 per EUP | $4.50 per EUP |
Table (3)
Note: Refer table (1) and table (2) for equivalents units of production.
Therefore, the conversion cost and the direct materials cost per equivalent unit are $3.00 per EUP and $4.50 per EUP respectively.
3. (a)
Calculate conversion cost and direct materials costs assigned to units completed and transferred out.
3. (a)
Explanation of Solution
Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.
Conversion cost: Cost of changing the materials into a finished product. It includes direct labour costs and factory overhead costs.
Calculate conversion cost and direct materials costs assigned to units completed and transferred out.
| Cost assignment– Weighted average | Direct materials | Conversion |
| Costs transferred out | ||
| Direct materials | $2,100,000 | |
| Conversion | $3,150,000 | |
| Total costs transferred out | $5,250,000 |
Table (4)
Thus, the conversion cost and direct materials costs assigned to units completed and transferred out are $2,100,000 and $3,150,000 respectively.
3. (b)
Calculate conversion cost and direct materials costs assigned to ending inventory.
3. (b)
Explanation of Solution
Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.
Conversion cost: Cost of changing the materials into a finished product. It includes direct labour costs and factory overhead costs.
Calculate conversion cost and direct materials costs assigned to ending inventory.
| Cost assignment– Weighted average | Direct materials | conversion |
| Costs of ending work in process inventory | ||
| Direct materials | $540,000 | |
| Conversion | $243,000 | |
| Total cost of ending work in process inventory | $783,000 |
Table (5)
Thus, the conversion cost and direct materials costs assigned to ending inventory are $540,000 and $243,000 respectively.
4.
Write a one page memo to the plant manager of Company V explaining the effects of the errors in percentage of completion in the financial statements.
4.
Explanation of Solution
Memo
From
XYZ
To
ABC,
Plant manager,
Company V,
January 29, 2019
Subject: Percentage of completion error analysis.
The number of equivalent units in ending inventory with respect to conversion would be understated and the total equivalent units produced for the period would also be understated if the units in ending inventory are 60% complete instead of 30% with respect to conversion. Though, the conversion cost in ending work in process is higher due to the larger percentage of equivalent units remaining in the ending inventory.
Such errors would overstate the cost of goods sold and understate the net income on the income statement for the month of November. Subsequently, the work in process inventory (total assets) and the
Regards,
XYZ
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Chapter 20 Solutions
Principles of Financial Accounting, Chapters 1-17 - With Access (Looseleaf)
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